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

Federal RegisterNov 28, 2025

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 422 and 423

[CMS-4212-P]

RIN 0938-AV63

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

AGENCY:

Centers for Medicare & Medicaid Services (CMS), Department of Health and Human Services (HHS).

ACTION:

Proposed rule.

SUMMARY:

This proposed rule would revise the Medicare Advantage (Part C), Medicare Prescription Drug Benefit (Part D), and Medicare cost plan regulations to implement changes related to Star Ratings, marketing and communications, drug coverage, enrollment processes, special needs plans, and other programmatic areas.

DATES:

To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. Eastern Time on January 26, 2026.

ADDRESSES:

In commenting, please refer to file code CMS-4212-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

Comments, including mass comment submissions, must be submitted in one of the following three ways (please choose only one of the ways listed):

Electronically.

You may submit electronic comments on this regulation to

http://www.regulations.gov.

Follow the “Submit a comment” instructions.

By regular mail.

You may mail written comments to the following address ONLY:

Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-4212-P, P.O. Box 8013, Baltimore, MD 21244-8013.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

By express or overnight mail.

You may send written comments to the following address ONLY:

Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-4212-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

For information on viewing public comments, see the beginning of the

SUPPLEMENTARY INFORMATION

section.

FOR FURTHER INFORMATION CONTACT:

Kristy Nishimoto, (206) 615-2367—General Questions and Beneficiary Enrollment Issues.

Naseem Tarmohamed, (410) 786-0814—Part C and Cost Plan Issues.

Lucia Patrone, (410) 786-8621—Part D Issues.

Alissa Stoneking, (410) 786-1120—Parts C and D Payment Issues.

Sara Klotz, (410) 786-1984—D-SNP Issues.

Beckie Peyton, (410) 786-1572—Manufacturer Discount Program Issues.

PartCandDStarRatings@cms.hhs.gov

—Parts C and D Star Ratings Issues.

CMMI_MAStrategy@cms.hhs.gov

—RFI on Future Directions in Medicare Advantage.

CPI_PartC&D_RegIssues@cms.hhs.gov

—Part D Program Integrity Issues.

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments:

All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following website as soon as possible after they have been received:

http://www.regulations.gov.

Follow the search instructions on that website to view public comments. CMS will not post on

Regulations.gov

public comments that make threats to individuals or institutions or suggest that the commenter will take actions to harm an individual. CMS continues to encourage individuals not to submit duplicative comments. We will post acceptable comments from multiple unique commenters even if the content is identical or nearly identical to other comments.

Plain Language Summary:

In accordance with 5 U.S.C. 553(b)(4), a plain language summary of this proposed rule may be found at

https://www.regulations.gov/.

Deregulation Request for Information (RFI):

On January 31, 2025, President Trump issued Executive Order (E.O.) 14192 “Unleashing Prosperity Through Deregulation,” which states the Administration policy to significantly reduce the private expenditures required to comply with Federal regulations to secure America's economic prosperity and national security and the highest possible quality of life for each citizen. We would like public input on approaches and opportunities to streamline regulations and reduce administrative burdens on providers, suppliers, beneficiaries, and other interested parties participating in the Medicare program. We have made available an RFI at

https://www.cms.gov/medicare-regulatory-relief-rfi.

Please submit all comments in response to this request for information through the provided weblink. Please note, this is an RFI only. In accordance with the implementing regulations of the Paperwork Reduction Act (PRA), specifically 5 CFR 1320.3(h)(4), this general solicitation is exempt from the PRA. Facts or opinions submitted in response to general solicitations of comments from the public, published in the

Federal Register

or other publications, regardless of the form or format thereof, provided that no person is required to supply specific information pertaining to the commenter, other than that necessary for self-identification, as a condition of the agency's full consideration, are not generally considered information collections and therefore not subject to the PRA.

I. Executive Summary

A. Purpose

The primary purpose of this proposed rule is to amend the regulations for the Medicare Advantage (Part C) program, Medicare Prescription Drug Benefit (Part D) program, and Medicare cost plan program. This proposed rule includes a number of changes that would improve these programs for contract year 2027 as well as codify existing sub-regulatory guidance.

We note that, as with previous rules, the new marketing and communications policies in this rule are proposed to be applicable for all contract year 2027 marketing and communications, beginning October 1, 2026.

B. Summary of the Key Provisions

1. Medicare Part D Redesign

This proposal would implement the changes made to the Part D benefit design and the payment obligations of enrollees, Part D plan sponsors, manufacturers, and CMS by section 11201 of the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169).

We are proposing to codify the statutory changes to the phases of the Part D benefit made by the IRA related to the deductible, initial coverage limit, the coverage gap, the annual out-of-pocket threshold, and alternative prescription drug coverage options. In alignment with these changes to the Part

D benefit, we are also proposing to codify technical and conforming changes to our specialty tier regulations. This proposal would codify additional structural and operational statutory changes to the Part D benefit design, including making changes to the types of payments that count as True Out-Of-Pocket costs (TrOOP), establishing a policy for how an enrollee's costs for drugs not subject to the Part D defined standard deductible count towards becoming eligible for manufacturer discounts under the Medicare Part D Manufacturer Discount Program (Manufacturer Discount Program), making updates to the methodology for reinsurance payments from us to Part D sponsors, and implementing the Selected Drug Subsidy, among others.

2. Coverage Gap Discount Program

We propose to codify the sunsetting of the Coverage Gap Discount Program and termination of all Coverage Gap Discount Program agreements as of January 1, 2025, in alignment with subsection (h) of section 1860D-14A of the Social Security Act (the Act), as added by section 11201 of the IRA. Specifically, we propose to revise § 423.2300 by adding paragraph (b) to establish applicability dates for the Coverage Gap Discount Program, revise § 423.2345 by adding paragraph (f) to terminate all Coverage Gap Discount Program agreements, as well as make conforming changes for clarity.

3. Manufacturer Discount Program

We propose regulatory changes to codify the Manufacturer Discount Program, established in section 1860D-14C of the Act, as added by section 11201 of the IRA. Under the Manufacturer Discount Program, which replaces the Coverage Gap Discount Program and began on January 1, 2025, manufacturers that enter into a Manufacturer Discount Program agreement are required to provide discounts on applicable drugs in both the initial and catastrophic coverage phases of the Part D benefit. Specifically, we propose to add new subpart AA to part 423 to codify the Manufacturer Discount Program requirements and make several conforming changes throughout part 423 to reflect the new program.

4. Updates to Star Ratings

We have continued to identify enhancements to the Star Ratings program over time to increase the health and wellbeing of enrollees. In this proposed rule, we are proposing changes to simplify and refocus the areas included in the Star Ratings, including changes to the measure set. We also propose to not move forward with the implementation of the Health Equity Index (also called Excellent Health Outcomes for All) reward at §§ 422.166(f)(3) and 423.186(f)(3) and to continue to include the historical reward factor in the Star Ratings methodology at §§ 422.166(f)(1) and 423.186(f)(1). We also solicit comments on ways to further simplify and modify the Star Ratings program to further drive improved quality of care and reduce regulatory burden.

5. Request for Information on Dually Eligible Individual Enrollment Growth in C-SNPs and I-SNPs

Chronic condition special needs plans (C-SNPs) and the number of dually eligible individuals enrolled in these plans have grown significantly between 2021 and 2025. Dually eligible enrollment in institutional special needs plans (I-SNPs) has remained more stable. While C-SNPs and I-SNPs can offer benefits specific to chronic disease and institutional level of care, respectively, they do not integrate Medicare and Medicaid benefits and may not be the best approach for meeting the needs of dually eligible individuals. The growth in C-SNP enrollment could be an intentional approach by MA organizations to circumvent Federal and State requirements for dual eligible special needs plans (D-SNPs), such as States determining which D-SNPs will be offered in a State through their State Medicaid agency contract authority and general coordination and integration requirements. This proposed rule includes a request for information (RFI) to share information with interested parties on these trends and solicit feedback on them as well as on potential policy solutions for future consideration.

6. Request for Information on Future Directions in Medicare Advantage (Risk Adjustment and Quality Bonus Payments)

This RFI will serve as a formal mechanism to solicit comprehensive public input from interested parties, including MA organizations, beneficiary advocates, healthcare providers, as well as technology and industry experts, regarding the future direction of the MA program. The goal of this RFI is to solicit comment on modernizing and improving the MA program that could be implemented through either programmatic changes or through a CMS Innovation Center (CMMI) model. This public comment process will enable us to gather critical feedback on risk adjustment enhancements and quality bonus payment changes. Through this RFI, we are working to ensure any resulting changes would effectively address interested parties' concerns while achieving objectives of data transparency for beneficiaries to facilitate optimal plan selection, improved quality, enhanced competition, taxpayer savings, and minimizing fraud, waste, and abuse in the MA program.

