Inflation Reduction Act’s Drug Price Negotiation Program explained

In the first of a three-part webinar series on the recently enacted Inflation Reduction Act of 2022 (IRA), Hogan Lovells partners Alice Valder Curran and Ken Choe discussed the Drug Price Negotiation Program established by the IRA and answered questions from industry observers on how the program will be rolled out. Alice and Ken addressed the circumstances under which a drug or biologic may be selected for negotiation as well as how the “maximum fair price” of a product may be determined under the new law.

Parts two and three of the webinar series focused on the other two primary components of the IRA related to prescription drugs: the Medicare Parts B and D inflation rebates, and the Medicare Part D redesign. Part one is summarized below.


Kicking off the first of our three-part webinar series discussing the recently enacted prescription drug legislation, Alice Valder Curran, partner in the Hogan Lovells Life Sciences & Health Care practice, summarized how, on August 16, 2022, the Inflation Reduction Act of 2022 (IRA) was signed into law. The legislation, which we summarized on August 8 (online here), revived many of the prescription drug provisions proposed last fall in the Build Back Better Act, but with some notable differences.

Leading this webinar, Ken Choe, partner in the Hogan Lovells Health practice, explained how the IRA establishes a “Drug Price Negotiation Program” that seeks to lower the prices of certain high Medicare spend drugs without generic/biosimilar competition with respect to Medicare beneficiaries, starting in 2026. Ken described how, under the law, the Secretary of Health and Human Services (HHS) will select a specified number of drugs for negotiation each year, generally two years before the negotiated price applies, and the manufacturer of a drug selected for negotiation will be required to offer a “maximum fair price” for such drug with respect to Medicare beneficiaries. The first set of drugs will be selected for negotiation by September 1, 2023, with the resulting negotiated prices taking effect in “initial price applicability year” 2026.

What drugs are subject to negotiation?

In the webinar, Ken outlined how only certain drugs are subject to the Drug Price Negotiation Program:

  • Qualifying single source drugs: Certain drugs/biologics approved/licensed by FDA with no generic/biosimilar on the market. Drugs must be at least 7 years post-approval by the selection date, and biologics must be at least 11 years post-licensure by the selection date. Certain orphan drugs, low Medicare spend drugs, and plasma-derived products are excluded. When asked about the definition of “plasma-derived products,” Ken described the ambiguity in the legislative text, speculating that CMS may confine the exclusion to the current FDA and CMS view of plasma-derived products, which excludes CAR-T products, especially as the agency may not have incentive to create large carve-outs.

  • Negotiation-eligible drugs: The 50 qualifying single source drugs with highest total expenditures under Part D during a specified 12-month lookback period, and the 50 qualifying single source drugs with highest total expenditures under Part B during a specified 12-month lookback period. In the webinar, Ken detailed how total expenditures under Part B/D will be determined and the 12-month lookback period will be identified.

  • Selected drugs:

    • For initial price applicability years 2026 and 2027, HHS will select, respectively, the 10 and 15 highest ranked drugs on the list of the 50 highest Part D spend drugs.

    • For initial price applicability year 2028 and thereafter, HHS will select, respectively, the 15 and 20 highest ranked drugs on a combined list of the 50 highest Part B spend drugs and the 50 highest Part D spend drugs.

When asked about HHS’s flexibility in selecting drugs, Ken explained that the law removes discretion from HHS and that HHS is required to select the drugs ranked highest on the list.

Ken also pointed out that the law also specifies that small biotech drugs are ineligible for selection for negotiation for initial price applicability years 2026, 2027, and 2028, and set forth how the law defines a “small biotech drug.”

How is the negotiated price determined?

Ken summarized the negotiation process and how the negotiated price is determined under the law:

  1. The manufacturer must enter into an agreement to negotiate
  2. The manufacturer must submit specified information to the HHS
  3. HHS makes an initial offer
  4. The manufacturer must accept or make a counteroffer
  5. HHS responds to any counteroffer
  6. The negotiation ends, and a “maximum fair price” is set with respect

The webinar presentation lays out in visual form the negotiation timeline for the first initial price applicability year, 2026, as well as that for subsequent years, which will become the conventional timeline.

