CMS Issues Revised Medicare Part B and Part D Inflation Rebate Guidance

• Part D Rebatable Drugs
  • Initial Guidance. In the Initial Guidance and consistent with the statute, CMS stated that Part D rebatable drugs are all products approved under a New Drug Application or licensed under a Biologics License Application (including biosimilars), as well as certain generics that “feel like” an innovator, excluding low Medicare spend drugs.
  • What Changed? CMS clarifies how it will calculate the rebate amount for a generic drug that meets the Part D rebatable drug definition on the first day of an applicable period but ceases to do so later during such applicable period. Specifically, CMS will use the FDA’s Orange Book to identify whether FDA has approved any generic products that are therapeutically equivalent to the generic in question. CMS will “then use the NDC Directory to determine the marketing status of such therapeutically equivalent drug and to determine whether, during the applicable period, the therapeutically equivalent drug was marketed.” Any units dispensed after the date on which the generic in question no longer meets the Part D rebatable drug definition will be excluded.

• Drugs Not Covered Under a Medicaid Drug Rebate Program (MDRP) Agreement
  • Initial Guidance. CMS acknowledged in the Initial Guidance that not all drugs that qualify as a Part D rebatable drug are associated with a Medicaid Drug Rebate Program (MDRP) agreement requiring the manufacturer to report the average manufacturer price (AMP) on which the Part D inflation rebate is based. However, because CMS would not have the AMP information needed to calculate Part D inflation rebates for a manufacturer without an MDRP agreement in place, CMS explained in the Initial Guidance that it would not subject a manufacturer without such an agreement to Part D inflation rebates but that the agency was working on determining how to collect the data necessary to do so.
  • What Changed? No change.
• Calculating the Part D Inflation Rebate Amount
  • Initial Guidance. In the Initial Guidance and consistent with the statute, CMS stated that the Part D inflation rebate would be calculated as: 
    • the total number of Part D units of the drug in the rebate year, excluding 340B units beginning in 2026;
    • multiplied by the amount (if any) by which the annual manufacturer price (AnMP) for the rebate year exceeds the inflation-adjusted benchmark period manufacturer price.
  • What Changed? No change. 
• Calculating the AnMP and the Benchmark Period Manufacturer Price
  • Initial Guidance.
    • In the Initial Guidance, CMS stated that, consistent with the statute, the AnMP would be calculated by (1) multiplying each quarterly AMP for the drug in the applicable period by (2) the ratio of the number of AMP-reported units for the quarter to the number of AMP-reported units for the year and (3) adding the results for all quarters in the applicable period.
    • CMS also stated that the benchmark period manufacturer price would be calculated in the same way as the AnMP, but: 
      • For products approved or licensed on or before 10/1/21: The period would be three quarters rather than four (from Q1 to Q3 2021).
      • For products approved or licensed after 10/1/21 (i.e., subsequently approved drugs): The period would be calculated using the first calendar year after the drug is first marketed. 
    • To determine when a drug was first marketed, CMS intended to use the MDRP “market date.”
  • What Changed? CMS finalizes these policies as proposed, but clarifies the following:
    • For products approved or licensed on or before 10/1/21: CMS indicates that, if such drugs nevertheless were not marketed until after that date (10/1/21), such drugs will be treated as a subsequently approved drug.
• First Applicable (Rebate) Period for Subsequently Approved Drugs
  • Initial Guidance. CMS explained in the Initial Guidance that the applicable period for Part D inflation rebates typically is a four-quarter period beginning with the fourth quarter of the calendar year through the third quarter of the next calendar year. For subsequently approved drugs, CMS proposed that the first applicable period would be truncated to the first three quarters of the first calendar year that begins after the payment amount benchmark period ends. After the first applicable period, the regular four quarter applicable period would apply.
  • What Changed? CMS changes the applicable period for subsequently approved drugs to begin on October 1 of the year following the payment amount benchmark period. CMS notes that doing so will avoid any overlap between the payment amount benchmark period and the first applicable period.
• Excluding 340B Units 
  • Initial Guidance. In the Initial Guidance, CMS sought comment on whether “requiring that a 340B indicator be included on the [Part D prescription drug event (PDE)] record is the most reliable way to identify drugs that are subject to a 340B discount that were dispensed under Medicare Part D.
  • What Changed? CMS states that it will continue to evaluate different options for identifying 340B units and will finalize a policy to exclude them by 2026.
• Use of PDE Data to Determine Total Number of Units 
  • Initial Guidance. Because the unit type reported with respect to Part D PDE units and that with respect to AMP under the MDRP may be distinct, CMS stated in the Initial Guidance that it would “compare the Part D rebatable drug units reported in the PDE record to the units reported . . . for the monthly AMP” and convert units as needed.
  • What Changed? No change. 
• Situations in Which Manufacturers Do Not Report Units 
  • Initial Guidance. The Initial Guidance addressed the possibility of there being no sales of a subsequently approved drug for the entire payment amount benchmark period. CMS stated that a manufacturer’s reported AMP price would be used in such circumstances and the benchmark period manufacturer price would be calculated as an average of reported AMP price(s).
  • What Changed? CMS clarifies that the above approach will apply when calculating both the AnMP and the benchmark period manufacturer price but specifies that:
    • Where units are reported for some but not all quarters in the period: CMS will calculate the weighted average AMP using those quarters where units are reported.
    • Where units are reported for no quarters in the period: CMS will calculate a straight average of the reported AMPs.
• Shortages and Severe Supply Chain Disruptions 
  • Initial Guidance. As with the Part B inflation rebate, CMS sought comment in the Initial Guidance with respect to how to reduce or waive the Part D rebate amount for products on the 506E shortage list and for biosimilars experiencing severe supply chain disruptions.
  • What Changed? CMS clarifies the following details regarding drug shortages:
    • Currently in shortage: Similar to the Part B inflation rebate, for drugs listed on the FDA shortage list as “currently in shortage” at any time during the applicable period, CMS will grant a reduction in the rebate based on the length of time the drug is in shortage. CMS will provide a greater reduction for plasma-derived products as opposed to non-plasma derived products on the rationale that these products depend on a donated supply that can impact downstream production and limit the ability to respond to a shortage. CMS will also provide a greater reduction for generic products.
    • Severe supply chain disruption: Following from a written request submitted to CMS by the manufacturer, and should CMS determine that (1) there is a severe supply chain disruption for a generic drug or biosimilar biological product or (2) a generic Part D rebatable drug is likely to be in shortage without additional relief, CMS will provide a standard reduction of 75% in the rebate amount. The reduction will be time-limited.
    • Manufacturers may receive a rebate reduction under only one and not both policies.
• Line Extensions
  • Initial Guidance. In the Initial Guidance, CMS stated that it would calculate the Part D inflation rebate amount for line extensions as follows:
    • First, CMS would “identify line extensions based on manufacturer reporting of drugs as line extensions and related pricing and product data” under the MDRP.
    • Second, CMS would determine the greater of “(1) the inflation rebate amount for the applicable period . . . for the Part D rebatable line extension drug ["option (1)”]; or, (2) the alternative inflation rebate amount calculated under the alternative rebate formula ["option (2)”]” for such drug. 
      • The alternative rebate formula would divide the inflation rebate amount for the initial drug, identified by the manufacturer for MDRP purposes for the last quarter of the applicable period, by the AnMP for such initial drug.
      • The resulting ratio would then be multiplied by the AnMP for the line extension for the applicable period to determine the alternative inflation rebate amount under option (2). 
      • CMS also explained that there may be instances where a Part D rebatable drug has multiple potential initial drugs during an applicable period, in which case CMS will use the initial drug identified by the manufacturer in the last quarter of the applicable period.
    • Third, the greater of the amounts under option (1) and option (2) would be multiplied by the total units of the drug.
  • What Changed? Nothing fundamentally, but CMS clarifies that, where an initial drug was not identified in the last quarter of the applicable period for a drug that is a line extension, CMS will use the initial drug that was identified most recently in the applicable period to determine the initial drug for the line extension alternative rebate calculation.
• Ensuring the Integrity of the Part D Inflation Rebate Payments
  • Initial Guidance. By statute, CMS is required to send a Rebate Report and invoice to a manufacturer for the amount of a Part D inflation rebate due. In the Initial Guidance, CMS proposed to issue the Report and invoice as follows:
    • Step One. No later than six months after the end of the rebate period, the manufacturer would receive a Preliminary Rebate Report, which would include the total number of units subject to a rebate (reporting on such utilization is not required by statute), the NDC of the drug, the rebate amount due, and the amount by which the AnMP exceeds the pace of inflation for the applicable period. 
    • Step Two. The manufacturer would have ten calendar days after receiving the Preliminary Rebate Report to identify calculation errors to CMS, and the agency would have discretion to consider such identified errors. 
    • Step Three. The manufacturer would receive the final Rebate Report no later than nine months after the end of the rebate year.
    • Step Four. The manufacturer would have 30 calendar days from receipt of the final Rebate Report to pay the rebate amount owed. 
    • Step Five. Approximately one year after the final Rebate Report is sent, CMS would conduct a one-time true-up recalculation to account for any updated data, including updates from plan sponsors on Part D units dispensed.