C. Summary of Costs and Benefits

BILLING CODE 4120-01-P

EP28NO25.000

BILLING CODE 4120-01-C

D. Supplemental Requests for Information

We are requesting comments on several specific areas beyond the various comment opportunities already presented throughout the proposed rule as part of our commitment to reducing regulatory burden while strengthening program integrity. First, we are considering ways to modernize our approach to marketing oversight and agent/broker regulation in the Medicare program while ensuring beneficiaries continue to receive accurate information about plan choices. This includes, but is not limited to, all of the following:

• Modifying the current definition of third-party marketing organization (TPMO) under §§ 422.2260 and 423.2260 to delineate the roles of and requirements applicable to the different kinds of TPMOs.

• Modifying the 5 percent translation requirement found in §§ 422.2267 and 423.2267.

• Removing the requirement for our approval of plan use of the Medicare Card image found in §§ 422.2262(a)(1)(xix) and 423.2262(a)(1)(xviii).

• Eliminating the Outbound Enrollment Verification found in §§ 422.2272(b) and 423.2272(b).

• Modifying testimonial requirements found under §§ 422.2262(b) and 423.2262(b).

• Eliminating mailing statement requirements found under §§ 422.2267(e)(36) and 422.2267(e)(37).

We are also looking specifically at regulatory changes that will assist the agency in taking appropriate action against TPMOs, including agents and brokers who fail to adhere to our requirements. Our goal is to address non-compliance, holding MA plans and Part D sponsors accountable for those TPMOs who provide inaccurate, misleading, and confusing information, or act in a manner contrary to our requirements. We have considered options such as further segmentation of the definition for TPMOs found under §§ 422.2260 and 423.2260 to account for size, scope, and role of various interested parties; however, we recognize the need for industry input before implementing any change. We, therefore, solicit comments on how to hold “bad actors” accountable, while not burdening those TPMOs and plans that adhere to our requirements. We also solicit comments on how to properly align incentives in the agent or broker space, how to identify and address when agents and brokers perform their jobs in good faith but does not adhere to requirements that apply to the MA plan. For example, we welcome comment on whether updates to the training and testing requirements are needed or new ways CMS or MA organizations and Part D sponsors can improve how beneficiaries interact with agents or brokers. We are also soliciting comments on how best to monitor and assess the actions of MA organizations, Part D sponsors, and their downstream entities such as TPMOs, using data driven strategies. We are interested in finding ways to better utilize data—whether it is CMS, plan, first tier, downstream or related entity (FDR), or TPMO data—to review and monitor the MA and Part D market, and to assist us in addressing MA organization and PDP sponsor compliance with our requirements. Likewise, the agency is also seeking interested parties feedback regarding how technology can be leveraged, including on the use of artificial intelligence, to enhance the decision support tools used by beneficiaries and their caregivers.

In addition to issues regarding marketing oversight and agent/broker regulation and consistent with the Administration's deregulation priorities, we are seeking comment on current reporting processes and data collections to identify specific areas where requirements can be simplified, consolidated, or eliminated while maintaining program integrity and beneficiary protections in the following areas:

• Network adequacy.

• Medical loss ratio (MLR) reporting.

• Benefit, including supplemental benefit, usage and utilization data reporting.

• Requirements related to the SNP model of care (MOC).

We are interested in ideas for streamlining data collection processes for the areas listed previously, including automated data sharing to reduce manual reporting and ideas related to alignment with existing reporting mechanisms. We are also interested in feedback regarding which data elements are the most burdensome to collect and report, as we seek to balance the level of detail required to maintain proper program oversight while promoting efficiency.

Regarding network adequacy, we seek comments on how to simplify the provider and facility network review process overall, including the submission process, the exception request process, and the timing and frequency of the reviews. An example of a way that we could simplify the exception request process is to create a separate pattern of care exception under § 422.116(f)(1), that could be used where the pattern of care in the area is unique and the organization believes their contracted network is consistent with or better than the Original Medicare pattern of care. An organization could use this exception in lieu of demonstrating the current requirements under § 422.116(f)(1)(i), that is: (A) Certain providers or facilities are not available for the MA plan to meet the network adequacy criteria as shown in the Provider Supply file for the year for a given county and specialty type ; and (B) the MA plan has contracted with other providers and facilities that may be located beyond the limits in the time and distance criteria, but are currently available and accessible to most enrollees, consistent with the local pattern of care.

We welcome comments on these topics.

E. Conclusion

Finally, we are clarifying and emphasizing our intent that if any provision of this rule, once finalized, is held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further agency action, it shall be severable from this rule and not affect the remainder thereof or the application of the provision to other persons not similarly situated or to other, dissimilar circumstances. Through this rule, we propose provisions that are intended to and will operate independently of each other, even if each serves the same general purpose or policy goal. Where a provision is necessarily dependent on another, the context generally makes that clear (such as by a cross-reference to apply the same standards or requirements).

II. Implementation of Certain Provisions of the Inflation Reduction Act of 2022 and the Substance Use-Disorder Prevention That Promotes Opioid Recovery and Treatment for Patients and Communities Act of 2018

A. Medicare Part D Redesign

1. Background

Section 11201 of the Inflation Reduction Act of 2022 (IRA) made significant changes to the Part D benefit design that affect the structure of the Part D benefit and the payment obligations of enrollees, Part D plan sponsors, manufacturers, and CMS. Several of the changes made by section 11201 of the IRA have taken effect already and other changes will go into effect in 2026, as described later.

Section 11201(f) of the IRA directed the Secretary to implement section

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.

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.

https://www.cms.gov/files/document/2024-advance-notice-pdf.pdf.

On April 1, 2024, we released the Final CY 2025 Part D Redesign Program Instructions.

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.

https://www.cms.gov/files/document/final-cy-2025-part-d-redesign-program-instructions.pdf.

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.

In these program instructions, we implemented further changes made by the IRA to the Part D benefit that go into effect in CY 2026, including certain changes to the Part D benefit that relate to the Medicare Drug Price Negotiation Program that also was established by the IRA. Beginning January 1, 2026, the maximum fair prices (MFPs) negotiated under the Medicare Drug Price Negotiation Program go into effect.

This program, as established in Part E of title XI of the Act, permits the Secretary to negotiate MFPs for certain high expenditure, single source drugs and biological products with participating manufacturers. When these prices go into effect, the IRA makes further changes to payment obligations in Part D related to selected drugs (as defined in section 1192(c) of the Act) during a price applicability period (as defined in section 1191(b)(2) of the Act).

https://www.cms.gov/files/document/final-cy-2026-part-d-redesign-program-instruction.pdf.

For more information on the Medicare Drug Price Negotiation Program, please see:

https://www.cms.gov/priorities/medicare-prescription-drug-affordability/overview/medicare-drug-price-negotiation-program.

As described in the Final CY 2026 Part D Redesign Program Instructions, the defined standard Part D benefit for CY 2026 will consist of the following phases and liabilities, with the CY 2026 changes reflected in bolded and italicized font:

•

Annual deductible.

The enrollee pays 100 percent of their gross covered prescription drug costs (GCPDC) until the deductible is met.

•

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

and 75 percent of the costs of all other covered Part D drugs. The manufacturer, through the Manufacturer Discount Program, typically covers 10 percent of the costs of applicable drugs.

In the initial coverage phase, CMS will pay a 10 percent subsidy for selected drugs during a price applicability period.

This phase ends when the enrollee has reached the annual OOP threshold of $2,100 for CY 2026.

An applicable drug under the Manufacturer Discount Program is a Part D drug approved under a new drug application (NDA) under section 505(c) of the Federal Food, Drug, and Cosmetic Act (FDCA) or, in the case of a biological product, licensed under section 351 of the Public Health Service Act (PHSA), but does not include a selected drug (as defined in section 1192(c) of the Act) dispensed during a price applicability period (as defined in section 1191(b)(2) of the Act) with respect to that drug. Selected drug has the meaning given such term in section 1192(c) of the Act and any applicable regulations and guidance.

•

Catastrophic.

The enrollee pays no cost sharing for Part D drugs. Part D plan sponsors typically pay 60 percent of the costs of all covered Part D drugs. The manufacturer pays a discount, typically equal to 20 percent, for applicable drugs. Medicare pays a reinsurance subsidy equal to 20 percent of the costs of applicable drugs, and equivalent to 40 percent of the costs of all other covered Part D drugs that are not applicable drugs.