Ken then explained the limits on the maximum fair price, noting that HHS must develop and use a consistent negotiation methodology and process that aims to achieve the lowest maximum fair price. There will be a maximum fair price ceiling for all selected drugs, which the maximum fair price cannot exceed. For initial price applicability years 2029 and 2030, there will also be a temporary maximum fair price floor for small biotech drugs set at 66 percent of average non-Federal Average Manufacturer Price (non-FAMP) for 2021, increased by an inflation factor.

During the webinar, Ken went on to explain that the maximum fair price ceiling will reflect the lowest of three options. The first two options reflect an applicable percentage of the average non-FAMP for a specified year. The maximum fair price ceiling is lower the longer that the drug/biologic goes without drawing competition, Ken emphasized, when explaining how the applicable percentage is determined. For Part B drugs, the third option is lower of average sales price (ASP) or wholesale acquisition cost (WAC) for the year before the selection year. For Part D drugs, the third option is the sum of the enrollment-weighted net Part D negotiated prices under each Part D/MA-PD plan. When asked about whether the third option for Part D drugs is net of manufacturer rebates, Ken answered that there is some ambiguity whether the statute intends for net Part D negotiated prices to encompass manufacturer price concessions.

The webinar outlined the factors that HHS must consider in calculating the maximum fair price:

  • Manufacturer-specific data:
    • Research and development costs and the extent to which the manufacturer has recouped such costs
    • Current unit costs of production and distribution
    • Prior federal financial support for discovery and development
    • Data on pending and approved patents and exclusivity
    • Market data and revenue and sales volume data
  • Evidence about alternative treatments:
    • The extent to which the drug represents a therapeutic advance as compared to existing therapeutic alternatives and the costs of such alternatives
    • FDA-approved prescribing information for the drug and the alternatives
    • Comparative effectiveness of the drug and the alternatives, including effects on specific patient populations
    • The extent to which the drug and the alternatives address unmet medical needs

Ken remarked that an important question to which we do not yet know the answer is how HHS will weigh each of these factors. Concluding the analysis of how the maximum fair price is calculated, Ken explained the annual increase in the maximum fair price and the renegotiation process.

Ken advised manufacturers that may be selected in the first round of the Drug Price Negotiation Program to begin thinking now about arguments that can be made and evidence that can be provided to try to affect HHS’s consideration of the various factors.

What happens after the negotiated price is set?

During the price applicability period, for Part B drugs, the manufacturer must offer the maximum fair price to hospitals, physicians, and other providers and suppliers with respect to Part B beneficiaries, Ken explained. For Part D drugs, the manufacturer must offer the maximum fair price to pharmacies and other dispensers with respect to Part D beneficiaries (and to Part D beneficiaries at the point of sale). In the webinar, Ken also set forth the implications of the maximum fair price for Best Price, Average Manufacturer Price (AMP), ASP, the 340B program, Part B and Part D inflation rebates, and the Part D Manufacturer Discount Program.

Ken noted that, although the negotiation program does not directly affect the price that manufacturers offer with respect to commercial patients, there is the potential for diversion, whereby units purchased at the maximum fair price are administered to a commercially insured patient. It is currently unclear how maximum fair price units for Medicare beneficiaries and commercial units for commercial patients will be differentiated, he said. In addition, Ken observed that it is possible that the published maximum fair price may serve as an anchor for commercial prices, with commercial customers potentially seeking a price similar to the maximum fair price.

What happens if a generic/biosimilar launches?

The impact of the launch of a generic/biosimilar depends on the when the generic/biosimilar enters the market, Ken explained. A generic/biosimilar market entry can cause the following:

  • Ineligibility for selection for negotiation. If a generic/biosimilar launches before selection of the drug/biologic for negotiation, the drug/biologic is ineligible for selection for negotiation.
  • Termination of negotiation. If a generic/biosimilar launches after the selection of the drug/biologic for negotiation but before the end of the negotiation period, negotiation of a maximum fair price for the drug/biologic terminates.
  • Termination of maximum fair price. If a generic/biosimilar launches after the end of the negotiation period of the drug/biologic, the drug/biologic generally ceases to be subject to the maximum fair price at the start of the first year that begins at least nine months after the generic/biosimilar entered the market.
    • Therefore, Ken explained, if a generic/biosimilar launches on or before April 1, the drug/biologic ceases to be subject to the maximum fair price at the start of the first year after launch.
    • However, if a generic/biosimilar launches after April 1, the drug/biologic ceases to be subject to the maximum fair price at the start of the second year after launch.

