The Centers for Medicare & Medicaid Services (CMS) recently issued initial guidance on how the agency expects the Medicare Drug Price Negotiation Program (the “Negotiation Program”) to operate. The Negotiation Program was established under the Inflation Reduction Act (Pub. Law No. 117-169), which was signed into law on August 16, 2022 (the “IRA”).
The Negotiation Program permits CMS to negotiate a maximum fair price (MFP) for certain high-expenditure, single-source drugs and biological products starting contract year 2026. Although CMS’s initial guidance focuses on drugs in Part D, the Negotiation Program will eventually expand to Part B drugs.
While the initial guidance may impact pharmaceutical manufacturers most significantly, pharmacies should pay close attention to it because they will need to understand how CMS expects manufacturers to pass on the MFP through a chargeback system, including how and when a manufacturer will pay a rebate to the pharmacy after the pharmacy charges the MFP to a patient eligible for government-negotiated drugs. Similar chargeback processes were contemplated under the now-stalled rebate rule from the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG). Pharmacies may want to revisit their prior concerns with chargeback processes as CMS seeks to employ a similar paradigm under the Negotiation Program.
The Negotiation Program’s Chargeback Process
The statutory language in the IRA states that access to the government-negotiated drug price will be provided by the manufacturer to MFP-eligible individuals at the pharmacy, by a mail order service, or by another dispenser at the point of sale (collectively referred to as “dispensing entities” under the initial guidance). However, the statute does not contemplate how the manufacturer will provide that price to MFP-eligible individuals through the point of sale. Nor does it address when a chargeback process is used, the mechanism for facilitating final reimbursement to the pharmacy or processes to remedy discrepancies when that price is either not passed along to an MFP-eligible individual or a pharmacy is not made whole on the backend for dispensing to such individual.
CMS’s guidance seeks to explain how the statutory language should be operationalized and notes that “[t]here are various methods by which dispensing entities and MFP-eligible individuals can determine whether they are accessing the MFP for a selected drug.” For example, from a technical standpoint, CMS highlights that Part D plans are already required to use a unique Part D processor identification number (RxBIN) and Part D processor control number (RxPCN) combination to identify a Medicare Part D payer. CMS reasons that usage of these identifiers means the pharmacy will be able to distinguish, at the point of sale, patients who will be eligible for the negotiated drug price. In this scenario, a pharmacy would then be required to charge a patient that is MFP-eligible the MFP and collect that amount at the point of sale.
Of course, it is understood that a pharmacy may not have purchased the pharmaceutical product at the government-negotiated price, creating a delta between the pharmacy’s acquisition cost and the pharmacy’s reimbursement at MFP at the point of sale. A chargeback system could be implemented to resolve the discrepancy. In an example in its initial guidance, CMS contemplates that a pharmacy could submit the difference between its acquisition cost and MFP to the manufacturer, through its wholesaler, and receive a credit from the wholesaler for that delta to be made whole. The wholesaler could then be reimbursed by the manufacturer after billing the manufacturer for the chargeback amount.
Chargeback Processes in the Other Programs
CMS’s initial guidance recognizes that chargeback systems are already widely used in the commercial drug distribution channel and in other federal programs, which allows for pharmacies “to receive rebates or discounts on their purchases after those purchases are made.” For instance, wholesalers currently process chargebacks to manufacturers for their sales to customers that are entitled to a discount to effectuate the manufacturer’s commercially negotiated contract with the customer or its commitment to offer a discounted price under a federal program (such as the 340B drug discount program or the Federal Supply Schedule program).
Further, pharmacies may recognize similar chargeback processes were contemplated in the 2019 rebate rule from the HHS-OIG. The HHS-OIG’s rebate rule eliminated safe harbor protection for retrospective rebates and created a new discount safe harbor under the Anti-Kickback Statute that would have the effect of requiring pharmaceutical rebates to be applied while the patient is at the pharmacy counter. Pharmacies would then be reimbursed for their total cost on the backend through a credit from an intermediary, like a pharmacy benefit manager (PBM) or wholesaler, though the rule did not clarify which entity would hold this responsibility. Last fall, President Biden signed a law to stave off implementation of the rule until 2026. Under the IRA, the rule’s effective date is further delayed to 2032.
Pharmacies Should Gear Up to Respond as MFP Processes Are Finalized
While the rebate rule is currently on pause, any point-of-sale policy effectuated through a chargeback system raises several operational questions, some of which CMS seeks to address in its initial guidance. For example, pharmacies may want to know the timing of when such chargeback would be paid to the pharmacy. CMS’s initial guidance states that it expects pharmacies to be reimbursed “for the full amount of the difference between their acquisition cost for the selected drug and the MFP within 14 days.” Another concern could be whether manufacturers, wholesalers, or other intermediaries will seek to charge the pharmacies administrative fees for effectuating the operation of the chargeback system. To that end, CMS’s initial guidance states that “[m]anufacturers or their contracted entities shall not charge any transaction fee for this process,” though it will be important to determine who is a “contracted entity” for the purposes of this language.