In the catastrophic phase, Medicare will provide 40 percent reinsurance for selected drugs during a price applicability period.

As part of the overall restructuring of the Part D benefit, the IRA also made changes to the treatment of Advisory Committee on Immunization Practices (ACIP)-recommended adult vaccines and covered insulin products under Part D. Section 11401 of the IRA added section 1860D-2(b)(8) of the Act to require that, effective for plan years beginning on or after January 1, 2023, the Medicare Part D deductible shall not apply to, and there is no coinsurance or cost sharing for, an adult vaccine recommended by ACIP that is a covered Part D drug. Further, section 11406 of the IRA added section 1860D-2(b)(9) of the Act to require that, effective for plan years beginning on or after January 1, 2023, the Medicare Part D deductible shall not apply to covered insulin products, and the Part D cost-sharing amount for a one-month supply of each covered insulin product must not exceed the applicable cost-sharing amount for all enrollees. For CYs 2023, 2024, and 2025, this amount was $35.

Sections 11401(e) and 11406(d) of the IRA directed the Secretary to implement the vaccine and insulin cost sharing changes for CYs 2023, 2024, and 2025 by program instruction or other forms of program guidance. In accordance with the law, we issued several memoranda via the Health Plan Management System (HPMS) that implemented sections 11401 and 11406 of the Act for CYs 2023, 2024, and 2025.

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).

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.

https://www.federalregister.gov/documents/2025/04/15/2025-06008/medicare-and-medicaid-programs-contract-year-2026-policy-and-technical-changes-to-the-medicare.

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 § 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 (§§ 423.100 and 423.104)

In this rule, we are proposing to codify at §§ 423.100 and 423.104

changes to the Part D benefit made by the IRA related to the deductible, initial coverage limit, the coverage gap, the annual out-of-pocket (OOP) threshold, and alternative prescription drug coverage options.

a. Deductible (§ 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.

Specifically, the vaccine changes codified at § 423.120(g)(1) and the insulin changes codified at § 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.

https://www.federalregister.gov/documents/2025/04/15/2025-06008/medicare-and-medicaid-programs-contract-year-2026-policy-and-technical-changes-to-the-medicare.

In alignment with these changes, we are proposing to revise the regulatory text at § 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 § 423.100.

b. Initial Coverage Limit (§§ 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 § 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 § 423.100, met the OOP threshold, at which point the enrollee would enter the catastrophic phase.

By eliminating the initial coverage limit beginning in CY 2025, the IRA eliminated the coverage gap phase, resulting in a three-phase benefit for Part D prescription drug coverage which includes the deductible phase, the initial coverage phase, and the catastrophic phase. As such, as of CY 2025, there is no longer an initial coverage limit and the initial coverage phase extends to the annual OOP threshold, at which point the catastrophic phase begins. Once an enrollee enters the catastrophic phase, they pay no cost sharing for Part D drugs.

As a result of these changes, we are proposing to revise § 423.104(d)(2) and (d)(3) to reflect the elimination of the initial coverage limit beginning in CY 2025. Specifically, we are proposing to revise the section heading at § 423.104(d)(2) by removing “the initial coverage limit” and replacing it with “prescription drug plans” to accurately reflect the new benefit structure in which there is no initial coverage limit beginning in CY 2025 and to ensure consistency with the statutory changes made by the IRA. This proposed heading language change is intended to accurately encompass the regulations included in the paragraphs that are subordinate to § 423.104(d)(2), which include regulations related to tiered copayments and the specialty tier.

We are also proposing to revise § 423.104(d)(2)(i), which currently specifies that coinsurance for actual costs for covered Part D drugs above the annual deductible applies up to the initial coverage limit. To align our regulations with current statute and the redesigned Part D benefit structure where beneficiaries move directly from the initial coverage phase to the catastrophic phase once they reach the OOP threshold, we propose to revise this language to specify that for each year preceding 2025, this coinsurance applies up to the initial coverage limit and, for 2025 and each subsequent year, this coinsurance applies up to the annual OOP threshold specified in § 423.104(d)(5)(iii).

We also propose to revise § 423.104(d)(3), which specifies how the initial coverage limit is determined. We first propose to correct § 423.104(d)(3) by removing the references to paragraphs (d)(4) and (d)(5) of this section because these paragraphs refer to regulations related to cost sharing in the coverage gap and the out-of-pocket threshold, which do not affect how the initial coverage limit is determined. We propose to revise § 423.104(d)(3)(ii) to specify that the methodology for increasing the initial coverage limit was in effect from 2007 to 2024. We are also proposing to add a new paragraph at § 423.104(d)(3)(iii) to state that, for 2025 and each subsequent year, there is no initial coverage limit.

Finally, we are proposing two conforming changes at § 423.128(e), which refers to the explanation of benefits that a Part D sponsor must furnish directly to enrollees. First, we propose to revise § 423.128(e)(3)(ii) which states that Part D sponsors are required to include information on the cumulative, year-to-date total amount of benefits provided in relation to the initial coverage limit for the current year in the explanation of benefits provided to enrollees. In alignment with section 1860D-4(a)(4)(B)(i) of the Act, as amended by section 11201 of the IRA, we are proposing to revise § 423.128(e)(3)(ii) by adding language to specify that the requirement to include information about the initial coverage limit was only in effect for years preceding 2025. Second, we propose to revise § 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 § 423.104(d)(3) and the out-of-pocket threshold described in § 423.104(d)(5)(iii). In alignment with the elimination of the initial coverage limit and coverage gap phase beginning in CY 2025, we are proposing to add language to specify that the covered Part D spending between the initial coverage limit and the out-of-pocket threshold requirement is only applicable for years preceding 2025.

Rather than striking the regulations that apply through CY 2024, we are proposing to maintain these regulations, with the described revisions, for historical purposes and for any reconciliation activities related to benefit years prior to 2025.

c. Coverage Gap (§§ 423.100 and 423.104(d)(4))

Section 11201 of the IRA eliminated the coverage gap phase of the Part D benefit by amending section 1860D-2(b) of the Act to eliminate the initial coverage limit beginning in CY 2025.

To align with these changes to the Part D benefit, we propose to revise § 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 § 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 are also proposing to revise § 423.104(d)(4)(iii), which describes the generic gap coinsurance percentage, by adding an end date to paragraph (C) of this section to state that the 25 percent generic gap coinsurance percentage only applied for years 2020 through 2024. This aligns with the IRA's elimination of the coverage gap phase in CY 2025.We also propose to revise § 423.104(d)(4)(iv), which describes the applicable gap coinsurance percentage, by revising paragraph (E) to specify that the applicable gap coinsurance percentage for 2019 was 75 (not 80 percent) and to add an end date indicating that the 75 percent applies for years 2019 through 2024, and removing paragraph (F), which incorrectly stated that the applicable gap coinsurance percentage for 2020 and subsequent years was 75 percent. These changes align with changes made by the Bipartisan Budget Act (BBA) of 2018 and the IRA. Section 53116 of the BBA amended section 1860D-2(b)(2)(D)(ii) of the Act to specify that the applicable gap percentage for 2019 is 75 percent, not 80 percent, thus accelerating by 1 year a reduction in enrollee cost sharing in the coverage gap phase. We note that this revision to paragraph (E) is, in part, a technical correction to align our regulations with the statutory change made by the BBA, which was implemented in 2019. This revision does not change how the applicable gap percentage was calculated in the past, as these amounts were properly determined consistent with the statutory requirement. We additionally propose to add a new paragraph at § 423.104(d)(4)(v) to specify that, for 2025 and each subsequent year, there is no coverage gap.

Finally, we are proposing conforming changes to §§ 422.2267(e)(5)(ii)(B)(1) and 423.2267(e)(5)(ii)(A)(2) which state that information on prescription drug expenses, including information on the deductible, the initial coverage phase, coverage gap, and catastrophic coverage, is required to be included in the Summary of Benefits provided to prospective enrollees. Due to the elimination of the coverage gap in CY 2025, we are proposing to revise §§ 422.2267(e)(5)(ii)(B)(1) and 423.2267(e)(5)(ii)(A)(2) by adding language to specify that the requirement to include information about the coverage gap was only in effect for years preceding 2025.

Even though the coverage gap phase was eliminated in CY 2025, we are proposing to maintain these regulations, with the described revisions, for historical purposes and for any reconciliation activities related to benefit years prior to 2025.

d. Annual Out-of-Pocket Threshold (§ 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.