Ken also explained that the statute refers to, not the date on which the generic/biosimilar launches, but the date on which HHS makes the determination that the generic/biosimilar has launched. He noted that a delay between when the generic/biosimilar launches and when HHS makes the determination that the generic/biosimilar has launched could be consequential.

Ken also described in the webinar how HHS can delay the selection of a biologic for negotiation by one or two years if the biologic that otherwise would have been selected is an extended-monopoly drug, the delay is requested by a biosimilar manufacturer, and HHS determines there is a high likelihood that the biosimilar will launch. However, the delay is not permitted where:

  • The biosimilar is more than one year post-licensure and has not yet been marketed
  • The biosimilar manufacturer also manufactures the reference product
  • The biosimilar manufacturer has entered an agreement with the reference product manufacturer:
    • Requiring or incentivizing the biosimilar manufacturer to request the delay; or
    • Restricting the quantity of the biosimilar that may be sold in the United States; or
  • The reference product transitioned to long-monopoly drug status during the first year of delay, in which case it is ineligible for a second year of delay

Ken went on to explain that a reference product manufacturer must pay a rebate if, after a first year of delay, HHS determines that there is no longer a high likelihood that the biosimilar will launch within the specified window. The manufacturer is also subject to paying a rebate if, after a second year of delay, the biosimilar has not launched.

When asked about whether a biologics manufacturer may launch a biosimilar to serve as a competitor to its reference product, Ken explained that there is nothing in the IRA that appears to prohibit this, but current FDA policy does not allow a biologics manufacturer to do so.

How will compliance with the program be enforced?

Ken highlighted in the webinar how a manufacturer that does not comply with the IRA may be punished through an excise tax on each sale of the drug during a period of noncompliance, cautioning that the amount of the tax will escalate over time. Responding to an industry observer’s question, Ken clarified that this tax is on all units sold, not merely on Medicare units sold. Thus, Ken, emphasized, the IRA provides for a “significant hammer to ensure compliance.” Alice pointed out that there is some industry chatter about how this compliance tool may be targeted for a constitutional challenge.

The excise tax applies where the manufacturer has failed to timely: a) enter into a negotiation agreement; b) agree to a maximum fair price; or c) submit required data to HHS. The excise tax ceases to apply where: a) the manufacturer comes into compliance; b) a generic/biosimilar launches; or c) the manufacturer terminates its Part D Coverage Gap Discount Program, Part D Manufacturer Discount Program, and Medicaid Drug Rebate Program agreements, and none of its drugs are subject to any such agreement.

Apart from the excise tax, Ken emphasized how a manufacturer can be subject to significant civil monetary penalties (CMP) for:

  • Failing to offer the maximum fair price with respect to Part B/Part D beneficiaries, where penalties are equal to ten times the product of the number of units administered/dispensed to Part B/Part D beneficiaries during the year and the difference in between the price and the maximum fair price,
  • Violating terms of the negotiation agreement, including the requirement to submit required data to HHS, in which case the CMP amount is $1 million per day of noncompliance, or
  • Knowingly providing false information with respect to eligibility as a small biotech drug or eligibility for the delay for biosimilar market entry, in which case the penalty is $100 million for each item of false information

Ken further noted that there are broad, “sweeping” preclusions of administrative and judicial review under the statute, meaning there are “tight limits” on which of HHS’s determinations can be legally contested.

Next steps

In the immediate term, CMS will need to decide which component(s) of the agency will be in charge of the program, assemble program leadership and staff, and determine how best to establish initial program policy (e.g., whether CMS will allow public comment on proposed guidance prior to its finalization).

In the meantime, stakeholders will look to identify areas of potential agency discretion during the implementation process and help inform HHS with respect to those areas. Additionally, manufacturers of potential candidates for selection for negotiation may revisit lifecycle management considerations with respect to such products and future products.


You can find summaries of parts two and three of our Inflation Reduction Act webinar series online here:

Webinar summary: Inflation Reduction Act – Medicare Parts B and D Inflation Rebates

Webinar summary: Inflation Reduction Act – Medicare Part D Redesign

Ken Choe
Washington, D.C.
Alice Valder Curran
Washington, D.C.
Ashley Ifeadike
Washington, D.C.
Mahmud Brifkani
Senior Associate
Washington, D.C.


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