The inflation rebate for Medicare Part B-covered drugs should apply to Medicare Advantage

The Inflation Reduction Act (IRA) includes important tools to reduce Medicare spending on prescription drugs. One component of the law—the provisions that require drug companies to pay rebates to Medicare when drug prices increase faster than inflation—has some potential to hold down market-wide price increases by deterring brand-name pharmaceutical manufacturers from increasing list prices too fast. However, the Centers for Medicare and Medicaid Services (CMS) has made some implementation choices that restrain the full potential of this component of the law. In light of President Trump’s recent executive orders on prescription drugs, CMS should take steps to close gaps in the inflation rebate program by ensuring that rebates always apply when drugs are sold to enrollees in Medicare Advantage (MA) plans. This policy change could lower drug costs for everyone, not just people with Medicare. And if the administration does not take this step, then Congress should step in and ensure that the IRA inflation rebates benefit as many Americans as possible. 

Inflation rebates in the Inflation Reduction Act

Federal law has long included policies that require certain payments from drug companies if their prices increase faster than inflation. Specifically, since the early 1990s, drug manufacturers have been required to pay rebates to Medicaid and provide larger discounts to providers participating in the 340B program when their list prices grow faster than inflation, as measured by the consumer price index. The IRA extended a more limited version of this policy to Medicare: single source drugs without generic competition¹ (generally brand-name drugs), for which average per-enrollee spending is more than $100 per year, must newly pay rebates to Medicare when their list prices increase faster than inflation Under the IRA, rebates are generally calculated by determining the amount by which the list price for the drug has increased faster than inflation, multiplying by the number of units sold to Medicare beneficiaries that are not subject to 340B discounts, and requiring that full amount as a rebate. In this way, the inflation rebate ensures that a drug manufacturer cannot earn greater net revenue by dispensing a drug to a Medicare beneficiary at a list price that has risen faster than inflation, compared to what the manufacturer would have earned by dispensing the drug to that beneficiary at a price that had grown at exactly the rate of inflation.

Extending inflation rebates for expensive brand-name drugs to Medicare has the potential to deter price hikes greater than inflation from happening at all. A manufacturer will only increase prices faster than inflation if their net revenue (after accounting for inflation rebates in Medicare and Medicaid, 340B discounts, and other rebates and discounts made available throughout the supply chain) is greater with such a price increase than without. Effectively, manufacturers are trying to determine if they will be able to earn sufficient extra revenue from dispensing prescriptions to those not covered by Medicare, Medicaid, or served by 340B entities to make up for the increased inflation rebates they owe. The larger the share of prescriptions covered by an inflation rebate or discount, the more likely it is that the manufacturer will not be able to benefit from a price increase faster than inflation. Medicaid accounts for only 12% of total prescriptions, and will generally not be powerful enough on its own to deter price increases.² The 340B program is relevant to a growing share of total prescriptions, and there will be some drugs (especially those disproportionately used by low–income communities) where the two programs together will make a price increase unprofitable. But the addition of Medicare—which constitutes about one third of total prescriptions—creates potentially many more circumstances in which manufacturers will find it preferable to prevent price increases from exceeding inflation.³ This will be especially true for drugs that are disproportionately consumed by older enrollees; the greater the Medicare share of the drug, the more likely the manufacturer will find it profit–maximizing to avoid higher price increases. Indeed, the Congressional Budget Office (CBO) estimated that applying an inflation rebate in Medicare would, in fact, modestly lower costs for prescription drugs in the employer health insurance market, and those savings would be passed on as lower employer health insurance premiums and higher wages.   

To implement inflation rebates, the IRA contains two separate sections imposing the rebate requirement, one applicable to pharmacy-dispensed drugs (i.e., Part D drugs) and a separate section applicable to physician-administered drugs (i.e., Part B drugs). Similarly, Medicare has implemented the program through guidance and regulations that operate separately for each type of drug. The provisions are generally structured in very similar ways, and the separate statutory and regulatory provisions account for differences in how CMS collects data about each type of drug.