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 § 423.100, exceed the annual OOP threshold, an enrollee will enter the catastrophic phase where there is no cost sharing for Part D drugs.

https://www.cms.gov/files/document/2026-announcement.pdf.

As a result of these changes, we are proposing to revise § 423.104(d)(5) to state the specific years for which certain aspects of this section apply and describe the new methodology for determining the annual OOP threshold, consistent with section 1860D-2(b)(4)(B)(i) of the Act.

We are proposing to revise § 423.104(d)(5)(i) to specify that, once an enrollee's incurred costs, as defined at § 423.100, exceed the annual OOP threshold described in paragraph (d)(5)(iii) of this section, they would have $0 cost sharing for 2024 and each subsequent year and, for each year preceding 2024, the cost-sharing structure currently outlined at paragraphs (d)(5)(i)(A) and (d)(5)(i)(B) of this section would apply. We also propose to revise § 423.104(d)(5)(i)(A)(2) to specify that the methodology described in this section for determining an enrollee's copayment amount applies through 2023. These proposed changes reflect the elimination of enrollee cost sharing for Part D drugs in the catastrophic phase beginning in CY 2024, consistent with section 1860D-2(b)(4)(A)(i) of the Act, as amended by section 11201 of the IRA.

We propose to revise § 423.104(d)(5)(iii)(F) to add an end date to state that this paragraph describes how the annual OOP threshold was determined for years 2021 through 2024. We also propose to add new § 423.104(d)(5)(iii)(G) to establish that for 2025, the annual OOP threshold was set at $2,000, consistent with section 1860D-2(b)(4)(B)(i)(VII) of the Act. Additionally, we are proposing to add new § 423.104(d)(5)(iii)(H) to specify the methodology for determining the annual OOP threshold for 2026 and each subsequent year. Consistent with section 1860D-2(b)(4)(B)(i)(VIII) of the Act, we propose that the annual OOP threshold for 2026 and each subsequent year would be the amount specified in this paragraph for the previous year, increased by the annual percentage increase specified in paragraph (d)(5)(iv) of this section, and rounded to the nearest $50.

e. Alternative Prescription Drug Coverage (§ 423.104(e)(5)) and Enhanced Alternative Coverage (§ 423.104(f)(1))

Part D sponsors must provide their enrollees with qualified prescription drug coverage which, as defined at § 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 § 423.100, means coverage of Part D drugs that meets the requirements of § 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 § 423.100, exceeded the annual OOP threshold. After the implementation of the IRA, defined standard coverage, as discussed in more detail in the introduction of this section of the proposed rule, now consists of an annual deductible, an initial coverage phase where the enrollee pays 25 percent coinsurance for covered Part D drugs until they reach the annual OOP threshold ($2,100 for CY 2026), and the catastrophic phase where the enrollee pays no cost sharing for Part D drugs. AE standard coverage, as defined at § 423.100, provides for cost sharing as described in

§ 423.104(d)(2)(i)(B) or cost sharing as described in § 423.104(d)(5)(ii), or both. In other words, under an AE plan, Part D sponsors modify certain benefit parameters, such as cost-sharing structures, while maintaining the same actuarial value. The changes the IRA made to the defined standard benefit are discussed in detail in the preceding sections of this proposed rule.

The IRA also, through section 11201 which amended section 1860D-2(c) of the Act, made changes to the requirements for alternative prescription drug coverage. Alternative prescription drug coverage, as defined in § 423.100, means coverage of Part D drugs, other than standard prescription drug coverage, that meets the requirements of § 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 § 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 § 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 § 423.104(e), combine certain features to maintain an actuarial value of coverage equal to defined standard prescription drug coverage, such as: (1) reducing the deductible, (2) making changes in cost sharing in an actuarially equivalent manner to the 25 percent cost sharing above the deductible and below the initial coverage limit under defined standard coverage and in an actuarially equivalent manner to the gap coverage coinsurance during the coverage gap, or (3) modifying the initial coverage limit. With the changes made to the Part D benefit by the IRA, including the elimination of the initial coverage limit and the coverage gap, certain features that could be offered by basic alternative plans are no longer available. Thus, we are proposing to revise our regulations at § 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 § 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 § 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:

• Reduction (or elimination) of the defined standard deductible.

• Reduction of cost sharing in the initial coverage phase.

• Increase of the initial coverage limit threshold.

• Additional cost-sharing reduction in the coverage gap phase.

• Reduction (or elimination) of cost sharing in the catastrophic phase.

As noted in the Final CY 2025 Part D Redesign Program Instructions, section 1860D-2(a)(2)(A)(i) of the Act does not include a reduction in the annual OOP threshold in its list of permissible supplemental benefits, and we have never interpreted such provision to allow for a reduction in the annual OOP threshold. Because the IRA established a defined annual OOP threshold of $2,000 for CY 2025, and an amount equal to the previous year's OOP threshold increased by the annual percentage increase for 2026 and subsequent years, and did not modify the list of permissible supplemental benefits in section 1860D-2(a)(2)(A)(i) of the Act to include a reduction in the annual OOP threshold, Part D sponsors may not lower the annual OOP threshold below the specified amount. Additionally, the IRA eliminated cost sharing in the catastrophic phase beginning in CY 2024 and eliminated the coverage gap phase and replaced the Coverage Gap Discount Program with the Manufacturer Discount Program beginning in CY 2025. Thus, only the following supplemental benefits remain as possible enhancement features: coverage of drugs that are specifically excluded from the definition of a Part D drug, and/or:

• Reduction (or elimination) of the defined standard deductible.

• Reduction of cost sharing in the initial coverage phase.

Given these changes to alternative prescription drug coverage, we propose to revise § 423.104(e)(5) to align our requirements for alternative prescription drug coverage with the changes made by the IRA. We are also proposing to revise § 423.104(f)(1) to align our requirements for enhanced alternative drug coverage with the changes made by the IRA.

We first propose to revise § 423.104(e)(5) to establish a distinction between the requirements for alternative prescription drug coverage that are applicable for years preceding 2025 and requirements for 2025 and each subsequent year. Specifically, we are proposing to add language that, for years preceding 2025, alternative prescription drug coverage is required to provide coverage that is designed to provide payment for costs incurred for covered Part D drugs that is equal to the initial coverage limit. We also propose to add language stating that, for 2025 and each subsequent year, this coverage must be equal to the annual OOP threshold, consistent with section 1860D-2(c)(1)(C) of the Act. Similarly, we propose to revise § 423.104(e)(5)(i) to specify that when calculating the required payment amount for costs incurred for covered Part D drugs, the amount the initial coverage limit exceeds the deductible should be used for years preceding 2025, and the amount the annual OOP threshold exceeds the deductible should be used for 2025 and each subsequent year. We propose maintaining § 423.104(e)(5)(ii) without change; therefore, the amount calculated in § 423.104(e)(5)(i) would be multiplied by 100 percent minus the coinsurance percentage specified in paragraph (d)(2)(i) of this section to determine the required payment amount.

Finally, we propose to revise § 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 § 423.104(f) remain applicable under the redesigned Part D benefit. Therefore, we are not proposing any additional changes to this section.

3. Specialty Tier (§ 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 § 423.104(d)(2)(iv), is a formulary cost-sharing tier dedicated to high-cost Part D drugs with ingredient costs for a 30-day equivalent supply (as described in paragraph (d)(2)(iv)(A)(2) of this section) that are greater than the specialty-tier cost threshold specified in paragraph (d)(2)(iv)(A) of this section. Consistent with § 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.

In the final rule titled “Medicare and Medicaid Programs; Contract Year 2022 Policy and Technical Changes to the Medicare Advantage Program, Medicare Prescription Drug Benefit Program, Medicaid Program, Medicare Cost Plan Program, and Programs of All-Inclusive Care for the Elderly” (CY 2022 final rule) which appeared in the

Federal Register

on January 19, 2021 (86 FR 5864),

We codified several important aspects of the specialty-tier policy that had previously been maintained through subregulatory guidance, including our methodology for setting and increasing the specialty-tier cost threshold and determining the maximum allowable cost sharing for specialty-tier drugs.

https://www.federalregister.gov/documents/2021/01/19/2021-00538/medicare-and-medicaid-programs-contract-year-2022-policy-and-technical-changes-to-the-medicare.

