CMS details its Medicare benefit redesign: Top points for biopharmaceutical companies
The Centers for Medicare and Medicaid Services (CMS) recently released information explaining how it will implement a Medicare benefit redesign as included in the Inflation Reduction Act (IRA).
The IRA was the most substantial change to biopharmaceutical pricing and federally required rebates since the Medicare Part D benefit was implemented nearly 20 years ago. The Act changes required discount obligations for health insurers and biopharmaceutical companies in Medicare Part D, eliminating the Part D coverage gap and replacing it with a new program that will require manufacturers and Part D plan sponsors to take on more of the beneficiary cost previously subsidized by the federal government.
CMS’s release includes a description of how it will identify manufacturers eligible for specified biopharmaceutical company phase-ins that reduce their discounting obligations in the initial years following the benefit design change.
This alert focuses on the changing obligations for specified, typically small biopharmaceutical companies in the Medicare Benefit redesign as a result of the IRA and their implications for access to medicine and small company risk management.
The IRA redesigned the Medicare Part D drug benefit by eliminating the coverage gap, establishing an annual out-of-pocket cap on patient costs starting at $2000 per year, and changing manufacturer and plan liability for drug costs. The redesign will require manufacturers to provide discounts for drugs for all beneficiaries, including those receiving the low-income subsidy (LIS). The discount grows depending on the amount of expenses incurred by the beneficiary, with no discount offered in the deductible (illustration below for branded drugs).
In addition, health plans offering Medicare Part D coverage will be liable for a greater share of the costs of the beneficiaries that reach a high level of spending than they were previously.
Certain companies with drugs that constitute a smaller portion of Medicare Part D spending will have their Medicare redesign cost liability phased in over time. The discount is phased in even more gradually for companies that have only one dominant drug in Medicare, significantly delaying their full exposure to the new discount. Companies meeting “specified manufacturer” criteria will have the discount phased in for LIS beneficiaries, and companies with one dominant drug meeting these same “specified manufacturer” conditions will have the discount phased in across all beneficiaries.
CMS will use 2021 Part D spending data to determine which companies meet the specified manufacturer criteria. Companies considered single employers for the calculation and determination of a “specified manufacturer” will be aggregated. Companies acquired after 2021 that met the 2021 qualification will no longer be eligible for the phase-in.
CMS’s methodology, detailed in the guidance, involves aggregating all spending for one manufacturer and dividing it by the total Part D spend in 2021. If that amount is 1 percent or less, CMS will designate the manufacturer a “specified manufacturer.” A manufacturer with “specified manufacturer” status qualifies for the phase-in for both LIS and non-LIS if one of its drugs is 80 percent or more of the total in Medicare.
In this first year of the new program, CMS will let companies know if they qualify for the phase-in by January 2024, provided they attest to ownership in the Health Plan Management System (HPMS) by December 8, 2023.
Key takeaways of the benefit design changes
Biopharma companies that make drugs that are likely to be used by patients with sizable health needs who reach the catastrophic level of the benefit and/or beneficiaries with lower incomes, and the health plans that cover those drugs, will likely experience the largest increase in financial obligations as a result of the IRA. This may lead to stricter access controls on medicines for those populations and lower profitability for the plans and manufacturers that primarily serve those groups.
The phase-in for the Part D redesign discount lessens the initial burden on biopharma companies whose drugs are a small portion of Medicare drug spending. Based on our analysis of the 2021 Part D spending by drug, we estimate that roughly one third of all Part D spending that year was for a drug produced by a manufacturer eligible for phase-in.
The law appears to aim at allowing smaller companies some time to adjust to the new financial obligation. However, CMS has indicated that health plans will be responsible for the difference between discounts offered by small companies and those provided for larger company drugs or at least companies whose drugs are a larger share of total Medicare spending. This could disadvantage small-company medicines by making them more expensive to cover due to the reduced subsidy from a drug company. Health plans could counteract the intent of the IRA by demanding an increased rebate or downgrading the formulary placement of the specified manufacturers’ products to make up for the difference.
For more information, please contact any of the authors.
 Medicare Part D Manufacturer Program Final Guidance November 17, 2023 accessed https://www.cms.gov/files/document/manufacturer-discount-program-final-guidance.pdf-0
 Memorandum from CMS to Pharmaceutical Manufacturers and Part D Plan Sponsors, “Medicare Part D Manufacturer Discount Program: Methodology for Identifying Specified Manufacturers and Specified Small Manufacturers” (https://www.cms.gov/files/document/manufacturer-discount-program-specified-and-specified-small-manufacturer-methodology.pdf)
 To qualify, drugs must have been marketed by August 16, 2022
 Discounts are phased in starting at 1 percent in both initial and catastrophic coverage in 2025, growing to 10 percent for both initial and catastrophic coverage in 2029, and increasing to 20 percent in catastrophic in 2031
 Analysis of 2021 Medicare Part D Spending by Drug https://data.cms.gov/summary-statistics-on-use-and-payments/medicare-medicaid-spending-by-drug/medicare-part-d-spending-by-drug aggregated to the manufacturer name and combining across manufacturers where the first ten letters of the name were the same. Selected all drugs where the aggregated manufacturer spend was less than 1 percent of the total
 Memorandum from CMS to Pharmaceutical Manufacturers and Part D Plan Sponsors, “Medicare Part D Manufacturer Discount Program Final Guidance” at page 6, (https://www.cms.gov/files/document/manufacturer-discount-program-final-guidance.pdf) (The guidance clarifies that “[b]ecause the discount, regardless of the discount percentage, reduces the plan liability, the plan is responsible for the remaining liability, less enrollee cost sharing,” but does not prevent plans from conditioning formulary access on rebates from manufacturers of phased-in drugs)
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