As the September 1, 2023 deadline for Centers for Medicare & Medicaid Services (CMS) to publish the first 10 “selected drugs” subject to negotiation of “maximum fair prices” under Medicare Parts B and D fast approaches, CMS has recently specified information that manufacturers must submit in order for their drugs to qualify for the “Small Biotech Exception” to being included on the list. The information is to be submitted during the summer of 2023; the specific deadline has not yet been announced.
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (IRA). Among other provisions, the IRA provides for the CMS to negotiate “maximum fair prices” with manufacturers of “selected drugs” covered under Medicare Parts B and D. The price negotiation process begins on September 1, 2023, when CMS is required to publish the list of the first 10 selected drugs subject to negotiation, for maximum fair prices which will take effect beginning January 1, 2026.
The IRA provides that the selected drugs will be the 10 “negotiation-eligible drugs” having the highest total expenditures under Medicare Part D during the period June 1, 2022 through May 31, 2023. Negotiation-eligible drugs generally consist of “qualifying single-source drugs”, which are generally defined as branded drugs and biologicals approved by the Food and Drug Administration (FDA) at least 7 years (with respect to drugs) or 11 years (with respect to biologicals) before the date the list is published, and which do not have a marketed generic equivalent or biosimilar. However, for 2026 through 2028, the IRA provides that negotiation-eligible drugs exclude certain drugs under what CMS refers to as the “Small Biotech Exception”.
What is the Small Biotech Exception?
The Small Biotech Exception, which is set forth at 42 U.S.C. §1320f-1(d)(2), excludes “a qualifying single source drug that meets either of the following”:
- A qualifying single source drug for which total expenditures under Medicare Part D during 2021 are both: (i) 1 percent or less of Part D expenditures for all covered Part D drugs during 2021; and (ii) at least 80 percent of the total Part D expenditures for all covered Part D drugs for which the manufacturer of the drug had a Coverage Gap Discount Program agreement in effect during 2021; or
- A qualifying single source drug for which total expenditures under Medicare Part B during 2021 are both: (i) 1 percent or less of total expenditures under Part B for all qualifying single source drugs; and (ii) at least 80 percent of the total expenditures under Part B for all qualifying single source drugs of the manufacturer.
As further described below, it appears that CMS may be planning not to implement the second exception, based upon Part B expenditures, with respect to the list of selected drugs to be released on September 1, 2023. If that is correct, it is presumably based upon the fact that selected drugs for 2026 and 2027 are limited to qualifying single source drugs which are among those having the 50 highest expenditures under Part D.
However, the Small Biotech Exception, as drafted, does not appear to be so limited—i.e., a drug which would be on the list based upon high Part D expenditures appears to be eligible for exclusion from it based solely upon Part B expenditures, if it meets that portion of the Small Biotech Exception.
The IRA provides that, in applying the Small Biotech Exception, all entities treated as a single employer under the Internal Revenue Code (IRC) (a “controlled group”) are considered a single manufacturer; consequently, expenditures for products marketed by different subsidiaries of a common parent entity will be aggregated for purposes of the 80 percent test.
Further, a drug which would otherwise qualify for the Small Biotech Exception will not be excluded from the list of selected drugs if its manufacturer is acquired after 2021 by another manufacturer, unless the acquiring manufacturer had a Coverage Gap Discount Program agreement in effect for 2021 and the “specified drugs” on which coverage gap discounts were payable under such agreement represented less than 1 percent of covered Part D drug expenditures and 1 percent of Part B drug expenditures for 2021.
CMS Seeks Input on Information Needed
On January 24, 2023, CMS published a notice in the Federal Register under the Paperwork Reduction Act of 1995 soliciting public comment regarding its proposed collection of information from manufacturers to implement the Small Biotech Exception. CMS stated, “a manufacturer that seeks the Small Biotech Exception for its covered Part D drug (‘Submitting Manufacturer’) must submit information to CMS about the company and its products in order for the drug to be considered for the exception. If the Submitting Manufacturer seeks the Small Biotech Exception for a covered Part D drug it acquired after December 31, 2021, [it] must also submit information related to the separate entity that had the Medicare Coverage Gap Discount Program agreement for the drug on December 31, 2021.”
