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Understanding the Inflation Reduction Act: Inflation Rebates

Prescription drug manufacturers routinely implement price increases for a variety of reasons that support their business. With the passage of the Inflation Reduction Act late in 2022, Congress added a twist to these price increases. One provision of the Act, also known as the IRA, implements rebates from pharmaceutical companies to Medicare for price increases that outpace inflation. The Centers for Medicare and Medicaid Services (CMS), the federal agency that oversees Medicare, recently issued guidance for manufacturers to operationalize the statute.

Common Elements

The IRA mandates that pharmaceutical manufacturers that sell their products prescribed to Medicare Part B and Part D beneficiaries will be subject to these inflation rebates. For both the Part B (outpatient services) and Part D (prescription drug) programs, CMS will implement some common requirements. The rebate requirement will apply to drugs which have spending that totals more than $100 per year per patient for which they are prescribed. The calculations of the rebate will be based on the inflation factor established by the Consumer Price Index-Urban (CPI-U) for the applicable calculation periods. CMS will exempt drugs that the Food and Drug Administration (FDA) has on its shortages or problematic supply chain list, as well as several vaccines. Also exempt will be drugs dispensed and reimbursed under the 340B program. And for Parts B and D, manufacturers will be subject to a 125% civil monetary penalty if payment is not received by the government within 30 days of the final invoice/report for each reporting period.

The nature of Parts B and D necessitates different approaches to implementing the rebate program.

Part B Specifics

In Part B, only sole-source drugs will be subject to this program, meaning that generics and other multi-source products will not trigger reports and invoices to the manufacturers. CMS will employ FDA (Orange Book) data to determine whether a product is sole-source, along with Average Sales Price (ASP) data, which is reported by manufacturers, and pricing compendia (e.g., Red Book) information to determine the price changes of applicable products. Part B beneficiaries will have adjusted coinsurance amounts that reflect the difference between the old and new prices that are above the CPI-U inflationary factor.

Only those products administered to traditional Medicare patients will be counted in the calculations because the reporting mechanisms for Medicare Advantage (Part C) patients is too divergent and complex. Additional exceptions under Part B include skin substitutes (for now), drugs that are identified with miscellaneous reimbursement codes, and specific vaccines including influenza, pneumococcal, hepatitis B, and COVID-19. Monoclonal antibodies for treating COVID-19 will also be exempt until the end of the calendar year that their Emergency Use Authorizations end.

In the guidance document, CMS provided information on the benchmark calendar quarters for calculating the rebates. CMS will calculate the rebate for drugs approved on or before December 1, 2020 for quarters beginning July 1, 2021, using the January 2021 CPI-U. For drugs approved after December 1, 2020, CMS will calculate the rebate starting with the third full calendar quarter after the first day of marketing. This calculation will use the CPI-U for the first full month of the first full calendar quarter after the first date of sale as reported to CMS by manufacturers in ASP data. This date may be different than the first day of marketing.

While the reporting process is similar for Parts B and D, there are different timeframes and deadlines for each, which are illustrated in Table 1.

Part D Specifics

Sole-source drugs also are the primary target in Part D, and through the regulatory language, CMS identifies these Covered Outpatient Drugs as those having gone through FDA’s New Drug Application (NDA) or Abbreviated NDA (ANDA) process. CMS will rely on the manufacturer reported Average Manufacturer Price (AMP), which the agency will then calculate out as the AnMP, the Annualized Manufacturer Price.

Similar to Part B, any vaccine provided under Part D will be excluded, along with drugs not part of the Medicaid Drug Rebate Program (MDRP) because they would not qualify as reportable Part D drugs.

Benchmark quarters and other timeframes are slightly different in Part D. For drugs approved prior to October 2021, the benchmark CPI-U month will be January 2021, and for those approved after October 2021, it will be January of the following calendar year.

