President Joe Biden Signs Drug-Pricing Measures into Law

President Joe Biden signed into law this week (August 16, 2022) a major climate, tax, and healthcare bill, “The Inflation Reduction Act of 2022,” which includes measures to address the cost of prescription drugs in the US. The bill had early passed in the US Senate and US House of Representatives as part of the budget-reconciliation process.  

Key measures: negotiation of drug prices under Medicare
A key measure in the new law is to authorize and require the US government, through the Department of Health and Human Services (HHS), to negotiate prices for certain prescription drugs under Medicare, the US federal health insurance program for people 65 or older, the first time that the HHS would have such authority. The measure applies to drugs under Medicare Part D, which covers most outpatient prescription drugs from pharmacies and other pharmacy providers, and Medicare Part B, which applies to prescription drugs administered in a physician’s office or clinical/hospital outpatient setting.

Prior to the new law, the US government was not authorized to negotiate drug prices under Medicare and the new law has certain limitations for the types of drugs that are eligible for negotiation. For example, it limits the drug-pricing negotiation plan to drugs covered under Medicare and does not include products covered under private insurance. It also limits the number and type of drugs eligible to be negotiated under the drug-pricing plan. The plan also applies only to “high-cost” drugs defined by levels of Medicare spending, “older” drugs, defined on the basis of the number of years from when a drug was approved by the US Food and Drug Administration (FDA), and drugs without generic-drug and biosimilar competition. A recent analysis by KFF, an independent non-profit organization focused on national health issues, highlighted key provisions of the Senate-passed bill as outlined below (1).

Number and types of drugs subject to price negotiations. The new law establishes a drug-price negotiation program within the HHS under which the HHS Secretary would select a specified number of drugs from a list of 50 “negotiation-eligible drugs” with the highest Medicare Part D spending and from a list of 50 “negotiation-eligible drugs” with the highest Medicare Part B spending over a given 12-month period. It would limit the number of eligible drugs for negotiations to 10 Medicare Part D drugs in 2026, 15 Medicare Part D drugs in 2027, 15 Medicare Part B and D drugs in 2028, and 20 Medicare Part B and D drugs in 2029 and thereafter.

“Negotiation-eligible” drugs include brand-name drugs but would exclude the following types of drugs:

Drugs that have a generic or biosimilar available; 

  • Small-molecule drugs with less than nine years from their approval date by the US Food and Drug Administration (FDA) and biologic-based drugs with less than 13 years from their licensure date by the FDA;
  • Certain “small biotech drugs,” defined as drugs that account for no more than 1% of Medicare spending for all drugs from all manufacturers and that account for at least 80% of total 2021 Medicare spending for all drugs from a given manufacturer (this exclusion applies only in 2026, 2027, and 2028);
  • Drugs that accounted for less than $200 million in Medicare spending in 2021;
  • Drugs with an orphan-drug designation as the only-FDA approved indication; and
  • Plasma-derived products.

Maximum fair price. A maximum fair price would be determined by setting the upper limit of a negotiated price to be equal to the lower of three possible conditions: (1) the drug’s enrollment-weighted negotiated price (net of price concessions) for a Medicare Part D drug; (2) the average sales price of a Medicare Part B drug; or (3) a percentage of the non-federal average manufacturer price (referring to the average price wholesalers pay manufacturers to distribute their drugs to non-federal purchasers) based on FDA approval dates. For this condition, that percentage would be 75% for small-molecule drugs with more than nine years but less than 12 years beyond FDA approval, 65% for drugs with between 12 and 16 years beyond FDA approval, and 40% for drugs with more than 16 years beyond FDA approval.

Penalties for non-compliance.  Drug manufactures would face financial penalties for non-compliance in the form of an excise tax that would be imposed for not negotiating prices with the HHS Secretary. That excise tax would start at 65% of the drug’s prior-year sales and increase by 10% each quarter, up to 95%. The excise tax would be suspended if a drug manufacturer decides not to have that drug covered under Medicare or Medicaid, the US government healthcare program for lower-income individuals. A civil monetary penalty would also be imposed on drug manufacturers not offering the agreed maximum fair price; that penalty would be up to 10 times the difference between the price charged and the negotiated price.

Other measures: rebates, capping out-of-pocket costs
The new law also includes other measures for drug pricing under Medicare as outlined below.

Rebates for drug price increases above inflation. Under the new law, beginning in 2023, drug manufacturers will be required to pay a rebate if prices for certain types of drugs under Medicare increase faster than the rate of inflation. The rebate would apply to single-source drugs and biologics under Medicare Part B as well as to all drugs covered under Medicare Part D, except for those drugs whose average annual costs are less than $100.

Capping out-of-pockets costs under Medicare. The new law also caps out-of-pocket costs for prescription drugs for Medicare recipients at $2,000 per year, effective in 2025. It also requires from drug companies a price discount on brand name drugs above the out-of-pocket spending cap and modifies the price discount on brands below the out-of-pocket spending cap.

Extending implementation timeline of a drug rebate rule. The new law also moves the implementation date to 2032 of a drug rebate rule first initiated under the Trump Administration that would eliminate rebates negotiated between drug manufacturers and pharmacy benefit managers or health plan sponsors in Medicare Part D by removing the safe harbor protection for rebate arrangements under the federal anti-kickback statute. The Biden Administration had first delayed the implementation date to 2023 and subsequent legislation moved the implementation date to 2027. The new law would move the implementation date to 2032.

Limiting co-pays of insulin to $35 under Medicare. The new law also limits co-payments to $35 per month for covered insulin products under Medicare Part D and for insulin provided from medical durable equipment under Medicare Part B, beginning in 2023. For 2026 and beyond, the bill would limit Medicare Part D co-payments to the lesser of: (1) $35; (2) 25% of the negotiated maximum fair price, if the product is subject to negotiation; or (3) 25% of the negotiated price in Medicare D plans.


1.“Understanding the Health Care Provisions in the Inflation Reduction Act,” KFF, accessed August 11, 2022,

Source: The White House