This report provides information related to several topics of recent congressional concern with respect to the implementation of the prescription drug negotiation provisions of the 2022 budget reconciliation legislation commonly known as the Inflation Reduction Act (IRA; P.L. 117-169),¹ including litigation surrounding the Medicare Drug Price Negotiation Program (Program); concerns about its impact on future drug innovation, research, and development; and questions about its interaction with patents and other federal marketing protections for pharmaceuticals.

Medicare Coverage of Prescription Drugs

The federal Medicare program pays for covered health care services of qualified beneficiaries, including prescription drugs.² Medicare Part A covers inpatient hospital services, skilled nursing care, hospice care, and some home health services. Part A typically pays providers for drugs as part of a predetermined, per-episode payment. Medicare Part B covers physician care, outpatient services, and some home health and preventive services. Medicare pays most health care practitioners for Part B prescription drugs based on a statutory formula, which is the drug's average sales price (ASP) plus a percentage add-on payment.³

Medicare Part D is a voluntary benefit that provides coverage of outpatient prescription drugs to beneficiaries who enroll in stand-alone private prescription drug plans (PDPs) or Medicare Part C (Medicare Advantage, or MA) managed care plans (which cover Part A hospital coverage and B services) with a Part D component (MA-PDs).

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003⁴ (MMA), which created the Part D program, included a "noninterference" provision that barred the Health and Human Services (HHS) Secretary (the Secretary) from negotiating Part D prices, requiring a set formulary (list of covered drugs), or pricing structure.⁵ Instead, Part D plan sponsors (insurers), working with pharmacy benefit managers (PBMs), negotiate prescription drug price discounts and rebates with pharmaceutical manufacturers and dispensing pharmacies.⁶

Overall, Medicare accounts for about 32% of U.S. retail drug spending, with much of the spending concentrated in higher-cost brand name and specialty drugs.⁷

Selected Drug Negotiation Provisions of the IRA

Drugs Eligible for Negotiation

The IRA requires the Secretary to negotiate prices for certain single-source chemical drugs and biologics⁸ covered under Medicare Parts D and B. To be selected for negotiation, a chemical drug cannot have a marketed generic substitute and must have been approved by FDA for at least 7 years, while a biologic cannot have a marketed biosimilar substitute and must have been licensed by the Food and Drug Administration (FDA) for at least 11 years. In addition, the product must be among the 50 qualifying single-source drugs with the highest gross spending in Part B or Part D.

The Secretary must negotiate maximum fair prices (MFPs) for 10 drugs to take effect in 2026, 15 additional drugs for each of 2027 and 2028, and 20 additional drugs for 2029 and each following year. For the first two years (2026 and 2027), the Program applies only to Part D drugs.

The IRA excludes the following drugs from negotiation:

• low-spend drugs (i.e., drugs with Medicare spending of less than $200 million; indexed for inflation in subsequent years);
• plasma-derived products;
• orphan drugs designated for only one rare disease and for which the only FDA-approved indication is for such disease;⁹ and
• certain products made by small biotech firms (through 2028).¹⁰

The Secretary may delay negotiation of qualifying biologic products for up to two years when the Secretary determines that there is a high likelihood that a biosimilar will soon enter the market.¹¹

In August 2023, HHS announced the first 10 drugs selected for negotiation under the Program, with negotiated prices to become effective in 2026.¹² (See Table 1.) In October 2023, the Secretary announced that all manufacturers of the selected drugs had agreed to participate in negotiations.¹³

MFP Ceiling

The Secretary and manufacturers are to engage in negotiations on MFPs for the first round of selected drugs from October 1, 2023, to August 1, 2024. During the negotiation period, the Secretary will consider factors including each manufacturer's research and development (R&D) costs for the drug, production cost, any federal financial support for development of the drug, and data on patents and existing and pending exclusivities. The Secretary is to publish the negotiated MFPs for 2026 no later than September 1, 2024. Each subsequent year under the Program, MFPs are to take effect two years after new drugs are selected for negotiation.

The IRA sets a ceiling on the MFP, based on the lesser of

• 1. the weighted average net price of the drug or biologic under Part D (and starting in 2028, average Part B prices);¹⁴ or
• 2. a percentage of the nonfederal average manufacturer price (non-FAMP). The non-FAMP is a wholesaler price, minus certain discounts, that is used in calculating a maximum price for drugs by the "big four" federal purchasers: the Department of Veterans Affairs, the Department of Defense, the Public Health Service, and the Coast Guard. The MFP ceiling is 75% of the non-FAMP for a drug approved for less than 16 years or 40% of the non-FAMP for a drug approved for 16 years or more.¹⁵

An MFP is calculated across all dosage forms and strengths of a drug and is in effect until the first year beginning at least nine months after a generic or biologic substitute for a drug is marketed.