Despite these clarifications, it remains unclear how CMS would provide sufficient oversight over reimbursement mechanisms to ensure that the process or fees are appropriate. For example, pharmacies may want to have, at the point of sale, full visibility of the total and final reimbursement due to the pharmacy or claim-level detail in electronic remittance advices that substantiate the total and final reimbursement, including chargeback amounts. Other potential administrative oversight issues that could arise include a pharmacy’s ability to appeal for incorrect reimbursement amounts, inquire about missing payments, use audit processes, and engage in dispute resolution. On the latter, CMS states that it intends to establish a process “by which beneficiaries, dispensing entities, and other providers and suppliers, would be able to report instances to CMS in which the MFP should have been made available to them but was not.” For example, CMS contemplates establishing a toll-free phone line and an email box where an individual or a dispenser could communicate information to CMS regarding an incident in which the MFP was not provided, but CMS is seeking comment on how such a process would operate most effectively.
Pharmacies may wish to consider raising other concerns to CMS, including the need to update their claims systems to recognize indicators for drugs and/or MFP-eligible individuals who are subject to the MFP. The National Council for Prescription Drug Pricing (NCPDP) billing standards could be updated to effectuate such change. Further, pharmacies may want to consider other entities (PBMs, pharmacy services administration organizations (PSAOs), or pharmacy switch vendors) that could effectuate a chargeback system, other than wholesalers, and whether those entities can ensure that any post-point-of-sale reimbursement is paid timely. Specifically, pharmacies may want to review their agreements with relevant entities to make sure that these agreements address such operational specifics.
Finally, pharmacies should be aware that coinciding with the MFP process is the Part D redesign (starting with contract year 2025) and the implementation of CMS’s pharmacy rule on pharmacy price concessions (starting with contract year 2024). Because these changes are happening in tandem in the Part D program within such a short period, they may further complicate pharmacy contracts and systems in the near future.
In sum, pharmacies should consider the concerns they want to raise to CMS on the MFP process. Comments on the initial guidance are due April 14, 2023, but there will likely be subsequent opportunities to address CMS on the processes in the coming months. In developing their concerns for CMS, pharmacies may want to consider, among other issues, whether there is a broader swath of entities that could reasonably effectuate chargebacks, including wholesalers, PBMs, PSAOs, or other third parties (such as switch vendors), and what kind of oversight CMS could provide over such entities if they are used. At the very least, pharmacies should consider how the coinciding changes to the Part D program over the next few years may further complicate pharmacy contracts and systems and how to best respond to this new Medicare landscape.
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This Insight was authored by Alan J. Arville, Kala Shankle, and Constance A. Wilkinson. For additional information about the issues discussed in this Insight, please contact one of the authors or the Epstein Becker Green Health Care and Life Sciences attorney who regularly handles your legal matters.
 CMS, Medicare Drug Price Negotiation Program: Initial Memorandum, Implementation of Sections 1191 – 1198 of the Social Security Act for Initial Price Applicability Year 2026, and Solicitation of Comments, p. 64 (Mar. 15, 2023), available at https://www.cms.gov/files/document/medicare-drug-price-negotiation-program-initial-guidance.pdf.
 See Fraud and Abuse; Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection for Certain Point-of-Sale Reductions in Price on Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager Service Fees, 85 Fed. Reg. 76666 (Nov. 30, 2020).
 Pub. Law No. 117-169 (signed into law Aug. 16, 2022); 42 U.S.C. §1320f–2.
 See Medicare Drug Price Negotiation Program: Initial Memorandum, Implementation of Sections 1191 – 1198 of the Social Security Act for Initial Price Applicability Year 2026, and Solicitation of Comments at p. 65. CMS also notes that the MFP for selected drugs will be publicly published and that such transparency will help dispensing entities and MFP-eligible individuals know the MFP for a selected drug.
 85 Fed. Reg. 76666.
 Pub. Law No. 117-58 (signed into law Nov. 15, 2021).
 Pub. Law No. 117-169.
 Medicare Drug Price Negotiation Program: Initial Memorandum, Implementation of Sections 1191 – 1198 of the Social Security Act for Initial Price Applicability Year 2026, and Solicitation of Comments at p. 32.
 Medicare Drug Price Negotiation Program: Initial Memorandum, Implementation of Sections 1191 – 1198 of the Social Security Act for Initial Price Applicability Year 2026, and Solicitation of Comments at p. 66.
 Pub. Law No. 117-169.
 See Medicare Program; Contract Year 2023 Policy and Technical Changes to the Medicare Advantage and Medicare Prescription Drug Benefit Programs; Policy and Regulatory Revisions in Response to the COVID-19 Public Health Emergency; Additional Policy and Regulatory Revisions in Response to the COVID-19 Public Health Emergency, 87 Fed. Reg. 27704 (May 9, 2022), available at https://www.federalregister.gov/documents/2022/05/09/2022-09375/medicare-program-contract-year-2023-policy-and-technical-changes-to-the-medicare-advantage-and.