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Rule2026-06600

Medicare Program; Contract Year 2027 and Certain Contract Year 2026 Policy and Technical Changes to the Medicare Advantage Program, Medicare Prescription Drug Benefit Program, and Medicare Cost Plan Program

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Published

April 6, 2026

Effective

June 1, 2026

Issuing agencies

Health and Human Services DepartmentCenters for Medicare & Medicaid Services

Abstract

This final rule revises 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.

Full Text

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<title>Federal Register, Volume 91 Issue 65 (Monday, April 6, 2026)</title>
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[Federal Register Volume 91, Number 65 (Monday, April 6, 2026)]
[Rules and Regulations]
[Pages 17384-17602]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-06600]

[[Page 17383]]

Vol. 91

Monday,

No. 65

April 6, 2026

Part III

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 and Certain Contract Year 2026
Policy and Technical Changes to the Medicare Advantage Program,
Medicare Prescription Drug Benefit Program, and Medicare Cost Plan
Program; Final Rule

Federal Register / Vol. 91 , No. 65 / Monday, April 6, 2026 / Rules
and Regulations

[[Page 17384]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 422 and 423

[CMS-4208-F3 and CMS-4212-F]
RIN 0938-AV40 and 0938-AV63

Medicare Program; Contract Year 2027 and Certain Contract Year
2026 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: Final rule.

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SUMMARY: This final rule revises 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:
Effective date: These regulations are effective June 1, 2026.
Applicability date: These regulations are applicable to coverage
beginning January 1, 2027.

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 Gross, (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#6f3f0e1d1b2c0e010b2b3c1b0e1d3d0e1b0601081c2f0c021c4107071c41080019">[email&#160;protected]</a>--Parts C and D Star Ratings Issues.
<a href="/cdn-cgi/l/email-protection#56151b1b1f091b17052224372233312f16353b25783e3e2578313920">[email&#160;protected]</a>--RFI on Future Directions in Medicare
Advantage
<a href="/cdn-cgi/l/email-protection#86c5d6cfd9d6e7f4f2c5a0c2d9d4e3e1cff5f5f3e3f5c6e5ebf5a8eeeef5a8e1e9f0">[email&#160;protected]</a>--Part D Program Integrity Issues

SUPPLEMENTARY INFORMATION:

I. Executive Summary

A. Purpose

The primary purpose of this 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 rule
includes a number of changes that would improve these programs for
contract year 2027 as well as codify existing subregulatory guidance.
We note that, as with previous rules, the new marketing and
communications policies in this rule are applicable for all contract
year 2027 marketing and communications, beginning October 1, 2026.

B. Summary of the Key Provisions

1. Medicare Part D Redesign
We are implementing 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 codifying the statutory changes to the phases of the Part D
benefit made by the IRA related to the deductible, the 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 D benefit, we are also codifying technical and
conforming changes to our specialty tier regulations. We are codifying
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 are codifying 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 are revising Sec. 423.2300 by
adding paragraph (b) to establish applicability dates for the Coverage
Gap Discount Program, revising Sec. 423.2345 by adding paragraph (f)
to terminate all Coverage Gap Discount Program agreements, and making
conforming changes for clarity.
3. Manufacturer Discount Program
We are codifying 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
are adding new subpart AA to part 423 to codify the Manufacturer
Discount Program requirements and are making 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 final rule, we are finalizing changes to simplify and refocus the
areas included in the Star Ratings, including changes to the measure
set with the exception of the Diabetes Care--Eye Exam measure which
will remain in the Star Ratings. We are also finalizing that we will
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 will 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 appreciate commenters' suggestions
on ways to further simplify and modify the Star Ratings program to
further drive improved quality of care and reduce regulatory burden.
The measure removals will apply (that is, data will be collected
and performance measured) for the 2027 measurement period and the 2029
Star Ratings, except for the Call Center--Foreign Language Interpreter
and TTY Availability (Part C and D) measures and the Statin Therapy for
Patients with Cardiovascular Disease (Part C) measure, which will apply
beginning with the 2028 Star Ratings. Not proceeding with the HEI
reward and maintaining the historical reward factor, finalizing
additional information about the data available to Medicare Advantage
(MA) organizations and Part D sponsors during the plan preview periods
before each Star Ratings release at Sec. Sec. 422.166(h)(2) and
423.186(h)(2), and clarifying the process for measure

[[Page 17385]]

removals at Sec. Sec. 422.164(e)(2), 422.164(e)(3), 423.184(e)(2) and
423.184(e)(2), will be applicable upon the effective date of this final
rule and apply beginning with the 2027 Star Ratings. We are also
finalizing the technical clarification proposed in the Medicare and
Medicaid Programs; 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 proposed rule, which appeared in the Federal Register
on December 10, 2024 (89 FR 99340) (hereinafter referred to as the
``Contract Year 2026 proposed rule'') to provide details about how the
enrollment-weighted measure score is calculated when a consumed or
surviving contract is missing data for a measure; this provision will
be applicable upon the effective date of this final rule and apply
beginning with the 2027 Star Ratings.
5. Provisions Related to Supplemental Benefits Being Finalized From the
Contract Year 2026 Proposed Rule
In the Contract Year 2026 proposed rule (89 FR 99340), we proposed
several policies that were not finalized at that time, some of which
are being finalized in this CY 2027 final rule. Specifically, we
proposed to strengthen the administration of Special Supplemental
Benefits for the Chronically Ill (SSBCI) by increasing transparency and
clarifying eligibility requirements, including a requirement to make
plan-developed SSBCI eligibility criteria publicly available; we are
finalizing this provision as proposed. We also proposed to codify and
clarify requirements for the administration of supplemental benefits
through debit cards to promote transparency, consistency, and program
integrity, and are finalizing this proposal with modifications,
including not finalizing the proposed prohibition on marketing the
dollar value of supplemental benefits. We are finalizing these
proposals to support beneficiary access, informed choice, and
appropriate administration of MA benefits.

C. Summary of Costs and Benefits

BILLING CODE --P

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[GRAPHIC] [TIFF OMITTED] TR06AP26.027

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BILLING CODE ????-??-C

D. Publication of the Proposed Rule, Responding to Public Comments,
Finalization of Proposed Provisions, and Requests for Information

The proposed rule titled ``Medicare Program; Contract Year 2027
Policy and Technical Changes to the Medicare Advantage Program,
Medicare Prescription Drug Benefit Program, and Medicare Cost Plan
Program,'' appeared in the Federal Register on November 28, 2025 (90 FR
54894) (hereinafter referred to as the ``Contract Year 2027 proposed
rule'').
In response to the Contract Year 2027 proposed rule, we received
approximately 42,632 timely pieces of correspondence containing a
variety of comments on the proposed rule and the requests for
information (RFIs) contained within the rule. Summaries of the public
comments within the scope of the proposed rule and our responses to
those public comments are set forth in the various sections of this
final rule under the appropriate heading. We note that some of the
public comments were outside of the scope of the proposed rule and are
not addressed in this final rule. We also note that we do not respond
specifically to the comments pertaining to the RFIs, but we thank
commenters for their feedback.
In this final rule, CMS is not finalizing the proposal to establish
a special enrollment period for provider terminations and are not
addressing comments received on this proposal. We acknowledge the broad
interest related to this topic and will continue to consider the extent
to which it may be appropriate to engage in future rulemaking in this
area.

E. Conclusion

Finally, we are clarifying and emphasizing our intent that if any
provision of this rule 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 are codifying 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 took effect before the
Contract Year 2027 proposed rule and other changes went into effect in
2026, as described later.
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. 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 for the
first cohort of selected drugs went 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. The IRA made
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 consists
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, we pay a 10 percent subsidy for selected drugs during a
price applicability period. This phase ends when the enrollee has

[[Page 17388]]

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 (FFDCA)
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
provides 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)
We proposed to codify at Sec. Sec. 423.100 and 423.104 changes to
the Part D benefit made by the IRA related to the deductible, the
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 proposed 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 proposed 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 proposed 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 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 also proposed 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 proposed 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

[[Page 17389]]

annual OOP threshold specified in Sec. 423.104(d)(5)(iii).
We also proposed to revise Sec. 423.104(d)(3), which specifies how
the initial coverage limit is determined. We first proposed to remove
the references in Sec. 423.104(d)(3) to paragraphs (d)(4) and (d)(5)
of this section because those 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
proposed 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 also proposed to add new Sec. 423.104(d)(3)(iii)
to state that, for 2025 and each subsequent year, there is no initial
coverage limit.
Finally, we proposed 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 proposed 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 proposed 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 proposed 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 proposed
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
proposed 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 proposed 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.
We proposed 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 proposed 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 proposed 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 proposed 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 proposed 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
proposed 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 proposed 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.

