August 16, 2022

With Inflation Reduction Act Signed, Other Health Policy Issues Ahead for Congress

Holland & Knight Alert
Miranda A. Franco


  • President Joe Biden signed into law the Inflation Reduction Act (IRA), which provides $750 billion in funding and major federal policy changes impacting the U.S. energy, environment, healthcare and tax sectors. This Holland & Knight alert summarizes the healthcare provisions in the IRA and provides an outlook on health policy issues that may be addressed when Congress returns after Labor Day.
  • The IRA extends for three additional years the expanded premium tax subsidies first enacted in the American Rescue Plan Act (ARPA), allowing for expanded and more affordable coverage on Affordable Care Act (ACA) Marketplace plans.
  • The IRA also includes significant drug pricing reforms, including Medicare drug price negotiation, Medicare inflationary rebates and Medicare Part D benefit redesign.

Congress ended a busy work period after passing the Inflation Reduction Act (IRA) last week. This Holland & Knight alert summarizes the healthcare provisions in the IRA and provides an outlook on health policy issues that may be addressed when Congress returns after Labor Day. 

The Inflation Reduction Act

The Inflation Reduction Act of 2022 (IRA) cleared Congress on Aug. 12, 2022, following the House passage of the legislation and was signed into law by President Joe Biden on Aug. 16, 2022. Along with energy, environment and tax provisions, the IRA extends for three additional years the expanded premium tax subsidies first enacted in the American Rescue Plan Act (ARPA), allowing for expanded and more affordable coverage on Affordable Care Act (ACA) Marketplace plans. (See Holland & Knight's in-depth summary on the full IRA legislation, "The Inflation Reduction Act: Summary of the Budget Reconciliation Act," Aug. 8, 2022.)

The IRA also includes significant drug pricing reforms, including Medicare drug price negotiation, Medicare inflationary rebates and Medicare Part D benefit redesign. Notably, there are many areas where Congress delegated decisions to the Secretary of the U.S. Department of Health and Human Services (HHS) and thus will require further clarification through the regulatory process. The drug pricing provisions are also likely to be subject to legal challenges.

ACA Premium Tax Credits

The Affordable Care Act (ACA) created subsidies to offset the cost of health insurance, capping how people signing up on the ACA Marketplaces pay at a certain percent of their income. These subsidies work on a sliding scale. Under the original law, people whose incomes are at or just above the federal poverty level (FPL) received the most generous subsidies, and no subsidies were provided for those above 400 percent of poverty. However, the American Rescue Plan Act (ARPA) expanded the premium tax credits for a two-year period, making them more generous for lower-income beneficiaries and also extending them beyond the 400 percent FPL cut-off by capping beneficiary premiums at no more than 8.5 percent of an individual's income for a silver plan. The ARPA tax credits were originally set to expire on Jan. 1, 2023. Under the IRA, these credits will now be extended for another three years.

Medicare Drug Pricing Negotiation

The legislation allows the Medicare program to set the price of certain high-expenditure prescription drugs. Negotiation is limited to the single-source drugs with the highest-spend in Part B or Part D for 1) U.S. Food and Drug Administration (FDA)-approved drugs for which at least seven years have elapsed from approval and for which there is no generic on the market and 2) FDA-licensed biologics for which at least 11 years have elapsed since licensure and for which there is no biosimilar on the market. Small biotech drugs (until 2028), orphan drugs, low-spend Medicare drugs and plasma-derived products are excluded from price negotiation.

Drugs subject to the new negotiated price requirement will be initially selected in 2023, and the prices set will be applied beginning in 2026. Drugs must be selected by the Centers for Medicare & Medicaid Services (CMS) and an agreement must be reached with the manufacturer two years before the new price will apply.

Specifically, the bill directs HHS to negotiate prices for:

  • 2026 (only Part D drugs eligible for negotiation): 10 drugs based on Part D spending
  • 2027 (only Part D drugs eligible for negotiation): 15 drugs based on Part D spending
  • 2028 (first year both Part B and D drugs are eligible for negotiation): 15 drugs based on combined Part B and Part D spending
  • 2029 and beyond: 20 drugs based on combined Part B and Part D spending

The IRA spells out a detailed timeline involving an exchange of information between HHS and the manufacturer of a selected drug over the negotiation period. For instance, once Medicare gives a manufacturer a "written initial offer" and concise justification (based on several factors outlined in the IRA, including but not limited to research and development costs and distribution costs) for the proposed price, a drugmaker would have 30 days to either accept the proposal or make a counteroffer that is justified based on those same factors.

