Proposed Rule2025-21456
Medicare Program; Contract Year 2027 Policy and Technical Changes to the Medicare Advantage Program, Medicare Prescription Drug Benefit Program, and Medicare Cost Plan Program
Primary source
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Published
November 28, 2025
Issuing agencies
Health and Human Services DepartmentCenters for Medicare & Medicaid Services
Abstract
This proposed rule would revise the Medicare Advantage (Part C), Medicare Prescription Drug Benefit (Part D), and Medicare cost plan regulations to implement changes related to Star Ratings, marketing and communications, drug coverage, enrollment processes, special needs plans, and other programmatic areas.
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[Federal Register Volume 90, Number 227 (Friday, November 28, 2025)]
[Proposed Rules]
[Pages 54894-55030]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-21456]
[[Page 54893]]
Vol. 90
Friday,
No. 227
November 28, 2025
Part II
Department of Health and Human Services
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Centers for Medicare & Medicaid Services
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42 CFR Parts 422 and 423
Medicare Program; Contract Year 2027 Policy and Technical Changes to
the Medicare Advantage Program, Medicare Prescription Drug Benefit
Program, and Medicare Cost Plan Program; Proposed Rule
Federal Register / Vol. 90 , No. 227 / Friday, November 28, 2025 /
Proposed Rules
[[Page 54894]]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Parts 422 and 423
[CMS-4212-P]
RIN 0938-AV63
Medicare Program; Contract Year 2027 Policy and Technical Changes
to the Medicare Advantage Program, Medicare Prescription Drug Benefit
Program, and Medicare Cost Plan Program
AGENCY: Centers for Medicare & Medicaid Services (CMS), Department of
Health and Human Services (HHS).
ACTION: Proposed rule.
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SUMMARY: This proposed rule would revise the Medicare Advantage (Part
C), Medicare Prescription Drug Benefit (Part D), and Medicare cost plan
regulations to implement changes related to Star Ratings, marketing and
communications, drug coverage, enrollment processes, special needs
plans, and other programmatic areas.
DATES: To be assured consideration, comments must be received at one of
the addresses provided below, no later than 5 p.m. Eastern Time on
January 26, 2026.
ADDRESSES: In commenting, please refer to file code CMS-4212-P. Because
of staff and resource limitations, we cannot accept comments by
facsimile (FAX) transmission.
Comments, including mass comment submissions, must be submitted in
one of the following three ways (please choose only one of the ways
listed):
1. Electronically. You may submit electronic comments on this
regulation to <a href="http://www.regulations.gov">http://www.regulations.gov</a>. Follow the ``Submit a
comment'' instructions.
2. By regular mail. You may mail written comments to the following
address ONLY:
Centers for Medicare & Medicaid Services, Department of Health and
Human Services, Attention: CMS-4212-P, P.O. Box 8013, Baltimore, MD
21244-8013.
Please allow sufficient time for mailed comments to be received
before the close of the comment period.
3. By express or overnight mail. You may send written comments to
the following address ONLY:
Centers for Medicare & Medicaid Services, Department of Health and
Human Services, Attention: CMS-4212-P, Mail Stop C4-26-05, 7500
Security Boulevard, Baltimore, MD 21244-1850.
For information on viewing public comments, see the beginning of
the SUPPLEMENTARY INFORMATION section.
FOR FURTHER INFORMATION CONTACT:
Kristy Nishimoto, (206) 615-2367--General Questions and Beneficiary
Enrollment Issues.
Naseem Tarmohamed, (410) 786-0814--Part C and Cost Plan Issues.
Lucia Patrone, (410) 786-8621--Part D Issues.
Alissa Stoneking, (410) 786-1120--Parts C and D Payment Issues.
Sara Klotz, (410) 786-1984--D-SNP Issues.
Beckie Peyton, (410) 786-1572--Manufacturer Discount Program
Issues.
<a href="/cdn-cgi/l/email-protection#beeedfcccafddfd0dafaedcadfccecdfcad7d0d9cdfeddd3cd90d6d6cd90d9d1c8"><span class="__cf_email__" data-cfemail="2e7e4f5c5a6d4f404a6a7d5a4f5c7c4f5a4740495d6e4d435d0046465d00494158">[email protected]</span></a>--Parts C and D Star Ratings
Issues.
<a href="/cdn-cgi/l/email-protection#f7b4bababea8bab6a48385968392908eb7949a84d99f9f84d9909881"><span class="__cf_email__" data-cfemail="3e7d73737761737f6d4a4c5f4a5b59477e5d534d1056564d10595148">[email protected]</span></a>--RFI on Future Directions in Medicare
Advantage.
<a href="/cdn-cgi/l/email-protection#1251425b4d427360665134564d4077755b616167776152717f613c7a7a613c757d64"><span class="__cf_email__" data-cfemail="efacbfa6b0bf8e9d9bacc9abb0bd8a88a69c9c9a8a9caf8c829cc187879cc1888099">[email protected]</span></a>--Part D Program Integrity Issues.
SUPPLEMENTARY INFORMATION:
Inspection of Public Comments: All comments received before the
close of the comment period are available for viewing by the public,
including any personally identifiable or confidential business
information that is included in a comment. We post all comments
received before the close of the comment period on the following
website as soon as possible after they have been received: <a href="http://www.regulations.gov">http://www.regulations.gov</a>. Follow the search instructions on that website to
view public comments. CMS will not post on <a href="http://Regulations.gov">Regulations.gov</a> public
comments that make threats to individuals or institutions or suggest
that the commenter will take actions to harm an individual. CMS
continues to encourage individuals not to submit duplicative comments.
We will post acceptable comments from multiple unique commenters even
if the content is identical or nearly identical to other comments.
Plain Language Summary: In accordance with 5 U.S.C. 553(b)(4), a
plain language summary of this proposed rule may be found at <a href="https://www.regulations.gov/">https://www.regulations.gov/</a>.
Deregulation Request for Information (RFI): On January 31, 2025,
President Trump issued Executive Order (E.O.) 14192 ``Unleashing
Prosperity Through Deregulation,'' which states the Administration
policy to significantly reduce the private expenditures required to
comply with Federal regulations to secure America's economic prosperity
and national security and the highest possible quality of life for each
citizen. We would like public input on approaches and opportunities to
streamline regulations and reduce administrative burdens on providers,
suppliers, beneficiaries, and other interested parties participating in
the Medicare program. We have made available an RFI at <a href="https://www.cms.gov/medicare-regulatory-relief-rfi">https://www.cms.gov/medicare-regulatory-relief-rfi</a>. Please submit all comments
in response to this request for information through the provided
weblink. Please note, this is an RFI only. In accordance with the
implementing regulations of the Paperwork Reduction Act (PRA),
specifically 5 CFR 1320.3(h)(4), this general solicitation is exempt
from the PRA. Facts or opinions submitted in response to general
solicitations of comments from the public, published in the Federal
Register or other publications, regardless of the form or format
thereof, provided that no person is required to supply specific
information pertaining to the commenter, other than that necessary for
self-identification, as a condition of the agency's full consideration,
are not generally considered information collections and therefore not
subject to the PRA.
I. Executive Summary
A. Purpose
The primary purpose of this proposed rule is to amend the
regulations for the Medicare Advantage (Part C) program, Medicare
Prescription Drug Benefit (Part D) program, and Medicare cost plan
program. This proposed rule includes a number of changes that would
improve these programs for contract year 2027 as well as codify
existing sub-regulatory guidance.
We note that, as with previous rules, the new marketing and
communications policies in this rule are proposed to be applicable for
all contract year 2027 marketing and communications, beginning October
1, 2026.
B. Summary of the Key Provisions
1. Medicare Part D Redesign
This proposal would implement the changes made to the Part D
benefit design and the payment obligations of enrollees, Part D plan
sponsors, manufacturers, and CMS by section 11201 of the Inflation
Reduction Act of 2022 (IRA) (Pub. L. 117-169).
We are proposing to codify the statutory changes to the phases of
the Part D benefit made by the IRA related to the deductible, initial
coverage limit, the coverage gap, the annual out-of-pocket threshold,
and alternative prescription drug coverage options. In alignment with
these changes to the Part
[[Page 54895]]
D benefit, we are also proposing to codify technical and conforming
changes to our specialty tier regulations. This proposal would codify
additional structural and operational statutory changes to the Part D
benefit design, including making changes to the types of payments that
count as True Out-Of-Pocket costs (TrOOP), establishing a policy for
how an enrollee's costs for drugs not subject to the Part D defined
standard deductible count towards becoming eligible for manufacturer
discounts under the Medicare Part D Manufacturer Discount Program
(Manufacturer Discount Program), making updates to the methodology for
reinsurance payments from us to Part D sponsors, and implementing the
Selected Drug Subsidy, among others.
2. Coverage Gap Discount Program
We propose to codify the sunsetting of the Coverage Gap Discount
Program and termination of all Coverage Gap Discount Program agreements
as of January 1, 2025, in alignment with subsection (h) of section
1860D-14A of the Social Security Act (the Act), as added by section
11201 of the IRA. Specifically, we propose to revise Sec. 423.2300 by
adding paragraph (b) to establish applicability dates for the Coverage
Gap Discount Program, revise Sec. 423.2345 by adding paragraph (f) to
terminate all Coverage Gap Discount Program agreements, as well as make
conforming changes for clarity.
3. Manufacturer Discount Program
We propose regulatory changes to codify the Manufacturer Discount
Program, established in section 1860D-14C of the Act, as added by
section 11201 of the IRA. Under the Manufacturer Discount Program,
which replaces the Coverage Gap Discount Program and began on January
1, 2025, manufacturers that enter into a Manufacturer Discount Program
agreement are required to provide discounts on applicable drugs in both
the initial and catastrophic coverage phases of the Part D benefit.
Specifically, we propose to add new subpart AA to part 423 to codify
the Manufacturer Discount Program requirements and make several
conforming changes throughout part 423 to reflect the new program.
4. Updates to Star Ratings
We have continued to identify enhancements to the Star Ratings
program over time to increase the health and wellbeing of enrollees. In
this proposed rule, we are proposing changes to simplify and refocus
the areas included in the Star Ratings, including changes to the
measure set. We also propose to not move forward with the
implementation of the Health Equity Index (also called Excellent Health
Outcomes for All) reward at Sec. Sec. 422.166(f)(3) and 423.186(f)(3)
and to continue to include the historical reward factor in the Star
Ratings methodology at Sec. Sec. 422.166(f)(1) and 423.186(f)(1). We
also solicit comments on ways to further simplify and modify the Star
Ratings program to further drive improved quality of care and reduce
regulatory burden.
5. Request for Information on Dually Eligible Individual Enrollment
Growth in C-SNPs and I-SNPs
Chronic condition special needs plans (C-SNPs) and the number of
dually eligible individuals enrolled in these plans have grown
significantly between 2021 and 2025. Dually eligible enrollment in
institutional special needs plans (I-SNPs) has remained more stable.
While C-SNPs and I-SNPs can offer benefits specific to chronic disease
and institutional level of care, respectively, they do not integrate
Medicare and Medicaid benefits and may not be the best approach for
meeting the needs of dually eligible individuals. The growth in C-SNP
enrollment could be an intentional approach by MA organizations to
circumvent Federal and State requirements for dual eligible special
needs plans (D-SNPs), such as States determining which D-SNPs will be
offered in a State through their State Medicaid agency contract
authority and general coordination and integration requirements. This
proposed rule includes a request for information (RFI) to share
information with interested parties on these trends and solicit
feedback on them as well as on potential policy solutions for future
consideration.
6. Request for Information on Future Directions in Medicare Advantage
(Risk Adjustment and Quality Bonus Payments)
This RFI will serve as a formal mechanism to solicit comprehensive
public input from interested parties, including MA organizations,
beneficiary advocates, healthcare providers, as well as technology and
industry experts, regarding the future direction of the MA program. The
goal of this RFI is to solicit comment on modernizing and improving the
MA program that could be implemented through either programmatic
changes or through a CMS Innovation Center (CMMI) model. This public
comment process will enable us to gather critical feedback on risk
adjustment enhancements and quality bonus payment changes. Through this
RFI, we are working to ensure any resulting changes would effectively
address interested parties' concerns while achieving objectives of data
transparency for beneficiaries to facilitate optimal plan selection,
improved quality, enhanced competition, taxpayer savings, and
minimizing fraud, waste, and abuse in the MA program.
C. Summary of Costs and Benefits
BILLING CODE 4120-01-P
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[GRAPHIC] [TIFF OMITTED] TP28NO25.000
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BILLING CODE 4120-01-C
D. Supplemental Requests for Information
We are requesting comments on several specific areas beyond the
various comment opportunities already presented throughout the proposed
rule as part of our commitment to reducing regulatory burden while
strengthening program integrity. First, we are considering ways to
modernize our approach to marketing oversight and agent/broker
regulation in the Medicare program while ensuring beneficiaries
continue to receive accurate information about plan choices. This
includes, but is not limited to, all of the following:
<bullet> Modifying the current definition of third-party marketing
organization (TPMO) under Sec. Sec. 422.2260 and 423.2260 to delineate
the roles of and requirements applicable to the different kinds of
TPMOs.
<bullet> Modifying the 5 percent translation requirement found in
Sec. Sec. 422.2267 and 423.2267.
<bullet> Removing the requirement for our approval of plan use of
the Medicare Card image found in Sec. Sec. 422.2262(a)(1)(xix) and
423.2262(a)(1)(xviii).
<bullet> Eliminating the Outbound Enrollment Verification found in
Sec. Sec. 422.2272(b) and 423.2272(b).
<bullet> Modifying testimonial requirements found under Sec. Sec.
422.2262(b) and 423.2262(b).
<bullet> Eliminating mailing statement requirements found under
Sec. Sec. 422.2267(e)(36) and 422.2267(e)(37).
We are also looking specifically at regulatory changes that will
assist the agency in taking appropriate action against TPMOs, including
agents and brokers who fail to adhere to our requirements. Our goal is
to address non-compliance, holding MA plans and Part D sponsors
accountable for those TPMOs who provide inaccurate, misleading, and
confusing information, or act in a manner contrary to our requirements.
We have considered options such as further segmentation of the
definition for TPMOs found under Sec. Sec. 422.2260 and 423.2260 to
account for size, scope, and role of various interested parties;
however, we recognize the need for industry input before implementing
any change. We, therefore, solicit comments on how to hold ``bad
actors'' accountable, while not burdening those TPMOs and plans that
adhere to our requirements. We also solicit comments on how to properly
align incentives in the agent or broker space, how to identify and
address when agents and brokers perform their jobs in good faith but
does not adhere to requirements that apply to the MA plan. For example,
we welcome comment on whether updates to the training and testing
requirements are needed or new ways CMS or MA organizations and Part D
sponsors can improve how beneficiaries interact with agents or brokers.
We are also soliciting comments on how best to monitor and assess the
actions of MA organizations, Part D sponsors, and their downstream
entities such as TPMOs, using data driven strategies. We are interested
in finding ways to better utilize data--whether it is CMS, plan, first
tier, downstream or related entity (FDR), or TPMO data--to review and
monitor the MA and Part D market, and to assist us in addressing MA
organization and PDP sponsor compliance with our requirements.
Likewise, the agency is also seeking interested parties feedback
regarding how technology can be leveraged, including on the use of
artificial intelligence, to enhance the decision support tools used by
beneficiaries and their caregivers.
In addition to issues regarding marketing oversight and agent/
broker regulation and consistent with the Administration's deregulation
priorities, we are seeking comment on current reporting processes and
data collections to identify specific areas where requirements can be
simplified, consolidated, or eliminated while maintaining program
integrity and beneficiary protections in the following areas:
<bullet> Network adequacy.
<bullet> Medical loss ratio (MLR) reporting.
<bullet> Benefit, including supplemental benefit, usage and
utilization data reporting.
<bullet> Requirements related to the SNP model of care (MOC).
We are interested in ideas for streamlining data collection
processes for the areas listed previously, including automated data
sharing to reduce manual reporting and ideas related to alignment with
existing reporting mechanisms. We are also interested in feedback
regarding which data elements are the most burdensome to collect and
report, as we seek to balance the level of detail required to maintain
proper program oversight while promoting efficiency.
Regarding network adequacy, we seek comments on how to simplify the
provider and facility network review process overall, including the
submission process, the exception request process, and the timing and
frequency of the reviews. An example of a way that we could simplify
the exception request process is to create a separate pattern of care
exception under Sec. 422.116(f)(1), that could be used where the
pattern of care in the area is unique and the organization believes
their contracted network is consistent with or better than the Original
Medicare pattern of care. An organization could use this exception in
lieu of demonstrating the current requirements under Sec.
422.116(f)(1)(i), that is: (A) Certain providers or facilities are not
available for the MA plan to meet the network adequacy criteria as
shown in the Provider Supply file for the year for a given county and
specialty type ; and (B) the MA plan has contracted with other
providers and facilities that may be located beyond the limits in the
time and distance criteria, but are currently available and accessible
to most enrollees, consistent with the local pattern of care.
We welcome comments on these topics.
E. Conclusion
Finally, we are clarifying and emphasizing our intent that if any
provision of this rule, once finalized, is held to be invalid or
unenforceable by its terms, or as applied to any person or
circumstance, or stayed pending further agency action, it shall be
severable from this rule and not affect the remainder thereof or the
application of the provision to other persons not similarly situated or
to other, dissimilar circumstances. Through this rule, we propose
provisions that are intended to and will operate independently of each
other, even if each serves the same general purpose or policy goal.
Where a provision is necessarily dependent on another, the context
generally makes that clear (such as by a cross-reference to apply the
same standards or requirements).
II. Implementation of Certain Provisions of the Inflation Reduction Act
of 2022 and the Substance Use-Disorder Prevention That Promotes Opioid
Recovery and Treatment for Patients and Communities Act of 2018
A. Medicare Part D Redesign
1. Background
Section 11201 of the Inflation Reduction Act of 2022 (IRA) made
significant changes to the Part D benefit design that affect the
structure of the Part D benefit and the payment obligations of
enrollees, Part D plan sponsors, manufacturers, and CMS. Several of the
changes made by section 11201 of the IRA have taken effect already and
other changes will go into effect in 2026, as described later.
Section 11201(f) of the IRA directed the Secretary to implement
section
[[Page 54898]]
11201 of the IRA for 2024, 2025, and 2026 by program instruction or
other forms of program guidance. On February 1, 2023, we released
guidance outlining changes to the Part D benefit that were specific to
Calendar Year (CY) 2024 in the CY 2024 Advance Notice and Rate
Announcement.\1\ In that guidance, we eliminated cost sharing for
covered Part D drugs in the catastrophic phase of coverage, consistent
with section 1860D-2(b)(4)(A)(i) of the Social Security Act (the Act),
as amended by section 11201 of the IRA.\2\
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\1\ <a href="https://www.cms.gov/files/document/2024-advance-notice-pdf.pdf">https://www.cms.gov/files/document/2024-advance-notice-pdf.pdf</a>.
\2\ <a href="https://www.cms.gov/files/document/2024-advance-notice-pdf.pdf">https://www.cms.gov/files/document/2024-advance-notice-pdf.pdf</a>.
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On April 1, 2024, we released the Final CY 2025 Part D Redesign
Program Instructions.\3\ In these program instructions, we implemented
changes to the structure of the Part D benefit for CY 2025 made by
section 11201 of the IRA. Section 11201 of the IRA added section 1860D-
2(b)(4)(B)(i)(VII) of the Act to reduce the annual out-of-pocket (OOP)
threshold to $2,000 for CY 2025 (to be annually increased by the annual
percentage increase, as described in section 1860D-2(b)(6) of the Act).
The IRA also amended section 1860D-2(b) of the Act to eliminate the
coverage gap phase and added subsection (h) to section 1860D-14A of the
Act to sunset the Coverage Gap Discount Program. The IRA added section
1860D-14C of the Act to establish the Manufacturer Discount Program.
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\3\ <a href="https://www.cms.gov/files/document/final-cy-2025-part-d-redesign-program-instructions.pdf">https://www.cms.gov/files/document/final-cy-2025-part-d-redesign-program-instructions.pdf</a>.
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On April 7, 2025, we issued the Final CY 2026 Part D Redesign
Program Instructions which described changes to the Part D benefit for
CY 2026.\4\ In these program instructions, we implemented further
changes made by the IRA to the Part D benefit that go into effect in CY
2026, including certain changes to the Part D benefit that relate to
the Medicare Drug Price Negotiation Program that also was established
by the IRA. Beginning January 1, 2026, the maximum fair prices (MFPs)
negotiated under the Medicare Drug Price Negotiation Program go into
effect.\5\ This program, as established in Part E of title XI of the
Act, permits the Secretary to negotiate MFPs for certain high
expenditure, single source drugs and biological products with
participating manufacturers. When these prices go into effect, the IRA
makes further changes to payment obligations in Part D related to
selected drugs (as defined in section 1192(c) of the Act) during a
price applicability period (as defined in section 1191(b)(2) of the
Act).
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\4\ <a href="https://www.cms.gov/files/document/final-cy-2026-part-d-redesign-program-instruction.pdf">https://www.cms.gov/files/document/final-cy-2026-part-d-redesign-program-instruction.pdf</a>.
\5\ For more information on the Medicare Drug Price Negotiation
Program, please see: <a href="https://www.cms.gov/priorities/medicare-prescription-drug-affordability/overview/medicare-drug-price-negotiation-program">https://www.cms.gov/priorities/medicare-prescription-drug-affordability/overview/medicare-drug-price-negotiation-program</a>.