One important difference in the way CMS has implemented the provisions concerns the treatment of drugs sold to enrollees in MA plans. Under the guidance and regulations applicable to pharmacy-dispensed Part D drugs, in calculating inflation rebates, Medicare counts all units of the drug sold to any Medicare enrollee, regardless of whether their drug coverage is through a stand-alone Part D plan or a MA plan. However, for physician-administered Part B drugs, in calculating inflation rebates, CMS will currently only count units of the drug dispensed to enrollees in fee-for-service Medicare, not MA. When a Medicare Advantage enrollee receives a Part B-covered drug, no inflation rebate is currently owed. 

Clearly, this gap meaningfully weakens the effectiveness of the IRA’s inflation rebate in deterring list price increases. Medicare Advantage now constitutes more than half of the Medicare program, a share that is projected to continue to grow over time. Because the Part B rebate requirement currently applies to less than half of the Medicare population, there will be fewer cases where the inflation rebates that are newly owed will render a price increase unprofitable. Drug manufacturers are more likely to increase prices faster, and Americans with private health insurance will continue to pay more for these drugs.

Moreover, the impact of excluding MA units of Part B drugs is particularly significant for commercial prices due to differences in the way the statute measures the price of Part B versus Part D drugs. For Part D drugs, CMS looks at changes in the Average Manufacturer Price (AMP) to determine if a price has risen faster than inflation. AMP is effectively the “list price” for a drug and does not include rebates negotiated between payers and drug manufacturers. That gives the manufacturer significant flexibility to design a rebate strategy that can avoid increasing AMP faster than inflation while potentially increasing actual revenue faster than inflation—which somewhat dampens the power of inflation rebates for Part D drugs. However, for Part B drugs, the inflation rebate is based on Average Sales Price (ASP), a pricing metric which includes certain rebates and discounts, including some in the commercial market. That means a strong inflation rebate could hold down net prices (not just list prices) in the commercial market, and so weakening the rebate to apply to less than half of Medicare enrollees depresses that potential.  

Despite the potential impact, CMS explained that operational considerations were prompting them to exclude MA units. In order to determine whether an inflation rebate is owed when a particular unit of the drug is dispensed, CMS must be able to determine if the manufacturer has provided a 340B discount for that unit. It is relatively straightforward to require healthcare providers to report information about applicability of 340B discounts when they submit a claim for payment under fee-for-service Medicare, and, indeed, in 2023, CMS began requiring that information appear on fee-for-service claims for Part B-covered drugs in the form of a designated claim “modifier.” While MA companies do report detailed encounter data to CMS about the claims they pay—including for Part B-covered drugs—it is significantly more complex to include a modifier applicable to 340B in those data, and CMS has not yet taken that step. Therefore, at present, CMS does not have access to the information they would need to properly assess liability for the Medicare inflation rebate for Part B-covered drugs dispensed to MA enrollees.

Beyond CMS’ operational concerns, some have claimed that applying inflation rebates to Part B-covered drugs dispensed to Medicare Advantage enrollees violates the statute. When CMS sought comment on steps to collect the necessary data, some drug manufacturers responded by arguing that even if CMS could address the operational issues, inflation rebates would not be owed when Part B-covered drugs were dispensed in MA. As described in detail below, these claims do not hold up to scrutiny.

The text of the IRA reaches Medicare Advantage

As noted, the IRA contains two provisions implementing the inflation rebate requirements, one applicable to pharmacy-dispensed Part D-covered drugs and the other to physician-administered Part B-covered drugs. In general, the provisions operate by (1) defining the type of drug to which the language applies, and then (2) counting the number of units that have been dispensed and multiplying by the amount of the price increase above the rate of inflation. That is, the language first defines a “rebatable drug” for which rebates may be owed, and then separately instructs the agency how to calculate the amount of the rebate, including by instructing the agency in how to count units of the drug.

Specifically, the language implementing the inflation rebate requirement for Part B-covered drugs defines the type of drug as follows: 

“the term ‘part B rebatable drug’ means a single source drug or biological…, for which payment is made under this part, except such term shall not include [drugs with less than $100 in annual average per-enrollee spending, or vaccines].” 42 U.S.C. § 1395w-3a(i)(2)(A). 

And the language defining the number of units for Part B-covered drugs specifies:

“the total number of units for the billing and payment code with respect to a part B rebatable drug… is equal to- 

(i) the number of units for the billing and payment code of such drug furnished during such calendar quarter, minus 

(ii) the number of units for such billing and payment code of such drug furnished during such calendar quarter- 

(I) with respect to which the manufacturer provides a [340B discount or Medicaid inflation rebate]; or 

(II) that are packaged into the payment amount for an item or service and are not separately payable.” 42 U.S.C. § 1395w-3a(i)(3)(B).