Once the negotiated price is set, the manufacturer would be required to offer the drug at the maximum fair price (MFP) with respect to Medicare beneficiaries. The MFP represents the ceiling on a drug's negotiated Part B or Part D price. It cannot exceed certain specified percentages of a drug's non-federal average manufacturer price (non-FAMP) or an amount reflecting an average market price and determined by the number of years since a drug's FDA approval.

The bill also allows for a delay in the negotiation of no more than two years for certain drugs where there is a "high likelihood … that a biosimilar biologic product" of the reference biologic product will be both "licensed and marketed" within the next two years. To avoid efforts to game this provision (for instance, being licensed but not marketed), if the biosimilar does not come to the market during the two-year period, the originator biologic manufacturer would be required to pay a rebate for the maximum fair price (MFP) amount and the biologic would be included in the selected drug list for the next applicable price period. In cases where these negotiated drug prices are lower than the 340B prices, manufacturers would be obligated to make the MFP available to covered entities, but in a non-duplicated amount to the ceiling price.

The IRA also includes enforcement provisions. Manufacturers will be subject to significant civil monetary penalties (CMPs) up to 10 times the difference between the MFP and the price charged for failing to offer the MFP with respect to a Medicare beneficiary, violating the terms of an agreement or knowingly providing false information. Additionally, manufacturers can be assessed an escalating excise tax beginning at 65 percent of the drug's prior year's total sales, increasing to 95 percent once the manufacturer is out of compliance for more than 270 days. Alternatively, the manufacturer may withdraw its products from Medicare instead of engaging in negotiations.

Inflation Rebates

Under the IRA, single-source Part B drugs and all Part D drugs, excluding certain low-spend drugs, would be required to pay a rebate on a unit of a drug paid under Part B or D where the price of the drug increases faster than inflation. The original intent was to apply this penalty to drugs under Medicare as well as private health insurance, but because of budgetary rules, the Senate parliamentarian determined that it could only be applied to Medicare. A manufacturer that does not pay a rebate would be subject to a civil monetary penalty (CMP) in an amount at least equal to 125 percent of the rebate amount.

According to an analysis by the Kaiser Family Foundation (KFF), these inflation-based rebates could apply to many drugs. The Foundation's analysis determined that, in 2019 and 2020, half of all Medicare-covered prescriptions saw price increases that outpaced inflation.

For Part B drugs, the rebate will be calculated as the total number of Medicare Part B units of the drug in the rebate quarter (excluding 340B units and packaged units); multiplied by the amount (if any) by which the rebate quarter Part B payment rate exceeds the inflation-adjusted benchmark quarter Part B payment rate. Part B drugs currently approved would have Q3 of 2021 as their payment amount benchmark quarter, while drugs approved after Dec. 1, 2020, would have the third full quarter after their approval as a benchmark quarter.

For Part D drugs, the rebate will be calculated as the total number of Medicare Part D units of the drug in the rebate year (excluding 340B units beginning in 2026); multiplied by the amount (if any) by which the volume-weighted average annualized average manufacturer price (AMP) for the rebate year exceeds the inflation-adjusted volume-weighted average annualized AMP for the benchmark yearThe benchmark year for currently approved Part D drugs is 2021. Part D drugs approved after Oct. 1, 2021, will use the first calendar year following approval as their benchmark year.

A manufacturer subject to a rebate would receive a rebate invoice within six months of the end of the rebate quarter. The Secretary may choose to delay sending invoices for calendar quarters in 2023 and 2024 to not later than Sept. 25, 2025. A manufacturer would be required to pay the rebate within 30 days of invoice receipt.

Part D Benefit Changes and Other Notable Health Provisions

Out-of-Pocket Cap: While Medicare Part D has limits on patient copays, it does not have an explicit out-of-pocket cap for Medicare beneficiaries. When a beneficiary has incurred out-of-pocket costs and discounts slightly in excess of $7,000, they reach what is known as the "catastrophic phase" of the benefit, where they pay 5 percent of the cost of their drugs (while Medicare covers 80 percent and plans cover the remaining 15 percent). The IRA eliminates this 5 percent cost-sharing in the catastrophic phase (effective in 2024) and caps total patient out-of-pocket costs in Part D at $2,000 (effective in 2025).