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As described in the Final CY 2026 Part D Redesign Program
Instructions, the defined standard Part D benefit for CY 2026 will
consist of the following phases and liabilities, with the CY 2026
changes reflected in bolded and italicized font:
<bullet> Annual deductible. The enrollee pays 100 percent of their
gross covered prescription drug costs (GCPDC) until the deductible is
met.
<bullet> Initial coverage. The enrollee pays 25 percent coinsurance
for covered Part D drugs. The Part D plan sponsor typically pays 65
percent of the costs of applicable drugs and selected drugs \6\ and 75
percent of the costs of all other covered Part D drugs. The
manufacturer, through the Manufacturer Discount Program, typically
covers 10 percent of the costs of applicable drugs. In the initial
coverage phase, CMS will pay a 10 percent subsidy for selected drugs
during a price applicability period. This phase ends when the enrollee
has reached the annual OOP threshold of $2,100 for CY 2026.
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\6\ An applicable drug under the Manufacturer Discount Program
is a Part D drug approved under a new drug application (NDA) under
section 505(c) of the Federal Food, Drug, and Cosmetic Act (FDCA)
or, in the case of a biological product, licensed under section 351
of the Public Health Service Act (PHSA), but does not include a
selected drug (as defined in section 1192(c) of the Act) dispensed
during a price applicability period (as defined in section
1191(b)(2) of the Act) with respect to that drug. Selected drug has
the meaning given such term in section 1192(c) of the Act and any
applicable regulations and guidance.
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<bullet> Catastrophic. The enrollee pays no cost sharing for Part D
drugs. Part D plan sponsors typically pay 60 percent of the costs of
all covered Part D drugs. The manufacturer pays a discount, typically
equal to 20 percent, for applicable drugs. Medicare pays a reinsurance
subsidy equal to 20 percent of the costs of applicable drugs, and
equivalent to 40 percent of the costs of all other covered Part D drugs
that are not applicable drugs. In the catastrophic phase, Medicare will
provide 40 percent reinsurance for selected drugs during a price
applicability period.
As part of the overall restructuring of the Part D benefit, the IRA
also made changes to the treatment of Advisory Committee on
Immunization Practices (ACIP)-recommended adult vaccines and covered
insulin products under Part D. Section 11401 of the IRA added section
1860D-2(b)(8) of the Act to require that, effective for plan years
beginning on or after January 1, 2023, the Medicare Part D deductible
shall not apply to, and there is no coinsurance or cost sharing for, an
adult vaccine recommended by ACIP that is a covered Part D drug.
Further, section 11406 of the IRA added section 1860D-2(b)(9) of the
Act to require that, effective for plan years beginning on or after
January 1, 2023, the Medicare Part D deductible shall not apply to
covered insulin products, and the Part D cost-sharing amount for a one-
month supply of each covered insulin product must not exceed the
applicable cost-sharing amount for all enrollees. For CYs 2023, 2024,
and 2025, this amount was $35.
Sections 11401(e) and 11406(d) of the IRA directed the Secretary to
implement the vaccine and insulin cost sharing changes for CYs 2023,
2024, and 2025 by program instruction or other forms of program
guidance. In accordance with the law, we issued several memoranda via
the Health Plan Management System (HPMS) that implemented sections
11401 and 11406 of the Act for CYs 2023, 2024, and 2025.\7\ These
provisions of the IRA were then codified in the ``Contract Year 2026
Policy and Technical Changes to the Medicare Advantage Program,
Medicare Prescription Drug Benefit Program, Medicare Cost Plan Program,
and Programs of All-Inclusive Care for the Elderly)'' final rule, which
appeared in the Federal Register on April 15, 2025 (90 FR 15792) (CY
2026 final rule).\8\
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\7\ See the following HPMS memoranda: Contract Year 2023 Program
Guidance Related to Inflation Reduction Act Changes to Part D
Coverage of Vaccines and Insulin (and Revision); Final Contract Year
(CY) 2024 Part D Bidding Instructions; and Final CY 2025 Part D
Redesign Program Instructions.
\8\ <a href="https://www.federalregister.gov/documents/2025/04/15/2025-06008/medicare-and-medicaid-programs-contract-year-2026-policy-and-technical-changes-to-the-medicare">https://www.federalregister.gov/documents/2025/04/15/2025-06008/medicare-and-medicaid-programs-contract-year-2026-policy-and-technical-changes-to-the-medicare</a>.
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In the CY 2026 final rule, consistent with section 1860D-2(b)(9)(B)
of the Act, we finalized the requirement that, for CY 2026 and each
subsequent year, the applicable cost-sharing amount for a covered
insulin product is the lesser of: (1) $35, (2) an amount equal to 25
percent of the MFP established for the covered insulin product in
accordance with Part E of title XI of the Act; or (3) an amount equal
to 25 percent of the negotiated price, as defined in Sec. 423.100, of
the covered insulin product under the Part D Prescription Drug Plan
(PDP) or Medicare Advantage Prescription Drug (MA-PD) plan.
2. Redesigned Part D Benefit (Sec. Sec. 423.100 and 423.104)
In this rule, we are proposing to codify at Sec. Sec. 423.100 and
423.104
[[Page 54899]]
changes to the Part D benefit made by the IRA related to the
deductible, initial coverage limit, the coverage gap, the annual out-
of-pocket (OOP) threshold, and alternative prescription drug coverage
options.
a. Deductible (Sec. 423.104(d)(1))
The IRA Part D benefit redesign does not change how the annual
deductible for standard prescription drug coverage is calculated.
However, as discussed previously, sections 11401 and 11406 of the IRA
provide that, effective for plan years beginning on or after January 1,
2023, the Medicare Part D deductible shall not apply to ACIP-
recommended adult vaccines or covered insulin products under Part D. We
codified these changes in the CY 2026 final rule.\9\ Specifically, the
vaccine changes codified at Sec. 423.120(g)(1) and the insulin changes
codified at Sec. 423.120(h)(1) state, respectively, that the Part D
deductible does not apply with respect to ACIP-recommended adult
vaccines and covered insulin products.
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\9\ <a href="https://www.federalregister.gov/documents/2025/04/15/2025-06008/medicare-and-medicaid-programs-contract-year-2026-policy-and-technical-changes-to-the-medicare">https://www.federalregister.gov/documents/2025/04/15/2025-06008/medicare-and-medicaid-programs-contract-year-2026-policy-and-technical-changes-to-the-medicare</a>.
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In alignment with these changes, we are proposing to revise the
regulatory text at Sec. 423.104(d)(1) by adding language to state
there, too, that the deductible does not apply to ACIP-recommended
adult vaccines or covered insulin products, as defined in Sec.
423.100.
b. Initial Coverage Limit (Sec. Sec. 423.104(d)(2) and 423.104(d)(3))
Section 11201 of the IRA amended section 1860D-2(b)(3)(A) of the
Act to specify that the initial coverage limit only applies for years
preceding CY 2025. Prior to this statutory change, once an enrollee met
their deductible, they would enter the initial coverage phase, which
would extend until the enrollee's gross covered prescription drug
costs, as defined in Sec. 423.100, reached the initial coverage limit.
At that point the enrollee would enter the coverage gap phase. The
enrollee would remain in the coverage gap phase until the enrollee's
incurred costs, as defined in Sec. 423.100, met the OOP threshold, at
which point the enrollee would enter the catastrophic phase.
By eliminating the initial coverage limit beginning in CY 2025, the
IRA eliminated the coverage gap phase, resulting in a three-phase
benefit for Part D prescription drug coverage which includes the
deductible phase, the initial coverage phase, and the catastrophic
phase. As such, as of CY 2025, there is no longer an initial coverage
limit and the initial coverage phase extends to the annual OOP
threshold, at which point the catastrophic phase begins. Once an
enrollee enters the catastrophic phase, they pay no cost sharing for
Part D drugs.
As a result of these changes, we are proposing to revise Sec.
423.104(d)(2) and (d)(3) to reflect the elimination of the initial
coverage limit beginning in CY 2025. Specifically, we are proposing to
revise the section heading at Sec. 423.104(d)(2) by removing ``the
initial coverage limit'' and replacing it with ``prescription drug
plans'' to accurately reflect the new benefit structure in which there
is no initial coverage limit beginning in CY 2025 and to ensure
consistency with the statutory changes made by the IRA. This proposed
heading language change is intended to accurately encompass the
regulations included in the paragraphs that are subordinate to Sec.
423.104(d)(2), which include regulations related to tiered copayments
and the specialty tier.
We are also proposing to revise Sec. 423.104(d)(2)(i), which
currently specifies that coinsurance for actual costs for covered Part
D drugs above the annual deductible applies up to the initial coverage
limit. To align our regulations with current statute and the redesigned
Part D benefit structure where beneficiaries move directly from the
initial coverage phase to the catastrophic phase once they reach the
OOP threshold, we propose to revise this language to specify that for
each year preceding 2025, this coinsurance applies up to the initial
coverage limit and, for 2025 and each subsequent year, this coinsurance
applies up to the annual OOP threshold specified in Sec.
423.104(d)(5)(iii).
We also propose to revise Sec. 423.104(d)(3), which specifies how
the initial coverage limit is determined. We first propose to correct
Sec. 423.104(d)(3) by removing the references to paragraphs (d)(4) and
(d)(5) of this section because these paragraphs refer to regulations
related to cost sharing in the coverage gap and the out-of-pocket
threshold, which do not affect how the initial coverage limit is
determined. We propose to revise Sec. 423.104(d)(3)(ii) to specify
that the methodology for increasing the initial coverage limit was in
effect from 2007 to 2024. We are also proposing to add a new paragraph
at Sec. 423.104(d)(3)(iii) to state that, for 2025 and each subsequent
year, there is no initial coverage limit.
Finally, we are proposing two conforming changes at Sec.
423.128(e), which refers to the explanation of benefits that a Part D
sponsor must furnish directly to enrollees. First, we propose to revise
Sec. 423.128(e)(3)(ii) which states that Part D sponsors are required
to include information on the cumulative, year-to-date total amount of
benefits provided in relation to the initial coverage limit for the
current year in the explanation of benefits provided to enrollees. In
alignment with section 1860D-4(a)(4)(B)(i) of the Act, as amended by
section 11201 of the IRA, we are proposing to revise Sec.
423.128(e)(3)(ii) by adding language to specify that the requirement to
include information about the initial coverage limit was only in effect
for years preceding 2025. Second, we propose to revise Sec.
423.128(e)(7) which states that the explanation of benefits must be
provided no later than the end of the month following any month when
prescription drug benefits are provided under this part, including the
covered Part D spending between the initial coverage limit described in
Sec. 423.104(d)(3) and the out-of-pocket threshold described in Sec.
423.104(d)(5)(iii). In alignment with the elimination of the initial
coverage limit and coverage gap phase beginning in CY 2025, we are
proposing to add language to specify that the covered Part D spending
between the initial coverage limit and the out-of-pocket threshold
requirement is only applicable for years preceding 2025.
Rather than striking the regulations that apply through CY 2024, we
are proposing to maintain these regulations, with the described
revisions, for historical purposes and for any reconciliation
activities related to benefit years prior to 2025.
c. Coverage Gap (Sec. Sec. 423.100 and 423.104(d)(4))
Section 11201 of the IRA eliminated the coverage gap phase of the
Part D benefit by amending section 1860D-2(b) of the Act to eliminate
the initial coverage limit beginning in CY 2025.
To align with these changes to the Part D benefit, we propose to
revise Sec. 423.104(d)(4) by adding language to reflect that the
coverage gap phase was eliminated. The proposed revision would state
that the methodology for determining cost sharing in the coverage gap
that is described in this section applies only for years preceding
2025. This proposed change aligns with our proposed revision to the
definition of ``coverage gap'' in Sec. 423.100 to specify that the
coverage gap means the period in prescription drug coverage that occurs
between the initial coverage limit and the OOP threshold during the
years 2006 through 2024.
[[Page 54900]]
We are also proposing to revise Sec. 423.104(d)(4)(iii), which
describes the generic gap coinsurance percentage, by adding an end date
to paragraph (C) of this section to state that the 25 percent generic
gap coinsurance percentage only applied for years 2020 through 2024.
This aligns with the IRA's elimination of the coverage gap phase in CY
2025.We also propose to revise Sec. 423.104(d)(4)(iv), which describes
the applicable gap coinsurance percentage, by revising paragraph (E) to
specify that the applicable gap coinsurance percentage for 2019 was 75
(not 80 percent) and to add an end date indicating that the 75 percent
applies for years 2019 through 2024, and removing paragraph (F), which
incorrectly stated that the applicable gap coinsurance percentage for
2020 and subsequent years was 75 percent. These changes align with
changes made by the Bipartisan Budget Act (BBA) of 2018 and the IRA.
Section 53116 of the BBA amended section 1860D-2(b)(2)(D)(ii) of the
Act to specify that the applicable gap percentage for 2019 is 75
percent, not 80 percent, thus accelerating by 1 year a reduction in
enrollee cost sharing in the coverage gap phase. We note that this
revision to paragraph (E) is, in part, a technical correction to align
our regulations with the statutory change made by the BBA, which was
implemented in 2019. This revision does not change how the applicable
gap percentage was calculated in the past, as these amounts were
properly determined consistent with the statutory requirement. We
additionally propose to add a new paragraph at Sec. 423.104(d)(4)(v)
to specify that, for 2025 and each subsequent year, there is no
coverage gap.
Finally, we are proposing conforming changes to Sec. Sec.
422.2267(e)(5)(ii)(B)(1) and 423.2267(e)(5)(ii)(A)(2) which state that
information on prescription drug expenses, including information on the
deductible, the initial coverage phase, coverage gap, and catastrophic
coverage, is required to be included in the Summary of Benefits
provided to prospective enrollees. Due to the elimination of the
coverage gap in CY 2025, we are proposing to revise Sec. Sec.
422.2267(e)(5)(ii)(B)(1) and 423.2267(e)(5)(ii)(A)(2) by adding
language to specify that the requirement to include information about
the coverage gap was only in effect for years preceding 2025.
Even though the coverage gap phase was eliminated in CY 2025, we
are proposing to maintain these regulations, with the described
revisions, for historical purposes and for any reconciliation
activities related to benefit years prior to 2025.
d. Annual Out-of-Pocket Threshold (Sec. 423.104(d)(5))
Section 11201 of the IRA amended section 1860D-2(b)(4)(B)(i) of the
Act to limit the annual OOP threshold for CY 2025 and each subsequent
year. As amended, section 1860D-2(b)(4)(B)(i)(VII) of the Act specifies
that the annual OOP threshold is $2,000 for CY 2025. For subsequent
years, section 1860D-2(b)(4)(B)(i)(VIII) of the Act specifies that the
annual OOP threshold will be increased by the annual percentage
increase described in section 1860D-2(b)(6). Accordingly, as specified
in the CY 2026 Rate Announcement, the annual OOP threshold for CY 2026
was determined to be $2,100.\10\ This amount was calculated, consistent
with section 1860D-2(b)(4)(B) of the Act, by multiplying the CY 2025
OOP threshold amount of $2,000 by the 2026 annual percentage increase
and rounding to the nearest multiple of $50. Once an enrollee's
incurred costs, as defined at Sec. 423.100, exceed the annual OOP
threshold, an enrollee will enter the catastrophic phase where there is
no cost sharing for Part D drugs.
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\10\ <a href="https://www.cms.gov/files/document/2026-announcement.pdf">https://www.cms.gov/files/document/2026-announcement.pdf</a>.
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As a result of these changes, we are proposing to revise Sec.
423.104(d)(5) to state the specific years for which certain aspects of
this section apply and describe the new methodology for determining the
annual OOP threshold, consistent with section 1860D-2(b)(4)(B)(i) of
the Act.
We are proposing to revise Sec. 423.104(d)(5)(i) to specify that,
once an enrollee's incurred costs, as defined at Sec. 423.100, exceed
the annual OOP threshold described in paragraph (d)(5)(iii) of this
section, they would have $0 cost sharing for 2024 and each subsequent
year and, for each year preceding 2024, the cost-sharing structure
currently outlined at paragraphs (d)(5)(i)(A) and (d)(5)(i)(B) of this
section would apply. We also propose to revise Sec.
423.104(d)(5)(i)(A)(2) to specify that the methodology described in
this section for determining an enrollee's copayment amount applies
through 2023. These proposed changes reflect the elimination of
enrollee cost sharing for Part D drugs in the catastrophic phase
beginning in CY 2024, consistent with section 1860D-2(b)(4)(A)(i) of
the Act, as amended by section 11201 of the IRA.
We propose to revise Sec. 423.104(d)(5)(iii)(F) to add an end date
to state that this paragraph describes how the annual OOP threshold was
determined for years 2021 through 2024. We also propose to add new
Sec. 423.104(d)(5)(iii)(G) to establish that for 2025, the annual OOP
threshold was set at $2,000, consistent with section 1860D-
2(b)(4)(B)(i)(VII) of the Act. Additionally, we are proposing to add
new Sec. 423.104(d)(5)(iii)(H) to specify the methodology for
determining the annual OOP threshold for 2026 and each subsequent year.
Consistent with section 1860D-2(b)(4)(B)(i)(VIII) of the Act, we
propose that the annual OOP threshold for 2026 and each subsequent year
would be the amount specified in this paragraph for the previous year,
increased by the annual percentage increase specified in paragraph
(d)(5)(iv) of this section, and rounded to the nearest $50.
e. Alternative Prescription Drug Coverage (Sec. 423.104(e)(5)) and
Enhanced Alternative Coverage (Sec. 423.104(f)(1))
Part D sponsors must provide their enrollees with qualified
prescription drug coverage which, as defined at Sec. 423.100, means
coverage that consists of either: (1) standard prescription drug
coverage or (2) alternative prescription drug coverage. Standard
prescription drug coverage, as defined at Sec. 423.100, means coverage
of Part D drugs that meets the requirements of Sec. 423.104(d) and
includes two distinct types of coverage: (1) defined standard coverage
and (2) actuarially equivalent (AE) standard coverage.
Prior to the implementation of the IRA, defined standard coverage
consisted of coverage of covered Part D drugs subject to an annual
deductible, 25 percent coinsurance for costs above the annual
deductible but at or below an initial coverage limit, coinsurance that
was equal to the costs of non-applicable and applicable drugs during
the coverage gap multiplied by the gap coinsurance percentages, and
catastrophic coverage with nominal cost sharing for the remainder of
the coverage year once an enrollee's incurred costs, as defined in
Sec. 423.100, exceeded the annual OOP threshold. After the
implementation of the IRA, defined standard coverage, as discussed in
more detail in the introduction of this section of the proposed rule,
now consists of an annual deductible, an initial coverage phase where
the enrollee pays 25 percent coinsurance for covered Part D drugs until
they reach the annual OOP threshold ($2,100 for CY 2026), and the
catastrophic phase where the enrollee pays no cost sharing for Part D
drugs. AE standard coverage, as defined at Sec. 423.100, provides for
cost sharing as described in
[[Page 54901]]
Sec. 423.104(d)(2)(i)(B) or cost sharing as described in Sec.
423.104(d)(5)(ii), or both. In other words, under an AE plan, Part D
sponsors modify certain benefit parameters, such as cost-sharing
structures, while maintaining the same actuarial value. The changes the
IRA made to the defined standard benefit are discussed in detail in the
preceding sections of this proposed rule.
The IRA also, through section 11201 which amended section 1860D-
2(c) of the Act, made changes to the requirements for alternative
prescription drug coverage. Alternative prescription drug coverage, as
defined in Sec. 423.100, means coverage of Part D drugs, other than
standard prescription drug coverage, that meets the requirements of
Sec. 423.104(e). Alternative prescription drug coverage includes two
types of coverage: (1) basic alternative coverage and (2) enhanced
alternative coverage. Both basic alternative and enhanced alternative
coverage must provide access to negotiated prices, coverage of Part D
drugs, and meet the requirements described in Sec. 423.104(e).
Basic alternative coverage is alternative coverage that is
actuarially equivalent to defined standard coverage, as determined
through the processes and methods established under Sec.
423.265(d)(2). Prior to the implementation of the IRA, Part D sponsors
offering basic alternative coverage could, within the parameters for
alternative prescription drug coverage as described in Sec.
423.104(e), combine certain features to maintain an actuarial value of
coverage equal to defined standard prescription drug coverage, such as:
(1) reducing the deductible, (2) making changes in cost sharing in an
actuarially equivalent manner to the 25 percent cost sharing above the
deductible and below the initial coverage limit under defined standard
coverage and in an actuarially equivalent manner to the gap coverage
coinsurance during the coverage gap, or (3) modifying the initial
coverage limit. With the changes made to the Part D benefit by the IRA,
including the elimination of the initial coverage limit and the
coverage gap, certain features that could be offered by basic
alternative plans are no longer available. Thus, we are proposing to
revise our regulations at Sec. 423.104(e) to align with these changes,
as discussed in more detail later.
Enhanced alternative coverage is alternative coverage that includes
both required basic prescription drug coverage and supplemental
benefits, as described at Sec. 423.104(f)(1)(ii). Prior to the
implementation of the Part D benefit redesign provisions in the IRA,
supplemental benefits included: the coverage of drugs that are
specifically excluded from the definition of a Part D drug in Sec.
423.100 under paragraph (2)(ii) and/or any one or more of the following
changes that increase the actuarial value of benefits above the
actuarial value of defined standard prescription drug coverage:
<bullet> Reduction (or elimination) of the defined standard
deductible.