Nothing in this language directly excludes Part B-covered drugs dispensed to Medicare Advantage enrollees—which Congress certainly could have done if it wanted to. The remainder of this section evaluates the two primary arguments advanced to claim that such units should nonetheless be excluded and then addresses related considerations. 

“Covered under this part”

Industry’s primary argument is that the IRA inflation rebate provision refers to Part B drugs “covered under this part”—meaning Part B—but Medicare Advantage is Part C of the Medicare program. For example, in their comments to CMS, PhRMA argues that “the statutory definition of a ‘Part B rebatable drug’ is expressly limited to certain drugs ‘for which payment is made under this part’ (emphasis added). Because [this language] is codified under Part B of Title XVIIII ‘this part’ refers to Part B of the Medicare statute. MA is codified under Part C of the Medicare statute.”

This claim both misunderstands the part of the statute that it is quoting and neglects consistent Medicare usage of the term “Part B.” To start, the language at issue appears only in the definition of a Part B rebatable drug. That means it is not about counting the number of units of a drug that have been dispensed, but rather about defining whether a given drug is reached by this provision. For example, the oncology drug gemcitabine is a drug administered by physicians and, therefore, is a drug “for which payment is made under” Part B. Thus, it is a “Part B rebatable drug” under the IRA: that is the entirety of the analysis that is conducted under this definition. The fact that for some beneficiaries the statutory provisions in Part C govern coverage and payment for their gemcitabine is not relevant—gemcitabine is defined as a Part B rebatable drug because payment for the drug is made under Part B. 

Moreover, across the Medicare program, healthcare services provided to Medicare Advantage enrollees under the rules of Part C still retain their character as “Medicare Part A services” or “Medicare Part B services.” In the statute and in common usage, the terms “Part A” or “Part B” are regularly used when talking about services delivered to a beneficiary who is enrolled in a MA plan—and the statutory rules of Part A and Part B define what beneficiary protections apply and from which “pot” of money the MA plan itself will be paid.

Indeed, other parts of the IRA clearly and directly adopt the reading that when a Medicare Advantage beneficiary receives a Part B-covered drug, the drug itself remains a “Part B” drug. Of the most direct relevance, the IRA specifies that when an inflation rebate is triggered for a “Part B rebatable drug,” then beneficiary coinsurance is reduced. CMS has explained that lower cost-sharing is applied in fee-for-service Medicare and in Medicare Advantage—because the drug remains a Part B drug for which Part B rules apply. Similarly, in explaining how any prices negotiated under the Medicare drug price negotiation program for Part B-covered drugs will be made available to beneficiaries (including fee-for-service and MA enrollees), the IRA says that the price applies for “an individual who is enrolled under part B of title XVIII, including an individual who is enrolled in an MA plan under part C of such title, if payment may be made under part B for such selected drug” (emphasis added). It is noteworthy both that that the IRA treats services for Part C enrollees as “included” within Part B, and that the statute clearly adopts the frame that a drug is considered a “Part B drug” at the level of the molecule and without regard to the type of coverage for a particular enrollee.  

Thus, the fact that the IRA language defines a Part B rebatable drug by reference to payment under Part B is of no relevance to how CMS should determine the number of units of the drug to which the Medicare inflation rebate applies.  

“Not separately payable”

Industry makes a second argument that the text of the IRA forecloses inclusion of units dispensed to MA enrollees because those units should be treated as “not separately payable.” This claim derives from the portion of the statute that directs CMS on how to count units of a Part B rebatable drug, so it does not suffer from the same shortcomings as the argument above. Nonetheless, it ignores critical statutory context.

Specifically, in counting units of the drug for which an inflation rebate may be owed, CMS is directed to exclude units “that are packaged into the payment amount for an item or service and are not separately payable.” Industry argues that “CMS does not separately pay for drugs under MA. Rather CMS makes capitated payment to MA plans on a per member per month basis.” This is an accurate description of MA payment operations, and it may be reasonable to claim that drugs dispensed to MA enrollees are not separately paid by CMS. However, this is notably not what is required for exclusion from the inflation rebate. Rather, the statute excludes units “that are packaged into the payment amount for an item or service and are not separately payable” (emphasis added). That is, the statute makes clear that in order to be excluded, a unit must be both not separately paid and “packaged” with another “item or service.” This language is not about capitation at all; it is about payment made to providers where the drug is considered part of a bundle.

