For the first time in history, the Centers for Medicare and Medicaid Services (CMS) will engage in price negotiations with drug manufacturers for a subset of high-cost, name-brand drugs covered by Medicare. Pursuant to the Inflation Reduction Act (IRA), CMS took its first steps toward implementing the Medicare Drug Price Negotiation Program (or “Negotiation Program”) in a memo published last week, which sets forth certain details of the program and outlines a timeline for implementation.
Pool of Drugs Subject to Negotiation
The IRA authorizes CMS to directly negotiate drug prices for certain high-expenditure, single-source Medicare Part B or Part D drugs. Drug price negotiations will initially be limited to a pool of 10 Medicare Part D drugs for the year 2026, which will be expanded in subsequent years of the program. CMS will select for negotiation 15 more Part D drugs for year 2027, an additional 15 Part B or Part D drugs for 2028, and 20 more Part B or Part D drugs for each year after that.
The drugs will be selected from among the 50 drugs with the highest total Medicare Part D or Medicare Part B spending. For the initial years 2026 and 2027, CMS will select the 10 and 15 highest-ranked drugs on the list, respectively. In 2028 and thereafter, CMS will select the respective 15 and 20 highest-ranked drugs on a combined list of the 50 highest Part B and Part D drugs by spending.
CMS expects to publish its first list of 10 Part D drugs on September 1, 2023, based on spending data for the 12-month period from June 1, 2022 to May 31, 2023. Manufacturers will then have until October 1, 2023 to sign an agreement to participate in the negotiation process.
Certain drugs will be exempted from the program, including drugs that have a generic or biosimilar available, drugs that are less than nine years (for small-molecule drugs) or 13 years (for biologics products) from their FDA-approval or licensure date, drugs with Medicare spending of less than $200 million in 2021 (increased for subsequent years by the CPI-U), drugs with an orphan designation as their only FDA-approved indication, and all plasma-derived products.
Under the “small biotech exception,” the program will also exempt certain single-source biotech drugs for the initial years 2026, 2027, and 2028. The exception will apply to drugs that account for 1% or less of Medicare Part D or Part B spending and account for 80% or more of spending under Part D or Part B on that manufacturer’s drugs. To identify drugs subject to the exception, the CMS will consider the total 2021 Medicare expenditures for the drug, and the expenditures for all Medicare-qualifying single-source Part B drugs of the manufacturer or all covered Part D drugs for which the manufacturer has an agreement under the Medicare Coverage Gap Discount Program, as applicable. 
For eligible drugs subject to the program, the negotiations will take the form of an exchange of offers and counteroffers between CMS and drug manufacturers.
To guide the negotiations, CMS will request data submissions from drug manufacturers whose drugs are affected by the statute. Relevant data to be considered in the negotiations includes: (i) research and development costs of the drug and the recoupment of those costs by the manufacturer; (ii) unit costs of production and distribution; (iii) prior federal financial support for drug discovery and development; (iv) approved and pending patent applications; (v) FDA-recognized exclusivities; and (vi) market data, including revenue and sales volume data.  Manufacturers and the public may also voluntarily submit data relating to evidence of alternative treatments. CMS has proposed that data submissions for the first round of drugs will be due on October 2, 2023.
By February 1, 2024, CMS expects to send its initial offers of a maximum fair price with a justification to manufacturers, beginning the negotiation period. Counteroffer submissions from manufacturers will be due 30 days from the date the initial offer is received.
The negotiation period will end on August 1, 2024, and CMS expects to publish its first round of maximum fair prices on September 1, 2024.
Maximum prices determined through the negotiation process will be in effect starting January 1, 2026. During the price applicability period, manufacturers must offer the agreed-upon negotiated price to all maximum fair-price-eligible individuals, which includes Medicare beneficiaries enrolled in Part B and/or Part D, as well as providers of services to those individuals (e.g., physicians and hospitals).
To ensure compliance with the negotiation process, the Inflation Reduction Act applies an excise tax on each sale of the drug during a period of non-compliance—including drugs sold to purchasers other than Medicare and Medicaid. The tax begins at 65% of the product’s U.S. sales and increases by 10% for each quarter of noncompliance, to a maximum of 95%. As an alternative, manufacturers can choose to withdraw all of their drugs from coverage under Medicare and Medicaid. Manufacturers that refuse to offer the agreed-upon price to eligible individuals will be subject to a civil monetary penalty equal to 10 times the difference between the price charged and the maximum fair price determined in negotiations.
Key dates for the rollout of the program are included in a timeline published by CMS. CMS invites public comments on various aspects of the program throughout this year. We will be following developments closely and are available to assist companies interested in participating in the comment process and navigating this new program.
 An information collection request for the small biotech exception will be published in winter of 2023 with a 60-day notice and public comment period. Manufacturers who believe they qualify for the exception will be given until summer 2023 to submit materials for the purpose of determining the selected drug list for the year 2026.
 In the spring of 2023, CMS plans to publish additional information collection requests relating to the manufacturer-specific data that will be considered in the negotiations and the format of offers and counteroffers during the negotiation.