CMS noted in the Initial Guidance that it could revise the rebate amount or true-up amount based on any calculation error or misreporting of manufacturer pricing or product data at any point after the rebate year ends.

• What Changed? CMS removes the true-up recalculation process for now and indicates it intends to adopt one at a later date after further consideration. 
  • CMS intends to establish a process for adjustments to the rebate amount based on revisions to the number of units of a Part D rebatable drugs and to reconcile underpayments and overpayments. CMS is also considering options for a standardized adjustment process at regular intervals “to account[] for a broader set of circumstances involving revised information.” CMS intends to finalize its process for adjustments before issuing Rebate Reports for the first two applicable periods. 
  • CMS also clarifies that, for the first two applicable periods, manufacturers will have 30 calendar days, instead of the standard 10 calendar days, to identify CMS calculation errors in the Preliminary Rebate Report. 
  • CMS will delay the issuance of Rebate Reports for the first two applicable years until no later than December 31, 2025, consistent with its authority to do so under the statute. 
• CMPs for Non-Payment of Rebates
  • Initial Guidance. Under the statute, a manufacturer that fails to pay an inflation rebate will be subject to a CMP equal to 125 percent of the rebate amount. CMS proposed in the Initial Guidance that it would give notice of the imposition of a CMP to the manufacturer, and the manufacturer would have 60 calendar days from receipt of the notice to request a hearing or pay the penalty. An unpaid penalty would be deducted from amounts owed by the United States to the manufacturer.
  • What Changed? No change. CMS finalizes its proposals and clarifies that it may utilize rulemaking in the future to address its approach to enforcement. 

We recommend that you carefully review the revised guidance to identify all issues relevant to your organization.

Authored by Alice Valder Curran, Ken Choe, Kathleen Peterson, James Huang, Samantha Marshall, Mahmud Brifkani, Rianna Modi, Drew Savage, and Gabrielle Simeck.