In the CY 2022 final rule, we codified our methodology for setting the specialty-tier cost threshold at § 423.104(d)(2)(iv)(A), as well as our methodology for increasing this cost threshold at § 423.104(d)(2)(iv)(B). These rules describe our processes for setting a minimum dollar-per-month threshold amount to determine which drugs are eligible, based on relative high cost, for inclusion on the specialty tier as well as adjusting this threshold to maintain approximately one percent of Part D drugs as specialty-tier eligible. In the CY 2022 final rule, we also codified, at § 423.104(d)(2)(iv)(D)(1) through (3), the maximum allowable cost sharing for drugs on the specialty tier between 25 and 33 percent coinsurance. By codifying this rule, we aimed to prevent discriminatory formulary structures and protect Part D enrollees with certain disease states that are treated only by specialty-tier eligible drugs. This “25/33 percent” maximum allowable cost sharing means that we approve cost sharing for the specialty tier of no more than 25 percent coinsurance after the standard deductible and before the initial coverage limit (ICL), or up to 33 percent coinsurance for plans with decreased or no deductible under alternative prescription drug coverage designs and before the ICL.

The implementation of the IRA has made it necessary for us to make changes to our current specialty-tier regulations related to adjusting the specialty-tier cost threshold and determining the maximum allowable cost sharing to align with the redesigned Part D benefit. In this rule, we propose to codify technical and conforming changes to our specialty-tier regulations at § 423.104.

a. Technical Correction to the Specialty-Tier Cost Threshold Determination (§ 423.104(d)(2)(iv)(A)(4))

We are proposing a technical correction in § 423.104(d)(2)(iv)(A)(4), which describes how the specialty-tier cost threshold is determined for the plan year. The current regulation text incorrectly refers to paragraph (d)(2)(iii) for the cost threshold determination, but it should refer to the top one percent methodology for determining the specialty-tier cost threshold at paragraph (d)(2)(iv)(A)(3). We therefore propose to correct this inadvertent technical error in this proposed rule.

b. Limit on Specialty-Tier Cost Threshold Adjustment (§ 423.104(d)(2)(iv)(B))

We annually calculate a minimum dollar-per-month threshold amount to determine which drugs are eligible, based on relative high cost, for inclusion on the specialty tier. This cost threshold is adjusted to maintain approximately 1 percent of Part D drugs as specialty-tier eligible. In the CY 2022 final rule, we codified at § 423.104(d)(2)(iv)(B) our methodology to increase the specialty-tier cost threshold as follows:

(

) CMS increases the specialty-tier cost threshold for a plan year only if the amount determined in paragraph (d)(2)(iv)(A)(

) of this section for a plan year is at least 10 percent above the specialty tier cost threshold for the prior plan year.

(

) 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)(

) of this section to the nearest $10, and the resulting dollar amount is the specialty-tier cost threshold for the plan year.

Our current regulation only contemplates increasing the specialty-tier cost threshold and does not consider decreasing the threshold when market conditions might warrant such a change. Given the many changes made to the Part D benefit by the IRA, we believe that it may be necessary in future years to decrease the specialty-tier cost threshold due to reductions in Part D drug costs. In general, shifting market dynamics, such as increased utilization of lower cost generic drugs, could potentially lead to reductions in Part D drug costs. The Medicare Drug Price Negotiation Program, as established in Part E of title XI of the Act, which permits the Secretary to negotiate MFPs for certain high expenditure, single source drugs and biological products with participating manufacturers, could also lead to a future need for a downward adjustment. The MFPs for the first 10 selected drugs are scheduled to go into effect on January 1, 2026, with new MFPs taking effect and new drugs being selected for negotiation each subsequent year. Therefore, it is possible that as a result of general market dynamics and more high expenditure drugs being selected for negotiation and their negotiated MFPs taking effect, the methodology for determining the specialty-tier cost threshold, as described in § 423.104(d)(2)(iv)(A), may yield an amount that is at least 10 percent below the previous plan year's specialty-tier cost threshold.

Thus, we propose to revise § 423.104(d)(2)(iv)(B)(1) and (2) by adding language to allow us to reduce the cost threshold under certain circumstances. Specifically, in paragraph (B)(1) of this section, we are proposing to replace “increase” with “modifies” and add “or below” following “10 percent above.” In paragraph (B)(2), we are proposing to replace “increase” with “modification.”

c. Specialty Tier Maximum Allowable Cost Sharing (§ 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 § 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:

EP28NO25.001

To operationalize the concept of maximum allowable cost sharing for the specialty tier based on the plan's deductible, CMS, in the CY 2022 final rule, codified the following calculation at § 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:

EP28NO25.002

Consistent with the first equation, the numerator here represents beneficiary OOP costs while the denominator represents total drug costs, resulting in an effective coinsurance of 33 percent, to align with the defined standard benefit. This equation was then solved for the deductible, and each specialty-tier coinsurance percentage point was inserted, to calculate the maximum allowable deductible value corresponding to that coinsurance percentage.

However, in CY 2025, the ICL was eliminated and, as a result, the methodology codified at § 423.104(d)(2)(iv)(D)(3) was no longer valid. Therefore, in the Final CY 2025 Part D Redesign Program Instructions,

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,

we continued to use the methodology outlined in the Final CY 2025 Part D Redesign Program Instructions.

https://www.cms.gov/files/document/final-cy-2025-part-d-redesign-program-instructions.pdf.

https://www.cms.gov/files/document/final-cy-2026-part-d-redesign-program-instruction.pdf.

In accordance with the Final CY 2025 Part D Redesign Program Instructions, we are now proposing to codify this methodology for determining the specialty-tier coinsurance/deductible ranges to represent the effective coinsurance for a beneficiary under the Part D benefit. To ensure that a plan's value is reflective of the defined standard benefit, we are proposing to codify a methodology similar to the methodology used to calculate the cost-sharing requirements in § 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 § 423.104(d)(2)(iv)(D)(2).

We are proposing to use, as in previous years, an effective coinsurance equation to calculate the deductible that corresponds to each specialty-tier coinsurance percentage point from 25 percent through 33 percent. Consistent with our decision to retain the 33 percent maximum coinsurance, we are also proposing to use 33 percent to calculate the deductible that corresponds to each specialty-tier coinsurance percentage point. This equation would continue to represent beneficiary OOP costs in the numerator divided by total drug costs in the denominator. The following equation illustrates how we would calculate the effective coinsurance for the Part D benefit for purposes of calculating specialty-tier cost-sharing percentages:

EP28NO25.003

As with the previous methodology, the equation is solved for the deductible, and each maximum allowable specialty tier coinsurance value is inserted, to determine the maximum allowable deductible value corresponding to that coinsurance. For example, the results for CY 2026 are shown in Table 1.

EP28NO25.004

Consistent with the approach taken for both CY 2025 and CY 2026 as detailed in the Final CY 2025 Part D Redesign Program Instructions, we are proposing to codify this methodology for determining specialty-tier coinsurance/deductible ranges. Thus, we propose to revise § 423.104(d)(2)(iv)(D)(3)(i) to describe how the maximum coinsurance percentage was determined for years preceding 2025. We also propose to add new § 423.104 (d)(2)(iv)(D)(3)(ii) to describe the methodology for calculating the maximum coinsurance percentage for 2025 and each subsequent year.

4. Changes in True Out-of-Pocket (TrOOP) Costs (§§ 423.100 and 423.464)

A beneficiary's progression through the Part D benefit phases is determined by the total amount of costs incurred by the beneficiary for covered Part D drugs in the plan year. This amount is also referred to as the beneficiary's accumulated TrOOP spending. Incurred costs are defined at section 1860D-2(b)(4)(C) of the Act and the statutory definition has been revised several times since the beginning of the Part D program. Between 2005 and 2010, TrOOP expenditures represented costs actually paid by the beneficiary, another person on behalf of the beneficiary, or a qualified State Pharmaceutical Assistance Program (SPAP). The Act also expressly excluded certain costs from the definition of TrOOP, including costs “reimbursed through insurance or otherwise, a group health plan, or other third-party payment arrangement.”

In January 2005, we published the final rule titled, “Medicare Program; Medicare Prescription Drug Benefit” (70 FR 4194), in which we initially codified the rules applicable to incurred costs at § 423.100 (hereinafter referred to as the January 2005 Medicare Final Rule). In that rule, we established that the terms “insurance or otherwise” are separate terms with separate definitions. The term “insurance” refers to a health plan that provides or pays the cost of covered Part D drugs, including, but not limited to health insurance coverage, an MA plan, and a PACE organization. The term “or otherwise” refers to government-funded health programs, and accordingly, we defined the term “government-funded health programs” to mean any program established, maintained, or funded—in whole or in part—by the Federal government, the governments of States or political subdivisions of States, or any agency or instrumentality of these governments which uses public funds in whole or in part to provide to, or pay on behalf of, an individual the cost of Part D drugs at § 423.100.