Insulin Caps: The bill caps out-of-pocket costs for insulin copays under Medicare. Specifically, cost-sharing for Part D plans will be capped at $35 for approved insulin products during plan years 2023 through 2025, after which it will be the lesser of $35, 25 percent of the established maximum fair price or 25 percent of the negotiated price. There will be temporary subsidies for January-March 2023 for any cost-sharing over this amount and special limitations for insulin furnished under durable medical equipment. Senate budget procedural rules blocked the application of this price cap to private health insurance.

Pharmacy Benefit Manager Rebate Rule Further Delayed: The IRA further delays the implementation of a November 2020 HHS final rule that would have eliminated the safe harbor for Part D drug rebates and replaced it with a new one for point-of-sale discounts. The rule's implementation was previously delayed until Jan. 1, 2026, and this legislation further extends that delay to Jan. 1, 2032. Notably, the Congressional Budget Office (CBO) indicated that delaying the rebate rule saves money.

Enhanced Payments for BiosimilarsTo incentivize the uptake of biosimilars, the IRA temporarily increases the Medicare Part B add-on payment for certain biosimilars from 6 percent to 8 percent of the reference product's average sales price (ASP) from Oct. 1, 2022, through the end of 2027. Additionally, for new biosimilars furnished on or after July 1, 2024, the IRA changes the initial period payment rate to be the lesser of the biosimilar's wholesale acquisition cost (WAC) plus 3 percent or 106 percent of the reference product's ASP.

Maximum Monthly Cap on Cost-Sharing Payments Under Prescription Drug Plans and Medicare Advantage Prescription Drug (MA-PD) Plans: The IRA creates a maximum monthly cap on cost-sharing payments beginning in 2025 and directs Prescription Drug Plan sponsors and Medicare Advantage organizations offering plans to provide beneficiaries with the option to pay copays in monthly installments.

Cap on Premiums/"Premium Stabilization": Under the IRA, Part D plans will have a cap on the amount that they can increase premiums from year to year – 6 percent through 2029. In 2030 and subsequent years, CMS will recalculate base premiums using the original Part D premium formula.

Low-Income Subsidy (LIS) Eligibility: The IRA expands eligibility for low-income subsidies under Part D of the Medicare Program from 135 percent of the federal poverty line (FPL) to 150 percent of the FPL beginning Jan. 1, 2024.

Vaccine Cost-Sharing: The IRA establishes a program to eliminate cost-sharing for Medicare Part D beneficiaries for vaccines recommended by the Centers for Disease Control and Prevention's (CDC) Advisory Committee on Immunization Practices beginning in 2023.

Improving Access to Adult Vaccines Under Medicaid and CHIP: The IRA requires coverage of certain adult vaccinations under Medicaid and eliminates some cost-sharing. It also increases the Federal Medical Assistance Percentage (FMAP) by 1 percent for adult vaccines and their administration. Finally, the IRA requires the coverage of approved, recommended adult vaccines and their administration under Children's Health Insurance Program (CHIP) for individuals age 19 and older and eliminates cost-sharing.

Outlook for the Remainder of the 117th Congress

The IRA vote marked the end of the Congressional summer work period. Congress has now adjourned for August recess. The Senate returns on Sept. 6, 2022, and the House returns on Sept. 13. Healthcare issues not addressed in the IRA may be on the table in September, during a post-election "lame duck" session or in the next Congress that begins in January 2023.

Health Items on the Horizon

User Fees: Congress must act by the end of September to authorize the user fees that are responsible for funding a significant amount of the U.S. Food and Drug Administration's (FDA) review operations. If Congress fails to act by Sept. 30, 2022, the FDA could be forced to furlough thousands of employees. A version of the bill has passed the House; however, negotiations have hit a roadblock in the Senate. Senate Health, Education, Labor, and Pensions (HELP) Committee Ranking Member Richard Burr (R-N.C.) pulled out of negotiations on reauthorizing user fees. Sen. Burr introduced a clean version (S. 4535) of the reauthorization legislation that does not contain extensive reforms currently included in the bill (S. 4348) passed by the HELP Committee in June. For now, it seems unlikely that major reform provisions in the Senate bill will be passed. Thus, there is a race to pass a package by the end of September. The last time that Congress missed its deadline to reauthorize FDA user fees was in 1997. However, lawmakers had passed a continuing resolution (CR), allowing the FDA to avoid layoffs.

