CMS Finalizes Guidance on Medicare Part D Manufacturer Discount Program

The Inflation Reduction Act (IRA) significantly changed the Part D benefit. As part of this change, the Coverage Gap Discount Program (CGDP), a program that has existed since 2011, will sunset on December 31, 2024, and be replaced by the Medicare Part D Manufacturer Discount Program (the “Discount Program”). On November 17th, CMS issued its final guidance on the Discount Program in which it responded to public comments and provided updated guidance for the Discount Program for 2025 and 2026.

The Discount Program is similar to the CGDP with respect to several requirements and operational processes, and CMS will implement it in a similar manner. Below, we provide a high-level summary of the Final Guidance, focusing on the legal and regulatory updates from the May 2023 draft guidance. We do not address the technical and administrative details of the Discount Program here.

Sunsetting of Coverage Gap Discount Program: The 70% coverage gap discount under the CGDP will continue until December 31, 2024. CMS will send the final manufacturer invoice for discount liabilities accrued by then on April 30, 2028. Final Guidance at 2.

Conditions for Coverage after January 1, 2025: Any manufacturer that wishes to have its applicable drugs covered under Medicare Part D after January 1, 2025 (“participating manufacturers”) must execute a Discount Program agreement with CMS by March 1, 2024. Id. at 35. Applicable drugs are covered Part D drugs approved under a new drug application (NDA) or biologics license application (BLA) that are on a Part D plan formulary or for which benefits are available under a Part D plan, including through an exception or appeal, but do not include drugs selected under the Medicare Drug Price Negotiation Program for a Maximum Fair Price (MFP) applicability year. See id. at 54. The manufacturer’s agreement must cover all its labeler codes that contain an applicable drug or a selected drug. Id. at 33-34. All labeler codes that are covered by Discount Program agreements will be distributed to PDP sponsors and posted on the CMS website. Id. at 21.

The Final Guidance clarifies that, although both applicable drugs and selected drugs must be covered under a Discount Program agreement, selected drugs are excluded from the definition of an applicable drug, so they are not subject to applicable discounts during an MFP applicability year. Id. at 20-21. Non-applicable drugs (e.g., generics) will be coverable under Part D regardless of the manufacturer’s participation in the Discount Program. See id. at 22. CMS expects to provide additional guidance on payments, direct and indirect remuneration (DIR), and calculating subsidies for selected drugs in the coming months. Id. at 10.

Applicable drugs or selected drugs that are not covered by a Discount Program will not be covered by Part D. Although the IRA allows CMS to cover applicable drugs that CMS determines are “essential to the health of [Part D] beneficiaries” even if they are not under a manufacturer’s Discount Program agreement, CMS does not interpret this exception as allowing the agency to proactively create a list of essential medicines that can circumvent the Discount Program. Instead, CMS anticipates using this exception on rare occasions. Id. at 2-3.

Overview of Medicare Part D Design Changes: Beginning in 2025, the Medicare Part D benefit will consist of a 3-phase benefit:

• the deductible, during which the enrollee is responsible for 100% of their gross covered prescription drug costs.
• the coverage phase, during which the enrollee pays a 25% coinsurance, participating manufacturers cover 10% of the negotiated price through the Discount Program (or less if a manufacturer phase-in applies) and Part D plans (PDPs) cover the remainder, typically 65% (but more if a phase-in applies). at 6. This phase extends up to the out-of-pocket (OOP) maximum.
• The catastrophic coverage phase, during which the enrollee pays 0%, participating manufacturers typically provide a 20% discount and PDPs typically cover 60% of the costs for all covered Part D drugs. Medicare pays the remaining 20% reinsurance subsidy for applicable drugs. This reinsurance subsidy increases to 40% for selected drugs and non-applicable drugs, where no manufacturer discounts apply. at 20.

Discount Program Agreements and Requirements: CMS published the Discount Program agreement without the opportunity for public comments. It shares many of the same requirements of the CGDP: manufacturers must provide and maintain updated information on their labeler codes and NDCs; they must provide the applicable discount by making payments within 38 days after receiving the invoice; and they must comply with the program’s legal, regulatory, administrative and technical requirements.

Manufacturers must sign the agreement by March 1, 2024, to participate in the 2025 plan year. The initial term is valid for 12 months and the agreement will automatically renew each January 1 thereafter. For calendar year 2026 and subsequent years, an agreement will become effective on the first day of a calendar quarter that is at least 60 days after a manufacturer has signed the agreement. Id. at 35. An initial term that does not start on January 1 will end on December 31^st of the following year and then follow the yearly renewal cycles thereafter.