<bullet> Reduction of cost sharing in the initial coverage phase.
<bullet> Increase of the initial coverage limit threshold.
<bullet> Additional cost-sharing reduction in the coverage gap
phase.
<bullet> Reduction (or elimination) of cost sharing in the
catastrophic phase.
As noted in the Final CY 2025 Part D Redesign Program Instructions,
section 1860D-2(a)(2)(A)(i) of the Act does not include a reduction in
the annual OOP threshold in its list of permissible supplemental
benefits, and we have never interpreted such provision to allow for a
reduction in the annual OOP threshold. Because the IRA established a
defined annual OOP threshold of $2,000 for CY 2025, and an amount equal
to the previous year's OOP threshold increased by the annual percentage
increase for 2026 and subsequent years, and did not modify the list of
permissible supplemental benefits in section 1860D-2(a)(2)(A)(i) of the
Act to include a reduction in the annual OOP threshold, Part D sponsors
may not lower the annual OOP threshold below the specified amount.
Additionally, the IRA eliminated cost sharing in the catastrophic phase
beginning in CY 2024 and eliminated the coverage gap phase and replaced
the Coverage Gap Discount Program with the Manufacturer Discount
Program beginning in CY 2025. Thus, only the following supplemental
benefits remain as possible enhancement features: coverage of drugs
that are specifically excluded from the definition of a Part D drug,
and/or:
<bullet> Reduction (or elimination) of the defined standard
deductible.
<bullet> Reduction of cost sharing in the initial coverage phase.
Given these changes to alternative prescription drug coverage, we
propose to revise Sec. 423.104(e)(5) to align our requirements for
alternative prescription drug coverage with the changes made by the
IRA. We are also proposing to revise Sec. 423.104(f)(1) to align our
requirements for enhanced alternative drug coverage with the changes
made by the IRA.
We first propose to revise Sec. 423.104(e)(5) to establish a
distinction between the requirements for alternative prescription drug
coverage that are applicable for years preceding 2025 and requirements
for 2025 and each subsequent year. Specifically, we are proposing to
add language that, for years preceding 2025, alternative prescription
drug coverage is required to provide coverage that is designed to
provide payment for costs incurred for covered Part D drugs that is
equal to the initial coverage limit. We also propose to add language
stating that, for 2025 and each subsequent year, this coverage must be
equal to the annual OOP threshold, consistent with section 1860D-
2(c)(1)(C) of the Act. Similarly, we propose to revise Sec.
423.104(e)(5)(i) to specify that when calculating the required payment
amount for costs incurred for covered Part D drugs, the amount the
initial coverage limit exceeds the deductible should be used for years
preceding 2025, and the amount the annual OOP threshold exceeds the
deductible should be used for 2025 and each subsequent year. We propose
maintaining Sec. 423.104(e)(5)(ii) without change; therefore, the
amount calculated in Sec. 423.104(e)(5)(i) would be multiplied by 100
percent minus the coinsurance percentage specified in paragraph
(d)(2)(i) of this section to determine the required payment amount.
Finally, we propose to revise Sec. 423.104(f)(1) to specify that
an increase in the initial coverage limit could be considered a
supplemental benefit only for years preceding 2025. This change
reflects the elimination of the initial coverage limit beginning in CY
2025. All other requirements for enhanced alternative coverage that are
described in Sec. 423.104(f) remain applicable under the redesigned
Part D benefit. Therefore, we are not proposing any additional changes
to this section.
3. Specialty Tier (Sec. 423.104)
Section 1860D-2(b)(2) of the Act established the parameters of the
Part D program's defined standard benefit and allows for alternative
benefit designs that are actuarially equivalent to the defined standard
benefit, including the use of tiered formularies. Although not
required, Part D sponsors are permitted to include a specialty tier in
their plan design. A specialty tier, as defined in Sec.
423.104(d)(2)(iv), is a formulary cost-sharing tier dedicated to high-
cost Part D drugs with ingredient costs for a 30-day equivalent supply
(as described in paragraph (d)(2)(iv)(A)(2) of this section) that are
greater than the specialty-tier cost threshold specified in paragraph
(d)(2)(iv)(A) of this section. Consistent with Sec.
423.104(d)(2)(iv)(D), Part D sponsors may maintain up to two specialty
tiers.
[[Page 54902]]
Use of one or two specialty tiers provides the opportunity for Part
D sponsors to manage high-cost drugs apart from tiers that have less
expensive drugs. Our policies for the specialty tier aim to strike the
appropriate balance between plan flexibility and Part D enrollee access
to drugs, consistent with our statutory authority.
In the final rule titled ``Medicare and Medicaid Programs; Contract
Year 2022 Policy and Technical Changes to the Medicare Advantage
Program, Medicare Prescription Drug Benefit Program, Medicaid Program,
Medicare Cost Plan Program, and Programs of All-Inclusive Care for the
Elderly'' (CY 2022 final rule) which appeared in the Federal Register
on January 19, 2021 (86 FR 5864),\11\ We codified several important
aspects of the specialty-tier policy that had previously been
maintained through subregulatory guidance, including our methodology
for setting and increasing the specialty-tier cost threshold and
determining the maximum allowable cost sharing for specialty-tier
drugs.
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\11\ <a href="https://www.federalregister.gov/documents/2021/01/19/2021-00538/medicare-and-medicaid-programs-contract-year-2022-policy-and-technical-changes-to-the-medicare">https://www.federalregister.gov/documents/2021/01/19/2021-00538/medicare-and-medicaid-programs-contract-year-2022-policy-and-technical-changes-to-the-medicare</a>.
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In the CY 2022 final rule, we codified our methodology for setting
the specialty-tier cost threshold at Sec. 423.104(d)(2)(iv)(A), as
well as our methodology for increasing this cost threshold at Sec.
423.104(d)(2)(iv)(B). These rules describe our processes for setting a
minimum dollar-per-month threshold amount to determine which drugs are
eligible, based on relative high cost, for inclusion on the specialty
tier as well as adjusting this threshold to maintain approximately one
percent of Part D drugs as specialty-tier eligible. In the CY 2022
final rule, we also codified, at Sec. 423.104(d)(2)(iv)(D)(1) through
(3), the maximum allowable cost sharing for drugs on the specialty tier
between 25 and 33 percent coinsurance. By codifying this rule, we aimed
to prevent discriminatory formulary structures and protect Part D
enrollees with certain disease states that are treated only by
specialty-tier eligible drugs. This ``25/33 percent'' maximum allowable
cost sharing means that we approve cost sharing for the specialty tier
of no more than 25 percent coinsurance after the standard deductible
and before the initial coverage limit (ICL), or up to 33 percent
coinsurance for plans with decreased or no deductible under alternative
prescription drug coverage designs and before the ICL.
The implementation of the IRA has made it necessary for us to make
changes to our current specialty-tier regulations related to adjusting
the specialty-tier cost threshold and determining the maximum allowable
cost sharing to align with the redesigned Part D benefit. In this rule,
we propose to codify technical and conforming changes to our specialty-
tier regulations at Sec. 423.104.
a. Technical Correction to the Specialty-Tier Cost Threshold
Determination (Sec. 423.104(d)(2)(iv)(A)(4))
We are proposing a technical correction in Sec.
423.104(d)(2)(iv)(A)(4), which describes how the specialty-tier cost
threshold is determined for the plan year. The current regulation text
incorrectly refers to paragraph (d)(2)(iii) for the cost threshold
determination, but it should refer to the top one percent methodology
for determining the specialty-tier cost threshold at paragraph
(d)(2)(iv)(A)(3). We therefore propose to correct this inadvertent
technical error in this proposed rule.
b. Limit on Specialty-Tier Cost Threshold Adjustment (Sec.
423.104(d)(2)(iv)(B))
We annually calculate a minimum dollar-per-month threshold amount
to determine which drugs are eligible, based on relative high cost, for
inclusion on the specialty tier. This cost threshold is adjusted to
maintain approximately 1 percent of Part D drugs as specialty-tier
eligible. In the CY 2022 final rule, we codified at Sec.
423.104(d)(2)(iv)(B) our methodology to increase the specialty-tier
cost threshold as follows:
(1) CMS increases the specialty-tier cost threshold for a plan year
only if the amount determined in paragraph (d)(2)(iv)(A)(3) of this
section for a plan year is at least 10 percent above the specialty tier
cost threshold for the prior plan year.
(2) If an increase is made in accordance with this paragraph
(d)(2)(iv)(B), CMS rounds the amount determined in paragraph
(d)(2)(iv)(A)(3) of this section to the nearest $10, and the resulting
dollar amount is the specialty-tier cost threshold for the plan year.
Our current regulation only contemplates increasing the specialty-
tier cost threshold and does not consider decreasing the threshold when
market conditions might warrant such a change. Given the many changes
made to the Part D benefit by the IRA, we believe that it may be
necessary in future years to decrease the specialty-tier cost threshold
due to reductions in Part D drug costs. In general, shifting market
dynamics, such as increased utilization of lower cost generic drugs,
could potentially lead to reductions in Part D drug costs. The Medicare
Drug Price Negotiation Program, as established in Part E of title XI of
the Act, which permits the Secretary to negotiate MFPs for certain high
expenditure, single source drugs and biological products with
participating manufacturers, could also lead to a future need for a
downward adjustment. The MFPs for the first 10 selected drugs are
scheduled to go into effect on January 1, 2026, with new MFPs taking
effect and new drugs being selected for negotiation each subsequent
year. Therefore, it is possible that as a result of general market
dynamics and more high expenditure drugs being selected for negotiation
and their negotiated MFPs taking effect, the methodology for
determining the specialty-tier cost threshold, as described in Sec.
423.104(d)(2)(iv)(A), may yield an amount that is at least 10 percent
below the previous plan year's specialty-tier cost threshold.
Thus, we propose to revise Sec. 423.104(d)(2)(iv)(B)(1) and (2) by
adding language to allow us to reduce the cost threshold under certain
circumstances. Specifically, in paragraph (B)(1) of this section, we
are proposing to replace ``increase'' with ``modifies'' and add ``or
below'' following ``10 percent above.'' In paragraph (B)(2), we are
proposing to replace ``increase'' with ``modification.''
c. Specialty Tier Maximum Allowable Cost Sharing (Sec.
423.104(d)(2)(iv)(D))
Each year, we set the maximum allowable cost sharing for the
specialty tier based on the plan's deductible, in accordance with Sec.
423.104(d)(2)(iv)(D). The intent of this policy is to ensure a plan's
value is reflective of the defined standard benefit. The regulation
limits a plan with the full defined standard deductible to a 25 percent
coinsurance on its specialty tier but allows a plan that fully
eliminates the deductible up to a 33 percent coinsurance on its
specialty tier. Based on the pre-IRA benefit design, we determined that
the 33 percent maximum coinsurance was mathematically equivalent to the
effective coinsurance for a beneficiary who would have paid the defined
standard deductible for any given year plus the 25 percent coinsurance
in the initial coverage phase until their drug costs reached the
initial coverage limit. In other words, prior to CY 2025, beneficiary
OOP costs divided by total drug costs equaled a 33 percent effective
[[Page 54903]]
coinsurance for the beneficiary regardless of the plan deductible,
represented by the following equation:
[GRAPHIC] [TIFF OMITTED] TP28NO25.001
To operationalize the concept of maximum allowable cost sharing for
the specialty tier based on the plan's deductible, CMS, in the CY 2022
final rule, codified the following calculation at Sec.
423.104(d)(2)(iv)(D)(3) to determine the deductible range that
corresponded to each specialty-tier coinsurance percentage point from
25 percent through 33 percent. Thus, under the pre-IRA Part D benefit
design, we used this equation for the calculation:
[GRAPHIC] [TIFF OMITTED] TP28NO25.002
Consistent with the first equation, the numerator here represents
beneficiary OOP costs while the denominator represents total drug
costs, resulting in an effective coinsurance of 33 percent, to align
with the defined standard benefit. This equation was then solved for
the deductible, and each specialty-tier coinsurance percentage point
was inserted, to calculate the maximum allowable deductible value
corresponding to that coinsurance percentage.
However, in CY 2025, the ICL was eliminated and, as a result, the
methodology codified at Sec. 423.104(d)(2)(iv)(D)(3) was no longer
valid. Therefore, in the Final CY 2025 Part D Redesign Program
Instructions,\12\ we established a new methodology to determine the
specialty-tier coinsurance/deductible ranges to represent the effective
coinsurance for a beneficiary under the redesigned Part D benefit. In
the Final CY 2026 Part D Redesign Program Instructions,\13\ we
continued to use the methodology outlined in the Final CY 2025 Part D
Redesign Program Instructions.
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\12\ <a href="https://www.cms.gov/files/document/final-cy-2025-part-d-redesign-program-instructions.pdf">https://www.cms.gov/files/document/final-cy-2025-part-d-redesign-program-instructions.pdf</a>.
\13\ <a href="https://www.cms.gov/files/document/final-cy-2026-part-d-redesign-program-instruction.pdf">https://www.cms.gov/files/document/final-cy-2026-part-d-redesign-program-instruction.pdf</a>.
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In accordance with the Final CY 2025 Part D Redesign Program
Instructions, we are now proposing to codify this methodology for
determining the specialty-tier coinsurance/deductible ranges to
represent the effective coinsurance for a beneficiary under the Part D
benefit. To ensure that a plan's value is reflective of the defined
standard benefit, we are proposing to codify a methodology similar to
the methodology used to calculate the cost-sharing requirements in
Sec. 423.104(d)(2)(iv)(D). For Part D plans with the full deductible
provided under the defined standard benefit, the coinsurance is 25
percent, consistent with the defined standard benefit. Using the CY
2025 defined standard benefit parameters of a $590 deductible, a $2,000
annual OOP threshold, and a 25 percent coinsurance after the deductible
is met and before the annual OOP threshold is reached, the total drug
costs can be calculated at $6,230. This results in an effective
coinsurance of 32.1 percent. To ensure that coinsurance for the
specialty tier remains in alignment with cost sharing under the defined
standard benefit, we are retaining the 33 percent maximum coinsurance
currently effective at Sec. 423.104(d)(2)(iv)(D)(2).
We are proposing to use, as in previous years, an effective
coinsurance equation to calculate the deductible that corresponds to
each specialty-tier coinsurance percentage point from 25 percent
through 33 percent. Consistent with our decision to retain the 33
percent maximum coinsurance, we are also proposing to use 33 percent to
calculate the deductible that corresponds to each specialty-tier
coinsurance percentage point. This equation would continue to represent
beneficiary OOP costs in the numerator divided by total drug costs in
the denominator. The following equation illustrates how we would
calculate the effective coinsurance for the Part D benefit for purposes
of calculating specialty-tier cost-sharing percentages:
[GRAPHIC] [TIFF OMITTED] TP28NO25.003
As with the previous methodology, the equation is solved for the
deductible, and each maximum allowable specialty tier coinsurance value
is inserted, to determine the maximum allowable deductible value
corresponding to that coinsurance. For example, the results for CY 2026
are shown in Table 1.
[[Page 54904]]
[GRAPHIC] [TIFF OMITTED] TP28NO25.004
Consistent with the approach taken for both CY 2025 and CY 2026 as
detailed in the Final CY 2025 Part D Redesign Program Instructions, we
are proposing to codify this methodology for determining specialty-tier
coinsurance/deductible ranges. Thus, we propose to revise Sec.
423.104(d)(2)(iv)(D)(3)(i) to describe how the maximum coinsurance
percentage was determined for years preceding 2025. We also propose to
add new Sec. 423.104 (d)(2)(iv)(D)(3)(ii) to describe the methodology
for calculating the maximum coinsurance percentage for 2025 and each
subsequent year.
4. Changes in True Out-of-Pocket (TrOOP) Costs (Sec. Sec. 423.100 and
423.464)
A beneficiary's progression through the Part D benefit phases is
determined by the total amount of costs incurred by the beneficiary for
covered Part D drugs in the plan year. This amount is also referred to
as the beneficiary's accumulated TrOOP spending. Incurred costs are
defined at section 1860D-2(b)(4)(C) of the Act and the statutory
definition has been revised several times since the beginning of the
Part D program. Between 2005 and 2010, TrOOP expenditures represented
costs actually paid by the beneficiary, another person on behalf of the
beneficiary, or a qualified State Pharmaceutical Assistance Program
(SPAP). The Act also expressly excluded certain costs from the
definition of TrOOP, including costs ``reimbursed through insurance or
otherwise, a group health plan, or other third-party payment
arrangement.''
In January 2005, we published the final rule titled, ``Medicare
Program; Medicare Prescription Drug Benefit'' (70 FR 4194), in which we
initially codified the rules applicable to incurred costs at Sec.
423.100 (hereinafter referred to as the January 2005 Medicare Final
Rule). In that rule, we established that the terms ``insurance or
otherwise'' are separate terms with separate definitions. The term
``insurance'' refers to a health plan that provides or pays the cost of
covered Part D drugs, including, but not limited to health insurance
coverage, an MA plan, and a PACE organization. The term ``or
otherwise'' refers to government-funded health programs, and
accordingly, we defined the term ``government-funded health programs''
to mean any program established, maintained, or funded--in whole or in
part--by the Federal government, the governments of States or political
subdivisions of States, or any agency or instrumentality of these
governments which uses public funds in whole or in part to provide to,
or pay on behalf of, an individual the cost of Part D drugs at Sec.
423.100.
Enacted into law on March 23, 2010, section 3314 of the Patient
Protection and Affordable Care Act (PPACA) (Pub. L. 111-148) added
section 1860D-2(b)(4)(C)(iii) of the Act to specify that costs borne or
paid for by the Indian Health Service (IHS), an Indian tribe or tribal
organization, or an urban Indian organization, and costs borne or paid
for by an AIDS Drug Assistance Program (ADAP) count as incurred costs
and accumulate towards TrOOP. In the final rule titled, ``Medicare
Program; Changes to the Medicare Advantage and the Medicare
Prescription Drug Benefit Programs for Contract Year 2012 and Other
Changes,'' which appeared in the April 15, 2011 Federal Register (76 FR
21432), we revised the definition of incurred cost at Sec. 423.100 to
reflect the amendments to section 1860D-2(b)(4)(C)(iii) of the Act made
by the PPACA. Specifically, we revised the regulation to include
payments by the IHS, an Indian tribe or tribal organization, or an
urban Indian organization (referred to as I/T/U pharmacy in Sec.
423.100) or under an ADAP in the definition of incurred costs at Sec.
423.100. We also amended Sec. 423.464(f)(2) to state that expenditures
made by IHS, an Indian tribe or tribal organization, or an urban Indian
organization or under an ADAP are not required to be excluded when
determining whether a Part D enrollee has satisfied the out-of-pocket
threshold.
Section 11201 of the IRA further amended section 1860D-2(b)(4)(C)
of the Act to update the definition of incurred costs. Section 1860D-
2(b)(4)(C)(iii)(II) of the Act, as added by the IRA, amended the
definition of incurred costs to include, for CY 2025 and subsequent
years, costs incurred that are reimbursed through insurance, a group
health plan, or certain other third party payment arrangements, but not
including the coverage provided by a prescription drug plan or an MA-PD
plan that is basic prescription drug coverage or any payments by a
manufacturer under the Manufacturer Discount Program. In addition, the
IRA provided that, for beneficiaries who have opted into the Medicare
Prescription Payment Plan described in section 1860D-2(b)(2)(E) of the
Act, election into such program will not impact how a beneficiary moves
through the Part D benefit or what counts towards TrOOP. Under section
1860D-2(b)(4)(F) of the Act, a Medicare Prescription Payment Plan
participant's TrOOP-eligible costs that are paid by their Part D plan
under the Medicare Prescription Payment Plan shall be treated as
incurred costs.
Section 11201(f) of the IRA directed the Secretary to implement
section 11201 of the IRA for 2024, 2025, and 2026 by program
instruction or other forms of program guidance. In the Final CY 2025
Part D Redesign Program Instructions, we released guidance to implement
the IRA's additions to section 1860D-2(b)(4)(C) of the Act.
Specifically, we stated that
[[Page 54905]]
supplemental Part D coverage provided by enhanced alternative Part D
plans and other health insurance (OHI) will be counted as incurred
costs and included in the calculation of TrOOP for CY 2025. This
includes supplemental coverage provided by Employer Group Waiver Plans
(EGWPs), plan reductions in cost sharing for enrolled beneficiaries,
such as reductions by Medicare-Medicaid Plans and D-Special Needs Plans
(SNPs), and Center for Medicare and Medicaid Innovation (CMMI) model
benefits that reimburse costs for covered Part D drugs (unless stated
otherwise in an applicable CMMI model's respective Request for
Applications or model guidance). In response to comments received, we
explained that including supplemental coverage provided by enhanced
alternative Part D plans in addition to OHI is required by the plain
language of the statute. Specifically, by excluding ``coverage provided
by a prescription drug plan or an MA-PD plan that is basic prescription
drug coverage'' from the definition of costs ``reimbursed through
insurance,'' the text of section 1860D-2(b)(4)(C)(iii)(II) indicates
that drug coverage provided by Part D plans other than basic
prescription drug coverage is included in the definition of costs
``reimbursed through insurance.'' This would include enhanced
alternative supplemental benefits. If the provision only included EGWP
supplemental coverage in the definition of costs ``reimbursed through
insurance,'' then the statute would have explicitly included EGWP
supplemental coverage in the definition of ``costs reimbursed through
insurance'' and expanded the exclusion clause to apply to both basic
prescription drug coverage and enhanced alternative supplemental
coverage.