Manufacturers that do not comply with the Program could be subject to a civil monetary penalty or an excise tax. The excise tax would be set as a percentage of the sum of the drug's sales price plus the excise tax imposed by the IRA. This percentage could range from 65% up to a maximum of 95%, if a manufacturer were out of compliance more than 270 days.¹⁶

Industry Responses to IRA Negotiation Program

Even though all the manufacturers of selected drugs for 2026 agreed to enter into negotiations with the Secretary, several manufacturers and other stakeholders have sued the government to strike down or alter the IRA negotiation provisions as unconstitutional.¹⁷ Industry representatives, patient advocates, and other stakeholder groups have also asked Congress and the Centers for Medicare & Medicaid Services (CMS) to alter certain provisions of the statute or update regulatory guidance for implementing the law. Industry and patient advocacy groups have sought changes to two aspects of the IRA in particular: (1) its treatment of orphan drugs, and (2) its different timelines for the negotiation of drugs versus biologics.¹⁸

Orphan Drug Provisions

The IRA exempts from the Program orphan drugs used to treat only one rare disease or condition and for which the only approved indication (or indications) is for such disease or condition.¹⁹ In addition, drugs with an annual Medicare cost of less than $200 million are exempt from negotiation, a provision that could shield some orphan products from negotiation.

Some stakeholders have expressed concern that the orphan drug exemption is insufficient and could deter innovation, especially for existing approved orphan products.²⁰ At least one manufacturer has also challenged CMS's interpretation of "qualifying single source drug" as it applies to the IRA's orphan drug exception.²¹

Federal law provides tax breaks and extended marketing exclusivity for developers of orphan drugs, and the majority of all novel drugs approved by FDA in the past several years have been orphan products.²² Orphan drug manufacturers may seek orphan drug approval of a new indication for an already-approved orphan drug or an already-approved nonorphan drug, allowing use for more than one condition.²³

Although orphan drugs are intended to serve small patient populations or conditions for which therapies are not expected to be profitable, a recent report from the HHS Office of Inspector General found that a majority of 40 high-spending Medicare drugs it studied had orphan-drug designations, including drugs initially approved to treat common conditions.²⁴

CMS is considering additional actions in its implementation of the Program to support orphan drug development, including considering a drug's impact on unmet medical need and on specific populations during negotiations with manufacturers to set a final MFP.²⁵

IRA Timelines for Selection of Chemical and Biologic Products

Existing federal law provides for disparate treatment of chemical and biological products in many ways. (See "Drug Patent and Marketing Protections.") Even so, some pharmaceutical firms and investors have questioned the rationale for having different timelines for negotiating MFPs for chemical and biologic prescription products, saying it will make chemical drugs less financially attractive for investment.²⁶

The final version of the IRA was developed in negotiations outside the formal committee process, so there is limited public legislative history of the timeline provision. Congress debated drug price negotiation bills before the IRA that did not distinguish between chemical and biological products or set time-on-market requirements for negotiation eligibility. In 2019, the House passed H.R. 3, which would have required the Secretary to negotiate MFPs for insulins and single-source drugs and biologics that were FDA approved or licensed, were still marketed, and were among the 125 drugs with the estimated highest net spending in Medicare Part D or in the United States. New drugs likely to meet high-spending criteria were negotiation-eligible immediately following approval or licensure.

In September 2021, the House Ways and Means Committee approved drug negotiation provisions as part of the FY2023 reconciliation measure known as the Build Back Better Act (BBBA) that largely tracked H.R. 3 from 2019.²⁷ The Energy and Commerce Committee did not advance the provisions after three majority Members voted "no," concerned that the bill would weaken incentives for drug development.²⁸ During the Energy and Commerce markup, Representative Scott Peters raised but withdrew an amendment based on bills (H.R. 5260 and H.R. 5237) to allow the Secretary to negotiate prices only for single-source Medicare Part B drugs where federal marketing and patent protection had expired.²⁹

In November 2021, the House approved a revised version of the BBBA (H.R. 5376) which specified that MFPs could not apply until 9 years after approval for chemical drugs, or 13 years after licensure for biologics. In August 2022, Congress passed the final version of the IRA, which had these provisions as well.