[[Page 17390]]

We proposed 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 proposed 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 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 proposed 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 proposed
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 proposed 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 proposed 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 this final 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 a
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 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 final 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 proposed 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

[[Page 17391]]

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
proposed to revise Sec. 423.104(e)(5) to align our requirements for
alternative prescription drug coverage with the changes made by the
IRA. We proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 proposed 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 did not propose any additional changes to
this section.
Comment: Many comments were supportive of our proposals to codify
the changes to the phases of the Part D benefit made by the IRA. We did
not receive any comments opposed to our codification of these
requirements.
Response: We thank the commenters for their support of our
proposals.
Comment: A few comments expressed support for our proposed revision
to the regulatory text at Sec. 423.104(d)(1) to specify that the
deductible does not apply to ACIP-recommended adult vaccines or covered
insulin products. A commenter encouraged CMS to provide simple and
clear guidance on immunization coverage to plans, their beneficiaries,
as well as the range of providers who serve them.
Response: We thank the commenters for their support of this
proposal. We agree that clear guidance is important to support
implementation of these requirements. We will continue to provide
guidance to Part D plan sponsors, providers, and beneficiaries
regarding coverage of ACIP-recommended adult vaccines as appropriate.
We refer the commenter to <a href="http://Medicare.gov">Medicare.gov</a>, the Medicare Learning Network
Fact Sheet on Medicare Part D Vaccines, and Chapters 5 and 6 of the
Medicare Prescription Drug Benefit Manual for some of our existing
guidance on this topic.\11\
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\11\ MLN Fact Sheet on Part D Vaccines: <a href="https://www.cms.gov/files/document/mln908764-medicare-part-d-vaccines.pdf">https://www.cms.gov/files/document/mln908764-medicare-part-d-vaccines.pdf</a>; Chapter 5:
<a href="https://www.cms.gov/files/document/chapter-5-benefits-and-beneficiary-protection-v92011.pdf">https://www.cms.gov/files/document/chapter-5-benefits-and-beneficiary-protection-v92011.pdf</a>; Chapter 6: <a href="https://www.cms.gov/medicare/prescription-drug-coverage/prescriptiondrugcovcontra/downloads/part-d-benefits-manual-chapter-6.pdf">https://www.cms.gov/medicare/prescription-drug-coverage/prescriptiondrugcovcontra/downloads/part-d-benefits-manual-chapter-6.pdf</a>.
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Comment: Many commenters who were supportive of our proposals to
codify the changes to the phases of the Part D benefit also expressed
concerns about potential unintended consequences of the redesigned Part
D benefit. Commenters stated that the reallocation of financial risk
under the redesigned Part D benefit creates incentives for plans to
control costs through increased utilization management, increased usage
of step therapy protocols, narrower formularies, restricted pharmacy
networks, and reduced coverage for certain brand or specialty drugs.
Several commenters emphasized that, without sufficient safeguards,
these behaviors could undermine the intended affordability and access
benefits of the redesigned Part D benefit. A few commenters highlighted
the potential negative impacts these behaviors may have on high-cost
and medically complex populations, including beneficiaries with end-
stage renal disease (ESRD), hospitalized patients transitioning from
inpatient to outpatient care, and low-income beneficiaries. A commenter
noted that these behaviors may also increase administrative burden for
hospital clinicians, thus delaying treatment initiation and
complicating discharge planning and care coordination.
Due to these concerns, several commenters urged CMS to strengthen
its oversight of Part D plans, particularly with respect to formulary
design, utilization management practices, and appeals processes. A
commenter also urged CMS to require minimum formulary protections for
certain drugs and prohibit Part D plans from removing drugs mid-year in
response to increased plan liability.
A few commenters requested that CMS monitor the impacts on access
to drugs and evaluate whether costs are being shifted to beneficiaries.
A couple of commenters emphasized the importance of monitoring both
standalone prescription drug plans and Medicare Advantage prescription
drug plans. A few commenters also requested that CMS increase
transparency around formulary and evidentiary review findings so
stakeholders can better understand how access is evolving under the
redesigned Part D benefit.
Response: We thank the commenters for their support of our
proposals to codify the changes made by the IRA to the phases of the
Part D benefit. We appreciate the commenters sharing their concerns
regarding potential unintended consequences of the redesigned Part D
benefit, including the possibility that changes in plan liability could
influence formulary design, utilization management practices, and
beneficiary access to prescription drugs. We agree that robust
oversight and monitoring are essential to the successful implementation
of the redesigned Part D benefit, particularly for medically complex
beneficiaries and those transitioning across care settings. We will
continue to monitor the implementation of the redesigned Part D benefit
as part of our ongoing program oversight.
We emphasize that Part D plan sponsors remain subject to existing
statutory and regulatory requirements regarding formulary design,
utilization management, pharmacy access, coverage determinations, and
appeals. We will continue to oversee plan compliance with these
requirements and monitor plan behavior through our comprehensive
clinical formulary review process, which includes

[[Page 17392]]

evaluation of tier placement and utilization management restrictions
and criteria.
We note that there are several longstanding statutory and
regulatory safeguards in place to protect beneficiary access to
critical medications. Section 1860D-11(e)(2)(D)(i) of the Act and Sec.
423.272(b)(2)(i) require that CMS not approve a bid from a Part D
sponsor if the design of its plan and its benefits, including its
formulary structure and utilization management program, are ``likely to
substantially discourage enrollment by certain Part D eligible
individuals.'' In addition, Sec. 423.120(b) establishes requirements
for Part D formularies, including the requirement at Sec.
423.120(b)(2)(i) that formularies include at least two Part D drugs
within each therapeutic category and class. Section 1860D-4(b)(3)(G) of
the Act and Sec. 423.120(b)(2)(v) further require Part D sponsors to
include all covered Part D drugs in the classes and categories of
clinical concern identified by the Secretary, with limited exceptions
as described in Sec. 423.120(b)(2)(vi) and Chapter 6, Section 30.2.5
of the Medicare Prescription Drug Benefit Manual. Finally, Sec.
423.120(e) limits the circumstances under which a Part D sponsor may
make negative formulary changes during a contract year.
We appreciate the commenters' recommendations regarding
transparency and will consider appropriate opportunities to share
additional information regarding the formulary review and oversight
process in the future.
Comment: Several commenters requested that we develop clear and
simple beneficiary communications about the changes to the Part D
benefit. The commenters stated that beneficiaries and their caregivers
must understand how costs accrue over the plan year, what payments
count towards the annual OOP threshold, how catastrophic coverage
works, and what costs to expect across benefit phases. Another
commenter recommended that CMS encourage plans to use mobile
applications and digital tools for beneficiary education on the new
benefit structure.
Response: We thank the commenters for their suggestions. We agree
that beneficiary education and clear communication are critical to the
successful implementation of the redesigned Part D benefit. We will
continue to support the development of educational materials to help
beneficiaries understand the redesigned Part D benefit. We encourage
the commenters to refer beneficiaries to the Medicare & You Handbook,
which provides general information on Medicare benefits, costs, rights,
and protections; the Evidence of Coverage document provided by their
Part D plan, which provides details on what their plan covers, how much
they will pay, how to file a complaint, and more; and Medicare Plan
Finder on <a href="http://Medicare.gov">Medicare.gov</a> which allows users to compare Medicare health
and drug plans in their area and compare costs.
Comment: A commenter requested that CMS establish a formal
mechanism for patients and patient advocacy organizations to
communicate directly with CMS, including any barriers to getting
prescribed medications when enrollees need them. Another commenter
urged CMS to commit to ongoing provider and hospital engagement as part
of a long-term monitoring and evaluation strategy for the Part D
redesign. The commenter noted that hospitals and frontline clinicians
are uniquely positioned to identify access barriers and unintended
consequences as they emerge and that their input should be
systematically incorporated into CMS oversight frameworks.
Response: We appreciate the commenters' recommendations. There are
multiple avenues through which beneficiaries, providers, and other
stakeholders may raise concerns regarding access to prescription drugs,
including through the grievance, coverage determination, or appeals
processes, consistent with the requirements outlined in 42 CFR part
423, subpart M. Beneficiaries may also submit inquiries, complaints,
grievances, appeals, and requests for information to the Medicare
Beneficiary Ombudsman and 1-800-MEDICARE. Additionally, we developed
the Complaint Tracking Module (CTM) in the Health Plan Management
System (HPMS) to track complaints received by CMS from beneficiaries,
providers, and their representatives regarding specific plans.
Complaints are recorded in the CTM and assigned to the appropriate plan
and, as required under the contract provisions established at Sec.
422.504(a)(15) and Sec. 423.505(b)(22), plans are required to address
and resolve the complaints received by CMS against them in the CTM.
Plans must also adhere to the timelines to resolve complaints in
compliance with Sec. 422.125 and Sec. 423.129. We will consider
additional opportunities to engage with stakeholders as part of our
ongoing oversight of the Part D program as appropriate.
Comment: A commenter who supported CMS's proposal to codify the
Part D benefit changes also expressed concerns about the unintended
consequences of the IRA's changes. The commenter stated that plans have
experienced higher-than-anticipated costs due to changes in plan
liability, higher utilization among beneficiaries reaching the out-of-
pocket cap, and continued growth in the prescription drug pipeline. The
commenter noted that if current utilization trends continue, there may
be additional pressure on bids in CY 2027.
The commenter expressed prior concerns related to premium increases
resulting from the Part D benefit redesign. They noted that they
appreciated CMS's voluntary Part D Premium Stabilization Demonstration
but indicated that additional policy changes are needed to assist Part
D plan sponsors in preserving the affordability historically associated
with Part D plans. Specifically, the commenter recommended
modifications to the RxHCC model, including incorporating Direct and
Indirect Remuneration (DIR) into the model and using drug utilization
to better account for variation in drug costs among beneficiaries.
The commenter also urged CMS to provide additional flexibility to
Part D plans to manage costs by streamlining regulations and reducing
administrative burdens.
Response: CMS acknowledges the commenter's concerns about balancing
changes in plan liability under the Part D redesign with a need to
preserve affordability for Part D enrollees. We will continue to
monitor impacts of the redesigned Part D benefit and seek to identify
opportunities to improve program efficiency and reduce unnecessary
administrative burden. We appreciate the commenter's recommendations on
streamlining regulations and reducing administrative burden and will
consider this feedback in future rulemaking as appropriate. However, we
note that changes to the RxHCC model are outside the scope of this
rulemaking.
After consideration of the public comments we received, we are
finalizing these proposals as proposed.
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-

[[Page 17393]]

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.
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.
As described further later, 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 the Contract Year 2027 proposed rule, we
proposed 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 proposed 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 proposed to correct this inadvertent
technical error.
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 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), 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 went 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 proposed to revise Sec. 423.104(d)(2)(iv)(B)(1) and (2)
by adding language to allow CMS to reduce the cost threshold under
certain circumstances. Specifically, in paragraph (B)(1) of this
section, we proposed to replace ``increase'' with ``modifies'' and add
``or below'' following ``10 percent above.'' In paragraph (B)(2), we
proposed 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
coinsurance for the beneficiary regardless of the plan deductible,
represented by the following equation:
[GRAPHIC] [TIFF OMITTED] TR06AP26.028

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:

[[Page 17394]]