Enacted into law on March 23, 2010, section 3314 of the Patient Protection and Affordable Care Act (PPACA) (Pub. L. 111-148) added section 1860D-2(b)(4)(C)(iii) of the Act to specify that costs borne or paid for by the Indian Health Service (IHS), an Indian tribe or tribal organization, or an urban Indian organization, and costs borne or paid for by an AIDS Drug Assistance Program (ADAP) count as incurred costs and accumulate towards TrOOP. In the final rule titled, “Medicare Program; Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs for Contract Year 2012 and Other Changes,” which appeared in the April 15, 2011

Federal Register

(76 FR 21432), we revised the definition of incurred cost at § 423.100 to reflect the amendments to section 1860D-2(b)(4)(C)(iii) of the Act made by the PPACA. Specifically, we revised the regulation to include payments by the IHS, an Indian tribe or tribal organization, or an urban Indian organization (referred to as I/T/U pharmacy in § 423.100) or under an ADAP in the definition of incurred costs at § 423.100. We also amended § 423.464(f)(2) to state that expenditures made by IHS, an Indian tribe or tribal organization, or an urban Indian organization or under an ADAP are not required to be excluded when determining whether a Part D enrollee has satisfied the out-of-pocket threshold.

Section 11201 of the IRA further amended section 1860D-2(b)(4)(C) of the Act to update the definition of incurred costs. Section 1860D-2(b)(4)(C)(iii)(II) of the Act, as added by the IRA, amended the definition of incurred costs to include, for CY 2025 and subsequent years, costs incurred that are reimbursed through insurance, a group health plan, or certain other third party payment arrangements, but not including the coverage provided by a prescription drug plan or an MA-PD plan that is basic prescription drug coverage or any payments by a manufacturer under the Manufacturer Discount Program. In addition, the IRA provided that, for beneficiaries who have opted into the Medicare Prescription Payment Plan described in section 1860D-2(b)(2)(E) of the Act, election into such program will not impact how a beneficiary moves through the Part D benefit or what counts towards TrOOP. Under section 1860D-2(b)(4)(F) of the Act, a Medicare Prescription Payment Plan participant's TrOOP-eligible costs that are paid by their Part D plan under the Medicare Prescription Payment Plan shall be treated as incurred costs.

Section 11201(f) of the IRA directed the Secretary to implement section 11201 of the IRA for 2024, 2025, and 2026 by program instruction or other forms of program guidance. In the Final CY 2025 Part D Redesign Program Instructions, we released guidance to implement the IRA's additions to section 1860D-2(b)(4)(C) of the Act. Specifically, we stated that

supplemental Part D coverage provided by enhanced alternative Part D plans and other health insurance (OHI) will be counted as incurred costs and included in the calculation of TrOOP for CY 2025. This includes supplemental coverage provided by Employer Group Waiver Plans (EGWPs), plan reductions in cost sharing for enrolled beneficiaries, such as reductions by Medicare-Medicaid Plans and D-Special Needs Plans (SNPs), and Center for Medicare and Medicaid Innovation (CMMI) model benefits that reimburse costs for covered Part D drugs (unless stated otherwise in an applicable CMMI model's respective Request for Applications or model guidance). In response to comments received, we explained that including supplemental coverage provided by enhanced alternative Part D plans in addition to OHI is required by the plain language of the statute. Specifically, by excluding “coverage provided by a prescription drug plan or an MA-PD plan that is basic prescription drug coverage” from the definition of costs “reimbursed through insurance,” the text of section 1860D-2(b)(4)(C)(iii)(II) indicates that drug coverage provided by Part D plans other than basic prescription drug coverage is included in the definition of costs “reimbursed through insurance.” This would include enhanced alternative supplemental benefits. If the provision only included EGWP supplemental coverage in the definition of costs “reimbursed through insurance,” then the statute would have explicitly included EGWP supplemental coverage in the definition of “costs reimbursed through insurance” and expanded the exclusion clause to apply to both basic prescription drug coverage and enhanced alternative supplemental coverage.

We further stated in the Final CY 2025 Part D Redesign Program Instructions that under section 1860D-2(b)(4)(C)(iii)(II) of the Act, only amounts reimbursed by supplemental coverage will be newly included in the calculation of TrOOP. For enhanced alternative plans, plan liability is mapped to the defined standard benefit to distinguish between basic and supplemental benefits provided under the Part D sponsor. Because of this, if beneficiary cost sharing is greater than what it would have been under the defined standard benefit, a negative value is recorded on a Prescription Drug Event (PDE) record for the field representing the value of the supplemental coverage. Such negative values will be disregarded (that is, be treated as zero) when calculating TrOOP, because they do not represent reimbursement to the beneficiary. In response to comments received, we explained that, while excluding such negative values from TrOOP can overstate the net value of total supplemental benefits provided to beneficiaries over the course of the year, including negative values in TrOOP would inappropriately disregard any beneficiary cost sharing in excess of the defined standard cost sharing amount when calculating TrOOP. This would particularly disadvantage certain beneficiaries who have patterns of utilization that disproportionately include this situation. For example, if a beneficiary in an enhanced alternative plan has higher cost sharing than the defined standard benefit for a maintenance medication, including the negative values in TrOOP could significantly disadvantage that beneficiary as these negative values would continually offset part of the payments the beneficiary actually paid OOP. This would create some circumstances where certain beneficiaries have a net negative value for their supplemental benefits when they reach the $2,100 OOP threshold, which means they would have to pay more than $2,100 OOP to reach the catastrophic phase for CY 2026.

Additionally, we noted that section 1860D-2(b)(4)(C)(iii)(II) of the Act states that reimbursements through “certain other third party payment arrangements” are to be included in the calculation of TrOOP. We did not identify any third party payment arrangements in addition to those described in the preceding paragraphs that could be included in the calculation of TrOOP. For instance, primary payer amounts paid on Medicare as secondary payer (MSP) claims are a category of third party payments that we considered for TrOOP eligibility. We determined that these payments should remain excluded from TrOOP due to the requirements at section 1862(b) of the Act, which was not amended by the IRA. As such, for 2025, we did not count as incurred costs any other third party payments not considered TrOOP-eligible prior to 2025. In the Final CY 2025 Part D Redesign Program Instructions, we also solicited comment on whether interested parties are aware of other third party payments that could be included under section 1860D-2(b)(4)(C)(iii)(II) of the Act. No commenters identified additional third party payments that they believed should be included in TrOOP. We also did not receive any comments on the Final CY 2026 Part D Redesign Program Instructions recommending that we include any other third party payments towards TrOOP.

Further, we stated that, as required by section 1860D-2(b)(4)(C)(iii)(II) of the Act, any manufacturer payments made under the Manufacturer Discount Program, which was newly created under the IRA, do not count as incurred costs and are not included in the calculation of TrOOP in 2025.

Finally, we stated that for beneficiaries who have opted into the Medicare Prescription Payment Plan described in section 1860D-2(b)(2)(E) of the Act, as added by section 11202 of the IRA, election into such program will not impact how a beneficiary moves through the Part D benefit or what counts towards TrOOP. Under section 1860D-2(b)(4)(F) of the Act, as codified at § 423.137(c)(4), a Medicare Prescription Payment Plan participant's TrOOP-eligible costs that are paid by their Part D plan under the Medicare Prescription Payment Plan shall be treated as incurred costs.

In this proposed rule, we propose to codify at § 423.100 the policies we established in the Final CY 2025 Part D Redesign Program Instructions for CY 2025 and applied via the Final CY 2026 Part D Redesign Program Instructions for CY 2026 with respect to the definition of incurred costs for 2025 and subsequent years, without modification. These policies are currently in effect for CY 2026. Specifically, we propose to add a new subparagraph (3) to the definition of incurred costs at § 423.100 defining incurred costs for 2025 and subsequent years to include costs that are reimbursed through insurance, a group health plan, or certain other third party payment arrangements, but not including the coverage provided by a PDP or an MA-PD plan that is basic prescription drug coverage or any payments by a manufacturer under the Manufacturer Discount Program under section 1860D-14C of the Act. We also propose to amend § 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.

