Inflation Reduction Act’s Medicare Part D benefit redesign explained

Ken Choe, partner in the Hogan Lovells Health practice group, introduced the session by noting that the Inflation Reduction Act of 2022 (IRA) was signed into law by President Biden on August 16, 2022. The legislation, which we summarized on August 8 (online here), revived many of the prescription drug provisions proposed last fall in the Build Back Better Act, but with some notable differences.

This session focused on how the IRA will impact Medicare Part D coverage. Melissa K. Bianchi, partner in the Hogan Lovells health practice and leader of the firm’s digital health initiative, emphasized that manufacturers and plans may need to rethink how the changing cost factors in the redesign will impact how they approach coverage moving forward. Melissa also noted that important dates for implementation are rapidly approaching, with:

• insulin and vaccine coverage changes going into effect on January 1, 2023;
• premium stabilization changes, elimination of cost-sharing in the catastrophic phase, and expansion of low-income subsidy (LIS) benefits going into effect on January 1, 2024; and
• manufacturer discount program, lowering the beneficiary out-of-pocket (OOP) threshold, eliminating the coverage gap program, optional smoothing of beneficiary OOP costs, and lowering of the Medicare reinsurance payment amount going into effect on January 1, 2025.

Key benefit changes

Melissa first outlined the changes to beneficiary cost-sharing, which are:

• resetting the out-of-pocket threshold to $2,000 starting in 2025, subject to annual inflationary increases; 
• eliminating the coverage gap starting in 2025, such that Part D beneficiaries, after having met the deductible, would proceed through an initial coverage phase followed by a catastrophic phase. The current “coverage gap” program will be replaced with a new manufacturer discount program outlined below;
• eliminating beneficiary cost sharing in the catastrophic phase starting in 2024, after beneficiaries reach the OOP threshold; and
• permitting smoothing of OOP costs starting in 2025. A beneficiary would be able to opt to pay out-of-pocket costs on a monthly basis subject to a cap, defined as the beneficiary’s outstanding OOP costs for a plan year divided by the remaining months in the plan year. Melissa cautioned, however, that this option could be terminated if a beneficiary failed to make a monthly payment.

Next, Melissa explained that one of the ways that Centers for Medicare & Medicaid Services (CMS) subsidizes catastrophic coverage spending under current Part D plans is by reinsurance. The IRA, Melissa noted, will “significantly” reduce the Medicare reinsurance amount starting in 2025, from 80 percent to 20 percent where a drug is subject to the new manufacturer discount program, and from 80 percent to 40 percent where a drug is not subject to the program. 

Melissa also explained that the IRA provides for premium stabilization by capping the premium growth of a beneficiary base premium to six percent year-to-year from 2024 to 2029, with some options for the Secretary to make a permanent adjustment to the beneficiary premium percentage in 2030 and beyond. Addressing an audience question, Melissa noted that the cap will likely apply as to the plan premium, rather than to any specific individual, but also suggested that CMS will likely have to provide appropriate talking points to make sure this is communicated to beneficiaries.

The IRA also provides changes to coverage for insulin and vaccines, starting in 2023. In effect, Melissa explained, the IRA implements across the board the insulin pricing of an existing Center for Medicare and Medicaid Innovation (CMMI) model. For 2023-2025, cost-sharing for insulin must be set at no more than $35 in all phases of coverage (including the deductible). For 2026 and subsequent years, the cost-sharing is somewhat more complicated, but will be the lessor of $35 or 25 percent of maximum fair price (MFP) or 25 percent of negotiated price of insulin under Part D. In addition, all vaccines recommended by the Advisory Committee on Immunization Practices would be covered under Part D with no deductible and no coinsurance or other cost sharing. Melissa also noted that for 2023 only, the Secretary must subsidize prescription drug and Medicare Advantage prescription drug (MA-PD) plans for the costs of these changes.

Finally, Melissa noted, the IRA expands LIS benefits starting in 2024, such that the premium, deductible, and cost-sharing benefits previously available to individuals below 135 percent of the poverty line will now apply to those below 150 percent of the poverty line. 

New manufacturer discount program

As Melissa noted above, the IRA replaces the current coverage gap discount program with a new manufacturer discount program. Under this program, starting in 2025, manufacturers participating in Part D will be required to enter a manufacturer discount program agreement to provide discounts off the negotiated price under Part D for applicable drugs dispensed to applicable beneficiaries. Melissa noted that, like the current coverage gap discount program, the manufacturer discount program is “pay to play.” Under the program, a manufacturer must offer:

• a 10 percent discount where a beneficiary has satisfied the deductible and incurred costs below the OOP threshold; and
• a 20 percent discount where the beneficiary has incurred costs equal to or above the OOP threshold.

