CMS Issues First Request for Public Comments on the Medicare Drug Price Negotiation Program “Small Biotech” Exception – Due March 27, 2023

The Inflation Reduction Act’s (“IRA”) drug price negotiation provisions have captured the pharmaceutical and biotech industry’s attention. In part, the IRA allows the Centers for Medicare & Medicaid Services (“CMS”) to implement a price negotiation process that places Medicare price caps on top-spend single-source drugs and biologics without generic or biosimilar competition. The first set of ten drugs to be subject to these negotiated price caps are slated to be selected in September of this year. The IRA authorizes CMS to implement the IRA’s provisions via “Program Instruction” and not traditional notice-and-comment rulemaking for the first three years of the program (2026, 2027, and 2028). See new 42 U.S.C. § 1320f-7(c). 

Despite this authority, CMS has committed to issuing “voluntary” requests for comments from the public on a limited set of topics, including the logistics of how the so-called “small biotech” exception can apply for price years 2026, 2027, and 2028; the data elements CMS intends to collect as part of the negotiation process; and the offer and counteroffer process as part of the price negotiations. CMS has indicated that these requests will be issued throughout the first two quarters of 2023.

On January 24, 2023, CMS issued its first such request in the Federal Register, seeking feedback from the public on limited details about the small biotech exception. In brief, CMS is permitted under the IRA to exempt from price negotiations “small biotech drugs.”  

By way of background, a manufacturer qualifies for the small biotech exception (which would exempt the manufacturer from negotiated price caps for years 2026, 2027, and 2028) under new 42 U.S.C. § 1320f-1(d)(2) by meeting certain statutory requirements:

• First, there must be a Coverage Gap Discount Agreement in place for the drug. This is a special agreement that, in short, requires a manufacturer to offer a discounted price for Medicare beneficiaries who are in the so-called “coverage gap” between the initial coverage phase for Part D and the catastrophic coverage phase.
• Second, the total Medicare Part D spend for the drug in 2021 must be:
  • Less than or equal to 1% of the total Medicare Part D spend on all covered Part D drugs in 2021; and
  • Greater than or equal to 80% of the total Medicare Part D spend for all of the manufacturer’s Part D covered drugs in 2021 for which the manufacturer has a Coverage Gap Discount Agreement. See new 42 U.S.C. § 1320f-1(d)(2)(A)(i).
• Third, with respect to Medicare Part B drugs, which are not subject to the negotiated price caps until 2028, to qualify for the exception for price year 2028, the total Medicare Part B spend for the drug in 2021 must be:
  • Less than or equal to 1% of the total Medicare Part B spend on all qualifying single-source drugs for which payment can be made under Part B in 2021; and
  • Greater than or equal to 80% of the total Medicare Part B spend for all of the manufacturer’s qualifying single source drugs in 2021. See new 42 U.S.C. § 1320f-1(d)(2)(A)(ii).

A few special rules apply:

• The statute instructs CMS that it cannot consider a drug to meet the criteria if it is acquired after 2021 by another manufacturer that does not have a Coverage Gap Discount Agreement in place at the beginning of the year immediately after the acquisition. See new 42 U.S.C. § 1320f-19d)(2)(B)((ii).
• For purposes of calculating the threshold Medicare spend percentages above, the statute instructs CMS to aggregate all persons who are treated as a “single employer” for purposes of section 52(a) and (b) of the Internal Revenue Code as “one manufacturer.” See new 42 U.S.C. § 1320f-19d)(2)(B)(i) (referencing the special rules for controlled group of corporations and employees of partnerships, proprietorships, etc., which are under common control, from section 52 of the I.R.C.).
• The statute instructs CMS that a new formulation of a drug (for example, an extended release formulation) cannot be considered a qualifying single source drug for purposes of the negotiation program. See new 42 U.S.C. § 1320f-19d)(2)(C).

And indeed, the IRA takes the small biotech exception seriously. In fact, the statute imposes a $100 million civil monetary penalty for each item of false information that is submitted to CMS in connection with procedures relating to the small biotech exception. See new 42 U.S.C. § 1320f-6(c).

CMS’s January 24th request has been issued under the Paperwork Reduction Act (“PRA”), which requires federal agencies to seek approval from the Office of Management and Budget for each collection of information that might create a burden on the public or on key stakeholders.  In a PRA notice, the agency essentially gives the public 60 days to provide feedback on how much of a cost burden a specific data collection exercise will impose on the public and government.  

Here, CMS is focused narrowly on the burden to complete the small biotech exception application for 2026. CMS is not asking for feedback on the implementation of the IRA, how the small biotech exception should be defined, or any other matters related to the price negotiation provisions. Further, CMS has limited its request to the 2026 price year: in other words, the feedback provided will only pertain to how CMS collects information for the first year of the negotiated price caps and not for other years. Further, CMS made clear in a January 11, 2023 memorandum outlining IRA implementation timing that it only wants comments from manufacturers who may be seeking the exception for price year 2026.