[GRAPHIC] [TIFF OMITTED] TR06AP26.029

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, under statutory changes made by the IRA, 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>.
---------------------------------------------------------------------------

In accordance with the Final CY 2025 Part D Redesign Program
Instructions, we proposed 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 reflects the defined standard benefit, we
proposed 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 proposed 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 proposed 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] TR06AP26.030

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 2.
[GRAPHIC] [TIFF OMITTED] TR06AP26.031

[[Page 17395]]

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
proposed to codify this methodology for determining specialty-tier
coinsurance/deductible ranges. Thus, we proposed 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 proposed 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.
Comment: We received several comments that were supportive of our
proposal to allow for a decrease in the specialty-tier cost threshold
when market conditions might warrant such a change.
Response: We thank the commenters for their support of our
proposal.
Comment: Several commenters opposed our proposal to allow for a
decrease in the specialty-tier cost threshold when market conditions
might warrant such a change. These commenters stated that lowering the
specialty-tier cost threshold would expand the number of drugs eligible
for placement on the specialty tier and expose beneficiaries to higher
cost sharing. Commenters expressed concern that this would move drugs
from non-specialty tiers with fixed copayments or lower coinsurance
into the specialty tier, resulting in increased and less predictable
out-of-pocket (OOP) costs. A few commenters also noted that because
tiering or cost-sharing exception requests may be denied for specialty-
tier drugs, beneficiaries have no recourse to appeal their cost-sharing
liability, even when the drug is needed for clinical reasons and
expanding their specialty tier would exacerbate these issues.
Some commenters asserted that this proposal would undermine the
goals of the IRA's Part D redesign provisions and prevent beneficiaries
from benefitting from the IRA's affordability protections. Some
commenters further noted that Part D plans have increasingly shifted
from fixed copayments to coinsurance in response to IRA-related
changes, and they argued that allowing the specialty-tier cost
threshold to decrease would exacerbate these trends rather than limit
them.
Several commenters also raised concerns about beneficiary access to
prescription drugs. A few commenters stated that higher specialty-tier
cost sharing contributes to delayed initiation of therapy, treatment
disruptions, and prescription abandonment, particularly for
beneficiaries with serious or complex medical conditions who rely on
specialty drugs as well as those living in long-term care settings.
Additionally, some commenters expressed concern that decreasing the
specialty-tier cost threshold would lead to increased usage of
utilization management, including prior authorization and step therapy,
further limiting access to medically appropriate therapies.
A few commenters raised concerns that lowering the specialty-tier
cost threshold could also increase opportunities for vertically
integrated Pharmacy Benefit Managers (PBMs) to inappropriately steer
beneficiaries toward PBM-affiliated pharmacies or favor higher-cost
drugs on their formularies. These commenters recommended anti-steering
provisions, increased formulary oversight, and other guardrails.
Response: We appreciate the commenters' feedback on our proposal to
allow for a decrease in the specialty-tier cost threshold. We do not
agree that movement of drugs to the specialty tier will necessarily
result in increased beneficiary cost sharing. Under Sec.
423.104(d)(2)(iv)(D)(1) through (3), the maximum allowable cost sharing
for drugs on the specialty tier is set between 25 percent and 33
percent. In contrast, drugs placed on non-preferred tiers may be
subject to coinsurance rates that exceed these limits, up to 50
percent. Further, we do not agree that specialty-tier placement
uniformly increases beneficiary out-of-pocket costs.
As noted by many commentors, more plans are moving non-specialty
drug tiers from a copayment to a coinsurance cost-sharing structure, so
we do not agree that placement on the specialty tier will always result
in a change from a fixed copayment amount to a coinsurance. Placement
on the specialty tier may, in some cases, result in lower cost sharing
than placement on other formulary tiers.
We also note that the specialty-tier cost threshold is established
through a data-driven methodology that examines a year's worth of
prescription drug event (PDE) data to determine the dollar amount
associated with the top one percent of Part D drug claims. This
methodology is intended to ensure that the specialty tier remains
focused on the highest-cost drugs in the program. Historically, the
dollar amount associated with the top one percent of claims has
increased over time, and we do not anticipate that the specialty-tier
cost threshold will decrease in the near term. However, we believe it
is appropriate to maintain regulatory flexibility to account for future
market changes, including those that may result from the increasing
number of drugs subject to negotiation in the Medicare Drug Price
Negotiation Program.
We acknowledge the commenters' concerns regarding affordability and
access, including the interaction between specialty-tier placement,
cost sharing, and utilization management requirements. As discussed
earlier, Part D sponsors remain subject to existing requirements
related to formulary design, utilization management, pharmacy access,
and beneficiary protections. Given that the cost-sharing limits on the
specialty tier are intended to align with the defined standard benefit,
we do not consider placement on the specialty tier to be a cause for
concern regarding access and affordability. In addition, the redesigned
Part D benefit includes affordability protections, such as the reduced
annual out-of-pocket threshold, which will mitigate beneficiary
exposure to high prescription drug costs across the benefit.
Comment: A few commenters who opposed our proposal to allow for a
decrease in the specialty-tier cost threshold urged CMS to establish
clear guardrails before any downward adjustment is made in the future.
These commenters stated that such guardrails should include a
beneficiary impact analysis, advance notice, meaningful stakeholder
input, and strengthened affordability protections so beneficiaries do
not experience higher out-of-pocket costs. Another commenter
recommended that CMS conduct research on the effects of our proposed
regulatory change on patient out-of-pocket costs and health outcomes.
Response: We thank the commenters for their suggestions. We remain
committed to robust oversight and monitoring of Part D formularies and
utilization management practices. If future evidence indicates that
additional safeguards or refinements to our specialty-tier policies are
warranted, we may consider such adjustments in future rulemaking.
Comment: A commenter who supported our proposal to allow for a
decrease in the specialty-tier cost threshold recommended that CMS
establish clear guardrails to ensure that this bidirectional
flexibility does not inadvertently enable routine mid-year tiering
changes or create cost-sharing disruptions.
Response: We thank the commenter for their recommendation. We
clarify that specialty-tier cost threshold adjustments are effective at
the start of a contract year and should not result in mid-year
formulary changes. All

[[Page 17396]]

existing formulary change policies and protections remain in place. As
stated previously, if future evidence indicates that additional
safeguards or refinements to our specialty-tier policies are warranted,
we may consider such adjustments in future rulemaking.
Comment: A commenter requested that we explain why we are retaining
the 33 percent specialty-tier maximum allowable coinsurance when our
calculations show a maximum allowable coinsurance percentage of 32
percent. The commenter noted that CMS reports that this calculation,
using the CY 2025 values of $590 for the defined standard benefit
deductible and $2,000 for the out-of-pocket limit, results in an
effective coinsurance rate of 32.1 percent. The commenter also noted
that the same calculation, using the CY 2026 values of $615 for the
defined standard benefit deductible and $2,100 for the out-of-pocket
limit, results in an effective coinsurance rate of 32.0 percent. By
retaining the 33 percent maximum coinsurance percentage, the commenter
stated that enrollees in Part D plans with deductibles below that of
the defined standard benefit cost-sharing would be charged cost sharing
that is above the effective coinsurance rate, thus, reducing access to
covered Part D drugs and potentially leading to negative health
outcomes. The commenter recommended that CMS set the maximum allowable
coinsurance percentage for the specialty tier at 32 percent.
Response: To maintain continuity in transitioning our specialty-
tier calculation from the prior methodology to the updated methodology
reflecting the redesigned Part D benefit, CMS opted to maintain
consistency in the cost-sharing thresholds compared to the thresholds
prior to redesign. CMS agrees with the commenter's calculations of
effective coinsurance amount. When performing the annual calculation
using updated benefit parameters, we note that the effective
coinsurance amount calculated using the full deductible amount and 25
percent coinsurance results in a value that varies slightly from year
to year. For CY 2025, the calculation resulted in an effective
coinsurance of 32.10 percent compared to 32.04 percent for CY 2026. We
note that similar magnitudes of variance existed in the calculation of
this annual effective coinsurance even before the IRA's changes to the
Part D benefit design went into effect. An alternative approach to the
calculation could use this calculated value as the upper limit to the
specialty tier coinsurance; however CMS opted to use a single value
annually to maintain stability year-over-year. As such, the methodology
laid out in this final rule relies on the effective coinsurance value
of 33 percent as the basis for all calculations. We also note that this
is a mathematical equivalence calculation, for a hypothetical
beneficiary taking only specialty-tier drugs, and not intended to
reflect actuarial equivalence.
Comment: A commenter thanked CMS for the detailed illustrative
example of how the maximum coinsurance percentage would be calculated,
noting that it provides important clarity for plans.
Response: We thank the commenter for their support.
After consideration of the public comments we received, we are
finalizing our specialty-tier proposals as proposed.
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.
As discussed in the Contract Year 2027 proposed rule, section 11201
of 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.
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 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).
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.
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.
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.
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 the Contract Year 2027 proposed rule, we proposed 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