Pursuant to the program, an applicable drug is a covered Part D drug approved under a new drug application (NDA) or licensed as a biologic or biosimilar biological product (i.e., not including drugs approved under an abbreviated new drug application (ANDA)) for which benefits are available through a Part D plan (on a formulary or otherwise) but excluding drugs (i.e., selected drugs) subject to the negotiation program discussed in our Drug Price Negotiation Program webinar. An applicable beneficiary is one enrolled in a prescription drug plan (or a MA-PD plan) but not in a qualified retiree prescription drug plan (defined as employment-based retiree health coverage) and who has satisfied the applicable deductible. 

Melissa explained that the Secretary is required to establish a manufacturer agreement governing the terms of the manufacturer discount program.  Manufacturers are required to enter the discount program agreement for fiscal year 2025 by March 1, 2024.

In contrast to the above, Melissa noted, a selected drug (i.e., a drug selected for Medicare negotiation) is not subject to the manufacturer discount program while the drug is subject to MFP. The IRA also ensures that Medicare, and not the plan, covers the discount that the manufacturer would have paid had the drug qualified as an applicable drug. Where a beneficiary who has not yet satisfied the OOP threshold is dispensed a drug that does not qualify as an applicable drug because it is a selected drug, the Secretary must provide the plan a subsidy of 10 percent of the negotiated price of that drug (which would be 10 percent of MFP). For a beneficiary who has satisfied the OOP threshold, Medicare reinsurance is set at 40 percent.

Melissa also noted that the IRA provides for a phase in for drugs dispensed to LIS beneficiaries by a specified manufacturer, defined as a manufacturer that, in 2021:

• had a coverage gap discount agreement;
• for which the expenditures for all drugs of that manufacturer under Part D are less than one percent of total expenditures under Medicare Part D; and
• for which the expenditures for all single source drugs and biologicals of that manufacturer for which payment may be made under Part B are less than one percent of total expenditures for all drugs or biologics for which payment may be made under Medicare Part B.

In addition, the IRA provides a phase in for specified small manufacturers, defined as a manufacturer that, in 2021:

• qualified as a “specified manufacturer,” as previously defined; and
• for which total expenditures of a single drug of that manufacturer under Part D are equal to or exceed 80 percent of the total expenditures for the drugs of that manufacturer under Part D for 2021 that were covered under a coverage gap discount agreement in that year.

For each of these qualifying manufacturers, the phase in will be:

• for a beneficiary below the OOP threshold, from a one percent discount in 2025 stepping up to a 10 percent discount in 2029 and each subsequent year; and
• for a beneficiary who has satisfied OOP, from a one percent discount in 2025 to a 20 percent discount in 2031 and each subsequent year.

When it comes to enforcement, Melissa explained that as with the other prescription drug provisions, the IRA provides guidance for civil monetary penalties for noncompliance. A manufacturer that does not timely pay a rebate would be subject to a CMP equal to 125 percent of the discount that the manufacturer should have paid under the agreement. The Secretary may also terminate an agreement with a manufacturer for a knowing and willful violation of the terms of the agreement as established by the Secretary. The Secretary is also obligated to establish a dispute resolution mechanism to resolve disagreements between manufacturers, prescription drug plans and MA-PD plans, and the Secretary.

Finally, discounted prices under the manufacturer discount program are excluded from best price and average manufacturer price reporting under the Medicaid Drug Rebate Program.

Implementation: an opportunity for stakeholder engagement?

Melissa pointed out that CMS is permitted to implement most of the Part D changes for 2024 through 2026 via program instruction and other guidance. Reflecting back on the 2011 implementation of the coverage gap program, Melissa noted that the guidance process was also key to that roll out. While the IRA has appropriated $300 million to CMS to implement these changes, the necessary staffing increase will take some time. Importantly, Melissa urged stakeholders to engage in the guidance process.

Who are the winners with the redesign changes?

In concluding, Melissa noted that the IRA will really change the balance of who pays, and correspondingly, will also change how formularies work, as well as how rebate negotiations will be implemented moving forward. The below timelines capture the key comparative changes for both brands and biosimilars (top) and generics (bottom):

Melissa posed the important question, also raised by the audience, of who is the “winner” of the IRA’s benefit redesign. The short answer, according to Melissa, seems to be beneficiaries, especially those who would have paid a lot more for OOP costs, and for whom the $2,000 cap now comes into play.

Next steps

Stakeholders should be alert for guidance as to the implementation process and can continue to advocate in areas where there is agency discretion. The different cost factors outlined above will impact how drug manufacturers and other stakeholders prepare for these changes in the coming months.

Please contact the authors or the Hogan Lovells attorneys with whom you regularly work for guidance on your specific product needs.

You can find summaries of parts one and two of our Inflation Reduction Act webinar series online here:

• Webinar summary: Inflation Reduction Act – Inflation Reduction Act’s Drug Price Negotiation Program explained
• Webinar summary: Inflation Reduction Act – Inflation Reduction Act’s Medicare Part B and D inflation rebates explained

Authored by Mahmud Brifkani, Melissa Bianchi, and Ken Choe