Legal Challenges

Drug manufactures have challenged the Program on a number of legal grounds, making its ultimate implementation uncertain. In the various lawsuits, the government has attempted to refute manufacturers' claims that the IRA will significantly change the drug industry, that the negotiation of the MFPs will ultimately decrease revenues, and that manufacturers will be discouraged from investing in research and development for new drugs.³⁰

At least seven pharmaceutical manufacturers and two trade associations have filed lawsuits against CMS, arguing that the IRA is unconstitutional.³¹ The plaintiffs claim that the IRA violates the First Amendment because it compels speech,³² and that it violates the Fifth Amendment Due Process and Takings Clauses.³³ A few plaintiffs also claim that the excise tax violates the Eighth Amendment Excessive Fines Clause,³⁴ and that various provisions of the IRA violate the Nondelegation Doctrine.³⁵ The plaintiffs also argue that the IRA cannot be justified under Congress's Spending Clause power because it does not condition Medicare reimbursement on participation in the Program and that it is unconstitutionally coercive.³⁶

At least two pharmaceutical manufacturer plaintiffs have also claimed that CMS's implementation of the Program violates the Administrative Procedure Act (APA). Although the statute requires CMS to implement the Program via agency guidance, the manufacturers claim that the guidance violates the APA because parts of it were finalized without stakeholder input.³⁷ Manufacturers argue that the guidance should have been promulgated as a legislative rule, as it legally binds manufacturers and will subject them to steep penalties for noncompliance.³⁸ Another manufacturer argues that CMS's guidance "override[s]" the IRA's definition of "qualifying single source drug" by making it overly broad, so as to include more than one drug.³⁹ They also dispute CMS's "bona fide marketing" requirement, arguing that this could make a drug eligible for selection even if it has market competition.⁴⁰

At least one manufacturer has challenged CMS's interpretation of the IRA's orphan drug exclusion provision. The manufacturer argues that although the IRA excludes some orphan drugs from price negotiation,⁴¹ CMS's guidance aggregates drugs and biologics with the same active ingredient, such that the orphan drug exclusion will apply only if the entire group of products with the same active moiety is approved to treat a single orphan disease.⁴²

The government has filed at least one motion to dismiss,⁴³ and summary judgment motions have been filed by both the plaintiffs and the government in several of the cases,⁴⁴ which could fast track decisions in the cases. Some observers expect that at least one of the cases will eventually reach the U.S. Supreme Court.⁴⁵ The lawsuits have not yet interfered with CMS's implementation of the Program. For example, in September 2023, an Ohio district court denied a motion for a preliminary injunction to halt temporarily CMS's implementation of the Program, finding that the plaintiffs had not presented sufficient evidence that they would prevail on the merits of their constitutional arguments.⁴⁶ It could take years for all of the cases to be finally resolved, and the outcome of the litigation will determine how effectively CMS will be able to carry out the Program and uphold the Program's stated goals of lowering prescription drug prices for Medicare.

Drug Patent and Marketing Protections

Some industry concerns involve the potential impact of the Program on existing patent and marketing protections for pharmaceuticals.

New drugs and biologics are typically protected from generic and biosimilar competition by two distinct forms of intellectual property (IP) protection.⁴⁷ To encourage innovation, patents grant inventors the exclusive right to make and sell a novel invention.⁴⁸ Many innovations relating to a pharmaceutical product (such as the active ingredient, particular formulations, manufacturing processes, or methods of using a drug against particular diseases) may be patented.⁴⁹ Patents typically expire 20 years after the filing date of the relevant patent application.⁵⁰

Similarly, the FDA grants regulatory exclusivities to innovative pharmaceuticals meeting certain criteria.⁵¹ During a period of regulatory exclusivity, the FDA cannot approve applications for a generic or biosimilar form of the product.⁵² The main regulatory exclusivity for new chemical drugs lasts 5 years,⁵³ and the main exclusivity for new biologics lasts 12 years.⁵⁴ There are also a number of more specific exclusivities (such as the seven-year orphan drug exclusivity) that may apply to a particular product.⁵⁵

By design, both patents and regulatory exclusivities may enable drug manufacturers to charge higher-than-competitive prices because the product is protected from generic and biosimilar competition while these rights are in effect.⁵⁶ IP rights are typically justified as necessary to encourage innovation and for manufacturers to recoup their R&D costs, but are sometimes criticized as contributing to high prices for pharmaceutical products.⁵⁷ For example, some stakeholders and Members of Congress have questioned particular patenting strategies—such as "product hopping," "evergreening," and "patent thickets"—that allegedly misuse the IP system to unduly extend the periods of exclusivity for particular drugs and biologics.⁵⁸