[[Page 17397]]

currently in effect for CY 2026. Specifically, we proposed 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 proposed
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 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.
Comment: Many commenters opposed CMS' proposal to codify the
inclusion of supplemental coverage provided by enhanced alternative
Part D plans in the calculation of TrOOP. Several commenters asserted
that Congress's intent in amending the definition of ``incurred costs''
under section 1860D-2(b)(4)(C)(iii)(II) of the Act was to address the
specific and unique situation of EGWP beneficiaries who faced higher
out-of-pocket costs and longer stays in the coverage gap due to their
supplemental coverage. These commenters asserted that if Congress
intended to include supplemental coverage provided by Part D enhanced
alternative plans in the definition of ``incurred costs,'' they would
have done so explicitly. Several commenters stated that the use of the
term ``insurance'' to describe costs that are included as incurred
costs and the use of the phrase ``coverage provided by a prescription
drug plan or an MA-PD plan'' to describe basic coverage that is not
included as incurred costs illustrates Congress's intent that
supplemental coverage provided by Part D plans should not be included
in TrOOP because Congress typically uses the latter language rather
than the term ``insurance'' to refer to costs incurred by Part D plans,
including supplemental coverage. Commenters suggested that the best
reading of the statutory text is that only ``wrap-around'' benefits
should be added to the definition of incurred costs, and that the
statute's reference to costs ``reimbursed'' through insurance implies a
focus on costs covered through other insurance rather than costs
covered directly by the Part D benefit. A commenter asserted that if
Congress intended to include basic Part D coverage in the scope of
``reimbursed by insurance,'' the same logic should apply to enhanced
alternative coverage, on the grounds that enhanced alternative coverage
is merely a variant design of the same underlying Part D benefit
structure.
Response: CMS thanks the commenters for their input. CMS disagrees
that enhanced alternative supplemental benefits are not included in the
calculation of TrOOP under section 1860D-2(b)(4)(C)(iii) of the Act.
The statute does not draw a distinction between non-Part D commercial
insurance and coverage under Part D when it uses the term ``reimbursed
through insurance' in this provision. 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 plain 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.'' If the provision only included EGWP
supplemental coverage in the definition of costs ``reimbursed through
insurance,'' the statutory text would have done so by explicitly
including EGWP supplemental coverage in the definition of ``costs
reimbursed through insurance'' and expanding the exclusion clause to
apply to both basic prescription drug coverage and enhanced alternative
supplemental coverage. However, the statute does not do so and instead
enacted a broader provision for which the plain text requires any costs
``reimbursed through insurance'' be treated as incurred unless such
costs constitute basic prescription drug coverage provided by a
prescription drug plan or an MA-PD plan. We disagree with the assertion
that if the statute were intended to exclude basic Part D coverage from
the scope of ``reimbursed through insurance,'' the same logic must
apply to enhanced alternative coverage, because the statute draws an
explicit, meaningful distinction between basic and enhanced alternative
coverage. The Part D statute and regulations repeatedly distinguish
between basic and enhanced benefits, given that enhanced alternative
coverage is optional and sponsor-specific.
Comment: Several commenters expressed concern that the inclusion of
supplemental benefits in TrOOP artificially accelerates beneficiaries
through benefit phases into catastrophic coverage, increasing plan,
federal, and manufacturer liability. These commenters asserted that
including supplemental benefits in TrOOP creates distortions in plan
design and undermines market stability. Specifically, a few commenters
suggested that the inclusion of enhanced alternative supplemental
benefits in TrOOP decreases plans' ability to manage beneficiary costs,
increases government spending, increases bid pressure, and may cause
plans to scale back supplemental benefits or exit the PDP market
entirely, ultimately undermining program sustainability.
Response: CMS thanks the commenters for their input. CMS
acknowledges that the inclusion of enhanced alternative supplemental
benefits in TrOOP may affect the incentives available to beneficiaries
enrolled in enhanced alternative plans, including the incentives for
beneficiaries to choose higher-cost drugs over lower-cost ones in
certain circumstances. When beneficiaries move through the benefit
phases more quickly, overall plan liability increases, which may
contribute to increased premium costs for enhanced alternative plans
and affect sponsors' decisions about enhanced alternative plan
offerings. While we cannot definitively attribute these changes to this
policy, as other elements of the Part D redesign may also be
contributing factors, we have seen a notable decline in standalone Part
D-only enhanced alternative plan offerings along with a broader shift
from copayments to coinsurance benefit design since the redesign was
implemented. CMS recognizes stakeholder concerns that the proposed
provision has the potential to increase Part D program costs and
government spending and reduce plan offerings. We note that only a
statutory change would allow CMS to exclude enhanced alternative
supplemental benefits from counting towards TrOOP.
Comment: A couple of commenters requested that CMS clarify whether
manufacturer copayment assistance or patient assistance programs are
considered to be ``certain other third-party payment arrangements''
included as incurred costs for the calculation as TrOOP.
Response: CMS clarifies that manufacturer copayment assistance and

[[Page 17398]]

patient assistance programs do not count as incurred costs for purposes
of TrOOP accumulation, as these programs operate outside of the Part D
benefit.
Comment: Several commenters requested that CMS clarify whether the
proposed provision changes the treatment of supplemental benefits
provided by Puerto Rico Platino plans for the purposes of calculating
TrOOP, and requested that CMS codify current guidance related to the
treatment of supplemental benefits provided by Platino plans in
regulation.
Response: CMS appreciates commenters' request for clarity regarding
the treatment of Puerto Rico Platino wrap-around coverage for purposes
of calculating TrOOP. The proposed changes do not alter the
longstanding treatment of Platino wrap-around coverage funded by the
Commonwealth of Puerto Rico. Platino plans continue to submit Part D
bids with only basic benefits. Under section 1860D-42(a) of the Act and
Sec. 423.859(c), which permits CMS to waive or modify applicable Part
D requirements if CMS determines that waiver or modification is
necessary to secure access to qualified prescription drug coverage for
Part D eligible individuals residing in the territories, Platino wrap-
around coverage count towards the beneficiary's TrOOP. Note that no
other Medicaid assistance counts towards TrOOP, only those payments for
residents of territories that substitute for low-income cost-sharing
subsidies in accordance with the statute. CMS believes that existing
statutory provisions and guidance provide sufficient clarity and
additional rulemaking to codify current guidance related to
supplemental benefits provided by Platino plans is not warranted given
the longstanding nature of the section 1860D-42(a) waiver in place for
Platino wrap-around coverage.
Comment: A few commenters disagreed with the proposal to codify the
exclusion of negative values in the field on the PDE representing
supplemental coverage from the calculation of TrOOP. A commenter stated
that disregarding negative PDE values overstates the value of
supplemental benefits. Another commenter suggested that it could lead
to beneficiary confusion.
Response: CMS thanks the commenters for their input. CMS
acknowledges 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 OOP threshold, which could also lead to beneficiary
confusion and could potentially violate the statutory requirement for
an enrollee to have $0 cost sharing once their incurred costs exceed
the OOP threshold.
Comment: Some commenters supported CMS' proposal to codify the
inclusion of supplemental coverage provided by enhanced alternative
Part D plans in the calculation of TrOOP. These commenters stated that
aligning the regulatory definition of incurred costs with the statutory
amendments provides needed clarity and consistency for beneficiaries,
plans, and other stakeholders.
Response: We thank the commenters for their support.
After considering the comments we received and for the reasons
outlined in the Contract Year 2027 proposed rule and our responses to
comments, we are finalizing the proposed amendments to Sec. Sec.
423.100 and 423.464 without modification.
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.
In the Contract Year 2027 proposed rule, we explained that
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.
We described the policy established in the Final CY 2025 Part D
Redesign Program Instructions for drugs not subject to the defined
standard deductible, which addresses situations where a beneficiary has
not satisfied their plan deductible but has incurred sufficient TrOOP-
eligible costs to satisfy the defined standard deductible, or
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. We
explained that, as established in the Final CY 2025 Part D Redesign
Program Instructions, manufacturer discounts are not available until
cumulative TrOOP-eligible costs meet the defined standard deductible.
Plans that offer a non-defined standard plan deductible are responsible
for the portion of costs that would otherwise be covered by the
discount when 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.
Additionally, we noted that in the Final CY 2026 Part D Redesign
Program Instructions, we stated that this policy also applied in CY
2026 and established that for CY 2026 the policy for drugs not subject
to the defined standard deductible also applies to the selected drug
subsidy

[[Page 17399]]

with respect to selected drugs during a price applicability period. In
the Contract Year 2027 proposed rule, we proposed 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
proposed to codify the policy for drugs not subject to defined standard
deductible at a new Sec. 423.104(j).
Comment: A commenter supported the proposal to codify the policies
outlined in the Final CY 2025 and CY 2026 Part D Redesign Program
Instructions regarding the application of the Manufacturer Discount
Program to drugs that are not subject to the defined standard
deductible. The commenter stated that codifying these policies ensures
clarity, consistency, and effective implementation.
Response: We thank the commenter for their support.
Comment: A commenter recommended that CMS use the beneficiary's
plan deductible as the threshold for becoming an applicable beneficiary
under the Manufacturer Discount Program to alleviate potential
beneficiary confusion, stating that the current approach favors some
beneficiaries over others and ignores plan terms.
Response: Section 1860D-14C(g)(1)(C) 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 Part D 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. As such, once
a beneficiary has incurred sufficient TrOOP-eligible costs to satisfy
the defined standard deductible, they will be an applicable beneficiary
under the Discount Program. Because the threshold for when a
beneficiary becomes an applicable beneficiary is defined in statute,
CMS cannot choose an alternative threshold.
After considering the comments received and for the reasons
outlined in the Contract Year 2027 proposed rule and our responses to
comments, we are finalizing the proposed amendments to Sec. 423.104
without modification.
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 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 accordance with the statute and corresponding regulation, the
following Part D benefit parameters are updated annually using the API:
the standard Part D benefit deductible, the initial coverage limit, the
OOP threshold, maximum copayments below the OOP threshold for low-
income full subsidy eligible enrollees with income less than 150
percent, but greater than 100 percent of Federal Poverty Level (FPL)
not including institutionalized individuals, the RDS cost threshold,
and the RDS cost limit. The CPI is used to update maximum copayments
below the OOP threshold for low-income full subsidy eligible enrollees
with income less than 100 percent of FPL.
In the Contract Year 2027 proposed rule, we explained that 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 the Contract Year 2027
proposed rule, we proposed to codify these methodologies in regulation.
Although we proposed to codify the calculation methodology for the API
and CPI, 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.
Calculation of the Annual Percentage Increase in Drug Expenditures
In the Contract Year 2027 proposed rule, we described the
calculation of the API for Part D as the product of the annual
percentage trend (APT), which is the year-over-year change in total per
capita Part D covered drug expenditures based on PDE data, and a
multiplicative update (MU) factor that incorporates updated data for
prior years into the calculation.
We proposed 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
In the Contract Year 2027 proposed rule, we described the
calculation of the annual percentage increase in the CPI as the product
of an annual percentage trend, which is a year-over-year comparison of
the CPI-U for all items, ending in September, and a multiplicative
update factor that incorporates revisions when estimated CPI values are
replaced with actual BLS data. We explained that this CPI-based update
applies to copayments for the lowest-income dually eligible
beneficiaries (with incomes not exceeding 100 percent of the FPL) to
preserve purchasing power relative to general inflation.
To implement the CPI calculation described previously in our
regulations, we proposed to revise Sec. 423.782(a)(2)(iii)(A) to
include a reference to a new paragraph (d), which we proposed to add at
the end of Sec. 423.782. New 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