Reports and Payments

The Part B and Part D guidance documents outline the same reporting and payment activities, yet on different timetables. We have consolidated this information in Table 1.

Table 1 – Reports and Payments
Action Part B Timing/Deadline Part D Timing/Deadline
Preliminary Rebate Report to Manufacturers 5 months from end of calendar quarter 6 months after end of applicable period
Manufacturer Reviews Due back to CMS 10 days after receipt of preliminary report Due back to CMS 10 days after receipt of preliminary report
Rebate Report to Manufacturers 6 months from end of calendar quarter 9 months after end of applicable period
Manufacturer Rebate Payment Due 30 days after receipt of rebate report 30 days after receipt of rebate report
Preliminary True-Up Report Approximately 1 year after Preliminary Rebate Report Approximately 1 year after Preliminary Rebate Report
Manufacturer Reviews Due back to CMS 10 days after receipt of preliminary true-up report Due back to CMS 10 days after receipt of preliminary true-up report
True-Up Report to Manufacturers Approximately 1 year after Rebate Report sent Approximately 1 year after Rebate Report sent
Manufacturer True-Up Payment Due 30 days after receipt of true-up report 30 days after receipt of true-up report

As shown, manufacturers will have an opportunity to “suggest” the correction of errors; however, because of the way the statute is written, there is no appeal or administrative process to dispute the rebate report. CMS thus allows for these suggestions if a manufacturer believes that the rebate is calculated incorrectly.

Consistent with all medical and pharmaceutical reimbursement, CMS expects data to lag beyond the calculated quarters, so the agency has allowed for a true-up period approximately one year after each report and report/invoice. These true-ups may result in credits or notices for additional payment.

Manufacturer Considerations

The purpose of the IRA, of course, is to reduce the cost burden of pharmaceuticals on the Medicare program. That does not mean, however, that manufacturers should stop taking price increases or should stop investing in promising agents. We believe that implementing a strategic perspective on pricing will help manufacturers minimize their exposure to rebates for supra-inflationary increases. Manufacturers may decide to perform the calculus to determine how much an increase will be worth over the period between the increase and receiving a report and invoice.

The FDA and CMS have been communicating about the IRA and the FDA may ask manufacturers about data that CMS can use for decisions.

There are other timing considerations, such as when to anticipate market approval and first sale, which would determine the starting quarter for calculations. Additionally, when considering increases on drugs that use the January 2021 CPI-U benchmark (those drugs approved prior to October 2021), manufacturers will need to understand the implications of increases already taken as well as those planned for the future.

Finally, it will be mandatory to inspect closely the reports that CMS sends to determine whether to dispute calculations, the only disputable option for this initiative.

The experts at EVERSANA can help you with these strategies and calculations before they become ominous or even tedious. Please contact us for more information and stay tuned for more articles on other aspects of the IRA.

Brian Abraham
Senior Director,​ Market Access & Patient Services

Brian Abraham, Director of Revenue Management Solutions at EVERSANA™, helps medical technology and biopharma companies develop and execute strategies around coding, coverage and payment for innovative medical technology products. He has 20 years of…

Mike Kurland
Michael Kurland
Vice President, Revenue Management & Compliance Solutions

With more than 2 decades of experience in the pharmaceutical and biotech industries, Michael helps clients navigate the complex public and private payer marketplace. He has a proven reputation for helping manufacturers balance their…

Denise Woltemath
SVP, Custom Insights

Denise has more than 20 years of healthcare experience across sales, managed care, medical device, and hospital settings. In these leadership roles, she has hired, developed, and motivated over 500 representatives and district managers;…

Mike has over 25 years of experience in marketing and sales, market access, channel design, sales training and sales management, and has been involved in over 25 product launches in sales, marketing or consulting…

Kevin McDermott
Chief Commercial Officer

Kevin started his career in sales and marketing and for the past two decades, led market access functions across multiple biopharma organizations. He has a track record of building and leading customer-centric, highly collaborative and focused…