5. Policy for Drugs Not Subject to Defined Standard Deductible (§ 423.104)

Under sections 1860D-2(b) and (c) of the Act, as amended by section 11201 of the IRA, the coverage gap phase was eliminated in CY 2025. Beginning in CY 2025, a beneficiary leaves the initial coverage phase and enters the catastrophic phase once they incur enough TrOOP-eligible costs to meet the annual OOP threshold. Accordingly, under section 1860D-14A(h) of the Act, as added by section 11201 of the IRA, the Coverage Gap Discount Program sunset effective January 1, 2025. Section 11201 of the IRA added section 1860D-14C of the Act, which created the Manufacturer Discount Program beginning January 1, 2025. Under section 1860D-14C(b)(1)(A) of the Act, manufacturers that enter into a Manufacturer Discount Program agreement will provide discounts on applicable drugs, typically amounting to 10 percent of the negotiated price for enrollees in the initial coverage phase and 20 percent of the negotiated price for enrollees in the catastrophic phase, in CY 2025 and subsequent years.

Manufacturer discounts are available under the Manufacturer Discount Program once a beneficiary becomes an “applicable beneficiary.” Section 1860D-14C(g)(1) of the Act defines an applicable beneficiary as an individual who, on the date of dispensing a covered Part D drug, is enrolled in a PDP or MA-PD plan, is not enrolled in a qualified retiree prescription drug plan, and has incurred TrOOP-eligible costs that exceed the defined standard deductible specified in section 1860D-2(b)(1) of the Act. TrOOP-eligible costs for drugs not subject to the defined standard deductible, specifically covered insulin products, as well as TrOOP-eligible costs for drugs not subject to a non-defined standard plan deductible or drugs subject to a reduced deductible under non-defined standard plans, all count towards a beneficiary's satisfaction of the defined standard deductible.

In the Final CY 2025 Part D Redesign Program Instructions, we established a policy for drugs not subject to the defined standard deductible to address situations where a beneficiary has not satisfied their plan deductible but has incurred sufficient TrOOP-eligible costs to satisfy the defined standard deductible. The policy also addresses situations where a beneficiary incurs sufficient costs to satisfy the plan deductible but has not incurred TrOOP-eligible costs cumulatively across all drugs at or above the defined standard deductible amount. The component of the definition of an applicable beneficiary at section 1860D-14C(g)(1)(C) of the Act creates the possibility for a beneficiary to encounter these situations; therefore, this policy was necessary to ensure that such situations are treated similarly by all Part D plan sponsors.

We established that in CY 2025, if a beneficiary has not satisfied their plan deductible but has incurred sufficient TrOOP-eligible costs to satisfy the defined standard deductible, they will be both an applicable beneficiary under the Manufacturer Discount Program, as we propose to define at § 423.100, and be deemed to have satisfied their plan deductible.

Furthermore, we established that, if a plan offers a non-defined standard plan deductible—whether that be a lower deductible than the defined standard deductible or a deductible that applies for a subset of covered Part D drugs—and a beneficiary incurs sufficient costs to satisfy the plan deductible but has not incurred TrOOP-eligible costs cumulatively across all drugs at or above the defined standard deductible amount, discounts under the Manufacturer Discount Program are not available. As such, the plan is responsible for covering the portion of costs that would be covered by the manufacturer discount if the beneficiary were an applicable beneficiary until the beneficiary's TrOOP exceeds the defined standard deductible and they become an applicable beneficiary. The same guidance applies when a beneficiary under any Part D plan is dispensed a covered insulin product or ACIP-recommended vaccine before they have incurred TrOOP-eligible costs at or above the defined standard deductible amount.

For example, an enhanced alternative plan has a tiered formulary, does not charge a deductible for tier 1 drugs, and charges 20 percent coinsurance for drugs in that tier. A beneficiary's first fill of the year is for a $200 tier 1 drug, meaning they pay $40 out of pocket. The beneficiary has not incurred sufficient TrOOP-eligible costs to satisfy the defined standard deductible of $615 (and has $415 in remaining TrOOP-eligible costs before they satisfy the deductible) and does not meet the definition of an applicable beneficiary under the Manufacturer Discount Program. Therefore, the plan must cover the 10 percent of costs that would be covered by the manufacturer discount if the beneficiary were an applicable beneficiary.

In the Final CY 2026 Part D Redesign Program Instructions, we stated that certain policies described in the Final CY 2025 Part D Redesign Program Instructions, including the policy with respect to drugs not subject to the defined standard deductible, also applied in CY 2026. We also established that the policy for drugs not subject to the defined standard deductible also applies to selected drugs for CY 2026. Specifically, we stated that if a plan offers a non-defined standard plan deductible—whether that be a lower deductible than the defined standard deductible or a deductible that applies for a subset of covered Part D drugs—and a beneficiary incurs sufficient costs to satisfy the plan deductible but has not incurred TrOOP-eligible costs cumulatively across all drugs at or above the defined standard deductible amount, the selected drug subsidy is not available for selected drugs during a price applicability period. As such, for a selected drug during a price applicability period, the plan is responsible for covering the portion of costs that would be covered by the selected drug subsidy if the beneficiary were an applicable beneficiary until the beneficiary's TrOOP exceeds the defined standard deductible and they become an applicable beneficiary.

In this proposed rule, we propose to codify the policy for drugs not subject to the defined standard deductible that are in effect for 2025 and 2026 without modification. Specifically, we propose to codify the policy for drugs not subject to defined standard deductible at a new § 423.104(j).

6. Annual Indexing of Part D Benefit Parameters Using the Annual Percentage Increase in Drug Expenditures (API) and Consumer Price Index (CPI) (§§ 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 the January 2005 Medicare Final Rule (70 FR 4194), establishing the regulatory framework for the Medicare Part D prescription drug benefit program created by the MMA. This rule codified the statutory requirements for annual adjustments of the deductible under section 1860D-2(b)(6) of the Act and low-income cost-sharing amounts under section 1860D-14(a) of the Act, using the API and the CPI. The rule also established the regulatory basis for annual adjustments to additional Part D parameters, including the annual out-of-pocket threshold and retiree drug subsidy (RDS) cost thresholds, to maintain the actuarial integrity of the benefit structure as drug costs and economic conditions change over time.

In accordance with the statute and corresponding regulation, the following Part D standard benefit, low-income subsidy, and RDS program parameters are updated using the API:

•

Standard Benefit Deductible

—section 1860D-2(b)(1)(A)(ii) of the Act; § 423.104(d)(1)(ii).

•

Initial Coverage Limit

—section 1860D-2(b)(3)(A)(ii) of the Act; § 423.104(d)(3)(ii).

•

OOP Threshold

—section 1860D-2(b)(4)(B)(i)(VIII) of the Act.

•

Maximum copayments below the out-of-pocket threshold for certain low-income full subsidy eligible enrollees

(income less than 150 percent, but greater than 100 percent of Federal Poverty Level (FPL), not including institutionalized individuals)—section 1860D-14(a)(1)(D)(iii) of the Act; § 423.782(a)(2)(i).

•

RDS Cost threshold

—section 1860D-22(a)(3)(B)(i)(I) of the Act; § 423.886(b)(3).

•

RDS Cost limit

—section 1860D-22(a)(3)(B)(i)(II) of the Act; § 423.886(b)(3).

The CPI is used to update the following Part D low-income subsidy and cost-sharing program benefit parameter:

•

Maximum copayments below the out-of-pocket threshold for certain low-income full subsidy eligible enrollees

(income less than 100 percent of the FPL)—section 1860D-14(a)(1)(D)(ii) of the Act; § 423.782(a)(2)(iii)(A).

While sections 1860D-2(b)(6) and 1860D-14(a)(4)(A) describe the parameter adjustments as an “increase” when referring to API and CPI, we have historically applied them multidirectionally, including decreasing the parameter values in the event of a decrease in annual Part D expenditures or deflation, to ensure that the actuarial value of the drug benefit remains consistent each year.

The current regulations do not describe the specific methods used to calculate the annual percentage increases. Instead, the specific methods for calculating the annual percentage increases in drug expenditures and CPI that are applied to the Part D benefit parameters have been proposed for each CY in the Advance Notice of Methodological Changes for Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies (Advance Notice) and finalized in the Announcement of Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies (Rate Announcement). In this proposed rule, we propose to codify these methodologies in regulation. We also propose making certain technical changes to current regulations related to indexing certain benefit parameters for low-income individuals. Although we are proposing to codify the calculation methodology for the API and CPI in this rule, we will continue to publish the annual percentage increases in drug expenditures and CPI and updated Part D benefit parameters for each CY through the Advance Notice and Rate Announcement. The projections and calculations used in the methodologies described at proposed §§ 423.104 and 423.782 are made using generally accepted actuarial principles and practices. In applying generally accepted actuarial principles and practices, actuarial judgment and discretion may be used, including taking into account information such as changes in legislation (such as changes in Medicare benefits), Medicare payment policy, trends over several years of data, and external variables (such as public health emergencies); selecting among different approaches (such as weighting for utilization and using average or median values); and in selecting data or data samples.

