CMS Proposes Rule to Implement Mandatory Medicare Part B Discarded Drug Rebates

Last November, we blogged about a provision of the Infrastructure Investment and Jobs Act that requires new rebates for discarded amounts of drugs that are covered under Medicare Part B, and that are packaged in a single-dose container or single-use package.  An example of such a drug is a single-use vial of an injectable cancer drug that is dosed based upon weight, and therefore might not be entirely used for a lighter weight patient.  Currently, a health care provider identifies any discarded quantity from such a vial in the claim using a JW modifier, and Medicare Part B pays for both the utilized and the discarded amount.  Under the new law, Part B will continue to pay for discarded amounts from single-dose containers, but the manufacturer must pay a rebate (called a “refund”) to Medicare for discarded amounts above a specified threshold.

On July 8, as part of its annual physician fee schedule update for 2023, CMS issued a proposed regulation to implement the new refund.  Under the regulation, manufacturers would pay refunds on a “refundable single-dose container or single-use drug,” defined as a drug (1) that is a single source drug or biological (including a biosimilar); (2) that is paid for under Medicare Part B; and (3) that is furnished in a single-dose container or single-use package.  The preamble adds that, to meet this definition, all NDCs of the drug assigned to the drug’s billing and payment code must be single-dose containers or single-use packages.  Excluded are radiopharmaceuticals, imaging agents, and drugs whose administration requires filtration and discarding of the unused portion prior to administration.  No refunds would be due for discarded amounts that are not separately payable — for example, drugs that are packaged under the hospital outpatient or ambulatory surgical center prospective payment systems.  The discarded amounts would be identified in a claim as a separate line item with the JW modifier, as they currently are, but a new JZ modifier would be required for drugs in single-dose containers when there is no discarded amount.

Tracking the statute, the proposed rule provides that the refund amount for a refundable drug each quarter would be the amount by which the Part B payment amount for the total discarded units in the quarter (based on date of service) exceeds 10% of the total allowed charges for the drug during the quarter.  Both the discarded units and the total allowed charges would be included in a quarter based on the date of service.  The following example is provided in the preamble:  If Part B paid a total of $1.5 million for 15,000 units of a refundable drug during a quarter, and paid $200,000 for 2,000 discarded units, the refund for the quarter would be $50,000 ($200,000 minus 10% of $1.5 million).  In other words, up to 10% of the Part B payment amount for a single-dose container drug during a quarter may be discarded with no refund, but any discarded amount greater than that is subject to refund.

Refunds will be payable for single-dose container drugs beginning on January 1, 2023.  The manufacturer responsible for paying the refunds will be the company whose NDC is on the label.  No later than October 1 of each year, manufacturers of refundable drugs will receive a utilization report from CMS containing refund claims for the four quarters ending with the first quarter of that year, and payment of undisputed refunds will be due on December 31.  Of necessity, the October 1, 2023 report will contain only claims for 1Q 2023.  Each report will also contain late-received (lagged) claims for the period covered by the previous year’s report.  For example, the October 1, 2025 report will contain claims for 2Q 2024 through 1Q 2025, plus lagged claims from 2Q 2023 through 1Q 2024.  Lagged claims will no longer be subject to refund after the second subsequent annual report.

The statute contains an 18-month grace period during which no refunds are payable for single-dose container drugs approved by FDA on or after November 15, 2021.  CMS has chosen to measure this grace period from the first full quarter following the first date of sale, as reported in the manufacturer’s average sales price reports, through the following five quarters.  The grace period would be available only for the first NDC marketed under a billing code; additional NDCs subsequently marketed under the same billing code (for example, a new vial size) would not be eligible for the grace period.

The proposed regulation establishes a dispute resolution procedure, and codifies the statutory penalty for failure to pay refunds, which is 125% of the amount the manufacturer was required to pay.

Although the scope of drugs subject to the new refunds is narrow, the refunds represent a significant departure from previous federal programs establishing rebates or discounts on drugs purchased or reimbursed by the government.  Those programs, comprising the Medicaid Drug Rebate Program, the 340B drug discount program, the Veterans Affairs drug discount program, the TRICARE retail refund program, and the Medicare Part D Coverage Gap Discount Program, are all implemented through agreements between the manufacturer and the government.  Though foregoing such an agreement may have adverse financial consequences for a manufacturer, the agreements are nevertheless voluntary.  When most of these programs were established in the early 1990s, the voluntary agreement approach was viewed as a way to prevent the programs being perceived and challenged as direct price controls.  The new discarded drug refunds are unique in being mandatory, with a civil penalty for non-compliance.  Medicare Part B and Part D inflation rebates currently being considered by Congress would similarly be mandatory.  It is safe to conclude that Congress’ sensitivity about imposing mandatory drug price reductions is a thing of the past.