Curbing Rising Drug Prices: Medicare Inflation Rebates Explained

Makers of some of the highest-cost medications could start seeing Medicare rebate invoices as a provision of the Biden administration’s landmark drug pricing law takes effect.

As of Oct. 1, the Centers for Medicare & Medicaid Services will measure price increases for prescription drugs covered by Medicare Part D. Any increases exceeding the rate of inflation over the next 12 months will be subject to payments.

The Inflation Reduction Act, which also allows the CMS to negotiate prices for certain drugs, has been touted by Democrats as one of the most extensive drug-pricing laws in US history. But pharmaceutical companies say it will harm innovation and do little to bring down overall drug costs for Americans.

1. How will the rebates work?

The CMS will measure Part D drug manufacturer price increases for each rebate year, which started Oct. 1. For the first year, the Health and Human Services secretary has until July 1, 2024, to notify Part D drugmakers of rebates owed to Medicare. Drugmakers will be required to pay within 30 days of receiving the invoice.

Price increases for Medicare Part B drugs—treatments administered in hospitals or doctor’s offices—will be measured by quarter beginning in January 2023. For Part B price increases that rise faster than inflation during Q1 of 2023, HHS will have until Oct. 1 of that year to notify manufacturers of any rebates owed. Manufacturers will have 30 days to pay this back.

For Part D drugs, the secretary may decide to delay invoices for rebate years beginning Oct. 1, 2022, and Oct. 1, 2023, to no later than Dec. 31, 2025. Part B drug invoices may be delayed for calendar quarters in 2023 and 2024 to no later than Sept. 30, 2025, according to the law.

2. How will Medicare calculate the amount?

The CMS will look at the the average manufacturer price for Part D drugs—the average price wholesalers pay drug manufacturers—and the average sales price for Part B drugs—the market-based price that includes all rebates and discounts negotiated between manufacturers and purchasers.

For Part D drugs with price increases higher than inflation, the CMS will calculate the rebate amount by multiplying the total number of units sold to Medicare in a given year by the amount which a drug’s price exceeds the inflation-adjusted price. The same will be done for each quarter for Part B drugs, and the CMS will use 2021 as a base year to measure cumulative price changes relative to inflation.

Rebates manufacturers pay to Medicare will go into the Supplementary Medical Insurance (SMI) Trust Fund, which helps pay for Part B and D benefits, as well as costs associated with administering the Medicare program. The SMI fund is also boosted through congressional appropriations and premiums from Americans covered by Part D and Part B.

The IRA includes penalties for companies that don’t pay these rebates. Part D drugmakers will be forced to pay a civil monetary fine equal to 125% of the CMS-calculated rebate amount. For Part B drugs, the penalty can be an amount equal to or greater than 125%.

3. Which drugs will be impacted?

Part D drugs subject to the rebate provision include any drugs and biologics approved by the Food and Drug Administration, including biosimilars. Certain generic drugs are also included only if their reference drug isn’t being marketed, there’s no therapeutically equivalent generic available, the manufacturer is not a “first applicant” during a 180-day marketing exclusivity period, and the manufacturer is not a “first approved applicant” for a competitive generic therapy.

Part B drugs subject to the provision include single-source drugs or biologics. Vaccines for Covid-19, influenza, hepatitis B, and other widely-spread infections are exempt.

Part D and Part B drugs are exempt from rebates when the “average total allowed charges” for such drug or biologic for a year per individual is less than $100.

An HHS report found that 1,216 drugs had price increases that exceeded the 8.5% inflation rate during the 12-month period from July 2021 to July 2022. The average price increase among these drugs was 31.6%, according to HHS.

4. What’s industry saying about it?

The Biden administration has promoted the inflation rebate provisions as a way to lower health costs for American seniors. The drug industry and employers argue they won’t address other sources of high drug costs.

Drugmakers have long accused pharmacy benefit managers—the entities that manage drug coverage for health insurers, large employers, and others— of driving up drug costs, including by charging high rebates to manufacturers. But PBMs argue that they work to lower drug costs and deliver discounts to patients, and that drugmakers are the root cause of price increases.

Employers who provide private health coverage have said they could benefit from the new drug pricing law, in part because drugmakers will have some incentive to keep increases in the commercial market lower to avoid paying rebates to Medicare. But employers have also expressed concern that the law will lead to cost-shifting by drugmakers seeking to make up for lower Medicare prices by raising prices on commercial plans.

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