At a minimum, the manufacturer’s agreement must cover all its labeler codes that contain an applicable drug or a selected drug, and update CMS within 3 business days of being assigned a new labeler code. Id. at 34-35. Manufacturers must collect, maintain, and have available appropriate labeler code data needed to comply with the Discount Program. These may include data on changes in corporate ownership, or data on any new, transferred, or discontinued labeler codes. Manufacturers must also ensure that all electronic FDA listings and all NDC listings with the electronic database vendors used to process pharmacy claims, including information about discontinued drugs, are up to date for all applicable drug and selected drug NDCs.

CMS can terminate an agreement for any knowing and willful violation of the requirements of the agreement. 42 U.S.C. § 1395w-114c(b)(4)(B)(i). The agency may refuse to enter into a Discount Program agreement with a manufacturer that was terminated from the CGDP for a similar reason. Final Guidance at 34. For-cause terminations by CMS are subject to a hearing and a review by the CMS Administrator. Manufacturers can terminate their participation in the Discount Program at any time for any reason, subject to the requirements related to the effective date of the termination. Id. at 11. The primary manufacturer of a selected drug may also request CMS to terminate its agreement if they are unwilling to participate in the Medicare Drug Price Negotiation. Id. at 36-37.

Use of a Third-Party Administrator: CMS will continue to use an accredited Automated Clearing House (ACH) vendor Third Party Administrator (TPA) for the new Discount Program. Manufacturers will have to enter into a TPA agreement, which CMS has provided on its website, in order to access the Discount Program payment portal. The TPA will use PDE data to invoice participating manufacturers and plan sponsors and to report ACH activity to CMS.

Applicable Discounts: The manufacturer discounts apply regardless of whether the enrollee is entitled to low-income subsidies (LIS) that pays their deductible, has an enhanced benefit plan with a reduced or no deductible, or uses a drug that is not subject to the deductible (e.g., covered insulin product or vaccine). Id. at 23. The value of the applicable discounts applies before the application of any available supplemental benefits that Part D plans offer, and before any coverage or financial assistance under another plan (e.g., state pharmaceutical assistance programs). Id. at 30-31.

After 2024, the PDP sponsors will pay the enrollees’ 5% coinsurance during the catastrophic phase. Once participating manufacturers start making discounts available, those discounts will not count towards the enrollee’s incurred costs. Finally, claims that straddle more than one phase will be apportioned to those respective phases and the discount applicable for those phases will apply.

Phase-Ins:  To ease the transition to 10% and 20% discounts, the IRA has two phase-in programs for certain manufacturers. Each phase-in policy allows eligible manufacturers to build up in a stepwise manner to the 10% and 20% applicable discounts by 2029 and 2031, respectively. Each phase-in program requires the manufacturer to have had a Coverage Gap Discount Program agreement in effect in 2021, and only covers applicable drugs that have been in the market as of August 16, 2022 (i.e., had Part D expenditures on or before August 16, 2022). Id. at 24.

The first phase-in allows “specified manufacturers” to phase-in those discounts that apply to enrollees who receive LIS subsidies (this was not the case for the CGDP). A specified manufacturer is one that:

• Had a CGDP for plan year 2021 (or had its labeler codes listed in another manufacturer’s CGDP)
• Its total Part D expenditures under such 2021 CGDP represented less than 1.0% of the total expenditures for all Part D drugs in 2021.
• Its total expenditures for all specified drugs that are single source drugs or biologics for which payment may be made under Part B in 2021 represented less than 1.0% of the total expenditures for all drugs or biologics under Part B in 2021.
  • A “specified drug” means, for 2021, an applicable drug that is produced, prepared, propagated, compounded, converted, or processed by a specified manufacturer.

The second phase-in allows “specified small manufacturers” to phase-in their discounts. A specified small manufacturer is one that is a specified manufacturer and:

• Had total expenditures under Part D for any one of its specified small manufacturer drugs covered under a CGDP for 2021, and covered under Part D in 2021, equal to or greater than 80% of the total expenditures for all of its specified small manufacturer drugs covered under Part D in 2021.
  • A “specified small manufacturer drug” means, for 2021, an applicable drug that is produced, prepared, propagated, compounded, converted, or processed by a specified small manufacturer.