Under CMS’s approach, as outlined in the January 24th Federal Register notice and related supplemental information, a manufacturer seeking to take advantage of the small biotech exception will have to submit an application to CMS that includes key information for how the company meets the small biotech exception. CMS has released a sample of the application, which would require disclosing:

1. The relevant manufacturer’s name, employer identification number, address, and unique identifier assigned by CMS as well as all labeler codes;
2. All 11-digit National Drug Codes (NDCs) of drugs marketed during 2021 or end-dated prior to December 31, 2021 for the covered Part D drug for which the manufacturer is seeking the small biotech exception;
3. Confirmation that the manufacturer had a Coverage Gap Discount Program Agreement OR information about a relevant entity that did have such an agreement in place on December 31, 2021 for the relevant drug;
4. Information about the “controlled group” – i.e., all corporations, partnerships, proprietorships, and other entities treated as a single employer for purposes of section 52 of the Internal Revenue Code; and
5. A certification that includes a statement that the certifying party understands that any misrepresentations may give rise to the False Claims Act and other liability.

Notably, in its supplemental documentation attached to the January 24th Federal Register notice, CMS states its plan to develop an automated tool within the existing Health Plan Management System for manufacturers to submit the small biotech exception information, with a launch of mid-2023.

CMS also includes its estimates of the costs to manufacturers applying for the small biotech exception and the costs to the government to implement the data collection procedure for the small biotech exception. These estimates are, quite simply, very low: 

• CMS believes that there will be approximately nine manufacturers of negotiation-eligible drugs that will submit a request for the small biotech exception for price year 2026 and that have acquired their drug prior to December 31, 2021. CMS estimates that it will take a lawyer five hours at $142.34/hour to gather and review relevant Internal Revenue Code provisions and to identify any “controlled group members” that, as of December 31, 2021, were treated as a “single employer” with the manufacturer under the Internal Revenue Code. CMS estimates it will take a drug manufacturer’s CEO 15 minutes at $204.92/hour to review the information and log into CMS’s information technology system to authorize the submission. Finally, CMS estimates it will take an operations manager at a manufacturer one hour at $110.82/hour to examine and submit the information to CMS. All total, for each of these nine manufacturers, CMS estimates it will cost $873.73 per manufacturer or $7,863.53 across all nine manufacturers to complete the small biotech exception application. 
• CMS believes that there will be only one manufacturer that will submit a request for the small biotech exception for price year 2026 that will have acquired their drug after December 31, 2021. CMS estimates that it will take a lawyer ten hours at $142.34/hour to gather and review relevant Internal Revenue Code provisions, including contacting the entity that had the Coverage Gap Discount Program Areement for the drug in 2021 to identify any “controlled group members” that as of December 31, 2021 were treated as a “single employer” under the Internal Revenue Code and must be counted together by CMS when calculating 2021 Medicare expenditure for all covered Part D drugs for which that entity had an agreement under the Medicare Coverage Gap Discount Program. CMS estimates it will take a CEO 15 minutes at $204.92/hour to review the information and log into CMS’s information technology system to authorize the submission. Finally, CMS estimates it will take an Operations Manager two hours at $110.82/hour to examine and submit the information to CMS. For this one anticipated manufacturer, CMS estimates it will cost $1,696.25 to complete the small biotech exception application.

This means that CMS estimates it will be a burden on all drug manufacturers of $9,559.77 to conduct a complicated analysis under the federal tax code to aggregate persons under a controlled group of corporations; to assess and analyze whether there was an appropriate Coverage Gap Discount Agreement in place; to complete the relevant paperwork; and to submit the actual request for the small biotech exception. This amount is not $9,559.77 per manufacturer, but it is intended to cover ALL manufacturers.

• Finally, CMS estimates it will take one GS-13 federal employee 40 hours at $102.36/hour to maintain the small biotech exception information collection request form and 200 hours at $102.36/hour to provide technical direction to a contractor for the information technology system. CMS also estimates it will take a contracted vendor 1,120 hours at $254.54 per hour to build the IT system to support the small biotech exception information collection request form. All total, CMS estimates that the total cost to the government will be $299,571.20.

In addition to these low estimates, unanswered questions from CMS’s release include (a) when the application will be due in order to be considered for the small biotech exception; (b) what happens in the event that the entity that held the Coverage Gap Discount Agreement as of December 31, 2021 is no longer operational or is unwilling to provide data or information to the requesting manufacturer; and (c) how CMS intends to review and use the information from the application. CMS also does not provide a great deal of information about the proposed IT systems that will be implemented to capture all of the relevant data and administer the program.  

Given that notice-and-comment rulemaking will not be issued with respect to the substantive Medicare drug price negotiation program requirements – i.e., the negotiated price cap provisions of the IRA – for several years, it is important for stakeholders to provide feedback to CMS when possible.  

Comments are due to CMS by March 27, 2023. Please contact Matt Wetzel (mwetzel@goodwinlaw.com or 202-346-4208) or Heath Ingram (hingram@goodwinlaw.com or 212-459-7432) if you would like to submit comments or would like additional information.