Appropriations: A CR likely will be necessary to keep the government funded beyond the end of the fiscal year on Sept. 30, 2022. This temporary spending authority would likely last into November or early December, when Congress could hopefully agree on a full-year funding package, including funding under HHS.

Behavioral Health: Last fall, Senate Finance Committee Chairman Ron Wyden (D-Ore.) and Ranking Member Mike Crapo (R-Idaho) issued a call for proposals to address mounting mental and behavioral health challenges that the COVID-19 pandemic has exacerbated. Telehealth and pediatric elements of a prospective mental health package were included in the gun safety bill that President Biden signed into law last month, along with a significant funding bump for several federal programs related to mental health and violence prevention. Sen. Wyden has indicated that his committee is still working on additional components of a mental health proposal. Meanwhile, the House passed its bipartisan package of mental health legislation. It is possible that agreement on new mental health legislation could be accomplished before the end of the year.

Extending Telehealth Authorities: On July 27, 2022, the House passed the Advancing Telehealth Beyond COVID-19 Act of 2021 (H.R. 4040) bill, led by Reps. Liz Cheney (R-Wyo.) and Debbie Dingell (D-Mich.). The bill extends several COVID-19-related telehealth flexibilities through the end of 2024, including geographic and originating site flexibilities, increases the types of providers eligible to provide telehealth, waives in-person requirements for behavioral health services, allows coverage of audio-only telehealth and lets telehealth satisfy face-to-face requirements for hospice care. Despite broad support for the Act, it is unclear if the Senate will take this up during the remaining legislative days in 2022 or possibly pass a different telehealth extension bill with similar characteristics to the House bill. Under current law, equivalent telehealth authorities have been provided for up to five months following the end of the COVID-19 public health emergency (PHE) declaration. As of this writing, it is unclear when the administration might lift that declaration.

Prior Authorization: The House Ways and Means Committee advanced the Improving Seniors' Timely Access to Care Act (H.R. 8487). If enacted, the legislation would establish an electronic prior authorization program for Medicare Advantage (MA) plans, promote increased transparency surrounding which services are subject to prior authorization, as well as the rates of denial and delay, and ultimately lessen the administrative burden placed on providers. The committee advanced the legislation by voice vote, teeing it up for a House floor vote in the fall.

Medicaid FMAP for Territories: The Medicaid Federal Medical Assistance Percentage (FMAP) has been 76 percent for Puerto Rico and 83 percent for the Virgin Islands, Guam, the Northern Mariana Islands and American Samoa. It was most recently extended in the FY 2022 appropriations bill. Without additional action by Dec. 13, 2022, the FMAP for the territories would revert to 55 percent.

Medicare Sequester: Congress acted late last year to extend the moratorium of sequestration on Medicare provider payments through the end of March, followed by a gradual restoration (1 percent) during the second quarter before restoring the full 2 percent cuts effective July 1. Providers are advocating for the extension of the moratorium, particularly as healthcare systems continue to navigate the pandemic.

Medicare Physician Payment Cuts: CMS recently proposed a nearly 4.5 percent cut to the Medicare conversion factor that combined with the aforementioned sequester cut and additional specialty care cuts that have significant implications for providers. Accordingly, stakeholders are calling on Congress for an adjustment to the Medicare conversion factor and an inflation update based on the Medicare Economic Index. Members of the GOP Doctors Caucus have indicated an interest in addressing this issue before the year's end.

Improving Responses to Future Pandemics: Senate HELP Committee Chairman Patty Murray (D-Wash.) and Ranking Member Richard Burr (R-N.C.) have solicited stakeholder input to ensure that the country is better prepared for the next pandemic. While not necessarily a "must pass," the issue remains on the radar as the country faces continued challenges from COVID-19. Pandemic preparedness has long been a priority for Burr, who authored the Pandemic All-Hazards Preparedness Act (PAHPA) and is retiring at the end of the year.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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