All manufacturers that sign a Discount Program agreement in time to participate in any year of the phase-in will be considered for the phase-in, and do not need to submit a separate application. Final Guidance at 27. CMS will identify which manufacturers qualify for these phase-ins by analyzing Medicare Part B claims data, Part D PDE data, and ownership information submitted by manufacturers. CMS requires the ownership information in order to apply the IRA’s aggregation rule. See 42 U.S.C. § 1395w-114c(g)(4)(B)(ii)(II)(bb). Under this rule, CMS will consider all entities, including corporations, partnerships, proprietorships, and other entities treated as a single employer under subsection (a) or (b) of section 52 of the Internal Revenue Code of 1986 as one manufacturer. Phase-in Memorandum at 2. CMS will require participating manufacturers to submit and attest to this ownership information in the Health Plan Management System (HPMS). Final Guidance at 27. CMS issued instructions for manufacturers on how to submit this required ownership information. Participating manufacturers that have concerns with CMS’ calculation have the opportunity to ask CMS for a recalculation within 30 days of the eligibility determination. Id. at 29.

CMS also provides manufacturers a “special opportunity” to get a preliminary (i.e., before such manufacturer signs a Discount Program agreement) and non-binding of their phase-in eligibility if they provide CMS all ownership information by December 8, 2023. Id. at 28. CMS will provide this by January 2024 but will not extend the recalculation option to manufacturers that have not signed a Discount Program agreement.

Point-of-Sale (POS) Discounts and Payment Processes: As under the CGDP, PDP sponsors will provide applicable discounts at the POS. CMS confirmed in the Final Guidance that manufacturers must also provide discounts for out-of-network claims or in-network paper claims through direct member reimbursements. Id. at 8. CMS will pay the plans through monthly prospective payments based on the estimated per-member per-month costs submitted in plan bids. CMS recommended plans to incorporate all new risks they anticipate under the Discount Program into their annual bids. Id. at 9.

The plans must report the applicable discounts on the PDE records associated with such discounts to allow CMS to reconcile the prospective payments and issue quarterly invoices to the manufacturers. CMS intends to provide additional guidance on PDE data fields and calculating discounts on more complex claims. See id. at 8, 31. The pharmacy prompt payment requirements from the CGDP will also apply to the Discount Program.

Audits and Compliance Monitoring: Using its discretionary authority under 42 U.S.C. § 1395w-114c(d), CMS will allow participating manufacturers to audit the TPA up to one time per year with at least a 60-day notice. Manufacturers may only review a statistically significant random sample of the TPA data used to determine discounts (which includes claim-level information), and only do so on site, at a location specified by the TPA. CMS may similarly audit participating manufacturers up to once a year to monitor their compliance after a similar 60-day notice of a reasonable basis for the audit. CMS also intends to implement a compliance monitoring program through future regulations or guidance.

Dispute Resolution: CMS will set up a dispute resolution mechanism to help resolve disagreements between CMS, Plan D sponsors, and manufacturers over invoice data received from TPAs. This will be a 3-level process analogous to the one set up for the CGDP (initial dispute; independent review entity; CMS administrator). This dispute resolution system will not cover CMS decisions to terminate a Discount Program agreement or CMS decisions regarding phase-in program eligibility. Manufacturers are not permitted to withhold payment for any disputed invoiced amount, even while a dispute is pending, with the sole exception of a dispute over NDCs that do not correspond with the labeler codes covered under manufacturer’s agreement. Id. at 40. CMS will release requirements and operational guidance in the coming months.

Civil Money Penalties: The statute provides for civil monetary penalties (CMPs) each time a participating manufacturer fails to provide discounts to applicable beneficiaries. 42 U.S.C. § 1395w-114c(e). A participating manufacturer fails to provide this discount each time they fail to make a payment within 38 days of receiving an invoice. Final Guidance at 52-53. The penalty is equal to the amount outstanding plus 25% of such amount. 42 U.S.C. § 1395w-114c(e)(1). Although the statute states that the CMP amount equal to the outstanding amount “will be used to pay the discounts which the manufacturer had failed to provide,” § 1395w-14c(e)(1)(A), CMS states in the Final Guidance that CMS “may” reduce the CMP “by any amount the manufacturer has paid after 38 calendar days.” Id. at 53.

A manufacturer with a delayed payment will first receive a Notice of Non-Compliance and have 5 business days to cure it or challenge it. If the manufacturer can cure the delay show that it was due to reasons beyond the manufacturer’s control, CMS will generally not assess a CMP. Final Guidance at 15. CMS will not consider insufficient compliance controls as reasons enough to avoid the penalties. If CMS determines that CMPs do apply, the agency will send a written notice of this determination. The manufacturer will have 60 days to appeal the CMP before an administrative law judge (ALJ).