CMS separately posted its proposed Information Collection Request Form and Supporting Statement.
In its Supporting Statement, CMS states that the Small Biotech Exception requires it to consider information on Part D expenditures for 2021, and that it does not have information to determine whether manufacturers of Medicare Part D drugs and biologicals were treated as a single employer under the IRC as of December 31, 2021. It also states, “the information collection request does not collect all information relevant to Part B drugs, as Part B drugs may not be selected for negotiation until initial price applicability year 2028….”
The proposed form would require a Submitting Manufacturer to indicate:
- As of the date of the submission, the Submitting Manufacturer’s name, tax identification number, mailing address, P-number (identifying the manufacturer within the CMS Health Plan Management System (HPMS)), and labeler code(s);
- All National Drug Codes (NDCs) for Part D drug(s) that the Submitting Manufacturer seeks to have covered under the Small Biotech Exception;
- Whether the Submitting Manufacturer had a Medicare Coverage Gap Discount Program agreement in place on December 31, 2021 for the covered Part D drug for which the manufacturer seeks the Small Biotech Exception, and if not, the information described in #1 above for the entity that did have such an agreement in effect as of December 31, 2021 for such drug;
- Whether the entity that had a Coverage Gap Discount Program agreement in effect on December 31, 2021 for the drug for which the Small Biotech Exemption is sought had other members of its controlled group as of December 31, 2021, and if it did, the information described in #1 above for each such member of the controlled group;
- A certification that the information provided is complete, accurate, and was prepared in good faith and after reasonable efforts; and
- Identifying and contact information about the individual completing the form.
Notably, the form does not request information about drugs or biologicals that would qualify for the Part B portion of the Small Biotech Exception. In particular, the requirement to have a Coverage Gap Discount Program agreement in effect for the drug or biological as of December 31, 2021 applies only under the Part D portion of the exemption, but the form appears to contemplate that only a drug or biological for which such an agreement was in effect could be eligible for the exception.
While it may be unlikely that a single source drug or biological could currently be covered under both Part D and Part B, have been approved by the FDA for the requisite 7 or 11 year period and meet the Part D expenditure test without having been subject to a Coverage Gap Discount Program agreement in 2021, that is nevertheless possible. Moreover, a drug which is primarily covered under Part D and has high Part D expenditures could have a small amount of Part B coverage, such that, for 2021, it met the less than 1 percent of total Part B expenditures test and, depending upon the other drugs in the manufacturer’s portfolio, comprised more than 80 percent of the Part B expenditures for all qualifying single source drugs of the manufacturer.
In its Supporting Statement, CMS estimated that only 10 manufacturers will submit the form to seek the Small Biotech Exception, one of which will have acquired the drug since December 31, 2021. Consequently, CMS appears to have a pretty good idea about what manufacturers it expects will qualify for the exception. This may reflect its past involvement in crafting the Small Biotech Exception as part of the legislative drafting of the IRA, particularly if the language was drafted for the purpose of exempting specific drugs from price negotiation.
More guidance and tools coming
Notably, the IRA provides that CMS may implement the IRA for 2026, 2027 and 2028 by program instruction or other forms of program guidance, and that there shall be no administrative or judicial review of, among other things, the determination of negotiation-eligible drugs or selected drugs. As a result, there appear to be significant hurdles to challenging CMS’s determinations regarding implementation of the Small Biotech Exception.
CMS indicates that it intends to develop a tool through which Submitting Manufacturers would submit the form seeking the Small Biotech Exception via HPMS during the summer of 2023, by a specific date to be announced through program instruction.
Interested persons may submit comments in response to the Paperwork Reduction Act notice on or before March 23, 2023. CMS states that comments may relate to any aspect of the collection of information; however, it has not sought comment on the implementation of the IRA itself.
Reed Smith will continue to follow developments in the Drug Negotiation Program. Please reach out to Bob Hill, Joe Metro, James Segroves, or Janine Tougas for additional information regarding the current request for comments, or with other questions relating to the Drug Price Negotiation Program under the IRA.