The Inflation Reduction Act of 2022 (the “Act”), signed into law on August 16, 2022, contains several provisions aimed at reigning in prescription drug costs for Medicare beneficiaries. From a high level, these provisions include the imposition of an inflationary rebate on certain drugs under Medicare Part B and D, Medicare Part D redesign intended to close the oft-criticized coverage gap (also called the “donut hole”), temporary Medicare Part B payments for certain biosimilar products, a cap on cost-sharing for covered insulin products, and the elimination of cost-sharing obligations for certain vaccines administered under Part D.
Perhaps the most consequential change—one that represents a seismic shift in a policy that has spanned decades—is the Act’s authorization of the Secretary of Health & Human Services (“HHS”) to negotiate certain “high spend” drugs, administered under Part B and D, directly with manufacturers and on behalf of the government. As a consequence, the Act presents implications for the pharmaceutical sector that are undoubtedly significant.
Yet, while the Inflation Reduction Act seeks to reset the course of prescription drug pricing in the United States, to what extent does it address the role of Pharmacy Benefit Managers (“PBMs”)— organizations that many consider a primary driver of these run-away costs? Unfortunately for patients who rely on affordable medicines to stay alive and healthy, the answer is “very little.” In fact, Congress refers to PBMs only twice in the Act.
The omission of any PBM regulation from the IRA is significant when considering some of the more egregious tactics put into practice by the PBMs. Spread pricing, for example, occurs when PBMs charge plan sponsors a higher price for a patient’s medication than they pay the dispensing pharmacy, and keep the difference, known as the “spread,” for themselves. It is one of the many schemes employed by PBMs leading to unnecessary financial strain for payers and patients. Another example involves rebate aggregators that are wholly owned by PBMs. Unbeknownst to plan sponsors, PBMs delegate the rebate aggregation function to their rebate aggregators, and therefore do not pass on the rebates that are due and owed to plan sponsors.
This article will explore the potential impact of the Act on these questionable PBM practices should any exist, as well as the economic implications for prescription drug pricing in light of the Act’s shortcomings.
Price Negotiation for High-Spend Single-Source Medicare Drugs
Among the Act’s key provisions is the authorization of HHS to negotiate Maximum Fair Price (“MFP”) for certain high-spend single-source Medicare Parts B and D drugs and biologics.[1] A qualified single source drug is one that was approved at least seven years prior to selection and for which it is not the reference listed drug for a generic approved via Abbreviated New Drug Application. Though negotiated prices will not apply until 2026, initial negotiations begin in 2023 when the Secretary publishes a list of selected drugs.[2] Importantly, during the negotiations, the Secretary must consider a number of statutorily prescribed factors including, but not limited to, research and development costs of the manufacturer for the drug, current unit costs of production and distribution of the drug, and market data for the drug in the United States.
Without specific reference, the Act ostensibly removes PBMs from their role in negotiating eligible drugs under Medicare. While reducing the PBMs’ role in the drug channel is a step forward, the prohibition is limited in that PBMs still hold substantial leverage over drug prices, and drug price negotiations, outside of Medicare. It simply will not change what PBMs are permitted to do in other markets where they dictate which drugs make it onto their formularies or engage in other tactics (such as step therapy) to favor drugs that are financially beneficial to them.
At the core of the high drug pricing are manufacturer rebates; a lucrative tool used by PBMs to provide manufacturers with a favorable position on their formularies even over lower cost, but equally effective, generic drugs. Over time, manufacturers have had to increase list prices of prescription drugs to sustain ever-increasing rebate dollars. Drugs with low competition, however, present a low rebate opportunity for PBMs. Under the Act, drugs eligible for negotiation inherently face low competition. Therefore, it follows that even pre-IRA, currently eligible drugs would have presented low rebate opportunities for PBMs to exploit.
One on hand, due to the low rebate potential for negotiation-eligible drugs, PBMs will have little incentive to make up lost Medicare revenue in other markets. On the other, the Act does very little to remedy abusive rebate practices that have become endemic to prescription drug pricing under any other circumstances.
On November 30, 2020, the Office of Inspector General (“OIG”) promulgated a final rule to revise the Federal Anti-Kickback Statute’s discount safe harbor. More specifically, the final rule modified the existing discount safe harbor by exempting “fixed fees that manufacturers pay to PBMs for services rendered to the manufacturers that meet specified criteria.”[3] In other words, the final rule would have ended safe harbor protections from AKS liability for rebates negotiated between drug manufacturers and PBMs or plan sponsors in Medicare Part D. The IRA will delay implementation of the final rule until 2032.[4]
Though rebate schemes are a core issue at the heart of questionable PBM practices, replacing drug rebates with fixed service fees under the safe harbor does not fix the systematic issues in the Medicare Part D space. Frier Levitt has written extensively on the shortcomings of this final rule, concluding that HHS has failed to demand complete transparency from PBMs in terms of their rebate aggregation. It is often the case that plan sponsors are not aware of PBMs’ wholly owned rebate aggregators. Instead, PBMs use their rebate aggregators to keep the rebates that should’ve been relayed to plan sponsors. This lack of transparency is problematic because safe harbor protection is offered only for service fees related to pharmacy benefit management services provided by the PBMs to Part D plan sponsors.
Thus, the IRA’s moratorium on implementation of the final rule is commendable if only for the fact that, from its inception, would have failed to reign in abusive PBM practices, particularly those effecting Part D sponsors.
Conclusion
In passing the Inflation Reduction Act, Congress set in motion its electoral mandate to reign in the cost of prescription drugs and healthcare generally. With the IRA, however, comes added complexity and certain shortcomings. More specifically, it fails to effectively reign in questionable PBM practices particularly those relating to spread pricing and rebate programs. Notwithstanding, compliantly navigating the IRA in its current form, particularly with respect to its pricing provisions, is going to be of critical importance in the new year. Though negotiated prices will not apply until 2026, initial negotiations begin in 2023 upon the Secretary’s publication of selected drugs.
How Frier Levitt Can Help
Frier Levitt’s Life Sciences Group offers a range of legal services including healthcare policy review and analysis, representation of plan sponsor clients in legislative matters, and auditing of PBMs to ensure that plans have received the correct rebates. In addition, Frier Levitt counsels drug manufacturers seeking to implement drug pricing programs compliant with federal law, including the computation and negotiation of negotiate Maximum Fair Price (MFP) under the IRA. For more information or questions about our legal services for plan sponsors and manufacturers, contact us.
[1] H.R. 5376, 107th Cong. § 11301, codified at 42 U.S. Code § 1320f.
[2] Id.
[3] 85 Fed. Reg. 76,666, 76,667 (Nov. 30, 2022).
[4] H.R. 5376, 107th Cong. § 11301.