[[Page 17400]]

Announcement process described in section 1853(b) of the Act.
Technical Changes
We also proposed two technical changes to Sec. 423.782(b).
Comment: A commenter expressed support for CMS' proposal to codify
the methodologies for calculating the API and CPI used to update Part D
benefit parameters. The commenter stated that the proposal ensures
uniform application of Part D parameter updates across plan sponsors
and benefit years.
Response: CMS thanks the commenter for their support.
After considering the comments we received, we are finalizing the
proposed provisions at Sec. Sec. 423.104 and 423.782 without
modification.
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 (GCPDC) and allowable reinsurance costs for the
purpose of describing the methodology for calculating the reinsurance
payment amount. In the Contract Year 2027 proposed rule, we explained
that GCPDC is defined as the costs incurred under a Part D plan,
excluding administrative costs but including deductible and dispensing-
related costs, regardless of payer, while allowable reinsurance costs
are limited to amounts actually paid net of discounts and rebates. We
further explained that consistent with the statutory and regulatory
definition of GCPDC, manufacturer discounts under the Coverage Gap
Discount Program were included in GCPDC, but the IRA amended the
statute to require inclusion of manufacturer discounts under the new
Manufacturer Discount Program in both GCPDC and allowable reinsurance
costs beginning in 2025. CMS implemented these statutory changes
through the Final CY 2025 Part D Redesign Program Instructions and
Final CY 2026 Part D Redesign Program Instructions.
In the Contract Year 2027 proposed rule, we proposed 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 proposed 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 proposed 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).''
We received no comments on this proposal and are finalizing the
proposed revision at Sec. 423.308 without modification.
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.
Beginning in 2025, the IRA reduced the reinsurance payment amount
for a Part D beneficiary from 80 percent to 20 percent for applicable
drugs or 40 percent for drugs that are not applicable drugs. As we
explained in the Contract Year 2027 proposed rule, we make reinsurance
payments to Part D plan sponsors based on the GCPDC that were actually
paid during the coverage year, meaning that the costs must be actually
incurred by the Part D sponsor and must be net of any direct and
indirect remuneration (DIR). In the Final CY 2025 Part D Redesign
Program Instructions, we established a methodology to calculate
reinsurance subsidies separately for applicable drugs 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. In the Final CY 2026 Part D Redesign Program
Instructions we updated the methodology to account for selected drugs,
which are grouped with non-applicable drugs for purposes of calculating
the reinsurance subsidy. We explained that the Final CY 2026 Part D
Redesign Program Instructions established the process for calculating
reinsurance separately for applicable and non-applicable or selected
drugs, allocating DIR based on each category's share of gross drug
costs in the catastrophic phase, and reconciling the adjusted
reinsurance amounts against prospective payments using NDC-level drug
classifications.
In the Contract Year 2027 proposed rule, we proposed 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 proposed
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.
We received no comments on this proposal and are finalizing the
proposed revisions to Sec. 423.329 without modification.
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. In
the Contract Year 2027 proposed rule, we described the selected drug
subsidy program, under which the Secretary provides Part D plan
sponsors with a subsidy equal to 10 percent of the negotiated price for
selected drugs during a price applicability period dispensed to
applicable beneficiaries below the annual out-of-pocket threshold after
the deductible is met. We further explained that because of the
intertwined structure and wording of the Manufacturer Discount Program
and selected drug subsidy program provisions in the Act, we proposed 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. Finally, we
described our proposal to make monthly prospective payments for the
selected drug subsidy program, based on Part D plan sponsors' estimates
of selected drug subsidy amounts submitted with their annual bids, and
reconciled using the actual selected drug subsidy amounts that Part D
plan sponsors report on PDE data.
In the Contract Year 2027 proposed rule, we proposed 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 proposed to codify at new Sec. 423.315(h)
that we would provide prospective selected drug subsidy payments on a

[[Page 17401]]

monthly basis. We also proposed to codify at new Sec. 423.329(e) the
determination of selected drug subsidy payments. Finally, we proposed
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.
We received no comments on this proposal and are finalizing the
proposed additions at Sec. Sec. 423.265, 423.315, 423.329, and 423.343
without modification.
10. Technical Correction--Retroactive Adjustments and Reconciliations
(Sec. Sec. 423.336 and 423.343)
In the Contract Year 2027 proposed rule, we noted the need for a
technical correction at Sec. 423.343(d)(2). The final sentence of this
paragraph is incorrectly placed in Sec. 423.343 and should instead be
placed in Sec. 423.336. Thus, we proposed to revise Sec. 423.343 to
remove this sentence and revise Sec. 423.336(c) to add this sentence
in its proper context.
We received no comments on this proposal and are finalizing the
proposed revisions at Sec. Sec. 423.336 and 423.343 without
modification.
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 Contract Year 2027 proposed rule, we explained that 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 Contract Year 2027 proposed rule, we proposed to codify the
statutory amendments to section 1860D-13(a) of the Act. Specifically,
we proposed 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).
We received no comments on this proposal and are finalizing the
proposed changes to Sec. 423.286 without modification.
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 Contract Year 2027 proposed rule, we proposed to 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
proposed 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 proposed 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.
Comment: A commenter expressed support for CMS's proposal to align
LIS eligibility criteria with the IRA by updating the FPL limit to 150
percent for plan years beginning January 1, 2024.
Response: CMS thanks the commenter for their support.
After considering the comments we received, we are finalizing the
proposed revisions to Sec. 423.782 without modification.
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 Contract Year 2027 proposed rule, we explained that,
although the IRA amended the parameters of the standard prescription
drug coverage and makes other changes to the Part D benefit, it did not
change the requirements for qualified retiree prescription drug plans.
Although the majority of the IRA policies in effect for CY 2027 and
subsequent years do not require updates to Subpart R, we explained in
the Contract Year 2027 proposed rule that there are certain conforming
edits required. Specifically, we proposed 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
proposed 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.''
We received no comments on this proposal and are finalizing the
proposed revisions to Sec. Sec. 423.882 and 423.884 without
modification.
14. Medical Loss Ratio (Sec. 423.2420)
In the Contract Year 2027 proposed rule, we explained that the
medical loss ratio (MLR) requirements established under section 1857(e)
of the Act require Part D contracts to report 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

[[Page 17402]]

other items such as administration, marketing, and profit is excluded
from the numerator of the MLR. We described longstanding policy that
pass-through payments for which plans retain no liability, such as low-
income cost-sharing subsidies and Coverage Gap Discount Program
payments, are excluded from both the numerator and denominator of the
MLR. We further explained that new federal payments created by the IRA,
including Manufacturer Discount Program payments, the Inflation
Reduction Act Subsidy Amount (IRASA), and the selected drug subsidy,
are treated similarly as pass-through amounts and therefore excluded
from the MLR calculation. This was established in the Final CY 2025
Part D Redesign Program Instructions and applied in CY 2026 through the
Final CY 2026 Part D Redesign Program Instructions.
In the Contract Year 2027 proposed rule, we proposed 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 proposed 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.
We received no comments on this proposal and are finalizing the
proposed revisions at Sec. 423.2420 without modification.
15. Severability
We proposed that the Medicare Part D redesign provisions finalized
herein would be separate and severable from one another. Further, we
proposed that if any of these provisions 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.
We received no comments on this proposal and are finalizing without
modification.

B. Medicare Coverage Gap Discount Program

Section 1860D-14A of the Act established the Medicare Coverage Gap
Discount Program, which began on January 1, 2011. Coverage Gap Discount
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 Inflation Reduction Act of 2022 (Pub. L. 117-169) (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 proposed 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 proposed 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
proposed to add the new text at Sec. 423.2300(b). We also proposed to
revise Sec. 423.2315(c)(2) to reflect the sunset of the Coverage Gap
Discount Program by 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
proposed to amend Sec. 423.2345 by adding a new paragraph (f) to
specify 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.
To address programmatic differences between the Coverage Gap
Discount Program and the Manufacturer Discount Program, which are
discussed in more detail in section II.C. of this final rule, we
proposed to revise Sec. 423.2305 to clarify that the definitions at
Sec. 423.2305 apply only for purposes of the Coverage Gap Discount
Program. Further, we proposed 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. Lastly, we proposed technical changes throughout
subpart W to replace the shorthand term ``Discount Program'' with
``Coverage Gap Discount Program.''
Comment: A few commenters were in support of the proposed changes.
Commenters acknowledged the proposals as important and consistent with
statutory requirements.
Response: We thank the commenters for their support and are
finalizing the changes to the subpart that were proposed.

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).\14\
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\14\ 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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In the proposed rule, we proposed to codify the Manufacturer
Discount Program Final Guidance, with limited refinements and changes,
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. 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 and adjusts the payments through an annual
reconciliation.