Precisely when generic or biosimilar competition occurs for any given product depends on a complex interplay of market incentives, patents, regulatory exclusivities, FDA processes, and—not infrequently—litigation.⁵⁹ Although patents can last up to 20 years, some of the patent term is taken up by the patent application process itself. Still more of a patent's term may also occur prior to market approval for a drug or biologic, particularly for patents granted early in a product's life cycle, such as active-ingredient patents.⁶⁰ In addition, although patents carry a presumption of validity,⁶¹ they may be challenged by generic and biosimilar manufacturers in court.⁶² In practice, empirical studies usually find that the average effective market exclusivity period for new drugs (i.e., the average time before actual generic entry) is between 12 and 15 years.⁶³ Although data are limited, some studies show that average effective exclusivity periods are longer for biologics.⁶⁴ This difference may be due to patenting factors⁶⁵ and to the longer general regulatory exclusivity period (12 years) for new biologics.⁶⁶

Potential Effects of the IRA on the Pharmaceutical Market

In theory, the provisions of the IRA could alter some economic incentives in the pharmaceutical industry. As a result, the industry may respond with changes to its product development, patent acquisition, and patent assertion practices. Whether and how much such changes occur is uncertain, as this will depend on many factors, including how the Program is implemented.

Potential Effects of the Program on R&D Incentives

First, according to some analyses, price negotiation under the IRA could reduce the overall revenue for selected brand-name products, because negotiation limits the power to set prices for the Medicare market.⁶⁷ Presuming a chemical drug is selected for negotiation and has an average effective exclusivity of 13 years, the price-setting power afforded by its patent monopoly will be somewhat weaker in years 9 through 13 if selected for negotiation under the Program.⁶⁸ Put another way, although Medicare participants may benefit from lower prices under the Program, negotiation arguably reduces overall incentives to invest in new product development.⁶⁹ On the other hand, it is not clear whether this effect will be practically significant because, among other things, it is unclear how much negotiation will affect manufacturers' revenue,⁷⁰ and it is difficult to predict whether a drug still in development will be subject to negotiation years later. Some may also view existing incentives (including patents and regulatory exclusivities) as sufficient to encourage investment in R&D, and question whether selection of a small class of drugs for negotiation meaningfully alters those incentives.⁷¹

Second, because chemical drugs are subject to price negotiation earlier than biologics, the IRA could make biologics development comparatively more attractive for investment.⁷² (This difference may already be true to some degree, given the longer exclusivity period for biologics and the generally weaker effect of biosimilar competition on prices as compared to generic competition.⁷³) For example, a 2022 survey by Pharmaceutical Research and Manufacturers of America (PhRMA), a trade group for the drug industry, found 63% of responding member companies planned to shift R&D focus away from small molecules in response to the IRA and 95% to develop fewer uses for new medicines.⁷⁴ Whether this effect will be significant in practice remains to be seen, and other factors (such as the potential market for a product) may be more significant in R&D decisions than the possibility of MFPs imposed no earlier than 9 or 13 years after approval or licensure.⁷⁵

Third, because only single-source products are subject to negotiation, brand-name manufacturers may have reduced incentives to litigate generic and biosimilar entry, at least on the margins. Especially for biologics, a brand manufacturer could prefer in some cases to allow biosimilar competition to avoid being subject to price negotiation.⁷⁶ While brand-name manufacturers generally seek to prevent competition, immunity from price negotiation may influence the cost- benefit analysis when a manufacturer decides whether to file a patent lawsuit seeking to prevent the entry of a generic or biosimilar competitor.⁷⁷

Potential Effects of the Program on Drug Prices

The Congressional Budget Office (CBO) forecasts that the Program will reduce net prices for selected drugs by about 50%, on average, and that the Secretary will have sufficient leverage to negotiate some prices below the level of the MFP.⁷⁸ The CBO also expects Medicare drug prices to be affected by other IRA provisions besides the Program. For example, a separate IRA provision requires that manufacturers pay rebates to HHS if certain Part B- and D-covered drugs have price increases above an allowable rate of inflation. The mandatory rebate is separate from the Program, but includes drugs with an MFP.⁷⁹ The CBO expects that the mandatory rebate provision will slow drug price growth in Part D, even though manufacturers could attempt to set higher launch (list) prices for new drugs to offset some of its impact.