We further stated in the Final CY 2025 Part D Redesign Program
Instructions that under section 1860D-2(b)(4)(C)(iii)(II) of the Act,
only amounts reimbursed by supplemental coverage will be newly included
in the calculation of TrOOP. For enhanced alternative plans, plan
liability is mapped to the defined standard benefit to distinguish
between basic and supplemental benefits provided under the Part D
sponsor. Because of this, if beneficiary cost sharing is greater than
what it would have been under the defined standard benefit, a negative
value is recorded on a Prescription Drug Event (PDE) record for the
field representing the value of the supplemental coverage. Such
negative values will be disregarded (that is, be treated as zero) when
calculating TrOOP, because they do not represent reimbursement to the
beneficiary. In response to comments received, we explained that, while
excluding such negative values from TrOOP can overstate the net value
of total supplemental benefits provided to beneficiaries over the
course of the year, including negative values in TrOOP would
inappropriately disregard any beneficiary cost sharing in excess of the
defined standard cost sharing amount when calculating TrOOP. This would
particularly disadvantage certain beneficiaries who have patterns of
utilization that disproportionately include this situation. For
example, if a beneficiary in an enhanced alternative plan has higher
cost sharing than the defined standard benefit for a maintenance
medication, including the negative values in TrOOP could significantly
disadvantage that beneficiary as these negative values would
continually offset part of the payments the beneficiary actually paid
OOP. This would create some circumstances where certain beneficiaries
have a net negative value for their supplemental benefits when they
reach the $2,100 OOP threshold, which means they would have to pay more
than $2,100 OOP to reach the catastrophic phase for CY 2026.
Additionally, we noted that section 1860D-2(b)(4)(C)(iii)(II) of
the Act states that reimbursements through ``certain other third party
payment arrangements'' are to be included in the calculation of TrOOP.
We did not identify any third party payment arrangements in addition to
those described in the preceding paragraphs that could be included in
the calculation of TrOOP. For instance, primary payer amounts paid on
Medicare as secondary payer (MSP) claims are a category of third party
payments that we considered for TrOOP eligibility. We determined that
these payments should remain excluded from TrOOP due to the
requirements at section 1862(b) of the Act, which was not amended by
the IRA. As such, for 2025, we did not count as incurred costs any
other third party payments not considered TrOOP-eligible prior to 2025.
In the Final CY 2025 Part D Redesign Program Instructions, we also
solicited comment on whether interested parties are aware of other
third party payments that could be included under section 1860D-
2(b)(4)(C)(iii)(II) of the Act. No commenters identified additional
third party payments that they believed should be included in TrOOP. We
also did not receive any comments on the Final CY 2026 Part D Redesign
Program Instructions recommending that we include any other third party
payments towards TrOOP.
Further, we stated that, as required by section 1860D-
2(b)(4)(C)(iii)(II) of the Act, any manufacturer payments made under
the Manufacturer Discount Program, which was newly created under the
IRA, do not count as incurred costs and are not included in the
calculation of TrOOP in 2025.
Finally, we stated that for beneficiaries who have opted into the
Medicare Prescription Payment Plan described in section 1860D-
2(b)(2)(E) of the Act, as added by section 11202 of the IRA, election
into such program will not impact how a beneficiary moves through the
Part D benefit or what counts towards TrOOP. Under section 1860D-
2(b)(4)(F) of the Act, as codified at Sec. 423.137(c)(4), a Medicare
Prescription Payment Plan participant's TrOOP-eligible costs that are
paid by their Part D plan under the Medicare Prescription Payment Plan
shall be treated as incurred costs.
In the Final CY 2026 Part D Redesign Program Instructions, we
stated that certain policies described in the Final CY 2025 Part D
Redesign Program Instructions, including the policy with respect to
incurred costs, also applied in CY 2026.
In this proposed rule, we propose to codify at Sec. 423.100 the
policies we established in the Final CY 2025 Part D Redesign Program
Instructions for CY 2025 and applied via the Final CY 2026 Part D
Redesign Program Instructions for CY 2026 with respect to the
definition of incurred costs for 2025 and subsequent years, without
modification. These policies are currently in effect for CY 2026.
Specifically, we propose to add a new subparagraph (3) to the
definition of incurred costs at Sec. 423.100 defining incurred costs
for 2025 and subsequent years to include costs that are reimbursed
through insurance, a group health plan, or certain other third party
payment arrangements, but not including the coverage provided by a PDP
or an MA-PD plan that is basic prescription drug coverage or any
payments by a manufacturer under the Manufacturer Discount Program
under section 1860D-14C of the Act. We also propose to amend Sec.
423.464(f)(2)(i)(C) to remove the exclusion of expenditures for covered
Part D drugs made by insurance or otherwise, a group health plan, or
other third party payment arrangements, including expenditures by plans
offering other prescription drug coverage and replace it with an
exclusion limited to expenditures for covered Part D drugs made by
[[Page 54906]]
government-funded health programs or the coverage provided by a PDP or
an MA-PD plan that is basic prescription drug coverage or any payments
by a manufacturer under the Manufacturer Discount Program.
5. Policy for Drugs Not Subject to Defined Standard Deductible (Sec.
423.104)
Under sections 1860D-2(b) and (c) of the Act, as amended by section
11201 of the IRA, the coverage gap phase was eliminated in CY 2025.
Beginning in CY 2025, a beneficiary leaves the initial coverage phase
and enters the catastrophic phase once they incur enough TrOOP-eligible
costs to meet the annual OOP threshold. Accordingly, under section
1860D-14A(h) of the Act, as added by section 11201 of the IRA, the
Coverage Gap Discount Program sunset effective January 1, 2025. Section
11201 of the IRA added section 1860D-14C of the Act, which created the
Manufacturer Discount Program beginning January 1, 2025. Under section
1860D-14C(b)(1)(A) of the Act, manufacturers that enter into a
Manufacturer Discount Program agreement will provide discounts on
applicable drugs, typically amounting to 10 percent of the negotiated
price for enrollees in the initial coverage phase and 20 percent of the
negotiated price for enrollees in the catastrophic phase, in CY 2025
and subsequent years.
Manufacturer discounts are available under the Manufacturer
Discount Program once a beneficiary becomes an ``applicable
beneficiary.'' Section 1860D-14C(g)(1) of the Act defines an applicable
beneficiary as an individual who, on the date of dispensing a covered
Part D drug, is enrolled in a PDP or MA-PD plan, is not enrolled in a
qualified retiree prescription drug plan, and has incurred TrOOP-
eligible costs that exceed the defined standard deductible specified in
section 1860D-2(b)(1) of the Act. TrOOP-eligible costs for drugs not
subject to the defined standard deductible, specifically covered
insulin products, as well as TrOOP-eligible costs for drugs not subject
to a non-defined standard plan deductible or drugs subject to a reduced
deductible under non-defined standard plans, all count towards a
beneficiary's satisfaction of the defined standard deductible.
In the Final CY 2025 Part D Redesign Program Instructions, we
established a policy for drugs not subject to the defined standard
deductible to address situations where a beneficiary has not satisfied
their plan deductible but has incurred sufficient TrOOP-eligible costs
to satisfy the defined standard deductible. The policy also addresses
situations where a beneficiary incurs sufficient costs to satisfy the
plan deductible but has not incurred TrOOP-eligible costs cumulatively
across all drugs at or above the defined standard deductible amount.
The component of the definition of an applicable beneficiary at section
1860D-14C(g)(1)(C) of the Act creates the possibility for a beneficiary
to encounter these situations; therefore, this policy was necessary to
ensure that such situations are treated similarly by all Part D plan
sponsors.
We established that in CY 2025, if a beneficiary has not satisfied
their plan deductible but has incurred sufficient TrOOP-eligible costs
to satisfy the defined standard deductible, they will be both an
applicable beneficiary under the Manufacturer Discount Program, as we
propose to define at Sec. 423.100, and be deemed to have satisfied
their plan deductible.
Furthermore, we established that, if a plan offers a non-defined
standard plan deductible--whether that be a lower deductible than the
defined standard deductible or a deductible that applies for a subset
of covered Part D drugs--and a beneficiary incurs sufficient costs to
satisfy the plan deductible but has not incurred TrOOP-eligible costs
cumulatively across all drugs at or above the defined standard
deductible amount, discounts under the Manufacturer Discount Program
are not available. As such, the plan is responsible for covering the
portion of costs that would be covered by the manufacturer discount if
the beneficiary were an applicable beneficiary until the beneficiary's
TrOOP exceeds the defined standard deductible and they become an
applicable beneficiary. The same guidance applies when a beneficiary
under any Part D plan is dispensed a covered insulin product or ACIP-
recommended vaccine before they have incurred TrOOP-eligible costs at
or above the defined standard deductible amount.
For example, an enhanced alternative plan has a tiered formulary,
does not charge a deductible for tier 1 drugs, and charges 20 percent
coinsurance for drugs in that tier. A beneficiary's first fill of the
year is for a $200 tier 1 drug, meaning they pay $40 out of pocket. The
beneficiary has not incurred sufficient TrOOP-eligible costs to satisfy
the defined standard deductible of $615 (and has $415 in remaining
TrOOP-eligible costs before they satisfy the deductible) and does not
meet the definition of an applicable beneficiary under the Manufacturer
Discount Program. Therefore, the plan must cover the 10 percent of
costs that would be covered by the manufacturer discount if the
beneficiary were an applicable beneficiary.
In the Final CY 2026 Part D Redesign Program Instructions, we
stated that certain policies described in the Final CY 2025 Part D
Redesign Program Instructions, including the policy with respect to
drugs not subject to the defined standard deductible, also applied in
CY 2026. We also established that the policy for drugs not subject to
the defined standard deductible also applies to selected drugs for CY
2026. Specifically, we stated that if a plan offers a non-defined
standard plan deductible--whether that be a lower deductible than the
defined standard deductible or a deductible that applies for a subset
of covered Part D drugs--and a beneficiary incurs sufficient costs to
satisfy the plan deductible but has not incurred TrOOP-eligible costs
cumulatively across all drugs at or above the defined standard
deductible amount, the selected drug subsidy is not available for
selected drugs during a price applicability period. As such, for a
selected drug during a price applicability period, the plan is
responsible for covering the portion of costs that would be covered by
the selected drug subsidy if the beneficiary were an applicable
beneficiary until the beneficiary's TrOOP exceeds the defined standard
deductible and they become an applicable beneficiary.
In this proposed rule, we propose to codify the policy for drugs
not subject to the defined standard deductible that are in effect for
2025 and 2026 without modification. Specifically, we propose to codify
the policy for drugs not subject to defined standard deductible at a
new Sec. 423.104(j).
6. Annual Indexing of Part D Benefit Parameters Using the Annual
Percentage Increase in Drug Expenditures (API) and Consumer Price Index
(CPI) (Sec. Sec. 423.104, 423.782)
The Medicare Prescription Drug, Improvement, and Modernization Act
of 2003 (Pub. L. 108-173) (MMA) added sections 1860D-2(b) and 1860D-
14(a) of the Act directing the Secretary to index certain Part D
benefit parameters each year, which include, but are not limited to,
the deductible limit and low-income cost-sharing amounts. The required
annual adjustments ensure that the actuarial value of the drug benefit
remains consistent with changes in Part D drug expenditures and general
inflation. The MMA established two indices for adjusting Part D benefit
parameters: (1) the annual percentage increase in average per capita
aggregate expenditures for covered Part D drugs in
[[Page 54907]]
the U.S. for Part D eligible individuals under section 1860D-2(b)(6) of
the Act (referred to as the API); and (2) the annual percentage
increase in the Consumer Price Index based on all items per a U.S. city
average under section 1860D-14(a)(4)(A) of the Act (referred to as the
CPI).
In the January 2005 Medicare Final Rule (70 FR 4194), establishing
the regulatory framework for the Medicare Part D prescription drug
benefit program created by the MMA. This rule codified the statutory
requirements for annual adjustments of the deductible under section
1860D-2(b)(6) of the Act and low-income cost-sharing amounts under
section 1860D-14(a) of the Act, using the API and the CPI. The rule
also established the regulatory basis for annual adjustments to
additional Part D parameters, including the annual out-of-pocket
threshold and retiree drug subsidy (RDS) cost thresholds, to maintain
the actuarial integrity of the benefit structure as drug costs and
economic conditions change over time.
In accordance with the statute and corresponding regulation, the
following Part D standard benefit, low-income subsidy, and RDS program
parameters are updated using the API:
<bullet> Standard Benefit Deductible--section 1860D-2(b)(1)(A)(ii)
of the Act; Sec. 423.104(d)(1)(ii).
<bullet> Initial Coverage Limit--section 1860D-2(b)(3)(A)(ii) of
the Act; Sec. 423.104(d)(3)(ii).
<bullet> OOP Threshold--section 1860D-2(b)(4)(B)(i)(VIII) of the
Act.
<bullet> Maximum copayments below the out-of-pocket threshold for
certain low-income full subsidy eligible enrollees (income less than
150 percent, but greater than 100 percent of Federal Poverty Level
(FPL), not including institutionalized individuals)--section 1860D-
14(a)(1)(D)(iii) of the Act; Sec. 423.782(a)(2)(i).
<bullet> RDS Cost threshold--section 1860D-22(a)(3)(B)(i)(I) of the
Act; Sec. 423.886(b)(3).
<bullet> RDS Cost limit--section 1860D-22(a)(3)(B)(i)(II) of the
Act; Sec. 423.886(b)(3).
The CPI is used to update the following Part D low-income subsidy
and cost-sharing program benefit parameter:
<bullet> Maximum copayments below the out-of-pocket threshold for
certain low-income full subsidy eligible enrollees (income less than
100 percent of the FPL)--section 1860D-14(a)(1)(D)(ii) of the Act;
Sec. 423.782(a)(2)(iii)(A).
While sections 1860D-2(b)(6) and 1860D-14(a)(4)(A) describe the
parameter adjustments as an ``increase'' when referring to API and CPI,
we have historically applied them multidirectionally, including
decreasing the parameter values in the event of a decrease in annual
Part D expenditures or deflation, to ensure that the actuarial value of
the drug benefit remains consistent each year.
The current regulations do not describe the specific methods used
to calculate the annual percentage increases. Instead, the specific
methods for calculating the annual percentage increases in drug
expenditures and CPI that are applied to the Part D benefit parameters
have been proposed for each CY in the Advance Notice of Methodological
Changes for Medicare Advantage (MA) Capitation Rates and Part C and
Part D Payment Policies (Advance Notice) and finalized in the
Announcement of Medicare Advantage (MA) Capitation Rates and Part C and
Part D Payment Policies (Rate Announcement). In this proposed rule, we
propose to codify these methodologies in regulation. We also propose
making certain technical changes to current regulations related to
indexing certain benefit parameters for low-income individuals.
Although we are proposing to codify the calculation methodology for the
API and CPI in this rule, we will continue to publish the annual
percentage increases in drug expenditures and CPI and updated Part D
benefit parameters for each CY through the Advance Notice and Rate
Announcement. The projections and calculations used in the
methodologies described at proposed Sec. Sec. 423.104 and 423.782 are
made using generally accepted actuarial principles and practices. In
applying generally accepted actuarial principles and practices,
actuarial judgment and discretion may be used, including taking into
account information such as changes in legislation (such as changes in
Medicare benefits), Medicare payment policy, trends over several years
of data, and external variables (such as public health emergencies);
selecting among different approaches (such as weighting for utilization
and using average or median values); and in selecting data or data
samples.
Calculation of the Annual Percentage Increase in Drug Expenditures
Section 1860D-2(b)(6) of the Act defines the API for each year as
the annual percentage increase in average per capita aggregate
expenditures for Part D drugs in the United States for Part D eligible
individuals, for the 12-month period ending in July of the previous
year using such methods as the Secretary shall specify. We calculate
the aggregate expenditures for Part D drugs using the GCPDC instead of
an alternative cost measure such as actual net drug costs, because
gross drug costs reflect the prices available to beneficiaries and are
the basis for calculating beneficiary cost sharing and for beneficiary
progression through the Part D drug benefit. The GCPDC is reported to
CMS on PDE records; consequently, PDE records are the data source used
for this calculation. For contract years 2006 and 2007, the API
calculations were based on National Health Expenditure (NHE)
prescription drug per capita estimates due to insufficient Part D
program data availability; however, we transitioned to using PDE
records for CY 2008 and future years.
The API calculation, where API represents the annual percentage
increase for Part D expenditures for a given year, is comprised of two
factors we refer to as: (1) an annual percentage trend (APT), and (2) a
multiplicative update (MU) factor for prior-year revisions.
Mathematically, the formula is expressed as follows:
API = (APT) * (MU)
For a given payment year, the APT is the ratio of total per capita
Part D drug expenditures in the 12-month period (August through July)
prior to the given payment year (numerator) to the total per capita
Part D drug expenditures two years prior to the given payment year
(denominator).
For example, the APT for CY 2027 is equal to:
[GRAPHIC] [TIFF OMITTED] TP28NO25.005
[[Page 54908]]
The MU factor is used to incorporate updated data for prior years
into the calculation. We update data for prior years for two reasons:
First, at the time the CMS Office of the Actuary calculates the API,
actual, reasonably complete PDE data is typically only available for
dates of service during the first 5 months of the measurement period
(August-December). For the remainder of the measurement period
(typically 7 months (January-July)), the costs must be estimated using
historical data and actuarial experience. For example, for payment year
2027, the average per capita cost for August 2024-July 2025 (2 years
prior) is calculated from submitted PDE data, while the average for
August 2025-July 2026 (the year prior) is based on actual data from
August 2025-December 2025 and projections for January-July 2026.
Second, PDE data may be resubmitted to make corrections or retroactive
claim adjustments \14\ for activities such as coordination of benefits
or changes in eligibility status for Part D or the Low-Income Subsidy
program. Historically, we have used a retrospective period, typically 5
years, to update calculations to account for the impact of
resubmissions that occur as part of Part D operations such as the
annual Part D payment reconciliation under Sec. 423.343 or a reopening
of a reconciliation under Sec. 423.346. We have found few to no
resubmissions occur beyond a typical retrospective 5-year window.
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\14\ Medicare Prescription Drug Benefit Manual, Pub. 100-18,
Chapter 14: Coordination of Benefits.
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The MU factor for a given year is the ratio of the product of the
APTs for all prior recorded years (since the first calculation in
2007), with the most recent 5 years revised and updated with the
currently available data (numerator) to the product of APTs in prior
recorded years as published in the previous year's Rate Announcement
(denominator). As discussed in the preceding paragraphs, the MU factor
has a 5-year retrospective window; however, we have historically
included data since 2007 for informational purposes, as this historical
data is the same in the numerator and the denominator and has no
effect. To convert ratios to percentages, it is necessary to add 1.0 to
each factor prior to entering them into the formula.
For example, the MU factor for CY 2027 is equal to:
[GRAPHIC] [TIFF OMITTED] TP28NO25.006
In this example, APT is the annual percentage trend, denoted with a
subscript for the year of the data. The numerator is updated from CY
2020 through CY 2025, using the most recent data available when it is
calculated in 2026, and the denominator uses data published in the CY
2026 Rate Announcement (published in April 2025).
Historically, the statutory parameters updated by the API have
included the defined standard benefit deductible, initial coverage
limit, annual OOP threshold, and the parameters for the LIS and RDS
benefits. The IRA eliminated the coverage gap phase and beneficiary
cost sharing above the annual OOP threshold; it also set the annual OOP
threshold at $2,000 for CY 2025. Given these changes, for CY 2025, only
the defined standard deductible and LIS benefit parameters were updated
using the API. For CY 2025 and subsequent years, no updates to the
parameters for the initial coverage limit, maximum or minimum
beneficiary cost sharing in the coverage gap or above the annual OOP
threshold were necessary as the coverage gap phase and beneficiary cost
sharing above the annual OOP threshold were eliminated. In CY 2026, the
defined standard deductible, the annual OOP threshold, and the maximum
copayment below the annual OOP threshold for low-income, full-subsidy-
eligible beneficiaries with incomes between 100 and 150 percent of the
FPL were updated using the API.
We propose to revise Sec. 423.104(d)(5)(iv) by adding three
paragraphs describing (1) the overall calculation of the annual
percentage increase, or the API, in per capita Part D drug
expenditures, (2) the calculation of the annual percentage trend, or
the APT, and (3) the calculation of the multiplicative update factor,
or the MU. We will continue to publish updates to the Part D benefit
parameters calculated through these methodologies through the Advance
Notice and Rate Announcement process described in section 1853(b) of
the Act.
Calculation of the Annual Percentage Increase in CPI
Section 1860D-14(a)(4)(A) of the Act specifies that the annual
percentage increase in CPI, a measure of the average change over time
in the prices paid by urban consumers for a market basket of consumer
goods and services,\15\ is the annual percentage increase in the CPI
(all items; U.S. city average) as of September of such previous year.
As noted previously, the annual percentage increase in the CPI applies
to the copayments for the lowest income dually eligible individuals
(with incomes not exceeding 100 percent of the FPL) under section
1860D-14(a)(1)(D)(ii) of the Act, and is reflected at Sec.
423.782(a)(2)(iii). The CPI is based on economic assumptions of the
Consumer Price Index for All Urban Consumers (CPI-U), which is
published by the Bureau of Labor Statistics. The method for calculating
the annual percentage increase in the CPI comprises two factors we
refer to as: (1) an annual percentage trend; and (2) a multiplicative
update factor for prior-year revisions.