[[Page 17403]]

Discounts under the Manufacturer Discount Program generally reduce
the amount the Part D sponsor pays for the drug, 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. Discounts are 10 percent
of the negotiated price of the applicable drug in the initial coverage
phase and 20 percent in the catastrophic coverage phase, and 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 proposed to
codify 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.
Comment: We received several comments supportive of our proposal to
codify existing Manufacturer Discount Program policies. Commenters
appreciated that CMS implemented the Manufacturer Discount Program in a
manner similar to the former Coverage Gap Discount Program.
Response: We thank the commenters for their support. We are
finalizing the regulatory policies for the Manufacturer Discount
Program largely as proposed, with limited modifications, which are
described in greater detail below.
2. Basis and Scope (Sec. 423.2700)
We proposed 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 proposed a conforming change at Sec. 423.1 to incorporate
section 1860D-14C of the Act into the scope of part 423.
We received no comments on this section and we are finalizing Sec.
423.2700 as proposed.
3. Definitions (Sec. Sec. 423.100, 423.1002, and 423.2704)
We proposed 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 consistent with the policies we are finalizing in this
rule.
Several of these terms are also used for purposes of the Coverage
Gap Discount Program. Because some of the terms are applicable to both
subpart W and proposed subpart AA, we proposed 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 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 proposed to revise a number of existing
definitions as discussed below.
<bullet> ``Applicable beneficiary'';
We proposed 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.
<bullet> ``Applicable drug'';
We proposed 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 from the
definition. As stated in the proposed rule, this change would codify
both longstanding CMS policy under the Coverage Gap Discount Program as
well as policy established in section 40.1 of the Manufacturer Discount
Program Final Guidance. Whereas 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, because compounds as a whole
are not approved under a New Drug Application (NDA) or Biologic
Licensing Application (BLA), CMS has established that compounds do not
meet the definition of an applicable drug.
For the purposes of the Manufacturer Discount Program, we proposed
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. As
stated in the proposed rule, 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 proposed to specify
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 proposed to add definitions for the following terms at Sec.
423.100:
<bullet> ``Applicable discount'';
We proposed 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 proposed 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 proposed 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 proposed to remove the existing definition of ``date of
dispensing'' from Sec. 423.2305 and add it, with revisions, at Sec.
423.100. Specifically, we proposed 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.''
<bullet> ``Labeler code'';
We proposed to remove the existing definition of ``labeler code''
from Sec. 423.2305 and add it, with revisions, at Sec. 423.100.
Specifically, we proposed to remove the phrase ``Food and Drug
Administration.''
<bullet> ``Manufacturer'';
We proposed 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''.
<bullet> ``Manufacturer Discount Program'';
We proposed 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 proposed to define ``Manufacturer Discount Program agreement''
as the

[[Page 17404]]

agreement described at section 1860D-14C(b) of the Act.
<bullet> ``Medicare Coverage Gap Discount Program'';
We proposed 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 proposed 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 proposed 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''.
<bullet> ``Non-applicable drug'';
We proposed 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 proposed to define ``price applicability period'' as having the
meaning given such term in section 1191(b)(2) of the Act and any
applicable regulations and guidance.
<bullet> ``Selected drug''; and
We proposed to define ``selected drug'' as having the meaning given
such term in section 1192(c) of the Act and any applicable regulations
and guidance.
<bullet> ``Third Party Administrator (TPA)''.
We proposed to add at Sec. 423.100 the definition of ``Third Party
Administrator'' that we proposed to remove from Sec. 423.2305, with
revisions. Specifically, we proposed 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 proposed 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 proposed 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 proposed to remove the following definitions from Sec. 423.2305
because, as noted previously, we proposed 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 proposed to define the following terms for
purposes of proposed subpart AA and the Manufacturer Discount Program:
<bullet> ``Agreement holder'';
We proposed 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 proposed to define ``applicable discount'' as having the meaning
set forth at Sec. 423.2712.
<bullet> ``Applicable LIS percent'';
We proposed to define ``applicable LIS percent'' as having the
meaning set forth at Sec. 423.2712(d)(1).
<bullet> ``Applicable small manufacturer percent'';
We proposed to define ``applicable small manufacturer percent'' as
having the meaning set forth at Sec. 423.2712(d)(2).
<bullet> ``Covered Part D drug'';
We proposed to define ``covered Part D drug'' as having the meaning
set forth at Sec. 423.100.
<bullet> ``Dispute submission deadline'';
We proposed 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 proposed 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, the negotiated price includes
any dispensing fee and, if applicable, any vaccine administration fee
and sales tax.
<bullet> ``Network pharmacy'';
We proposed to define ``network pharmacy'' as having the meaning
set forth at Sec. 423.100.
<bullet> ``Part D drug'';
We proposed to define ``Part D drug'' as having the meaning set
forth at Sec. 423.100.
<bullet> ``Primary manufacturer'';
We proposed 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 proposed 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 proposed 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 proposed 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.
Comment: We received a few comments regarding our proposed
definitions, specifically in support of our proposed definitions of
``applicable drug'' and ``date of dispensing.'' Both commenters noted
that the proposed definitions will provide clarity for stakeholders,
including plans, pharmacies, enrollees, and manufacturers. A commenter
applauded CMS's recognition that transition fills and emergency
supplies are ``applicable drugs'' and may be necessary for long term
care residents to ensure uninterrupted access to medications that can
be lifesaving. Another commenter appreciated CMS ensuring that
definitions are consistent across the agency's guidance documents,
policies, and programs.

[[Page 17405]]

Response: We thank the commenters for their support and are
finalizing the proposals discussed in this section without modification
our proposed definitions at Sec. Sec. 423.100, 423.1002, 423.2305, and
423.2704.
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.
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 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.
At Sec. 423.2708(a), we proposed to codify existing Manufacturer
Discount Program policy 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 that chooses 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 did not propose to prohibit this
practice, provided all other requirements of the Manufacturer Discount
Program are met. As discussed in the preamble to the proposed rule, 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 proposed to codify this requirement at
Sec. 423.2708(b).
While a manufacturer may participate in the Manufacturer Discount
Program in accordance with proposed Sec. 423.2708(b)(2), 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
proposed 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 proposed 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.
At Sec. 423.2708(d), we proposed that non-applicable drugs, as we
proposed 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.
Comment: We received a comment on the proposals in this section.
The commenter expressed concern about limitations on enrollee access to
drugs of a manufacturer that does not participate in the Manufacturer
Discount Program, and recommended that CMS specify criteria for making
a determination that an applicable drug is essential to the health of
Part D enrollees.
Response: CMS appreciates and shares the commenter's concern about

[[Page 17406]]

enrollee access to applicable drugs of manufacturers that choose not to
participate in the Manufacturer Discount Program. However, we decline
to codify specifications for the exception provision at Sec.
423.2708(c) at this time. Based on experience under the Coverage Gap
Discount Program and the Manufacturer Discount Program to date, CMS
does not anticipate using this exception, which has not been used to
date under either program. We are concerned that proactive exemptions
for certain drugs, or categories and classes of drugs, from the
required conditions for Part D coverage would result in higher costs to
Part D sponsors, beneficiaries, and the government because
manufacturers of those drugs would have no incentive to participate in
the Manufacturer Discount Program. Manufacturers should not expect to
get their applicable drugs covered under Part D as a result of this
exception.
CMS is finalizing the regulation text at Sec. 423.2708 without
modification.
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
Consistent with the definition in Sec. 423.100 that we are
finalizing in this final rule, ``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 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
<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 proposed 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 final 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 proposed to codify this policy at Sec. 423.2712(g).
In accordance with section 1860D-14C(c)(1)(C) of the Act, we
proposed 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 proposed 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--

[[Page 17407]]

++ 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 proposed 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 proposed 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 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 proposed to codify the policy for straddle claims at Sec.
423.2712(e).
d. Claims Not Subject to Discount
Since CMS is unable to ascertain from the PDE how much liability,
if any, the Part D sponsor has on Medicare Secondary Payer (MSP)
claims, we proposed to codify our policy under the Manufacturer
Discount Program that discounts are not applied to MSP claims. In
addition, since 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 proposed to codify our policy that discounts are not
paid on Medicaid subrogation claims involving an applicable drug. We
proposed to codify those policies at Sec. 423.2712(f)(1) and (2),
respectively.
We proposed 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.
Lastly, at Sec. 423.2712(f)(4) we proposed 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.
As discussed in section II.C.3. of this preamble, compounded drug
products are excluded from the definition of applicable drug that we
proposed to revise at Sec. 423.100; as such, claims for Part D
compounds are not subject to discounts under the Manufacturer Discount
Program.
CMS received no comments on proposed Sec. 423.2712 and we are
finalizing this provision without modification.
6. Phase-In of Applicable Discounts (Sec. Sec. 423.2716 Through
423.2728)
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.
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 proposed 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; \15\
---------------------------------------------------------------------------

\15\ 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 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.
We proposed to codify this eligibility criteria for specified
manufacturers at Sec. 423.2716(a).
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 final rule.

[[Page 17408]]

We proposed to codify the aggregation rule 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.
We proposed to codify this eligibility criteria for specified small
manufacturers at Sec. 423.2716(b).
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 final rule.
We proposed to codify the aggregation rule at Sec. 423.2716(c).
c. Determination of Phase-In Eligibility
As discussed in section 50.1 of the Manufacturer Discount Program
Final Guidance and the preamble to the proposed rule, 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. The methodology used by CMS 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
proposed to codify the methodology at Sec. 423.2720.
Specifically, we proposed 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 proposed 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 proposed 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 proposed 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.
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 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,\16\ 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

[[Page 17409]]

manufacturer's applicable drugs in step 3 below.
---------------------------------------------------------------------------

\16\ We use 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.
---------------------------------------------------------------------------