Overall, the CBO forecasts that under the IRA "the number of drugs that would be introduced to the U.S. market would be reduced by about 1 over the 2023-2032 period, about 5 over the subsequent decade, and about 7 over the decade after that."⁸⁰

The federal government has also asserted that in some cases manufacturers could realize increased revenues if their products were selected for negotiation under the Program. For example, in a recent motion to dismiss filed by the government in a lawsuit challenging the constitutionality of the IRA, the government argued the pharmaceutical industry's claims of financial harm from the IRA were speculative, stating that "[c]ontrary to the tone of pessimistic inevitability in Plaintiffs' filings, it is possible that manufacturers will agree to prices that result in flat or even greater revenue for them…."⁸¹ The government pointed to the IRA formula for determining a Part D drug's MFP, which is the lower of the Part D average net price or the nonfederal AMP. (See "Selected Drug Negotiation Provisions of the IRA.") If the Part D average net price turned out to be the lower price, the MFP ceiling would be the drug's Part D price minus any rebates and certain other price concessions that the manufacturer provided to the insurers that offer Part D plans. In other words, the government argued that the MFP could be near the manufacturer's current net price.⁸²

Though not explicitly described in the legal filing, the IRA includes other provisions that could reduce the need for manufacturers to provide the same level of rebates for drugs with an MFP going forward. For example, manufacturers often provide rebates to Part D sponsors (insurers) and their pharmacy benefit managers to ensure that their drugs are included on Part D plan formularies or are placed on a lower-cost formulary tier. The IRA requires that Part D plans cover all drugs with a negotiated MFP, meaning manufacturers of those drugs might not need to provide rebates at the same level going forward.⁸³ Depending on the Secretary's decision on a final MFP for a drug at the end of the negotiation process, and negotiations with Part D plans regarding formulary placement, a manufacturer's net price after negotiation could be near the current net levels.⁸⁴

The government added that being selected for a negotiated MFP for a drug "will also trigger other unequivocal benefits to its manufacturer," namely an exemption from the Part D Manufacturer Discount Program.⁸⁵ Under current law, manufacturers that participate in Part D must provide a 70% discount on brand-name biologic and biosimilar drugs purchased by enrollees with sufficient drug spending to reach a phase of the annual benefit known as the doughnut hole. (See Figure 1.) For 2023, enrollees enter the doughnut hole when they have $4,660 in total drug spending, and exit when they have about $11,000 in total drug spending ($7,400 in out-of-pocket spending). If an enrollee were prescribed a brand-name drug that cost $40,000 per year, for example, the manufacturer would provide a 70% discount only on the portion of the drug spending that was incurred in the doughnut hole.⁸⁶

Figure 1. 2023 Medicare Part D Standard Benefit

Source: CRS visual based on CMS program information. Note: CMS has not yet released the 2025 Part D deductible.

The IRA eliminates the Part D doughnut hole in 2025. (See Figure 2.) Instead, drug manufacturers that participate in Part D will be required to provide a 10% discount on drugs purchased by enrollees between the annual deductible and $2,000 in out-of-pocket spending⁸⁷ and a 20% discount on drugs purchased by enrollees when they have more than $2,000 in out-of-pocket spending. Because the required discounts going forward would apply to the full price of a drug, some manufacturers could provide much higher discounts than under the current program.⁸⁸ According to CMS:

So even if prices for a selected drug fall, any losses could be offset (or more) by exemption from the obligation to offer these discounts—especially if the "maximum fair price" comes in at or near the ceiling price. Indeed, depending on how all these variables shake out, a manufacturer of a selected drug could even see increased revenue.

To be sure, it is possible that the "maximum fair price" for some selected drugs will be lower than the ceiling price—perhaps significantly so. After all, Congress directed CMS to "aim[] to achieve the lowest maximum fair price" that it can persuade manufacturers to accept.⁸⁹

Figure 2. 2025 Medicare Part D Standard Benefit

Source: CRS visual based on CMS program information. Note: CMS has not yet released the dollar amount of the 2025 Part D deductible or estimated total drug spending needed to accumulate $2,000 in out-of-pocket spending.

Industry and academic studies have posited varying outcomes for drug pricing under the IRA. Forecasts differ based on assumptions about the drugs to be selected for Program negotiation, and manufacturer responses.⁹⁰ Lawmakers are debating legislation in the 118^th Congress that would make further changes to Medicare and the commercial market, including regulation of pharmacy benefit managers and broader requirements for drug price transparency, that could also affect prescription drug pricing and distribution.