---------------------------------------------------------------------------
\15\ Consumer Price Index, <a href="https://www.bls.gov/cpi/">https://www.bls.gov/cpi/</a> (last
visited Jun 17, 2025).
---------------------------------------------------------------------------
While the other Part D benefit parameters are indexed using the API
to track drug expenditure trends and maintain actuarial equivalence
within the drug benefit structure, this parameter uses the CPI because
it represents a fixed dollar copayment amount that needs to maintain
its purchasing power relative to general inflation rather than
specifically tracking drug cost inflation trends.
Mathematically, the formula is expressed as follows:
Annual Percentage Increase in CPI = (APT) * (MU), where APT is the
annual percentage trend, and MU is the multiplicative update factor for
prior year revisions.
The APT consists of a year-over-year comparison of the CPI in the
United States for all items, ending in the month of September. For a
given payment year, it is the ratio of the CPI in the year ending the
previous September (numerator) to the CPI for the year ending the
September two years prior (denominator). To ensure that plan sponsors
and CMS have sufficient time to incorporate cost-sharing requirements
into the development of the benefit, any marketing materials, and
necessary systems, we include an estimate of the September CPI based on
projections from the President's Budget in its
[[Page 54909]]
methodology to calculate the annual increase in the CPI for the 12-
month period ending in September prior to the applicable payment year.
For example, the annual percentage trend in the September CPI for
CY 2027 is calculated as follows:
[GRAPHIC] [TIFF OMITTED] TP28NO25.007
The MU factor revises APTs in the September CPI to reflect updates
(provided by the BLS) from the previously estimated September CPI to
the actual reported September CPI. The MU factor for a given year is
the ratio of the product of the APTs for all prior recorded years
(since the first calculation in 2007), with the most recent year
updated with the currently available data (numerator) to the product of
APTs in prior recorded years as published in the previous year's Rate
Announcement (denominator). As mentioned in the preceding paragraphs,
data since 2007 is included for informational purposes. To convert the
ratios to percentages, it is necessary to add 1.0 to each factor prior
to entering them into the formula.
For example, the MU factor for CY 2027 is equal to--
[GRAPHIC] [TIFF OMITTED] TP28NO25.008
In this example, the numerator is updated from CY 2025 through CY
2026, using recent economic assumptions, and the denominator uses data
published in the CY 2026 Rate Announcement (published in April 2025).
To implement the CPI calculation described previously in our
regulations, we are proposing to revise Sec. 423.782(a)(2)(iii)(A) to
include a reference to a new paragraph (d), which we propose to add at
the end of Sec. 423.782. The new section at Sec. 423.782(d) would
comprise the general language of the statute, as well as add three
subparagraphs describing: (1) the overall calculation of the annual
percentage increase in CPI and specify the period ending in ``September
of such previous year,'' (2) the calculation of the annual percentage
trend, and (3) the calculation of the multiplicative update factor. We
will continue to publish updates to the Part D benefit parameters
calculated through these methodologies through the Advance Notice and
Rate Announcement process described in section 1853(b) of the Act.
Technical Changes
We are proposing two technical changes to Sec. 423.782(b). First,
we propose to add a cross-reference to Sec. 423.104(d)(5)(iv) to the
provision at Sec. 423.782(b)(1) to make clear that the annual
percentage increase in average per capita aggregate expenditures that
we use to calculate the deductible for certain low-income subsidy
eligible individuals is calculated as provided in Sec.
423.104(d)(5)(iv). Second, we propose to streamline the regulation text
at Sec. 423.782(b)(3) so that it directly cross references the updated
maximum copayment amounts that apply for years subsequent to 2006.
Section 1860D-2(b)(4)(A)(i)(I) is implemented in regulation at Sec.
423.104(d)(5)(i)(A)(2). We propose to replace the description in Sec.
423.782(b)(3) of the annual process for updating maximum copayments
with a cross reference to Sec. 423.104(d)(i)(A)(2).
7. Changes to GCPDC and Allowable Reinsurance Cost Definitions To
Include Costs Paid by the MDP (Sec. 423.308)
Section 1860D-15(b)(3) of the Act defines ``gross covered
prescription drug costs'' as, ``with respect to a part D eligible
individual enrolled in a prescription drug plan or MA-PD plan during a
coverage year, the costs incurred under the plan, not including
administrative costs, but including costs directly related to the
dispensing of covered part D drugs during the year and costs relating
to the deductible. Such costs shall be determined whether they are paid
by the individual or under the plan . . . regardless of whether the
coverage under the plan exceeds basic prescription drug coverage.''
Section 1860D-15(b)(2) of the Act defines allowable reinsurance costs
as ``. . . such costs that are actually paid (net of discounts,
chargebacks, and average percentage rebates) by the sponsor or
organization or by (or on behalf of) an enrollee under the plan . . .''
GCPDC and allowable reinsurance costs are defined and used at section
1860D-15(b) of the Act for the purpose of describing the methodology
for calculating the reinsurance payment amount.
In the January 2005 Medicare Final Rule (70 FR 4194), we codified
the definition of ``gross covered prescription drug costs'' at Sec.
423.308. This regulatory definition referred to ``gross covered
prescription drug costs'' as ``actually paid costs.'' In the final rule
that appeared in the Federal Register on April 12, 2023(70 FR 22120),
we revisited the regulatory definition of GCPDC by amending the
definition at Sec. 423.308 to remove the phrase ``actually paid.'' We
made this change because the term ``actually paid'' has a specific
meaning in Medicare Part D and is separately defined at Sec. 423.308
to mean costs actually incurred by the plan that are net of direct and
indirect remuneration (DIR), including discounts, rebates, or other
price concessions typically received and applied after the point of
sale (POS). However, unlike the statutory definitions of ``allowable
reinsurance costs'' and ``allowable risk corridor costs'' at sections
1860D-15(b)(2) and 1860D-15(e)(1)(B) of the Act, respectively, the
statutory definition of ``gross covered prescription drug costs'' at
section 1860D-15(b)(3) of the Act does not use the phrase ``actually
paid'' or otherwise specify that such costs must be net of all DIR. As
we explained in the December 2022 proposed rule (87 FR 79611), because
the definition of ``gross covered prescription drug costs'' was
codified in regulation for the sole purpose of describing the
methodology for calculating the reinsurance payment amount, in using
the phrase ``actually paid'' in the regulatory definition of ``gross
covered prescription drug costs,'' We were incorporating a requirement
from the statutory definition of ``allowable reinsurance costs'' to
emphasize that DIR would be netted out
[[Page 54910]]
in the calculation of costs eligible for Part D reinsurance. As we
explained in the proposed rule, the proposed revisions to the
definition would not change the fact that Part D reinsurance is
ultimately based on net drug costs or change the final reinsurance
payment amount a Part D sponsor receives. Rather, allowable reinsurance
costs would continue to be defined at Sec. 423.308 as the subset of
gross covered prescription drug costs actually paid.
Manufacturer discounts, among other costs, paid under the Coverage
Gap Discount Program (as described in section 1860D-14A of the Act)
were always included in the calculation of GCPDC. This policy was
consistent with the statutory and regulatory definition of GCPDC, which
generally requires the inclusion of all costs incurred under the plan,
including those paid on behalf of the Part D beneficiary. The IRA
sunset the Coverage Gap Discount Program as of January 1, 2025. As
such, these costs are no longer included in the calculation of GCPDC.
Section 11201(b)(3) of the IRA amended section 1860D-15(b)(3) of the
Act in two places to also require the inclusion of manufacturer
discounts paid under the Manufacturer Discount Program in the
calculation of GCPDC (first, by specifying that the definition of GCPDC
is subject to paragraph (2)(B) of section 1860D-15(b) of the Act and
second, by adding language specifying that, in the case of an
applicable drug, as defined at Sec. 423.100, GCPDC shall be determined
whether the costs are paid by the individual, under the plan, or by a
manufacturer). Moreover, section 11201(b)(2) of the IRA also amended
section 1860D-15(b)(2) of the Act to require the inclusion of
manufacturer discounts paid under the Manufacturer Discount Program
under section 1860D-14C of the Act in the calculation of allowable
reinsurance costs in 2025.
In the Final CY 2025 Part D Redesign Program Instructions, under
the requirement in section 11201(f) of the IRA that we use program
instruction or other forms of program guidance to implement section
11201 of the IRA for 2025 and to mirror the statutory language in
sections 1860D-15(b)(2) and (3) of the Act, as amended by the IRA, we
stated that the regulatory definition of ``gross covered prescription
drug costs'' at Sec. 423.308 would be considered to have been revised
for CY 2025 to include ``all amounts paid by manufacturers under the
Manufacturer Discount Program (as defined in section 1860D-14C of the
Act).'' Additionally, we stated that the regulatory definition of
``allowable reinsurance costs'' at Sec. 423.308 would be considered to
have been revised for CY 2025 to include ``the portion of the
negotiated price (as defined in section 1860D-14C(g)(6) of the Act) of
an applicable drug (as defined in section 1860D-14C(g)(2) of the Act)
paid by manufacturers under the Manufacturer Discount Program (as
defined in section 1860D-14C of the Act).''
In the Final CY 2026 Part D Redesign Program Instructions, we
stated that certain policies described in the Final CY 2025 Part D
Redesign Program Instructions, including the policy with respect to the
definitions of GCPDC and allowable reinsurance costs, also applied in
CY 2026.
We propose to codify the policy that we established in the Final CY
2025 Part D Redesign Program Instructions for CY 2025 and applied via
the Final CY 2026 Part D Redesign Program Instructions for CY 2026 with
the limited modifications mentioned later in this section.
Specifically, we propose that the regulatory definition of ``gross
covered prescription drug costs'' at Sec. 423.308 be revised to
include ``all amounts paid by manufacturers under the Manufacturer
Discount Program (as defined at Sec. 423.100).'' We also propose to
add the phrase ``for years prior to 2025'' before the phrase ``amounts
between the initial coverage limit and the out-of-pocket threshold''
and the phrase ``because the enrollee is between the initial coverage
limit and the out-of-pocket threshold'' to reflect that the coverage
gap phase does not exist for 2025 and subsequent years. Additionally,
we propose to revise the regulatory definition of ``allowable
reinsurance costs'' at Sec. 423.308 to include ``the portion of the
negotiated price (as defined in section 1860D-14C(g)(6) of the Act) of
an applicable drug (as defined at Sec. 423.100) paid by manufacturers
under the Manufacturer Discount Program (as defined at Sec.
423.100).''
8. Reinsurance Methodology (Sec. 423.329)
Section 1860D-15(b) of the Act, originally enacted into law by the
MMA, sets forth rules for the calculation and payment of federal
reinsurance subsidies for Part D plans. For years preceding CY 2025,
the reinsurance amount for a Part D eligible individual was an amount
equal to 80 percent of the allowable reinsurance costs attributable to
that portion of gross covered prescription drug costs incurred after
that individual reached the catastrophic phase of the benefit. In the
January 2005 Medicare Final Rule, we codified this calculation at Sec.
423.329(c)(1).
Under section 1860D-15(b)(2) of the Act, we make reinsurance
payments to Part D plan sponsors based on the GCPDC that were actually
paid during the coverage year. ``Actually paid,'' defined at Sec.
423.308, means that the costs must be actually incurred by the Part D
sponsor and must be net of any DIR. Each year, sponsors report their
DIR to us as part of the annual DIR reporting process, and we use this
information, along with cost data reported on PDE records, to allocate
a portion of the DIR towards reducing allowable reinsurance costs.
Historically, we allocated DIR to reduce allowable reinsurance costs
and calculate final reinsurance subsidy payments in accordance with the
methodology provided in the CY 2006 Advance Notice.
The IRA significantly modifies the reinsurance subsidy under the
Part D benefit in CY 2025. Specifically, under section 1860D-15(b) of
the Act, as amended by section 11201(b) of the IRA, in 2025, the
reinsurance payment amount for a Part D beneficiary will decrease from
80 percent of the allowable reinsurance costs incurred after the
beneficiary exceeds the annual OOP threshold to 20 percent for
applicable drugs or 40 percent for drugs that are not applicable drugs.
Covered Part D drugs that are not applicable drugs and which are
eligible for reinsurance payments amounts equal to 40 percent of the
allowable reinsurance costs incurred include selected drugs (as defined
in section 1192(c) of the Act and as we propose to define at Sec.
423.100) during a price applicability period (as defined in section
1191(b)(2) of the Act and as we propose to define at Sec. 423.100), as
well as non-applicable drugs (as defined in section 130 of the Medicare
Part D Manufacturer Discount Program Final Guidance and section II.C.
of this proposed rule).
Therefore, a different calculation applies to applicable drugs
versus non-applicable and selected drugs for the reinsurance payment
amount, and the methodologies for calculating the reinsurance subsidy
and allocating direct and indirect remuneration (DIR) towards
reinsurance, must also be reconsidered.
In the Final CY 2025 Part D Redesign Program Instructions, we
established a methodology to calculate the reinsurance subsidy
separately for applicable and non-applicable drugs and allocate the
share of DIR for applicable and non-applicable drugs based on their
respective gross drug costs that fall in the catastrophic phase. The
methodology otherwise aligns with
[[Page 54911]]
our historical approach for apportioning DIR.
Specifically, we stated that after the end of the coverage year, we
would reconcile reinsurance subsidies for applicable drugs as follows:
<bullet> Identify incurred reinsurance costs for applicable drugs
above the annual OOP threshold at the individual beneficiary level
(from PDE records).
<bullet> Sum incurred reinsurance costs for applicable drugs at the
plan level.
<bullet> Allocate DIR for applicable drugs to incurred reinsurance
costs for applicable drugs by applying the ratio of total DIR to total
allowed costs. (The allocated DIR for reinsurance is referred to as
``reinsurance DIR.'')
<bullet> Subtract reinsurance DIR for applicable drugs from
incurred reinsurance costs for applicable drugs, then multiply the
difference by 20 percent (the reinsurance payment amount percentage for
applicable drugs).
Similarly, after the end of the coverage year, we stated that we
would reconcile reinsurance subsidies for non-applicable drugs as
follows:
<bullet> Identify incurred reinsurance costs for non-applicable
drugs above the annual OOP threshold at the individual beneficiary
level (from PDE records).
<bullet> Sum incurred reinsurance costs for non-applicable drugs at
the plan level.
<bullet> Allocate DIR for non-applicable drugs to incurred
reinsurance costs for non-applicable drugs by applying the ratio of
total DIR to total allowed costs.
<bullet> Subtract reinsurance DIR for non-applicable drugs from
incurred reinsurance costs for non-applicable drugs, then multiply the
difference by 40 percent (the reinsurance payment amount percentage for
non-applicable drugs).
The sum of the adjusted reinsurance amounts for applicable and non-
applicable drugs will then be reconciled with prospective reinsurance
payment amounts made to plans during the coverage year.
In the Final CY 2026 Part D Redesign Program Instructions, we
updated the methodology applied in CY 2025 to account for selected
drugs, as the selected drug subsidy program begins in 2026.
Specifically, we stated that, for CY 2026, we would calculate the
reinsurance subsidy separately for applicable drugs. Because the
percentage of allowable reinsurance costs to calculate the reinsurance
payment amount for a Part D beneficiary is the same for non-applicable
and selected drugs, the reinsurance subsidy for non-applicable and
selected drugs would be calculated together. Additionally, we stated
that, for CY 2026, we would allocate the share of DIR for applicable
drugs and non-applicable and selected drugs based on their respective
share of gross drug costs that fall in the catastrophic phase.
After the end of CY 2026, we stated that we would reconcile
reinsurance subsidies for non-applicable and selected drugs as follows:
<bullet> Identify incurred reinsurance costs for non-applicable and
selected drugs above the annual OOP threshold at the individual
beneficiary level (from PDE records).
<bullet> Sum incurred reinsurance costs for non-applicable and
selected drugs at the plan level.
<bullet> Allocate DIR for non-applicable and selected drugs to
incurred reinsurance costs for non-applicable and selected drugs by
applying the ratio of total DIR to total allowed costs. (The allocated
DIR for reinsurance is referred to as ``reinsurance DIR.'')
<bullet> Subtract reinsurance DIR for non-applicable and selected
drugs from incurred reinsurance costs for non-applicable and selected
drugs, then multiply the difference by 40 percent (the reinsurance
payment amount percentage for non-applicable and selected drugs).
The sum of the adjusted reinsurance amounts for applicable drugs
and non-applicable and selected drugs for CY 2026 will then be
reconciled with prospective reinsurance payment amounts made to plans
during the coverage year. To determine the appropriate category
(applicable, non-applicable, or selected) for drugs, we stated we would
use the 11-digit NDC submitted on each PDE record and assign it with an
applicable, non-applicable, or selected designation based on the
marketing category listed for that NDC in the U.S. Food and Drug
Administration (FDA)'s NSDE file used for PDE processing and the list
of NDCs referenced in the Medicare Drug Price Negotiation Program
guidance.
For CY 2026, the calculation formulas for applicable drugs are:
Reinsurance DIR for applicable drugs = (total DIR/total allowed costs)
x incurred reinsurance costs for applicable drugs.
Adjusted reinsurance for applicable drugs = (incurred reinsurance costs
for applicable drugs-reinsurance DIR for applicable drugs) x 0.20.
For CY 2026, the calculation formulas for non-applicable and
selected drugs are:
Reinsurance DIR for non-applicable and selected drugs = (total DIR/
total allowed costs) x incurred reinsurance costs for non-applicable
and selected drugs.
Adjusted reinsurance for non-applicable and selected drugs = (incurred
reinsurance costs for non-applicable and selected drugs-reinsurance DIR
for non-applicable and selected drugs) x 0.40.
In this proposed rule, we propose to codify at Sec. 423.329 the
policies we established in the Final CY 2025 Part D Redesign Program
Instructions for CY 2025 and the Final CY 2026 Part D Redesign Program
Instructions for CY 2026 with respect to the reinsurance methodology
without modification. Specifically, we propose to redesignate paragraph
(c)(1) as paragraph (c)(1)(i) and revise the introductory language to
state ``general rule for years preceding 2025'' and add a new paragraph
(c)(1)(ii) to codify the rules described previously for 2026 and future
years.
9. Selected Drug Subsidy (Sec. Sec. 423.265, 423.315, 423.329,
423.343)
Section 11201 of the IRA added section 1860D-14D to the Act,
creating a new selected drug subsidy program, which began in CY 2026.
Under the selected drug subsidy program, the Secretary must,
periodically and on a timely basis, provide Part D plan sponsors with a
subsidy for selected drugs, as defined under section 1192(c) of the
Act, equal to 10 percent of the drug's negotiated price. The selected
drug subsidy applies to a covered Part D drug that would otherwise meet
the definition of an applicable drug but for being a selected drug
under the Medicare Drug Price Negotiation Program during a price
applicability period. The subsidy is paid on behalf of an applicable
beneficiary who is enrolled in a PDP or an MA-PD plan, has not incurred
costs that are equal to or exceed the annual OOP threshold, and is
dispensed a selected drug.
Under the selected drug subsidy program, once an enrollee incurs
costs exceeding the annual deductible specified in section 1860D-
2(b)(1) of the Act (that is, the deductible under the defined standard
benefit) the selected drug subsidy is available in the initial coverage
phase of the benefit. The selected drug subsidy lowers Part D plan
sponsor liability on the negotiated price of the drug.
Because of the intertwined structure and wording of the
Manufacturer Discount Program and selected drug subsidy program
provisions at sections 1860D-14C and 1860D-14D of the Act, we interpret
the statute as establishing the selected drug subsidy as a substitute
for the Manufacturer Discount Program discount for a covered Part D
drug that would otherwise meet the definition of an applicable drug but
for being a
[[Page 54912]]
selected drug under the Medicare Drug Price Negotiation Program during
a price applicability period. As such, we propose to treat claims that
are subject to the selected drug subsidy as coterminous with claims
that would qualify for applicable discounts under the Manufacturer
Discount Program, but for the drug's status as a selected drug during a
price applicability period. In other words, the selected drug subsidy
will apply if the selected drug that otherwise would be an ``applicable
drug'' would have received an applicable discount under the
Manufacturer Discount Program for the particular claim at issue under
the rules of the Manufacturer Discount Program. Conversely, the
selected drug subsidy will not apply if the applicable discount under
the Manufacturer Discount Program otherwise would not have applied to
that particular claim. For example, as discussed in section II.C. of
this proposed rule, certain claims involving an applicable drug, such
as Medicare Secondary Payer claims, are not subject to discounts under
the Manufacturer Discount Program; in these situations, the selected
drug subsidy would also not apply.
Because certain actual expenses can only be fully known after all
costs have been incurred for a payment year, we make final payment for
these costs after a coverage year after obtaining all the information
necessary to determine the amount of payment. We currently make monthly
prospective payments of certain estimated costs submitted with bids,
including reinsurance costs and low-income cost-sharing subsidy (LICS)
costs, to mitigate cash-flow concerns that plans could experience if
such payments were made wholly on a retrospective basis.
In the Final CY 2026 Part D Redesign Program Instructions, we
stated that similar concerns suggested that we should also make monthly
prospective payments for the selected drug subsidy program. We
accordingly established a process where Part D plan sponsors are
required to submit estimates of selected drug subsidy amounts with
their annual bids and we pay Part D plan sponsors prospective selected
drug subsidy amounts equal to these estimated amounts. We use the
actual selected drug subsidy amounts that Part D plan sponsors report
on PDE data to determine actual costs incurred for selected drug
subsidy payments.