Thus, while CMS provides capitated payment to MA plans, there is no plausible argument that Part B-covered drugs dispensed to MA enrollees are “packaged with an item or service,” and therefore the units are not excluded under this provision.   

Other considerations

A number of other considerations may be relevant to understanding whether the statute excludes MA units from the inflation rebate for Part B drugs:

Statutory history

In 2021, when Congress was first debating the law that would become the IRA, versions of the bill text applied the inflation rebate to all sales of the drug—Medicare and commercial insurance alike. However, ultimately, Congress had to enact a version of the inflation rebate provision that applied only in Medicare because the Senate parliamentarian concluded that the broader version could not be enacted through the budget reconciliation process. Nothing in the parliamentarian’s opinion, however, differentiated between fee-for-service Medicare and Medicare Advantage, and there was no policy reason to exclude MA, and especially no policy reason to exclude MA units only from the counting of units and not from the reduction in co-insurance. Given the initial ambitions of lawmakers, it is clear that Congress intended the inflation rebate requirement to apply as broadly as the parliamentarian would allow, and, therefore, MA units should be included. 

Discarded drugs

Prior to the enactment of the IRA, Congress amended the Medicare statute to require drug manufacturers to make payments to Medicare when the packaging of a Medicare Part B drug requires a large share of the amount Medicare purchases to be discarded. The statutory language for this provision is structured in a way that is similar to the inflation rebate provision, and it is codified in the same section of the Social Security Act. CMS has only applied the rebate requirement of this provision to fee-for-service units, not MA. That said, there is no statutory link that requires the two provisions to operate in similar ways, and it is certainly an available interpretation to apply the two provisions somewhat differently, given the differing nature of the rebate calculations. Given the absence of any statutory basis for concluding that MA units should be excluded from the inflation rebate, the similarity of the provisions does not compel an alternative reading.

Access to data

As noted above, CMS has emphasized that there are operational complexities associated with obtaining data necessary to determine the number of units of a Part B-covered drug that are dispensed to Medicare Advantage enrollees and subject to the inflation rebate—especially collecting data about whether a 340B discount has been provided. To apply inflation rebates to MA units, CMS would likely need to require MA plans to change the format in which they submit data to CMS to include 340B information, which, in turn, would require changes in the way health plans receive claims from providers, all of which would be a significant undertaking. However, as the drug price negotiation program expands to Part B-covered drugs (with any negotiated prices unambiguously applicable in MA), CMS, plans, and providers will need to make many of these same changes. As the agency prepares to operationalize the negotiation program, it would be reasonable to include changes related to the inflation rebate alongside.

Timing issues

A related operational challenge is timing: the statute requires CMS to communicate with drug manufacturers about their liability for inflation rebates six months after the rebate obligation for a Part B rebatable drug is incurred. Data from MA plans about drugs dispensed to their enrollees is currently not submitted fast enough for CMS to have full information within the six–month window, though the agency will have much of the required data in time. This data lag need not be an obstacle to the implementation of the inflation rebate to MA units for at least two reasons. First, CMS has indicated it will establish a true-up or restatement process for inflation rebates, and that process could easily accommodate these updates. Second, and similar to concerns regarding 340B, as the Medicare drug price negotiation program expands to include drugs covered under Part B, CMS will need to establish new timelines for exchange of information between CMS and MA plans about dispensing of Part B-covered drugs, and this process could similarly address inflation rebate considerations. 

What comes next

Broadening the reach of the Medicare inflation rebate to ensure rebates are required when a Part B-covered drug is dispensed to an MA enrollee has the potential to lower drug costs for all Americans, not just those with Medicare, and the statute allows such an expansion. As CMS considers how to implement the recent executive order on drug prices, the agency should prioritize making the operational changes necessary to extend this protection. In the absence of immediate CMS action, this also remains an available option for Congress as it looks for continued opportunities to lower healthcare costs.