The second step is to calculate each manufacturer's Part D total
expenditures for applicable drugs for 2021. For purposes of this
calculation, CMS will identify the National Drug Codes (NDCs)
attributable to the manufacturer that have a Marketing Category Code of
`NDA', `BLA', or `NDA AUTHORIZED GENERIC' on the NDC SPL Data Elements
(NSDE) File maintained by the Food and Drug Administration (FDA). CMS
will attribute an NDC as reported on the PDE record to the manufacturer
using the labeler code extracted from the first 5 digits of each NDC.
CMS will calculate the Part D total expenditures for each relevant NDC
attributable to the manufacturer as reported on all final action, non-
delete PDE records submitted as of June 30, 2022 for applicable drugs
dispensed in benefit year 2021. CMS will then sum the Part D total
expenditures for all relevant NDCs attributable to the manufacturer--
that is, the Part D total expenditures for all applicable drugs of all
manufacturers treated as a single employer under subsection (a) or (b)
of section 52 of the Internal Revenue Code of 1986, as identified by
the ownership information submitted and attested to by the manufacturer
(as described in the aggregation rule proposed at Sec. 423.2716(c)).
The third step is to calculate each manufacturer's percent share of
Part D total expenditures for 2021. CMS will divide the Part D total
expenditures for applicable drugs of the manufacturer, determined in
step 2 above, by the Part D total expenditures for all Part D drugs,
determined in step 1 above, and then multiply by 100 to get the
manufacturer's percent share. If a manufacturer's Part D total
expenditures for its applicable drugs are less than 1.0 percent of the
2021 Part D total expenditures, CMS will consider the manufacturer to
have satisfied the Part D total expenditure criterion for specified
manufacturer phase-in eligibility.
We proposed to codify this part of the methodology at Sec.
423.2720(a)(2).
Next, CMS will determine each manufacturer's share of Part B total
expenditures, which will be used to determine if the manufacturer's
total expenditures for all of its specified drugs that are single
source drugs or biological products represented less than 1.0 percent
of the total expenditures for all drugs or biologicals under Part B in
2021, excluding expenditures for a drug or biological that are bundled
or packaged into payment for another service. This calculation involves
three steps: identifying 2021 Part B total expenditures for drugs and
biological products, identifying the 2021 Part B total expenditures for
single-source drugs and biological products for each manufacturer that
had a Coverage Gap Discount Program agreement(s) in 2021, and
identifying eligible manufacturers for which Part B total expenditures
for single source drugs or biological products represent less than 1.0
percent of total expenditures for drug and biological products under
Part B for 2021.
The first step is to calculate Part B total expenditures for all
drugs and biological products for 2021. CMS will identify all
Healthcare Common Procedure Coding System (HCPCS) codes for drugs and
biological products. Then, CMS will calculate Part B Carrier, durable
medical equipment (DME), and Outpatient Medicare Part B total
expenditures for drug and biological products for Fee-for-Service claim
line items with a drug- or biological product-related HCPCS code,
submitted as of December 31, 2022, which represents the Medicare Fee-
For-Service submission deadline for CY 2021.
The second step is to calculate each manufacturer's Part B total
expenditures for applicable drugs that are single-source drugs and
biological products for 2021. CMS will first map the HCPCS codes
identified in step 1 above to NDCs using the NDC-HCPCS Crosswalk file
provided as part of the CMS ASP Pricing File and the Pricing, Data
Analysis and Coding (PDAC) HCPCS to NDC crosswalk file. Since the ASP
NDC-HCPCS Crosswalk file is not a comprehensive list of all drugs/NDCs
available in the United States, a Medi-Span Generic Product Identifier
(GPI-14) expansion is used to help identify all NDCs associated with
the HCPCS codes. We define a single source drug or biological following
the definition in section 1847A(c)(6)(D) of the Act and we are
identifying NDCs for single source drugs using Medi-Span and the FDA
NSDE marketing category data, or biological products using the FDA
Purple Book. A HCPCS code is considered to be indicative of a single
source drug or biological product if each NDC associated with the HCPCS
code is for a single source drug or biological product. The
corresponding NDCs are used to determine the labeler codes for each
applicable HCPCS code. CMS will match the labeler code extracted from
the first 5 digits of each NDC to the manufacturer. Since a HCPCS code
can be mapped to multiple NDCs and labeler codes, it can also be
associated with multiple manufacturers. While Part B single source
drugs or biological products can be mapped to a particular HCPCS code,
mapping applicable Part B expenditures to a particular manufacturer
when a particular HCPCS code may reflect drugs of multiple
manufacturers can be challenging. For this reason, CMS will only count
the payments associated with a HCPCS code toward a manufacturer's 2021
Part B total expenditures if the HCPCS code is only mapped to drugs of
that same manufacturer, consistent with the aggregation rule proposed
at Sec. 423.2716(c).
The third step is to calculate each manufacturer's percent share of
Part B total expenditures for 2021. CMS will divide the Part B total
expenditures for the applicable drugs that are single source drugs and
biological products of the manufacturer, determined in step 2 above, by
the Part B total expenditures for all drugs and biological products,
determined in step 1 above, and then multiply by 100 to get the
manufacturer's percent share. If a manufacturer's Part B total
expenditures are less than 1.0 percent of the 2021 Part B total
expenditures, CMS will consider the manufacturer to have satisfied the
Part B total expenditure criterion for the specified manufacturer
phase-in eligibility.
We proposed to codify this part of the methodology at Sec.
423.2720(a)(3).
The last value that must be determined for each specified
manufacturer is the total expenditures under Part D for any one of the
manufacturer's specified drugs covered under a Coverage Gap Discount
Program agreement(s) for 2021, and covered under Part D in 2021. This
will be used to determine if the manufacturer's total expenditures for
one specified drug are equal to or greater than 80 percent of the total
expenditures for all of its specified drugs covered under Part D in
2021 such that the manufacturer is eligible for the specified small
manufacturer phase-in.
The first step is to aggregate all NDCs for applicable drugs
reported on PDEs for each specified manufacturer that have the same
active moiety for drug products, or same active ingredient for
biological products, and with the same holder of the NDA or BLA. To
determine one drug's share of a manufacturer's Part D total
expenditures, which we will use to identify specified small
manufacturers, we first note that for drug products, one specified
small manufacturer drug will include all dosage forms and strengths of
a drug with the same active moiety

[[Page 17410]]

and the same holder of the NDA,\17\ inclusive of products that are
marketed pursuant to different NDAs. For biological products, one
specified small manufacturer drug will include all dosage forms and
strengths of the biological product with the same active ingredient and
the same holder of the BLA,\18\ inclusive of products that are marketed
pursuant to different BLAs. CMS will identify the holder of the NDA/BLA
for a drug or biological product as reported in Drugs@FDA or FDA Purple
Book. If a drug is a fixed combination drug \19\ with two or more
active moieties/active ingredients, the distinct combination of active
moieties/active ingredients will be considered as one active moiety/
active ingredient for the purpose of identifying a specified small
manufacturer drug. Therefore, all formulations of this distinct
combination with the same NDA/BLA holder will be aggregated across all
dosage forms and strengths of the fixed combination drug. A product
containing only one (but not both) of the active moieties/active
ingredients with the same NDA/BLA holder will not be aggregated with
the formulations of the fixed combination drug and will be considered a
separate specified small manufacturer drug. CMS will attribute Part D
expenditures for a drug, including authorized generic drugs and
repackaged and relabeled drugs, to a specified 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. (See the aggregation rule proposed at Sec.
423.2716(c)).
---------------------------------------------------------------------------

\17\ As described in section 505(c) of the FD&C Act.
\18\ As described in section 351(a) of the PHS Act.
\19\ As described in 21 CFR 300.50.
---------------------------------------------------------------------------

The second step is to calculate the Part D total expenditures for
each aggregated drug for 2021. CMS will calculate the Part D total
expenditures for each aggregated drug attributable to the manufacturer
as identified in step 1 by summing the Part D total expenditures for
all NDCs under each aggregated drug as reported on all final action,
non-delete PDE records submitted as of June 30, 2022, for drugs
dispensed in benefit year 2021.
The third step is to calculate each drug's percent share of the
specified manufacturer's Part D total expenditures for applicable drugs
for 2021. CMS will divide the Part D total expenditures for each
aggregated drug, determined in step 2, by the Part D total expenditures
for all applicable drugs of the specified manufacturer, and then
multiply by 100 to get the percent share. Specified manufacturers that
have 2021 Part D total expenditures for a single specified drug that
are equal to or greater than 80 percent of the specified manufacturer's
Part D total expenditures for all specified drugs are considered to
have met the eligibility criteria for specified small manufacturers and
are eligible for the specified small manufacturer phase-in.
We proposed to codify this part of the methodology at Sec.
423.2720(b).
Finally, at paragraph (c)(1) of Sec. 423.2720, we proposed to
specify that CMS will issue a phase-in determination notice to each
manufacturer that has executed and has in effect a Manufacturer
Discount Program agreement when such determination is made, delivered
by electronic mail, to the primary point of contact as identified by
the manufacturer. At paragraph (c)(2) of Sec. 423.2720, we proposed to
specify that in the case of a manufacturer that participates in the
Manufacturer Discount Program by means of an arrangement whereby its
labeler code(s) is covered by another manufacturer's Manufacturer
Discount Program agreement, CMS will issue a phase-in eligibility
determination notice to the agreement holder.
For purposes of identifying manufacturers eligible for phase-ins,
the aggregation rule at section 1860D-14C(g)(4)(B)(ii)(II)(bb) of the
Act for specified manufacturers and section 1860D-
14C(g)(4)(C)(ii)(II)(bb) of the Act for specified small manufacturers
requires that CMS treats as a single manufacturer all entities that are
treated as a single employer under subsection (a) or (b) of section 52
of the Internal Revenue Code of 1986. As noted previously, we proposed
to codify the aggregation rule at Sec. 423.2716(c). The statute, at
section 1860D-14C(g)(4)(B)(ii)(II)(bb) of the Act for specified
manufacturers and section 1860D-14C(g)(4)(C)(ii)(II)(bb) of the Act for
specified small manufacturers, also requires that manufacturers provide
and attest to necessary information as specified by CMS. Because CMS
does not have information about which entities are treated as a single
employer under the Internal Revenue Code of 1986, manufacturers that
wish to participate in the Manufacturer Discount Program must submit
and attest to information about the company and its products in order
for CMS to make a determination about phase-in eligibility.
d. Effect of Manufacturer Acquisition on Phase-In Eligibility
Section 1860D-14C(g)(4)(B)(ii)(III) of the Act requires that when a
specified manufacturer is acquired after 2021 by another manufacturer
that is not a specified manufacturer, the acquired manufacturer is no
longer a specified manufacturer effective at the beginning of the plan
year immediately following the acquisition. For acquisitions before
2025, the change is effective January 1, 2025. Section 1860D-
14C(g)(4)(C)(ii)(III) of the Act establishes a similar requirement for
specified small manufacturers: when acquired after 2021 by a
manufacturer that is not a specified small manufacturer, such
manufacturer is no longer a specified small manufacturer effective at
the beginning of the plan year immediately following the acquisition
(or January 1, 2025, for acquisitions before 2025).
While the statute is explicit that an acquired specified
manufacturer or specified small manufacturer loses that specific phase-
in status upon acquisition by another manufacturer that is not a
specified manufacturer or a specified small manufacturer, respectively,
it does not expressly address whether such acquired manufacturers
assume the phase-in eligibility of the acquiring manufacturer or lose
all phase-in eligibility (for example, a specified manufacturer is
acquired by a specified small manufacturer or a specified small
manufacturer is acquired by a specified manufacturer). Similarly, the
statute does not expressly address what happens if a specified
manufacturer or a specified small manufacturer acquires a manufacturer
that CMS determined was not eligible for either phase-in. Consistent
with our approach to acquisitions under the Manufacturer Discount
Program thus far, we proposed at Sec. 423.2724 to review phase-in
status bidirectionally such that acquired manufacturers may gain or
lose phase-in eligibility as the result of an acquisition. In other
words, regardless of the phase-in status of the acquiring manufacturer
or the acquired manufacturer at the time of the acquisition, when a
manufacturer acquires another manufacturer (that is, the acquired
manufacturer becomes part of such acquiring manufacturer under the
aggregation rule at Sec. 423.2716(c)), the acquired manufacturer will
assume the phase-in status of the acquiring manufacturer, as of the
effective date following the acquisition discussed later in this
section. CMS believes this bidirectional policy best aligns with the
statutory structure and purpose of the

