On August 16, 2022, U.S. President Joe Biden signed into law the Inflation Reduction Act, which requires the Secretary of the Department of Health and Human Services to negotiate a “maximum fair price” that it will pay for prescription drugs having the highest Medicare program expenditures under Medicare Parts B[1] and D[2]. Historically, Medicare spending has represented roughly 30% of annual prescription drug purchasing in the U.S.[3] [4]
Small molecule drug products for which there are no third-party generics on the market are eligible for price negotiation if they were approved by the FDA at least seven years before the date they are selected for price negotiation.
Biologic products for which there are no third party biosimilars on the market are eligible for price negotiation if they were approved by the FDA at least eleven years before the date they are selected for price negotiations. HHS may choose to delay negotiations an additional two years if there is a high likelihood that a biosimilar will be approved and marketed within such two-year period.[5]
Drug products are selected for price negotiation about two years before the negotiated price would apply. As a result, it can be expected that the period during which the negotiated price would apply will commence roughly nine years after regulatory approval for small molecules, and roughly thirteen years after regulatory approval for biologics. The negotiated price remains in effect until a generic or biosimilar of the product enters the marketplace.
The Secretary must select for negotiation 10 Part D drugs for which the negotiated price would go into effect in 2026, 15 Part D drugs for which the negotiated price would go into effect in 2027, 15 Part B or Part D drugs for 2028, and 20 Part B or Part D drugs for 2029 and each subsequent year. These drugs must be selected from among the 50 Part B drugs and 50 Part D drugs with the highest Medicare program expenditures over the 12-month period preceding selection.
We expect that drugs for certain common diseases and conditions are likely to be selected for drug price negotiations. In 2020, the 10 Part D drugs having highest annual Medicare spend were prescribed for medical conditions that affect large percentages of the U.S. population—3 for Type 2 diabetes, 3 for cancer, 2 anticoagulants and 1 each for asthma and rheumatoid arthritis.[6]
Negotiation Process
First, the Secretary will publish a list of the drugs that have been selected for negotiation proceedings. Next, manufacturers of the selected drugs must enter into an agreement to negotiate the price of the drug. During negotiations, the manufacturer must provide the product’s non-Federal Average Manufacturer Price and “any information that the Secretary requires to carry out the negotiation.” In response, the Secretary must provide a written initial offer, to which the manufacturer must either accept or provide a counteroffer within 30 days.[7] The negotiated price must be equal to or lower than a statutorily defined ceiling price, which is based on how long the product has been approved by the FDA. Once negotiations have concluded, the Secretary will publish the maximum fair price for the drug.
Failure to comply with the negotiation process will result in an excise tax beginning at 65% of sales of the selected drug and increasing to 95% for continued noncompliance. In addition, manufacturers are subject to civil monetary penalties for (1) failure to offer the maximum fair price, (2) breaching the negotiation agreement or (3) knowingly providing false information.
Impact on Transactions
As biopharmaceutical companies think about their pipelines, this new drug price negotiation framework will be another factor to consider. Drug products can be difficult to value at the time of licensing or sale because of many factors including the likelihood that the product will make it to market, the possibility of biosimilar or generic entry and the presence of other market competition. Now, negotiators will also have to consider the possibility of drug price negotiations when deciding how to agree upon an equitable value for the licensed or sold drug.
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[1] Typically, these would be prescription drugs administered by a physician in an out-patient setting.
[2] Typically, self-administered prescription drugs.
[3] One study found that Medicare accounted for 30% of U.S. prescription spending as of 2017 and projected that it would reach 33% by 2026. KFF analysis of CMS National Health Expenditure Data for Historical (CY2005-2017) and Projected (CY2018-2026 Retail Prescription Drug Expenditures, at https://www.kff.org/infographic/10-essential-facts-about-medicare-and-prescription-drug-spending/#:~:text=Medicare%20is%20second%20only%20to,2006%20to%2030%25%20in%202017.
[4] Inflation Reduction Act of 2022, H.R. 5376, 117th Cong. § Title 1-Subtitle B
[5] Certain categories of drugs have been excluded from price negotiation including: (1) Drugs for only one rare disease or condition and for which the only approved indication is for that disease or condition, (2) Drugs which the HHS spends less than $200,000,000 a year on (as increased each year for inflation), (3) Plasma-derived products, (4) New formulations, such as an extended release version of a qualifying drug, and (5) for years 2026-2028, certain “small biotech drugs,” which (i) constitute no more than 1% of HHS’s total 2021 expenditures and (ii) which account for at least 80% of HHS’s total 2021 expenditures to that manufacturer.
[6] https://www.aarp.org/politics-society/advocacy/info-2022/medicare-prescription-drug-costs.html
[7] The Secretary and the manufacturer must base their offer and counteroffer upon the following categories: (1) research and development costs, including the extent to which such costs have been recouped, (2) current unit costs of production and distribution, (3) prior federal financial support, (4) information on pending and approved patents and FDA exclusivities, (5) market data and revenue and sales volume data for the drug in the US, and (6) evidence about alternative treatments.