After the deadline for PDE submissions for a year, we will
calculate the difference between the prospective payments made by us to
the Part D plan sponsor and the actual payments made by the Part D plan
sponsor to determine a selected drug subsidy reconciliation amount. We
will make a lump-sum adjustment to monthly payments based on the
calculated reconciliation amount in the same manner as is done for
other Part D reconciliation payments. Specifically, we will recover
payments made for a coverage year if prospective selected drug subsidy
payments exceed the selected drug subsidy costs actually incurred by
the plan or if the Part D plan sponsor does not provide the data
requested by us to verify the plan's actual selected drug subsidy
amount; similarly, we will make a lump sum payment if the actually
incurred subsidy amount exceeds the prospective selected drug subsidy
payments.
In this proposed rule, we propose to codify the policies we
established in the Final CY 2026 Part D Redesign Program Instructions
with respect to the selected drug subsidy for 2026 and subsequent years
without modification. Specifically, we propose to codify at new Sec.
423.265(d)(2)(vi) a requirement that assumptions regarding selected
drug subsidy amounts payable be included in Part D bids submitted to
us. We also propose to codify at new Sec. 423.315(h) that we would
provide prospective selected drug subsidy payments on a monthly basis.
We also propose to codify at new Sec. 423.329(e) the determination of
selected drug subsidy payments. Finally, we propose to codify at Sec.
423.343(e) that we would make final payment for selected drug subsidy
payments after a coverage year after obtaining all information
necessary to determine the amount of payment.
10. Technical Correction--Retroactive Adjustments and Reconciliations
(Sec. Sec. 423.336 and 423.343)
In the course of this rulemaking, we noticed the need for a
technical correction at Sec. 423.343(d)(2). The final sentence of this
paragraph states that in the event Part D sponsors do not provide
adequate data to us for the calculation of risk corridor payments, we
assume that the Part D plan's adjusted allowable risk corridor costs
are 50 percent of the target amount. This sentence is incorrectly
placed in Sec. 423.343, which describes payments of low-income cost-
sharing subsidies, and should instead be placed in Sec. 423.336, which
describes risk sharing arrangements. Thus, we propose to revise Sec.
423.343 to remove this sentence and revise Sec. 423.336(c) to add this
sentence in its proper context.
11. Base Beneficiary Premium (Sec. 423.286)
Section 1860D-13(a)(2) of the Act, as established by the MMA,
describes the statutory formula for calculating plan-specific basic
Part D premiums under the Part D program. The national base beneficiary
premium (BBP) is the starting point for calculating a plan-specific
basic Part D premium. Prior to the enactment of the IRA, the BBP was
calculated as the product of the beneficiary premium percentage and the
national average monthly bid amount. The beneficiary premium percentage
(``applicable percentage'') is a fraction, with a numerator of 25.5
percent and a denominator equal to 100 percent minus a percentage equal
to (i) the total reinsurance payments that we estimate will be paid for
the coverage year, divided by (ii) that amount plus the total payments
that we estimate will be paid to Part D plans based on the standardized
bid amount during the year, taking into account amounts paid by both
CMS and plan enrollees. In the January 2005 Medicare Final Rule, we
codified the statutory formula for calculating the BBP at Sec.
423.286.
Section 11201 of the IRA amended section 1860D-13(a)(2) of the Act
such that the statutory formula described in the preceding paragraph
would apply subject to a newly added section 1860D-13(a)(8)(A) of the
Act, which states that, for a prescription drug plan for a month in
2024 through 2029, the BBP shall be equal to the lesser of the BBP for
the preceding year increased by 6 percent or the amount computed under
the formula described at section 1860D-13(a)(2) of the Act. In the
Advance Notice of Methodological Changes for CY 2024 for Medicare
Advantage (MA) Capitation Rates and Part C and Part D Payment Policies
(2024 Advance Notice) \16\ and the July 31, 2023 HPMS memorandum
titled, ``Annual Release of Part D National Average Bid Amount and
Other Part C & D Bid Information'',\17\ we stated that it would
calculate the BBP as the lesser of the prior year's BBP increased by 6
percent, or the BBP as it would have been calculated if the IRA's
premium stabilization provision had not been enacted, to determine the
CY 2024 BBP. In the July 29, 2024, HPMS memorandum titled, ``Annual
Release of Part D National Average Bid Amount and Other Part C & D Bid
Information,'' we applied the revised formula described in this
paragraph to determine the CY 2025 BBP.
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\16\ <a href="https://www.cms.gov/files/document/2024-announcement-pdf.pdf">https://www.cms.gov/files/document/2024-announcement-pdf.pdf</a>.
\17\ <a href="https://www.cms.gov/files/document/july-29-2024-parts-c-d-announcement.pdf">https://www.cms.gov/files/document/july-29-2024-parts-c-d-announcement.pdf</a>.
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In this proposed rule, we propose to codify the statutory
amendments to section 1860D-13(a) of the Act.
[[Page 54913]]
Specifically, we propose to redesignate Sec. 423.286(b) as Sec.
423.286(b)(1) and codify the BBP formula for 2024 through 2029 at new
Sec. 423.286(b)(2).
12. Low-Income Cost-Sharing Subsidy (Sec. 423.782)
The Part D low-income subsidy (LIS) helps individuals with Medicare
who meet certain statutory income and resource criteria pay for
prescription drugs and lowers the costs of prescription drug coverage.
Prior to the enactment of the IRA, individuals who qualified for the
full LIS received assistance to pay their full premiums and deductibles
(in certain Part D plans) and have reduced cost sharing. Individuals
who qualified for the partial LIS paid reduced premiums (on a sliding
scale based on their income) and also had reduced deductibles and cost
sharing. Section 11404 of the IRA amended section 1860D-14 of the Act
to expand eligibility for the full LIS to individuals who are
determined to have incomes below 150 percent of the FPL and who meet
either the resource standard in paragraph (3)(D) or paragraph (3)(E) of
section 1860D-14(a) of the Act, with respect to plan years beginning on
or after January 1, 2024. Thus, beginning in CY 2024, individuals who
previously would have qualified for the partial subsidy now receive the
full LIS.
In the final rule titled, ``Medicare Program; Contract Year 2024
Policy and Technical Changes to the Medicare Advantage Program,
Medicare Prescription Drug Benefit Program, Medicare Cost Plan Program,
and Programs of All-Inclusive Care for the Elderly,'' which appeared in
the April 12, 2023 Federal Register (88 FR 22120), and therewithin, we
codified the applicable rules under Sec. Sec. 423.773 and 423.780 to
expand eligibility for the LIS under Part D. In this rule, we propose
to also amend the eligibility criteria for LIS cost sharing reductions
at Sec. 423.782 to align with the IRA's amendments to section 1860D-
14(a)(1) of the Act and the changes to Sec. Sec. 423.773 and 423.780.
Specifically, we propose to update the FPL limit specified in Sec.
423.782(a)(2)(i)(B) to 150 percent for plan years beginning on or after
January 1, 2024.
In addition, we propose to amend paragraph (a)(2) of Sec. 423.782
to state that for years preceding 2025, LIS cost sharing reductions
applied to covered Part D drugs obtained after the initial coverage
limit and below the OOP limit.
13. Retiree Drug Subsidy Parameters (Sec. Sec. 423.882 and 423.884)
Section 1860D-22 of the Act provides for subsidy payments to
sponsors of qualified retiree prescription drug plans, provided that
the employment-based retiree health coverage is at least actuarially
equivalent to the standard prescription drug coverage under Medicare
Part D. In the January 2005 Medicare Final Rule, we established
regulations at 42 CFR part 423 Subpart R to, in part, determine which
group health plans may qualify as qualified retiree prescription drug
plans and, therefore, be eligible to receive retiree drug subsidy
payments for a qualifying covered retiree.
Per section 1860D-22(a)(2)(A) of the Act, qualified retiree
prescription drug plans are required to annually attest that the
actuarial value of prescription drug coverage under the plan (as
described in section 1860D-11(c) of the Act) is at least equal to the
actuarial value of standard prescription drug coverage, not taking into
account the value of any discount provided under the Manufacturer
Discount Program as established in section 1860D-14C of the Act, and
disclose that coverage under the plan is creditable in accordance with
section 1860D-13(b)(6)(B) of the Act.
In the Final CY 2025 Part D Redesign Program Instructions, we
addressed the implications of the amendments to the parameters of the
standard prescription drug coverage made by the IRA for the retiree
drug subsidy parameters described at Subpart R and summarized the IRA
policies in effect for 2025 that are considered in determining the
actuarial value of the defined standard benefit. While the IRA amends
the parameters of the standard prescription drug coverage and makes
other changes to the Part D benefit, we stated that there are no
changes to the requirements for qualified retiree prescription drug
plans.
In the Final CY 2026 Part D Redesign Program Instructions, we
stated that certain policies described in the Final CY 2025 Part D
Redesign Program Instructions, including the guidance related to the
retiree drug subsidy parameters, also applied in CY 2026.
The majority of the IRA policies in effect for CY 2027 and
subsequent years do not require updates to Subpart R; however, there
are certain conforming edits required to reflect the proposed revisions
to the definitions of ``gross covered prescription drug costs'' and
``allowable reinsurance costs'' as well as revisions needed to reflect
the sunsetting of the Coverage Gap Discount Program and the
establishment of the Manufacturer Discount Program. Specifically, we
propose to revise the definitions of ``gross covered retiree plan-
related prescription drug costs'' and ``allowable retiree costs'' at
Sec. 423.882 to reflect the proposed revisions to the definitions of
``gross covered prescription drug costs'' and ``allowable reinsurance
costs'' at Sec. 423.308. We also propose to replace all references in
Sec. 423.884(d) to ``not taking into account the value of any discount
or coverage provided during the coverage gap'' with the statement ``for
years prior to 2025, not taking into account the value of any discount
or coverage provided during the coverage gap and for 2025 and
subsequent years, not taking into account the value of any discount
provided under the Manufacturer Discount Program.''
14. Medical Loss Ratio (Sec. 423.2420)
Section 1103 of Title I, Subpart B of the Health Care and Education
Reconciliation Act (Pub. L. 111-152) amended section 1857(e) of the Act
to add a medical loss ratio (MLR) requirement to Medicare Part C (MA
program). An MLR is expressed as a percentage, generally representing
the percentage of revenue used for patient care rather than for such
other items as administrative expenses or profit. Because section
1860D-12(b)(3)(D) of the Act incorporates by reference the requirements
of section 1857(e) of the Act, these MLR requirements also apply to the
Medicare Part D program. In the final rule titled ``Medicare Program;
Medical Loss Ratio Requirements for the Medicare Advantage and the
Medicare Prescription Drug Benefit Programs,'' which appeared in the
May 23, 2013 Federal Register (78 FR 31284) (hereinafter referred to as
the May 2013 Medicare MLR final rule), in which we codified the MLR
requirements for MA organizations and Part D prescription drug plan
sponsors (``Part D sponsors'') (including organizations offering cost
plans that offer the Part D benefit) in the regulations at 42 CFR part
422, subpart X, and part 423, subpart X.
Generally, the MLR for each Part D contract reflects the ratio of
costs (numerator) to revenues (denominator) for all enrollees under the
contract. The MLR for a Part D contract reflects the percentage of
revenue received under the contract spent on incurred claims for all
enrollees for Part D prescription drugs and on quality initiatives that
meet the requirements at Sec. 423.2430. The percentage of revenue that
is used for other items such as administration, marketing, and profit
is excluded from the numerator of the MLR for MA and
[[Page 54914]]
Part D (see Sec. Sec. 423.2401; 423.2420(b)(4); 423.2430(b)).
The MLR regulations at Sec. 423.2420(c) specify that the following
Part D plan payments from the federal government are included in the
MLR denominator: the direct subsidy, prospective Federal reinsurance
subsidy, reconciliation adjustments to the Federal reinsurance subsidy,
low-income premium subsidy (LIPS) amount, and risk corridor payments.
In the May 2013 Medicare MLR final rule, we explained that we viewed
LICS and Coverage Gap Discount Program payments as pass-through
payments for which plans do not retain any liability, and that these
amounts should therefore be excluded from the MLR calculation (78 FR
31290); accordingly, LICS and Coverage Gap Discount Program payments
are excluded from both the MLR numerator and denominator.
The IRA introduced new categories of Part D plan payments from the
Federal government. These include the Manufacturer Discount Program
payment, the Inflation Reduction Act Subsidy Amount (IRASA), and the
selected drug subsidy payment. The payment process for the Manufacturer
Discount Program payments includes a cost-based reconciliation intended
to make Part D sponsors whole for the manufacturer discount amounts
they advance on behalf of the manufacturer. The IRASA is a Part D
payment specific to CY 2023 that we provided to Part D plan sponsors.
This temporary retrospective subsidy was paid to Part D plans for the
reduction in cost sharing and elimination of the deductible for ACIP-
recommended adult vaccines and covered insulin products during the 2023
plan year (that is, to cover the difference between the beneficiary
cost sharing for the covered insulin, or ACIP-recommended adult
vaccine, under the plan's 2023 benefit design, and the applicable
statutory maximum cost sharing ($35 for a one month-supply of covered
insulin products and $0 for vaccines)). Finally, under the selected
drug subsidy program, the government provides a subsidy to Part D plan
sponsors for selected drugs dispensed to enrollees in the initial
coverage phase.
In the Final CY 2025 Part D Redesign Program Instructions, we
stated that for CY 2025 and prior years, the new Part D plan payments
for the Manufacturer Discount Program and IRASA are excluded from the
denominator of the MLR calculation, and associated expenditures are
excluded from the numerator of the MLR calculation. In the Final CY
2026 Part D Redesign Program Instructions, we stated that the new Part
D plan payments for the selected drug subsidy are excluded from the
denominator of the MLR calculation, and associated expenditures are
excluded from the numerator of the MLR calculation. In the Final CY
2026 Part D Redesign Program instructions, we applied certain policies
described in the Final CY 2025 Part D Redesign Program Instructions,
including the treatment of the Manufacturer Discount Program payments,
in CY 2026.
In this proposed rule, we propose to codify for CY 2027 and
subsequent years the policies established in the Final CY 2025 Part D
Redesign Program Instructions and Final CY 2026 Part D Redesign Program
Instructions with respect to the treatment of the Manufacturer Discount
Program payments, IRASA, and selected drug subsidy program payments for
MLR purposes. These policies are currently in effect. Specifically, we
propose to codify the exclusion of the Manufacturer Discount Program
payments, IRASA, and selected drug subsidy program payments at Sec.
423.2420(b)(4)(iii), (iv), and (v) respectively.
15. Severability
The Medicare Part D redesign provisions proposed herein are
separate and severable from one another. If any of these provisions,
once finalized, is held to be invalid or unenforceable by its terms, or
as applied to any person or circumstance, or stayed pending further
agency action, it is our intention that such provision shall be
severable from this rule and not affect the remainder thereof, or the
application of such provision to other persons not similarly situated
or to other, dissimilar circumstances.
B. Medicare Coverage Gap Discount Program
The Patient Protection and Affordable Care Act (Pub. L. 111-148)
amended Title XVIII of the Act by adding sections 1860D-14A and 1860D-
43, establishing the Medicare Coverage Gap Discount Program. The
Coverage Gap Discount Program, which began on January 1, 2011, was
initially implemented through program instruction, and program
requirements were codified in the ``Medicare Program; Changes to the
Medicare Advantage and the Medicare Prescription Drug Benefit Programs
for Contract Year 2013 and Other Changes'' final rule (77 FR 22072)
under subpart W of 42 CFR part 423.
The Coverage Gap Discount Program made manufacturer discounts
available at the point of sale (POS) to Part D enrollees who are not
eligible for the low-income subsidy (LIS) under section 1860D-14 of the
Act when receiving applicable drugs (as defined at Sec. 423.100) while
in the coverage gap phase of the Part D benefit. Under Coverage Gap
Discount Program rules, pharmaceutical manufacturers were required to
enter into a Coverage Gap Discount Program agreement with CMS in order
for their applicable drugs to be covered under Part D. In general, the
discount was 70 percent of the negotiated price (as defined at Sec.
423.2305) of the applicable drug.
The Inflation Reduction Act of 2022 (Pub. L. 117-169) (IRA) made
significant changes to the Part D benefit design, which are discussed
in more detail in section II.A. of this proposed rule. These changes
included eliminating the coverage gap phase of the Part D benefit after
2024 and adding section 1860D-14C to the Act, which established the
Manufacturer Discount Program, under which manufacturers pay discounts
for applicable drugs when dispensed to Part D enrollees during the
initial and catastrophic coverage phases. Our proposal to codify the
Manufacturer Discount Program is discussed in section II.C. of this
proposed rule.
Consistent with the elimination of the coverage gap phase of the
Part D benefit, section 11201 of the IRA added section (h) to section
1860D-14A of the Act, which sunset the Coverage Gap Discount Program
and terminated all Coverage Gap Discount Program agreements, effective
January 1, 2025. Section 1860D-14A(h)(2) of the Act further specifies
that the provisions of section 1860D-14A of the Act, including all
responsibilities and duties under such agreements continue to apply
with respect to applicable drugs dispensed prior to January 1, 2025.
Accordingly, we propose to amend Sec. 423.2300 by adding a new
paragraph to specify that the requirements of Subpart W apply before
January 1, 2025 and, with respect to applicable drugs dispensed prior
to that date, continue to apply on and after January 1, 2025. To make
this change, we propose to redesignate the existing text of Sec.
423.2300 as paragraph (a) and redesignate existing paragraphs (a)
through (h) as Sec. 423.2300(a)(1) through (8), respectively. We
propose to add the new text at Sec. 423.2300(b). We also propose to
revise Sec. 423.2315(c)(2) to reflect the sunset of the Coverage Gap
Discount Program by limiting this provision specifying the effective
date of a Coverage Gap Discount Program agreement to 2012 and
subsequent years prior to 2025. Finally, in accordance with section
1860D-14A(h)(1) of the Act, we propose to amend Sec. 423.2345 by
adding a new paragraph (f) to specify
[[Page 54915]]
that, subject to Sec. 423.2300(b), as redesignated, all Coverage Gap
Discount Program agreements under this subpart are terminated as of
January 1, 2025.
As discussed in more detail in section II.C. of this proposed rule,
``discounted price'' is defined at section 1860D-14A(g)(4) of the Act
for purposes of the Coverage Gap Discount Program and at section 1860D-
14C(g)(4) of the Act for purposes of the Manufacturer Discount Program.
Because the percentage of the negotiated price that the manufacturer
agrees to pay is different under the two programs, the statutory term
``discounted price'' as well as its corresponding regulatory term
``applicable discount'' have different meanings between the two
programs. To address the programmatic difference, we propose to revise
the regulation text at Sec. 423.2305 to clarify that the definitions
in this section apply only for purposes of the Coverage Gap Discount
Program. Further, we propose to revise the definition of ``applicable
discount'' at Sec. 423.2305 to specify that it refers to 50 percent of
the negotiated price with respect to a plan year before 2019 and 70
percent of the negotiated price with respect to plan year 2019 through
plan year 2024. This clarification further distinguishes the definition
of ``applicable discount'' at Sec. 423.2305 under the Coverage Gap
Discount Program from the definition of ``applicable discount''
(proposed at Sec. 423.2712 as part of this proposed rule) under the
Manufacturer Discount Program.
Lastly, for clarity and readability, we propose technical changes
throughout Subpart W to replace the shorthand term ``Discount Program''
with ``Coverage Gap Discount Program,'' to better distinguish it from
the Manufacturer Discount Program.
C. Medicare Part D Manufacturer Discount Program
1. Background
The Medicare Part D Manufacturer Discount Program (Manufacturer
Discount Program) was enacted into law in section 11201 of the
Inflation Reduction Act of 2022, Public Law 117-169 (IRA) and codified
in sections 1860D-14C and 1860D-43 of the Act. Section 11201(f) of the
IRA directed the Secretary to implement the Manufacturer Discount
Program by program instruction or other forms of program guidance for
2025 and 2026. In accordance with the law, on November 17, 2023, CMS
released the Medicare Part D Manufacturer Discount Program Final
Guidance. On December 20, 2024, we released the Revised Medicare Part D
Manufacturer Discount Program Final Guidance (Manufacturer Discount
Program Final Guidance).\18\
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\18\ Available at: <a href="https://www.cms.gov/files/document/revised-manufacturer-discount-programfinal-guidance122024.pdf">https://www.cms.gov/files/document/revised-manufacturer-discount-programfinal-guidance122024.pdf</a>.
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The IRA made significant changes to the Part D benefit, which are
discussed in detail in section II.A. of this proposed rule. The IRA
eliminated the coverage gap phase of the Part D benefit after 2024 and
added subsection (h) to section 1860D-14A of the Act, which sunset the
Coverage Gap Discount Program and terminated all Coverage Gap Discount
Program agreements effective January 1, 2025. Our proposal to update
the Part D regulations to reflect the statutory sunsetting of the
Coverage Gap Discount Program and termination of Coverage Gap Discount
Program agreements is discussed in section II.B. of this proposed rule.
In this proposed rule, we would codify the Manufacturer Discount
Program Final Guidance, with the refinements and changes discussed
herein, to be effective beginning CY 2027. Under the Manufacturer
Discount Program, for applicable drugs and selected drugs to be
coverable under Part D, manufacturers of such drugs are required to
enter into a Manufacturer Discount Program agreement with CMS and agree
to provide discounts on their applicable drugs when dispensed to Part D
enrollees who are in the initial and catastrophic coverage phases of
the Part D benefit. Similar to the Coverage Gap Discount Program which
the Manufacturer Discount Program replaces, the discounts under the
Manufacturer Discount Program are advanced at the point of sale by the
Part D plan sponsor, and manufacturers are invoiced quarterly based on
the amounts submitted by plan sponsors on Prescription Drug Event (PDE)
records. CMS provides prospective payments to plan sponsors to ensure
they are able to advance the discounts and adjusts the payments through
an annual reconciliation.