[[Page 17411]]

phase-ins. First, we believe this policy is most consistent with the
directive in sections 1860D-14C(g)(4)(B)(ii)(II)(bb) and 1860D-
14C(g)(4)(C)(ii)(II)(bb) of the Act to treat 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 as one manufacturer for the
purposes of the phase-ins. Without applying the effect of acquisitions
bidirectionally, manufacturers that are members of the same controlled
group could have different phase-in eligibility statuses as a result of
an acquisition. Additionally, while a specified small manufacturer that
is acquired by a specified manufacturer will lose its specified small
manufacturer status consistent with section 1860D-14C(g)(4)(C)(ii)(III)
of the Act, such manufacturer becomes a specified manufacturer under
this policy, rather than losing eligibility for phase-in altogether.
We proposed that all changes to a manufacturer's phase-in status as
a result of an acquisition will become effective on January 1 of the
year following the acquisition or, in the case of an acquisition before
2025, effective January 1, 2025. This aligns the effective date of
changes to a manufacturer's phase-in status across all acquisitions
with the requirements in sections 1860D-14C(g)(4)(B)(ii)(III) and
1860D-14C(g)(4)(C)(ii)(III) of the Act discussed previously and is
consistent with our approach to date for acquisitions that have already
occurred. Operationally, adopting a January 1 effective date minimizes
burden on Part D sponsors who would otherwise need to regularly make
additional claims processing changes to accommodate phase-in status
changes throughout the year given the frequency of corporate ownership
changes in the pharmaceutical industry. It also minimizes any need for
Part D sponsors to make retrospective PDE adjustments if, for example,
CMS does not become aware of the acquisition until after it occurs.
In sum, in alignment with the statutory requirements and the
procedures already in place under the Manufacturer Discount Program, we
proposed at Sec. 423.2724 to codify a regulatory policy for
manufacturer acquisitions where, regardless of the manufacturer's
phase-in eligibility status prior to the acquisition, once acquired,
the acquired manufacturer is recognized as having the phase-in
eligibility status of the acquiring manufacturer. Consistent with the
statutory requirements related to the loss of phase-in eligibility, and
to minimize any potential impact on Part D sponsors or manufacturers as
a result of changes to manufacturer phase-in status in the middle of a
plan year, we also proposed at Sec. 423.2724 that any change in phase-
in eligibility status as a result of an acquisition, regardless of
whether the acquired manufacturer gains or loses phase-in eligibility,
would be effective on January 1 of the year following the acquisition.
e. Recalculation
We proposed to codify the recalculation policy discussed in section
50.2.2 of the Manufacturer Discount Program Final Guidance, with
certain modifications, at Sec. 423.2728.
As discussed in the guidance, while the requirements to qualify as
a specified manufacturer or specified small manufacturer are set forth
in statute, we recognize that, while unlikely, a manufacturer may wish
to raise concerns with the outcome of the application of those
statutory requirements. As such, CMS established a mechanism for
manufacturers that wish to request a recalculation of their phase-in
eligibility determination. Such requests can only be filed by the
manufacturer that received the determination. We proposed to codify
this requirement at Sec. 423.2728(a).
Under the recalculation policy, a manufacturer that seeks a
recalculation of their phase-in eligibility determination must file the
request with CMS no later than 30 calendar days from the date the
eligibility determination is electronically sent to the manufacturer.
The request must clearly describe the issue(s) forming the basis of the
request for recalculation, and include any relevant supporting
information. We proposed to codify these requirements at Sec.
423.2728(b).
After consideration of the issues raised in a recalculation
request, CMS will decide whether to perform the recalculation, and will
issue a written decision to the manufacturer that will include CMS's
decision about whether to perform the requested recalculation and, if
such recalculation is performed, the resulting eligibility
determination. The decision is final and binding, subject to the
requirements of the Manufacturer Discount Program under section 1860D-
14C of the Act and the Manufacturer Discount Program agreement. We
proposed to codify this policy at Sec. 423.2728(c).
Finally, at Sec. 423.2728(d), we proposed to limit the
recalculation process to requests that meet the requirements proposed
in Sec. 423.2728(a) and (b). The recalculation request process cannot
be used to request or be granted an exception to the requirements set
forth in statute that determine eligibility for the specified
manufacturer or specified small manufacturer phase-in.
CMS received two comments regarding the phase-in methodology and
summaries of the comments with our responses are below.
Comment: A commenter was opposed to aspects of our proposed
methodology to determine specified small manufacturer eligibility.
Specifically, the commenter objected to our proposal to calculate total
expenditures under Part D for each applicable drug of a manufacturer
based exclusively on PDE records and urged CMS to instead use PDE data
as prima facie evidence, rather than the sole determinant of Part D
total expenditures, and to consider, as part of CMS's recalculation
process, other sources of evidence for Part D total expenditures,
including data submitted to CMS by the manufacturer. The commenter
argued that CMS must include all costs directly related to the
dispensing of a covered drug when determining Part D total
expenditures, even if those costs are not included in the PDE data set.
The commenter also argued that, because of supposed flaws in the PDE
data set and because PDE data is not relied on exclusively in certain
other contexts, it cannot be relied on exclusively to determine the
Part D total expenditures for applicable drugs of a manufacturer.
Response: CMS acknowledges that certain aspects of our Manufacturer
Discount Program phase-in methodology as set forth in applicable
guidance are the subject of recent litigation, including Servier
Pharmaceuticals LLC v. Becerra, No. 1:24-cv-02664 (D.D.C.) and related
appeal Servier Pharmaceuticals LLC v. Kennedy, No. 25-5054 (D.C. Cir.)
(hereafter referred to as Servier) and PharmaEssentia USA Corp. v. HHS,
No. 1:24-cv-03346 (D.D.C.) (hereafter referred to as PharmaEssentia).
The district court in Servier upheld CMS's determination that Servier
fails to qualify as a specified small manufacturer. Servier appealed
the district court's decision, which appeal is pending in the U.S.
Court of Appeals for the D.C. Circuit. The district court in
PharmaEssentia vacated CMS's determination that PharmaEssentia failed
to qualify as a specified small manufacturer and remanded the matter
back to CMS after expressly recognizing that CMS might reach the same
conclusion after further proceedings.
CMS appreciates the comment, but we will continue to use PDE data
as the basis for calculating total expenditures under Part D because
PDEs are the

[[Page 17412]]

records used to capture Part D expenditures. CMS created the Medicare
Drug Data Processing System (DDPS) to collect and maintain records for
all Part D claims, and the agency requires Part D sponsors to submit a
PDE for every claim. The PDE contains information about payment
liability of the plan and the enrollee. As discussed in more detail in
section II.C.13 of this final rule, PDEs are subject to a robust
editing process to verify their accuracy. PDE records are used to pay
Part D sponsors for administering the prescription drug benefit and to
calculate manufacturer discounts under the Coverage Gap Discount
Program and the Manufacturer Discount Program. We note that while PDEs,
like any data set, may contain errors, Part D sponsors have significant
financial incentive to submit timely and accurate PDE records, in
addition to being legally required to do so. As a result, we continue
to believe that it is appropriate and consistent with the statute to
calculate Part D total expenditures based on PDE data when determining
a manufacturer's phase-in eligibility under the Manufacturer Discount
Program.
Nevertheless, consistent with the district court's opinion in
PharmaEssentia, we are clarifying that a manufacturer may provide
additional information, as part of a timely recalculation request under
the process described at Sec. 423.2728, that the manufacturer asserts
is evidence of Part D total expenditures that were not reported on
PDEs. CMS will evaluate the information to determine if it is
sufficient to merit consideration and what, if any, further
investigation of the information provided is necessary to determine if
there were actually paid Part D claims. If CMS determines based upon
the additional information, and any additional investigation, that
there were paid Part D claims that were not reported on PDEs that
constitute Part D total expenditures under section 1860D-14C(g)(4)(D)
of the Act, CMS will include those expenditures in the recalculation,
consistent with the requirements of this section.
For clarity and precision, we are making a minor change in the
regulation text at Sec. 423.2728(b) to specify that supporting
documentation for recalculation requests must be included with the
recalculation request.
Comment: Another commenter also opposed aspects of CMS's proposed
methodology for determining specified small manufacturer phase-in
eligibility. Specifically, the commenter disagreed with our proposal to
attribute 2021 total expenditures under Part D to a manufacturer based
on

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