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Impact of CMS Changes to Negotiated Price Definition in the Final Rule



By Yvonne Tso, Pharm. D., MBA


On May 9, 2022, the Centers for Medicare & Medicaid Services (CMS) issued final rules for Policy and Technical Changes to the Medicare Advantage (MA) and Medicare Prescription Drug Benefit Programs (MAPD) for contract year 2023 (Final Rule) [1]. The changes become effective on June 28, 2022, except for the implementation of “negotiated price” for Part D drugs in accordance with the new definition at §§ 423.100 and 423.2305, which will take effect on January 1, 2024.


Current Definition of negotiated prices

The Medicare Modernization Act (MMA) of 2003 defines negotiated prices to be inclusive of price concessions, such as discounts, direct or indirect subsidies, rebates, and direct or indirect remunerations (DIR), for covered part D drugs, and any dispensing fees for such drugs. The definition allows the exclusion of contingent amounts that cannot “reasonably be determined” at the point-of-sale[2]. Under this exclusion, negotiated prices usually do not reflect any performance-based pharmacy price concessions that lower the price ultimately paid for a drug because the amounts are contingent upon performance measured over a period beyond the point of sale (POS) and thus cannot reasonably be determined at POS. In recent years, performance-based reimbursements are increasingly prevalent and rising to 6% or more of drug prices which amounts are clawed backed from pharmacy reimbursements after measurements are determined and true-ups are completed[3]. Performance-based pharmacy price concessions, net of all pharmacy incentive payments, increased, on average, nearly 170 percent per year between 2012 and 2020 and now comprise the second largest category of DIR received by sponsors and PBMs, behind only manufacturer rebates[4]. Although rebates and performance-based price concessions are reported by Part D sponsors to CMS in the DIR report, Medicare beneficiaries have already paid the higher prices without the benefits associated with rebates or price concessions.


New definition of negotiated price and price concession

The Final Rule redefines negotiated price as “the lowest possible reimbursement [a] network [pharmacy or dispensing provider] will receive, in total, for a [covered Part D] drug.” This new definition will include all pharmacy price concessions received by the plan sponsor and apply across all phases of the Part D benefit cycle.[5]

CMS is also defining price concessions in the Final Rule as “any form of discount, direct or indirect subsidy, or rebate received by the Part D sponsor or its intermediary contracting organization from any source that serves to decrease the costs incurred under the Part D plan by the Part D sponsor. Examples of price concessions include but are not limited to: discounts, chargebacks, rebates, cash discounts, free goods contingent on a purchase agreement, coupons, free or reduced-price services, and goods in kind” [6]. According to DIR data provided in support of the Final Rule, pharmacy price concessions grew more than 107,400% between 2010 and 2020, totaling about $8.9 million in 2010, to $9.5 billion in 2020[7] or 4.8% of total Part D gross drug costs.


Impact of New definitions

CMS estimates that, in aggregate, the changes to the negotiated price definition will save beneficiaries $26.5 billion but will cost Medicare $46.8 billion between 2024 and 2032. For the manufacturers, CMS estimates that manufacturers will save $16.8 billion in Coverage Gap Discount Program discounts under the Final Rule reducing total manufacturer gap discount payments as fewer beneficiaries enter the coverage gap.[8]

However, beneficiaries who do not have significant Part D drug spending may see their Part D premiums raised as plan sponsors price Part D premiums based on lower DIR fees.

The increased cost to Medicare would be somewhat offset by the decreases in Medicare’s reinsurance and low-income cost-sharing payments because beneficiaries would not enter the catastrophic phase as quickly. Moreover, Medicare’s reinsurance payments would be based on lower negotiated prices. As drug prices decline at POS, beneficiaries’ cost-sharing obligations decline as well, lowering low-income cost-sharing payments by Medicare. CMS estimates $100,000 in cost for a one-time system change to operationalize the new definitions.


Changes promulgated in the Final Rule are driven by multiple factors. First and foremost are the rising costs of Part D drugs and increasing number of beneficiaries entering the catastrophic phase of Part D[9] for which Medicare’s reinsurance is 80%, now accounting for close to half of total Part D spending (45%), up from 14% in 2006 (increasing from $6 billion in 2006 to $48 billion in 2020).[10]

Since the establishment of the Innovation Center in 2010, CMS has tried various ways to test payment and delivery models, such as the Senior Savings Model, which is expected to reduce program costs and improve or maintain the quality of care for Medicare, Medicaid and Children’s Health Insurance Program (CHIP) beneficiaries. Plan sponsors are encouraged to participate and do likewise.



Dynamics of the Part D program are complex. Stakeholders’ interests and objectives are not aligned. The implementation date of January 1, 2024 to operationalize the new definition of negotiated price is not far off especially when Part D bids for 2024 are due in 12 months.

The intent of the rule includes the elimination of the distortions in the market that drive up pharmaceutical list prices for EGWPs as well as other MA and Part D plans. As discussed elsewhere in this rule, list prices have been rising to increase the rebates.


Integritas Medicare has helped plan sponsors meet regulatory changes since 2005. If you would like an in-depth discussion of how to meet the challenge of this policy change, please contact us at 415-596-5277.


[1] Contract Year 2023 Policy and Technical Changes to the Medicare Advantage and Medicare Prescription Drug Benefit Programs, May 9, 2022 [2] 42 C.F.R. § 423.100 [3] Both are typically done by the Pharmacy Benefit Manager. [4] Contract Year 2023 Policy and Technical Changes to the Medicare Advantage and Medicare Prescription Drug Benefit Programs, May 9, 2022 [5] CMS 4192-F [6] 42 C.F.R. § 423.100 [7] https://www.natlawreview.com/article/cms-proposes-changes-to-part-d-regulations-pharmacy-price-concessions [8] Contract Year 2023 Policy and Technical Changes to the Medicare Advantage and Medicare Prescription Drug Benefit Programs, May 9, 2022 [9] The number has more than tripled from nearly 400,000 in 2010 to 1.5 million in 2019. The percent of all Part D enrollees not receiving low-income subsidies with out-of-pocket spending above the catastrophic coverage threshold has more than doubled, from 2.1% in 2010 to 4.4% in 2019 according to Kaiser Family Foundation. https://www.kff.org/medicare/issue-brief/millions-of-medicare-part-d-enrollees-have-had-out-of-pocket-drug-spending-above-the-catastrophic-threshold-over-time/ [10] 2016-2021 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds

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