Unlike the Coverage Gap Discount Program, discounts under the
Manufacturer Discount Program generally reduce the amount the Part D
sponsor pays for the drug versus reducing the out-of-pocket amount for
the enrollee, and discounts are paid for all Part D enrollees who have
exceeded the annual Part D deductible specified in section 1860D-
2(b)(1) of the Act. While the discounts are a lower percentage of the
negotiated price of the applicable drug than under the Coverage Gap
Discount Program (10 percent in the initial coverage phase and 20
percent in the catastrophic coverage phase), they continue through the
end of the plan year once the enrollee exceeds the deductible. The
discount percentages manufacturers are required to pay are phased in
over the first several years of the program for manufacturers that meet
statutory criteria for specified manufacturers and specified small
manufacturers.
Many of the other policies currently in effect pursuant to the
Manufacturer Discount Program Final Guidance, which we propose to
codify in this rule, mirror longstanding policies under the Coverage
Gap Discount Program, including use of a third party administrator
(TPA) to facilitate program operations such as invoicing and payment,
use of the Health Plan Management System (HPMS) to execute agreements
and house data, and the manufacturer dispute resolution process. All of
these policies are discussed in more detail later in this section.
2. Basis and Scope (Sec. 423.2700)
We propose to codify the requirements for the Manufacturer Discount
Program under sections 1860D-14C and 1860D-43 of the Act as new subpart
AA of part 423. Proposed Sec. 423.2700(a) and (b) set forth the basis
and scope, respectively.
We propose a conforming change at Sec. 423.1 to incorporate
section 1860D-14C of the Act into the scope of part 423.
3. Definitions (Sec. Sec. 423.100, 423.1002, 423.2305, and 423.2704)
In this proposed rule, we propose to codify the definition of
frequently used terms consistent with section 1860D-14C of the Act or
established in the Manufacturer Discount Program Final Guidance, as
well as new definitions based on the policies in this proposed rule.
Several of these terms are also used for purposes of the Coverage
Gap Discount Program. In some cases, the same term has a different
meaning for the Manufacturer Discount Program than for the Coverage Gap
Discount Program because of differences in the programs reflected in
sections 1860D-14C and 1860D-14A of the Act, respectively. Where
possible under the statutory requirements, we propose to use the same
terms, defined in the same way, for both programs. Because some of the
terms are applicable to both subpart W and proposed subpart AA, we
propose to revise certain definitions in existing Sec. Sec. 423.100,
423.1002, and 423.2305, move certain definitions from Sec. 423.2305 to
Sec. 423.100 with revisions
[[Page 54916]]
as necessary to comply with relevant statutory requirements, and add
new definitions for purposes of the Manufacturer Discount Program at
proposed Sec. 423.2704.
At Sec. 423.100, we propose to revise a number of existing
definitions as discussed below.
<bullet> ``Applicable beneficiary'';
We propose to revise the definition of ``applicable beneficiary''
to reflect the statutory definition of such term under the Coverage Gap
Discount Program and the Manufacturer Discount Program. Specifically,
we propose adding that for the purposes of the Coverage Gap Discount
Program, applicable beneficiary means an individual who on the date of
dispensing a covered Part D drug is not entitled to an income-related
subsidy under section 1860D-14(a) of the Act; has reached or exceeded
the initial coverage limit under section 1860D-2(b)(3) of the Act
during the year; has not incurred costs for covered Part D drugs in the
year equal to the annual out-of-pocket threshold specified in section
1860D-2(b)(4)(B) of the Act; and has a claim that is within the
coverage gap or straddles or spans the coverage gap. We also propose
adding to the definition that for the purposes of the Manufacturer
Discount Program, applicable beneficiary means an individual who on the
date of dispensing a covered Part D drug has incurred costs, as
determined in accordance with section 1860D-2(b)(4)(C) of the Act, for
covered Part D drugs in the year that exceed the annual deductible
specified in section 1860D-2(b)(1) of the Act.
<bullet> ``Applicable drug'';
We propose to modify the existing definition of ``applicable drug''
to specify that compounded drug products (as described in Sec.
423.120(d)) containing an applicable drug are excluded. This proposed
change would codify both longstanding CMS policy under the Coverage Gap
Discount Program that excluded compounds as well as the policy
established in section 40.1 of the Manufacturer Discount Program Final
Guidance. As stated in the guidance, while plans may cover compounds
that include at least one Part D ingredient, and that ingredient would
be an applicable drug if dispensed on its own, we believe that the
applicable drug determination must be made with respect to the compound
as a whole. Because the compound as a whole is not approved under a New
Drug Application (NDA) or Biologic Licensing Application (BLA), a
compound does not meet the definition of an applicable drug.
Further, for the purposes of the Manufacturer Discount Program, we
propose to clarify that applicable drug also includes a Part D drug
that is provided to a particular applicable beneficiary as a transition
fill under Sec. 423.120(b)(3) or as an emergency supply as may be
required for an applicable beneficiary who is a long-term care
resident. This clarification would codify our longstanding approach
under the Coverage Gap Discount Program where, in practice, such fills
have been treated as meeting the definition of ``applicable drug.''
Finally, in accordance with the statutory definition of
``applicable drug'' at section 1860D-14C(g)(2) of the Act and the
Manufacturer Discount Program Final Guidance, we further propose to
specify in the definition of ``applicable drug'' that, for the purposes
of the Manufacturer Discount Program, an applicable drug is not a
selected drug during a price applicability period with respect to such
drug.
We propose to add definitions for the following terms at Sec.
423.100:
<bullet> ``Applicable discount'';
At Sec. 423.100, we propose to add a definition of ``applicable
discount'' that identifies the separate programmatic definitions of
such term for the Coverage Gap Discount Program and the Manufacturer
Discount Program. Specifically, we propose to define ``applicable
discount'' as, for purposes of the Coverage Gap Discount Program,
having the meaning set forth at Sec. 423.2305, and for purposes of the
Manufacturer Discount Program, the meaning set forth at Sec. 423.2712.
<bullet> ``Applicable number of calendar days'';
We propose to remove the definition of ``applicable number of
calendar days'' from Sec. 423.2305 and add it at Sec. 423.100. This
definition would apply to both the Coverage Gap Discount Program and
the Manufacturer Discount Program.
<bullet> ``Date of dispensing'';
We propose to remove the existing definition of ``date of
dispensing'' from Sec. 423.2305 and add it, with revisions, at Sec.
423.100. Specifically, we propose to add at the end of the definition,
``For long-term care and home infusion pharmacies, the date of
dispensing can be interpreted as the date the pharmacy submits the
discounted claim for reimbursement.'' This proposed revision is
consistent with the definition of ``date of dispensing'' used in the
Manufacturer Discount Program Final Guidance and with criteria
established under Sec. 423.2325(g) for the Coverage Gap Discount
Program.
<bullet> ``Labeler code'';
We propose to remove the existing definition of ``labeler code''
from Sec. 423.2305 and add it, with revisions, at Sec. 423.100.
Specifically, we propose to remove the phrase ``Food and Drug
Administration'' for conciseness and accuracy.
<bullet> ``Manufacturer'';
We propose to remove the existing definition of ``manufacturer''
from Sec. 423.2305 and add it at Sec. 423.100 with a revision
removing the phrase ``Discount Program'' and adding in its place the
phrase ``Coverage Gap Discount Program and the Manufacturer Discount
Program'' for accuracy.
<bullet> ``Manufacturer Discount Program'';
We propose to define ``Manufacturer Discount Program'' as the
Medicare Part D Manufacturer Discount Program established under section
1860D-14C of the Act.
<bullet> ``Manufacturer Discount Program agreement'';
We propose to define ``Manufacturer Discount Program agreement'' as
the agreement described at section 1860D-14C(b) of the Act.
<bullet> ``Medicare Coverage Gap Discount Program'';
We propose to remove the definition of ``Medicare Coverage Gap
Discount Program'' from Sec. 423.2305 and add it at Sec. 423.100,
with revisions to remove the phrase ``Program (or Discount Program)''
and add in its place the phrase ``Program (or Coverage Gap Discount
Program)''.
<bullet> ``Medicare Coverage Gap Discount Program agreement'';
We propose to remove the definition of ``Medicare Coverage Gap
Discount Program agreement'' from Sec. 423.2305 and add it at Sec.
423.100 with revisions to remove the phrase ``Program agreement (or
Discount Program agreement)'' and add in its place the phrase ``Program
agreement (or Coverage Gap Discount Program agreement)''.
<bullet> ``National Drug Code (NDC)''; and
We propose to remove the definition of ``National Drug Code'' from
Sec. 423.2305 and add it at Sec. 423.100 with revisions to remove the
phrase ``the product'' and add in its place the phrase ``the product's
manufacturer, product''. This proposed revision aligns with the
definition of NDC used in the Manufacturer Discount Program Final
Guidance.
<bullet> ``Non-applicable drug'';
We propose to define ``non-applicable drug'' to mean any Part D
drug that is not an applicable drug and not a selected drug during a
price applicability period with respect to such drug.
<bullet> ``Price applicability period'';
We propose to define ``price applicability period'' as having the
[[Page 54917]]
meaning given such term in section 1191(b)(2) of the Act and any
applicable regulations and guidance.
<bullet> ``Selected drug''; and
We propose to define ``selected drug'' as having the meaning given
such term in section 1192(c) of the Act and any applicable regulations
and guidance. Such definition aligns with the definition used in the
Manufacturer Discount Program Final Guidance.
<bullet> ``Third Party Administrator (TPA)''.
We propose to add at Sec. 423.100 the definition of ``Third Party
Administrator'' that we propose to remove from Sec. 423.2305, with
revisions. Specifically, we propose to remove the phrase ``section
1860D-14A of the Act'' and add in its place the phrase ``sections
1860D-14A and 1860D-14C of the Act''.
At Sec. 423.1002, we propose to revise the existing definition of
``affected party'' to account for the definition of ``manufacturer''
under the Coverage Gap Discount Program and the definition of
``agreement holder'' under the Manufacturer Discount Program.
Specifically, we propose that affected party means any Part D sponsor
or, for purposes of the Coverage Gap Discount Program, any manufacturer
(as defined in Sec. 423.100), or, for purposes of the Manufacturer
Discount Program, any manufacturer that is an agreement holder (as
defined in Sec. 423.2704), impacted by an initial determination or, if
applicable, by a subsequent determination or decision issued under this
part, and ``party'' means the affected party or CMS, as appropriate.
We propose to remove the following definitions from Sec. 423.2305
because, as noted previously, we propose to add definitions for such
terms at Sec. 423.100, for purposes of incorporating the Manufacturer
Discount Program:
<bullet> ``Applicable number of calendar days'';
<bullet> ``Date of dispensing'';
<bullet> ``Labeler code'';
<bullet> ``Manufacturer'';
<bullet> ``Medicare Coverage Gap Discount Program'';
<bullet> ``Medicare Coverage Gap Discount Program Agreement'';
<bullet> ``National Drug Code (NDC)''; and
<bullet> ``Third Party Administrator (TPA)''.
At Sec. 423.2704, we propose to define the following terms for
purposes of proposed subpart AA and the Manufacturer Discount Program:
<bullet> ``Agreement holder'';
We propose to define ``agreement holder'' as a manufacturer that
has executed and has in effect its own Manufacturer Discount Program
agreement in accordance with Sec. 423.2708(b)(1).
<bullet> ``Applicable discount'';
We propose to define ``applicable discount'' as having the meaning
set forth at Sec. 423.2712.
<bullet> ``Applicable LIS percent'';
We propose to define ``applicable LIS percent'' as having the
meaning set forth at Sec. 423.2712(d)(1).
<bullet> ``Applicable small manufacturer percent'';
We propose to define ``applicable small manufacturer percent'' as
having the meaning set forth at Sec. 423.2712(d)(2).
<bullet> ``Covered Part D drug'';
We propose to define ``covered Part D drug'' as having the meaning
set forth at Sec. 423.100.
<bullet> ``Dispute submission deadline'';
We propose to define ``dispute submission deadline'' as the date
that is 60 calendar days from the date of the invoice containing the
information that is the subject of the agreement holder's dispute.
<bullet> ``Negotiated price'';
We propose to define ``negotiated price'' as having the meaning set
forth at Sec. 423.100, and with respect to an applicable drug under
the Manufacturer Discount Program, such negotiated price includes any
dispensing fee and, if applicable, any vaccine administration fee and
sales tax.
<bullet> ``Network pharmacy'';
We propose to define ``network pharmacy'' as having the meaning set
forth at Sec. 423.100.
<bullet> ``Part D drug'';
We propose to define ``Part D drug'' as having the meaning set
forth at Sec. 423.100.
<bullet> ``Primary manufacturer'';
We propose to define ``primary manufacturer'' as having the meaning
given such term pursuant to applicable regulations and guidance for the
Medicare Drug Price Negotiation Program.
<bullet> ``Specified drug'';
We propose to define ``specified drug'' as meaning, with respect to
a specified manufacturer, for 2021, an applicable drug that is
produced, prepared, propagated, compounded, converted, or processed by
the specified manufacturer.
<bullet> ``Specified small manufacturer drug''; and
We propose to define ``specified small manufacturer drug'' as
meaning, with respect to a specified small manufacturer, for 2021, an
applicable drug that is produced, prepared, propagated, compounded,
converted, or processed by the specified small manufacturer.
<bullet> ``Total expenditures''.
We propose to define ``total expenditures'' as meaning, with
respect to Part D, the total gross covered prescription drug costs, as
defined in Sec. 423.308; and as meaning, with respect to Part B, the
total Medicare allowed amount (that is, total allowed charges),
inclusive of beneficiary cost sharing, for Part B drugs and
biologicals, except that expenditures for a drug or biological that are
bundled or packaged into the payment for another service are excluded.
4. Conditions for Coverage of Drugs Under Part D (Sec. 423.2708)
Section 1860D-43(a) of the Act, as amended by the IRA, specifies
that, beginning January 1, 2025, in order for Part D coverage to be
available for the covered Part D drugs of a manufacturer, the
manufacturer must participate in the Manufacturer Discount Program and
have entered into and have in effect a Manufacturer Discount Program
agreement with CMS, as described in section 1860D-14C(b) of the Act.
Operationally, coverage of a drug under a Manufacturer Discount Program
agreement is determined by coverage of its labeler code (as defined at
Sec. 423.100) under such agreement. As discussed in section 40 of the
Manufacturer Discount Program Final Guidance, CMS maintains a list of
all labeler codes that are covered by a Manufacturer Discount Program
agreement, which is updated monthly and posted on the CMS website to
assist Part D sponsors in accurately adjudicating claims at the point
of sale. As described in more detail in section II.C.12. of this
preamble, manufacturers are required to provide CMS with a complete
list of the labeler codes covered under their agreements.
Any Part D drug that is a selected drug during a price
applicability period with respect to such drug, is excluded from the
definition of applicable drug under section 1860D-14C(g)(2)(B) of the
Act and, therefore, not subject to applicable discounts under the
Manufacturer Discount Program when dispensed during a price
applicability period. However, a selected drug would otherwise meet the
definition of an applicable drug, but for it being in a price
applicability period following its selection into the Medicare Drug
Price Negotiation Program. Therefore, applying section 1860D-43(a) of
the Act's coverage exclusion in the absence of a Manufacturer Discount
Program agreement to both applicable drugs and selected drugs provides
incentive for manufacturers of brand name drugs and biological products
to participate in the Manufacturer Discount Program, while not
undermining beneficiary access to generics. Moreover, this
interpretation is consistent with the IRA's addition of
[[Page 54918]]
section 1860D-43(c)(2) of the Act, which prohibits the Secretary from
authorizing coverage for a covered Part D drug of a manufacturer
without a Manufacturer Discount Program agreement for any period
described in section 5000D(c)(1) of the Internal Revenue Code under the
exception for drugs determined to be essential to the health of Part D
enrollees. This provision further demonstrates that the statute does
not allow for a selected drug to be eligible for Part D coverage in the
absence of a Manufacturer Discount Program agreement. As stated in
section 40 of the Manufacturer Discount Program Final Guidance and
consistent with the policy on applicable drugs, beginning January 1,
2025, Part D coverage for selected drugs during a price applicability
period is available only for selected drugs for which the labeler code
is covered by a Manufacturer Discount Program agreement with CMS, as
described in section 1860D-14C(b) of the Act.
Accordingly, at Sec. 423.2708(a), we propose to codify that, in
order for coverage to be available under Part D for a Part D drug of a
manufacturer that is an applicable drug or a selected drug during a
price applicability period:
<bullet> The FDA-assigned labeler code of such drug must be covered
under a Manufacturer Discount Program agreement that is in effect;
<bullet> The manufacturer must participate in the Manufacturer
Discount Program; and
<bullet> The manufacturer must have entered into and have in effect
a Manufacturer Discount Program agreement.
We expect each manufacturer choosing to participate in the
Manufacturer Discount Program to enter into its own Manufacturer
Discount Program agreement with CMS. However, we acknowledge a
longstanding practice where CMS has permitted manufacturers to cover by
their Manufacturer Discount Program agreement (and previously by their
Coverage Gap Discount Program agreement) labeler code(s) assigned by
the FDA to another manufacturer. CMS does not currently and is not
proposing to prohibit this practice, provided all other requirements as
discussed in this proposed rule are met. As such, we clarify that a
manufacturer is considered to participate in the Manufacturer Discount
Program and to have entered into and have in effect a Manufacturer
Discount Program agreement under proposed Sec. 423.2708(a)--and thus,
under section 1860D-43(a) of the Act--if such manufacturer executes and
has in effect its own Manufacturer Discount Program agreement or
participates by means of an arrangement whereby its labeler code(s) is
covered by another manufacturer's Manufacturer Discount Program
agreement that is in effect. We propose to codify this requirement at
Sec. 423.2708(b).
We further clarify that, while a manufacturer that participates in
the Manufacturer Discount Program in accordance with proposed Sec.
423.2708(b)(2) is a participating manufacturer, as described in more
detail in section II.C.12. of this preamble, only the entity that
executes an agreement pursuant to proposed Sec. 423.2708(b)(1) is an
agreement holder (as defined at Sec. 423.2704). Consistent with our
longstanding practice, only the agreement holder is a party to the
Manufacturer Discount Program agreement with CMS, and the agreement
holder is the entity subject to the rights and obligations of the
Manufacturer Discount Program agreement, including the obligation to
pay all invoiced amounts under such agreement.
In accordance with section 1860D-43(c)(1)(A) of the Act, we propose
to codify at Sec. 423.2708(c) that an applicable drug of a
manufacturer that does not participate in the Manufacturer Discount
Program or has not entered into and does not have in effect a
Manufacturer Discount Program agreement under section 1860D-14C(b) of
the Act is not excluded from Part D coverage if CMS has made a
determination that the availability of the applicable drug is essential
to the health of Part D enrollees. In addition, we propose to codify
that, as specified in section 1860D-43(c)(2) of the Act, this exception
to the exclusion from Part D coverage does not apply to any applicable
drug or selected drug of a manufacturer for any period described in
section 5000D(c)(1) of the Internal Revenue Code of 1986 with respect
to such manufacturer.
Consistent with our prior interpretation of section 1860D-43(a) of
the Act under the Coverage Gap Discount Program, for purposes of the
Manufacturer Discount Program, the exclusion from Part D coverage
applies only to applicable drugs and selected drugs not covered by a
Manufacturer Discount Program agreement that is fully executed and in
effect. Coverage under Medicare Part D is available to non-applicable
drugs of a manufacturer regardless of whether the manufacturer
participates in the Manufacturer Discount Program or has a Manufacturer
Discount Program agreement in effect.
With regard to the Coverage Gap Discount Program, we previously
explained our interpretation that the conditions for coverage described
in section 1860D-43(a) of the Act must be read together with section
1860D-14A of the Act's provision for Part D coverage of non-applicable
drugs under certain circumstances in the absence of a Coverage Gap
Discount Program agreement (77 FR 22082). The IRA adopted parallel
language for the Manufacturer Discount Program, including section
1860D-14C(f) of the Act, which states that ``[n]othing in this section
shall prevent an applicable beneficiary from purchasing a covered part
D drug that is not an applicable drug (including a generic drug or a
drug that is not on the formulary of the prescription drug plan or MA-
PD plan that the applicable beneficiary is enrolled in).'' For the same
reasons described in the Manufacturer Discount Program Final Guidance
and our prior rulemaking, we propose to adopt the same interpretation
here with regard to the parallel provisions of section 1860D-14C of the
Act. Accordingly, at Sec. 423.2708(d), we propose that non-applicable
drugs, as we propose to define the term in Sec. 423.100, will continue
to be coverable under Part D whether or not the manufacturer
participates in the Manufacturer Discount Program or has a Manufacturer
Discount Program agreement in effect.
5. Applicable Discounts (Sec. 423.2712)
Under the Manufacturer Discount Program, once an enrollee incurs
costs exceeding the annual deductible specified in section 1860D-
2(b)(1) of the Act, that is, the deductible under the defined standard
benefit, manufacturer discounts are available in both the initial and
catastrophic coverage phases of the benefit. The applicable discount
lowers Part D sponsor liability on the negotiated price of the drug.
a. Defined
As described in section 50 of the Manufacturer Discount Program
Final Guidance, for the purposes of the Manufacturer Discount Program,
``applicable discount'' means, subject to the phase-ins and the
straddle claims policy described in this section, with respect to an
applicable drug of a manufacturer dispensed during a year to an
applicable beneficiary (as we propose to define in Sec. 423.100) who
has--
<bullet> Not incurred costs, as determined in accordance with
section 1860D-2(b)(4)(C) of the Act, for covered Part D drugs in the
year that are equal to or exceed the annual out-of-pocket threshold
specified in section 1860D-2(b)(4)(B)(i) of the Act for the year, 10
percent of the negotiated price of such drug; and
[[Page 54919]]
<bullet> Incurred costs, as determined in accordance with section
1860D-2(b)(4)(C) of the Act, for covered Part D drugs in the year that
are equal to or exceed the annual out-of-pocket threshold specified in
section 1860D-2(b)(4)(B)(i) of the Act for the year, 20 percent of the
negotiated price of such drug.
We propose to codify this policy at Sec. 423.2712(a). Consistent
with the statutory requirements and the Manufacturer Discount Program
Final Guidance, the applicable discount is not available until the
enrollee has incurred costs exceeding the annual deductible specified
in section 1860D-2(b)(1) of the Act, regardless of whether the enrollee
has to pay a deductible (for example, through eligibility for an
income-related subsidy or enrollment in an enhanced benefit plan with a
reduced or no deductible, or for a drug that is not subject to the
deductible, such as a covered insulin product or an Advisory Committee
on Immunization Practices (ACIP)-recommended adult vaccine). Because
the applicable discount and enrollee cost sharing are both calculated
based on the negotiated price of the drug, as described in section
II.A. of this proposed rule, the applicable discount will not affect
the application of the standard 25 percent coinsurance under section
1860D-2(b)(2)(A) of the Act or the application of the copayment amount
under section 1860D-2(b)(4)(A) of the Act unless, after the discount is
applied to the negotiated price of the drug, the enrollee cost sharing
specified under the plan would exceed such negotiated price minus the
applicable discount. In such a situation, the enrollee cost sharing
will be the negotiated price minus the applicable discount. We propose
to codify this at Sec. 423.2712(g).
In accordance with section 1860D-14C(c)(1)(C) of the Act, we
propose to codify at Sec. 423.2712(b) our policy that the value of the
discount is calculated before the application of supplemental benefits,
and at Sec. 423.2712(c) that the applicable discount must be
calculated before any coverage or financial assistance under another
health or prescription drug benefit plan or program that provides
prescription drug coverage or financial assistance.
b. Application of Discount Phase-In for Specified Manufacturers and
Specified Small Manufacturers
The IRA provides for lower applicable discounts for certain
manufacturers' applicable drugs marketed as of August 16, 2022, during
a multi-year phase-in period which concludes by 2031. Under section
1860D-14C(g)(4) of the Act, there are two such phase-ins: one for
certain applicable drugs of specified manufacturers dispensed to
applicable beneficiaries who are eligible for LIS under section 1860D-
14(a) of the Act and one for certain applicable drugs of specified
small manufacturers dispensed to all applicable beneficiaries.
The applicable discount paid by specified manufacturers for
specified drugs dispensed to applicable beneficiaries who are eligible
for LIS, referred to in the statute as the ``specified LIS percent,''
is defined in section 1860D-14C(g)(4)(B) of the Act. The discount paid
by specified small manufacturers for specified drugs dispensed to all
applicable beneficiaries, referred to in the statute as the ``specified
small manufacturer percent,'' is defined in section 1860D-14C(g)(4)(C)
of the Act. These provisions, which also set forth the criteria by
which specified manufacturers and specified small manufacturers are
defined, require such manufacturers to pay, when applicable, the
phased-in discount.
(1) Applicable LIS Percent
Under section 1860D-14C(g)(4)(B) of the Act, for an applicable drug
of a specified manufacturer (as described at proposed Sec.
423.2716(a)) that is marketed as of August 16, 2022, and dispensed for
an applicable beneficiary who is a subsidy eligible individual (as
defined in section 1860D-14(a)(3) of the Act), the applicable discount
is as follows:
<bullet> For such individual who has not incurred costs equal to or
exceeding the annual out-of-pocket threshold for the year--
++ For 2025, 1 percent;
++ For 2026, 2 percent;
++ For 2027, 5 percent;
++ For 2028, 8 percent; and
++ For 2029 and each subsequent year, 10 percent.
<bullet> For such individual who has incurred costs equal to or
exceeding the annual out-of-pocket threshold for the year--
++ For 2025, 1 percent;
++ For 2026, 2 percent;
++ For 2027, 5 percent;
++ For 2028, 8 percent;
++ For 2029, 10 percent;
++ For 2030, 15 percent; and
++ For 2031 and each subsequent year, 20 percent.
We propose to codify the policy for the applicable LIS percent at
Sec. 423.2712(d)(1).
(2) Applicable Small Manufacturer Percent
Under section 1860D-14C(g)(4)(C) of the Act, for an applicable drug
of a specified small manufacturer (as described at proposed Sec.
423.2716(b)), that is marketed as of August 16, 2022, and dispensed for
an applicable beneficiary, the applicable discount is as follows:
<bullet> For such individual who has not incurred costs equal to or
exceeding the annual out-of-pocket threshold for the year--
++ For 2025, 1 percent;
++ For 2026, 2 percent;
++ For 2027, 5 percent;
++ For 2028, 8 percent; and
++ For 2029 and each subsequent year, 10 percent; and
<bullet> For such individual who has incurred costs equal to or
exceeding the annual out-of-pocket threshold for the year--
++ For 2025, 1 percent;
++ For 2026, 2 percent;
++ For 2027, 5 percent;
++ For 2028, 8 percent;
++ For 2029, 10 percent;
++ For 2030, 15 percent; and
++ For 2031 and each subsequent year, 20 percent.
We propose to codify the policy for the applicable small
manufacturer percent at Sec. 423.2712(d)(2).
(3) Marketed as of the Date of Enactment
Sections 1860D-14C(g)(4)(B)(i) and 1860D-14C(g)(4)(C)(i) of the Act
limit the application of the discount phase-ins for specified
manufacturers and specified small manufacturers, respectively, to drugs
of such manufacturers that are ``marketed as of the date of enactment''
(that is, August 16, 2022). CMS interprets the reference to a drug that
is marketed as of August 16, 2022 to refer to a drug that was marketed
by the manufacturer on one specific, backward-looking date, that is,
the date of enactment of the IRA. Accordingly, for purposes of
identifying applicable drugs of specified manufacturers and specified
small manufacturers subject to phase-ins, CMS will determine whether an
applicable drug had Part D expenditures on or before August 16, 2022,
and did not have a marketing end date on the FDA NDC SPL Data Elements
File before August 17, 2022.
We propose to codify this requirement at Sec. 423.2712(d)(3).
c. Straddle Claims
In the case of a claim for an applicable drug for an applicable
beneficiary that ``straddles'' multiple phases of the benefit, section
1860D-14C(g)(4)(E) of the Act requires that for claims that do not fall
entirely--
<bullet> Above the annual deductible specified in section 1860D-
2(b)(1) of the
[[Page 54920]]
Act, the manufacturer provides the applicable discount on only the
portion of the negotiated price that falls above the deductible; and
<bullet> Below or entirely above the annual out-of-pocket threshold
specified in section 1860D-2(b)(4)(B)(i) of the Act, the manufacturer
provides the applicable discount on each portion of the negotiated
price in accordance with this section based on the benefit phase into
which each portion of the negotiated price falls.
We propose to codify the policy for straddle claims at Sec.
423.2712(e).
d. Claims Not Subject to Discount
Under the Coverage Gap Discount Program, certain coordination of
benefits and other non-standard Part D claims for applicable drugs were
not subject to manufacturer discounts. In response to the Manufacturer
Discount Program Draft Guidance, released on May 12, 2023, we received
public comments seeking clarification about how to calculate
manufacturer discounts under the Manufacturer Discount Program in
certain situations involving coordination of Part D with other benefits
and non-standard format claims. In the Manufacturer Discount Program
Final Guidance, CMS responded to those comments by clarifying that
discounts are not paid on Medicare Secondary Payer (MSP) claims or
Medicaid subrogation claims involving an applicable drug.
As described in section 60.1.4 of the Manufacturer Discount Program
Final Guidance, discounts are not applied to MSP claims under the
Manufacturer Discount Program because CMS is unable to ascertain from
the PDE how much liability, if any, the Part D sponsor has on such
claims. Discounts are not applied to Medicaid subrogation claims under
the Manufacturer Discount Program because drug costs reported on such
claims are accounted for during the payment reconciliation process as
contributing entirely to Covered D Plan Paid Amounts (CPP). We propose
to codify those policies at Sec. 423.2712(f)(1) and (2), respectively.
The Manufacturer Discount Program Final Guidance also referred to
Indian Health Service (IHS) ``subrogation'' claims as not being subject
to discounts under the Manufacturer Discount Program. We clarify that,
while the guidance specifically referred to IHS claims, our intent was
to adopt the longstanding policy applied under the Coverage Gap
Discount Program where coordination of benefits claims involving payer-
to-payer reconciliation are not subject to manufacturer discounts.
Using an example from Appendix E, Chapter 14, of the Medicare
Prescription Drug Benefit Manual, if a tribal member newly enrolled in
Part D is initially unable to access their Part D benefits through
their Part D plan, the tribe may step in to pay for the individual's
Part D drugs. In this scenario, the tribe is entitled to seek
compensation from the Part D plan once enrollment is confirmed.
Consistent with CMS coordination of benefits requirements at Sec.
423.464, the Part D plan is required to reimburse the tribe when the
tribe has paid primary. In accordance with these requirements, we
propose at Sec. 423.2712(f)(3) to specify that non-standard format
coordination of benefits claims involving an applicable drug are not
subject to discounts under the Manufacturer Discount Program. We
further clarify that claims submitted by a pharmacy operated by IHS,
tribes or tribal organizations, or Urban Indian organizations to a Part
D plan as the primary payer for an applicable drug dispensed to an
applicable beneficiary are subject to discounts under the Manufacturer
Discount Program, consistent with our policy under the Coverage Gap
Discount Program.
Lastly, at Sec. 423.2712(f)(4) we propose to codify our
longstanding policy that manual claims involving an applicable drug
with a service provider identification qualifier of ``Other'' are not
subject to discounts under the Manufacturer Discount Program. Because
PDE records for such claims do not have a service provider identifier,
there is no way to furnish the manufacturer with an invoice containing
all of the required data elements necessary for manufacturer review to
confirm or dispute the validity of the dispensing entity. Section
II.C.13.a. of this preamble contains a more detailed discussion of the
required data elements for manufacturer invoices.
As discussed in section II.C.3. of this preamble, compounded drug
products are excluded from the definition of applicable drug that we
propose to revise at Sec. 423.100; as such, claims for Part D
compounds are not subject to discounts under the Manufacturer Discount
Program.
6. Phase-In of Applicable Discounts (Sec. Sec. 423.2716 Through
423.2728)
As discussed in sections 50.1.1 and 50.1.2 of the Manufacturer
Discount Program Final Guidance, the IRA establishes lower percentages
for discounts on applicable drugs that are subject to phase-ins for
specified manufacturers and specified small manufacturers. Since the
discount reduces the plan liability for applicable drugs, Part D
sponsors are responsible for covering the remaining amount of the
negotiated price, less enrollee cost sharing, for applicable drugs
subject to a phased-in discount percentage as discussed in this
section. For example, the applicable discount for applicable drugs in
the initial coverage phase is 10 percent. In 2025, the applicable LIS
percent for a specified drug dispensed to an LIS enrollee during the
initial coverage phase is 1 percent. In a defined standard plan, the
plan liability in the initial coverage phase is 75 percent of the
negotiated price before the discount. With a 10 percent applicable
discount, the plan liability would be reduced to 65 percent of the
negotiated price. With a 1 percent applicable LIS percent in 2025, the
plan liability would be reduced to 74 percent of the negotiated price.
Section 1860D-14C(b)(1)(A) of the Act specifies that a Manufacturer
Discount Program agreement shall require the agreement holder to
provide discounted prices for applicable drugs covered by its agreement
when dispensed to applicable beneficiaries. The IRA does not provide a
mechanism by which CMS could permit specified manufacturers or
specified small manufacturers to ``opt out'' of the phase-in discounts.
At Sec. 423.2716, we propose to codify, without modification, the
criteria for phase-in eligibility for specified manufacturers and
specified small manufacturers established in the Manufacturer Discount
Program Final Guidance.
a. Specified Manufacturer
Pursuant to section 1860D-14C(g)(4)(B)(ii) of the Act, a specified
manufacturer is a manufacturer of an applicable drug that, in 2021
had--
<bullet> A Coverage Gap Discount Program agreement in effect; \19\
---------------------------------------------------------------------------
\19\ A manufacturer that participated in the Coverage Gap
Discount Program in 2021 by means of an arrangement whereby its
labeler code(s) were listed on another manufacturer's Coverage Gap
Discount Program agreement would be considered to have had an
agreement in effect during 2021. See November 17, 2023 HPMS
memorandum entitled, ``Medicare Part D Manufacturer Discount
Program: Methodology for Identifying Specified Manufacturers and
Specified Small Manufacturers'' for more information.
---------------------------------------------------------------------------
<bullet> Total expenditures for all of its specified drugs (as
proposed at Sec. 423.2704) covered by a Coverage Gap Discount Program
agreement for 2021 and covered under Part D in 2021 represented less
than 1.0 percent of total expenditures for all Part D drugs in 2021;
and
<bullet> Total expenditures for all of its specified drugs that are
single source
[[Page 54921]]
drugs and biological products for which payment may be made under Part
B in 2021 represented less than 1.0 percent of the total expenditures
under Part B for all drugs or biological products in 2021.
Pursuant to the aggregation rule set forth in section 1860D-
14C(g)(4)(B)(ii)(II)(bb) of the Act, all entities, including
corporations, partnerships, proprietorships, and other entities treated
as a single employer under subsection (a) or (b) of section 52 of the
Internal Revenue Code of 1986 are treated as one manufacturer for
purposes of this section. Our proposed definition of specified
manufacturer is subject to the limitation with respect to manufacturer
acquisitions proposed at Sec. 423.2724 and discussed in section
II.C.6.d. of this preamble.
The eligibility criteria for specified manufacturers are proposed
at Sec. 423.2716(a) and the aggregation rule is proposed at Sec.
423.2716(c).
b. Specified Small Manufacturer
Pursuant to section 1860D-14C(g)(4)(C)(ii) of the Act, a specified
small manufacturer is a manufacturer of an applicable drug that, in
2021--
<bullet> Is a specified manufacturer as described at proposed Sec.
423.2716(a); and
<bullet> The total expenditures under Part D for any one of its
specified small manufacturer drugs (as defined in Sec. 423.2704)
covered under a Coverage Gap Discount Program agreement for 2021 and
covered under Part D in 2021 are equal to or greater than 80 percent of
the total expenditures for all its specified small manufacturer drugs
covered under Part D in 2021.
Pursuant to the aggregation rule set forth in section 1860D-
14C(g)(4)(C)(ii)(II)(bb) of the Act, all entities, including
corporations, partnerships, proprietorships, and other entities treated
as a single employer under subsection (a) or (b) of section 52 of the
Internal Revenue Code of 1986 are treated as one manufacturer for
purposes of this section. Our proposed definition of specified small
manufacturer is subject to the limitation with respect to manufacturer
acquisitions proposed at Sec. 423.2724 and discussed in section
II.C.6.d. of this preamble.
The eligibility criteria for specified small manufacturers are
proposed at Sec. 423.2716(b) and the aggregation rule is proposed at
Sec. 423.2716(c).
c. Determination of Phase-In Eligibility
As discussed in section 50.1 of the Manufacturer Discount Program
Final Guidance, CMS identifies which manufacturers qualify for phase-
ins by analyzing Medicare Part B claims data, Part D PDE data, and
ownership information submitted by manufacturers. All manufacturers
that sign a Manufacturer Discount Program agreement that takes effect
prior to the end of the phase-in periods will be considered and do not
need to submit a separate application. Our policy describing the
methodology used to identify manufacturers eligible for phase-ins was
provided in the November 17, 2023 HPMS memorandum titled ``Medicare
Part D Manufacturer Discount Program: Methodology for Identifying
Specified Manufacturers and Specified Small Manufacturers''
(Manufacturer Discount Program Methodology).
The phase-in determination is a one-time assessment that CMS
performs with respect to each manufacturer when it executes a
Manufacturer Discount Agreement or when a manufacturer's labeler
code(s) is first added to another manufacturer's Manufacturer Discount
Program agreement. As such, the phase-in statuses have already been
determined for likely the vast majority of manufacturers that will
participate in the Manufacturer Discount Program during the phase-in
periods (that is, through 2030). Codifying the methodology described in
the Manufacturer Discount Program Methodology for identifying specified
manufacturers and specified small manufacturers ensures consistency
across the program by applying the same methodology to future cases of
new phase-in determinations to be made under the regulations proposed
in this rule (for example, when a new manufacturer enters into a
Manufacturer Discount Program agreement with respect to 2027 or
thereafter) as the methodology that was applied to the manufacturers
currently participating in the Manufacturer Discount Program. We are
proposing to codify such methodology at Sec. 423.2720.
Specifically, we propose to codify at Sec. 423.2720 that for each
manufacturer with one or more FDA-assigned labeler codes covered by a
Manufacturer Discount Program agreement, CMS will determine whether the
manufacturer is a specified manufacturer or a specified small
manufacturer when the manufacturer executes a Manufacturer Discount
Program agreement, or, in the case of a manufacturer whose FDA-assigned
labeler code(s) is covered by another manufacturer's Manufacturer
Discount Program agreement, when such labeler code(s) is first added to
such agreement. In addition, we propose to codify that in applying the
aggregation rule at Sec. 423.2716(c), CMS will attribute expenditures
for a drug to a manufacturer based on the NDC(s) for the drug, as
reported on PDE records. Specifically, CMS will match the labeler code
extracted from the first 5 digits of each NDC to the manufacturer to
whom the labeler code is assigned by the FDA.
As discussed in detail later in this section, we propose at
paragraph (a) of Sec. 423.2720 the methodology for identifying
``specified manufacturers'', at paragraph (b) of Sec. 423.2720 the
methodology for identifying ``specified small manufacturers'', and at
paragraph (c) the approach CMS will use to issue the phase-in
determination notices once a phase-in determination is made.
For identification of a specified manufacturer, we propose to
codify at Sec. 423.2720(a)(1) that a manufacturer is considered to
have had a Coverage Gap Discount Program agreement in 2021, as
specified at Sec. 423.2716(a)(1), if the manufacturer (i) had a
Coverage Gap Discount Program agreement in effect during 2021, or (ii)
participated in the Coverage Gap Discount Program in 2021 by means of
an arrangement whereby its labeler code(s) was covered by another
manufacturer's Coverage Gap Discount Program agreement in effect during
2021.
As described in the Manufacturer Discount Program Methodology, CMS
will calculate the three values needed for determining which
manufacturers that had a Coverage Gap Discount Program agreement in
2021 are specified manufacturers and specified small manufacturers. The
three values are:
<bullet> The manufacturer's percent share of Part D total
expenditures,
<bullet> The manufacturer's percent share of Part B total
expenditures, and
<bullet> Each drug's percent share of the specified manufacturer's
Part D total expenditures.
The first value that needs to be determined is each manufacturer's
share of Part D total expenditures, which will be used to determine if
the manufacturer's total expenditures for all of its applicable drugs
covered under a Coverage Gap Discount Program agreement(s) for 2021,
and covered under Part D in 2021, represented less than 1.0 percent of
total expenditures for all Part D drugs in 2021. CMS will identify
manufacturers that meet this threshold for the specified manufacturer
phase-in by first summing the 2021 Part D total expenditures for Part D
drugs, then summing the 2021 Part D total expenditures for applicable
drugs for each manufacturer, and finally, identifying each manufacturer
for which 2021 Part D total expenditures for applicable drugs are less
than 1.0
[[Page 54922]]
percent of all 2021 Part D total expenditures.
The first step is to calculate the Part D total expenditures for
2021. We will calculate the Part D total expenditures for 2021 reported
on all final action,\20\ non-delete Prescription Drug Event (PDE)
records submitted as of June 30, 2022, which represents the annual PDE
data submission deadline for Part D payment reconciliation, for all
Part D drugs dispensed in benefit year 2021. This value represents the
Part D total expenditures and will be used as the denominator when
calculating the percent share of Part D total expenditures attributable
to each manufacturer's applicable drugs in step 3 below.
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\20\ CMS uses the term ``final action'' to describe the most
recently accepted original, adjustment, or delete PDE record
representing a single dispensing event. See the 2011 Regional
Prescription Drug Event Data Technical Assistance Participant Guide,
page 3-29, available at https://www.csscoperations.com/internet/
csscw3.nsf/DIDC/
FJUKANFCP1~Prescription%20Drug%20Program%20(Part%20D)~Training.
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The second step is to calculate each manufacturer's Part D total
expenditures for applicable drugs for 2021. For purposes of calculating
each manufacturer's Part D total expenditures for applicable drugs, CMS
will identify the National Drug Codes (NDCs) attributable to the
manufacturer that hav
[…truncated; see source link]Indexed from Federal Register on November 28, 2025.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.