Calculation of the Annual Percentage Increase in Drug Expenditures

Section 1860D-2(b)(6) of the Act defines the API for each year as the annual percentage increase in average per capita aggregate expenditures for Part D drugs in the United States for Part D eligible individuals, for the 12-month period ending in July of the previous year using such methods as the Secretary shall specify. We calculate the aggregate expenditures for Part D drugs using the GCPDC instead of an alternative cost measure such as actual net drug costs, because gross drug costs reflect the prices available to beneficiaries and are the basis for calculating beneficiary cost sharing and for beneficiary progression through the Part D drug benefit. The GCPDC is reported to CMS on PDE records; consequently, PDE records are the data source used for this calculation. For contract years 2006 and 2007, the API calculations were based on National Health Expenditure (NHE) prescription drug per capita estimates due to insufficient Part D program data availability; however, we transitioned to using PDE records for CY 2008 and future years.

The API calculation, where API represents the annual percentage increase for Part D expenditures for a given year, is comprised of two factors we refer to as: (1) an annual percentage trend (APT), and (2) a multiplicative update (MU) factor for prior-year revisions.

Mathematically, the formula is expressed as follows:

API

= (

APT

) * (

)

For a given payment year, the APT is the ratio of total per capita Part D drug expenditures in the 12-month period (August through July) prior to the given payment year (numerator) to the total per capita Part D drug expenditures two years prior to the given payment year (denominator).

For example, the APT for CY 2027 is equal to:

EP28NO25.005

The MU factor is used to incorporate updated data for prior years into the calculation. We update data for prior years for two reasons: First, at the time the CMS Office of the Actuary calculates the API, actual, reasonably complete PDE data is typically only available for dates of service during the first 5 months of the measurement period (August-December). For the remainder of the measurement period (typically 7 months (January-July)), the costs must be estimated using historical data and actuarial experience. For example, for payment year 2027, the average per capita cost for August 2024-July 2025 (2 years prior) is calculated from submitted PDE data, while the average for August 2025-July 2026 (the year prior) is based on actual data from August 2025-December 2025 and projections for January-July 2026. Second, PDE data may be resubmitted to make corrections or retroactive claim adjustments

for activities such as coordination of benefits or changes in eligibility status for Part D or the Low-Income Subsidy program. Historically, we have used a retrospective period, typically 5 years, to update calculations to account for the impact of resubmissions that occur as part of Part D operations such as the annual Part D payment reconciliation under § 423.343 or a reopening of a reconciliation under § 423.346. We have found few to no resubmissions occur beyond a typical retrospective 5-year window.

Medicare Prescription Drug Benefit Manual, Pub. 100-18, Chapter 14: Coordination of Benefits.

The MU factor for a given year is the ratio of the product of the APTs for all prior recorded years (since the first calculation in 2007), with the most recent 5 years revised and updated with the currently available data (numerator) to the product of APTs in prior recorded years as published in the previous year's Rate Announcement (denominator). As discussed in the preceding paragraphs, the MU factor has a 5-year retrospective window; however, we have historically included data since 2007 for informational purposes, as this historical data is the same in the numerator and the denominator and has no effect. To convert ratios to percentages, it is necessary to add 1.0 to each factor prior to entering them into the formula.

For example, the MU factor for CY 2027 is equal to:

EP28NO25.006

In this example, APT is the annual percentage trend, denoted with a subscript for the year of the data. The numerator is updated from CY 2020 through CY 2025, using the most recent data available when it is calculated in 2026, and the denominator uses data published in the CY 2026 Rate Announcement (published in April 2025).

Historically, the statutory parameters updated by the API have included the defined standard benefit deductible, initial coverage limit, annual OOP threshold, and the parameters for the LIS and RDS benefits. The IRA eliminated the coverage gap phase and beneficiary cost sharing above the annual OOP threshold; it also set the annual OOP threshold at $2,000 for CY 2025. Given these changes, for CY 2025, only the defined standard deductible and LIS benefit parameters were updated using the API. For CY 2025 and subsequent years, no updates to the parameters for the initial coverage limit, maximum or minimum beneficiary cost sharing in the coverage gap or above the annual OOP threshold were necessary as the coverage gap phase and beneficiary cost sharing above the annual OOP threshold were eliminated. In CY 2026, the defined standard deductible, the annual OOP threshold, and the maximum copayment below the annual OOP threshold for low-income, full-subsidy-eligible beneficiaries with incomes between 100 and 150 percent of the FPL were updated using the API.

We propose to revise § 423.104(d)(5)(iv) by adding three paragraphs describing (1) the overall calculation of the annual percentage increase, or the API, in per capita Part D drug expenditures, (2) the calculation of the annual percentage trend, or the APT, and (3) the calculation of the multiplicative update factor, or the MU. We will continue to publish updates to the Part D benefit parameters calculated through these methodologies through the Advance Notice and Rate Announcement process described in section 1853(b) of the Act.

Calculation of the Annual Percentage Increase in CPI

Section 1860D-14(a)(4)(A) of the Act specifies that the annual percentage increase in CPI, a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services,

is the annual percentage increase in the CPI (all items; U.S. city average) as of September of such previous year. As noted previously, the annual percentage increase in the CPI applies to the copayments for the lowest income dually eligible individuals (with incomes not exceeding 100 percent of the FPL) under section 1860D-14(a)(1)(D)(ii) of the Act, and is reflected at § 423.782(a)(2)(iii). The CPI is based on economic assumptions of the Consumer Price Index for All Urban Consumers (CPI-U), which is published by the Bureau of Labor Statistics. The method for calculating the annual percentage increase in the CPI comprises two factors we refer to as: (1) an annual percentage trend; and (2) a multiplicative update factor for prior-year revisions.

Consumer Price Index,

https://www.bls.gov/cpi/

(last visited Jun 17, 2025).

While the other Part D benefit parameters are indexed using the API to track drug expenditure trends and maintain actuarial equivalence within the drug benefit structure, this parameter uses the CPI because it represents a fixed dollar copayment amount that needs to maintain its purchasing power relative to general inflation rather than specifically tracking drug cost inflation trends.

Mathematically, the formula is expressed as follows:

Annual Percentage Increase in CPI = (APT) * (MU),

where APT is the annual percentage trend, and MU is the multiplicative update factor for prior year revisions.

The APT consists of a year-over-year comparison of the CPI in the United States for all items, ending in the month of September. For a given payment year, it is the ratio of the CPI in the year ending the previous September (numerator) to the CPI for the year ending the September two years prior (denominator). To ensure that plan sponsors and CMS have sufficient time to incorporate cost-sharing requirements into the development of the benefit, any marketing materials, and necessary systems, we include an estimate of the September CPI based on projections from the President's Budget in its

methodology to calculate the annual increase in the CPI for the 12-month period ending in September prior to the applicable payment year.

For example, the annual percentage trend in the September CPI for CY 2027 is calculated as follows:

EP28NO25.007

The MU factor revises APTs in the September CPI to reflect updates (provided by the BLS) from the previously estimated September CPI to the actual reported September CPI. The MU factor for a given year is the ratio of the product of the APTs for all prior recorded years (since the first calculation in 2007), with the most recent year updated with the currently available data (numerator) to the product of APTs in prior recorded years as published in the previous year's Rate Announcement (denominator). As mentioned in the preceding paragraphs, data since 2007 is included for informational purposes. To convert the ratios to percentages, it is necessary to add 1.0 to each factor prior to entering them into the formula.

For example, the MU factor for CY 2027 is equal to—

EP28NO25.008

In this example, the numerator is updated from CY 2025 through CY 2026, using recent economic assumptions, and the denominator uses data published in the CY 2026 Rate Announcement (published in April 2025).

To implement the CPI calculation described previously in our regulations, we are proposing to revise § 423.782(a)(2)(iii)(A) to include a reference to a new paragraph (d), which we propose to add at the end of § 423.782. The new section at § 423.782(d) would comprise the general language of the statute, as well as add three subparagraphs describing: (1) the overall calculation of the annual percentage increase in CPI and specify the period ending in “September of such previous year,” (2) the calculation of the annual percentage trend, and (3) the calculation of the multiplicative update factor. We will continue to publish updates to the Part D benefit parameters calculated through these methodologies through the Advance Notice and Rate Announcement process described in section 1853(b) of the Act.

Technical Changes

We are proposing two technical changes to § 423.782(b). First, we propose to add a cross-reference to § 423.104(d)(5)(iv) to the provision at § 423.782(b)(1) to make clear that the annual percentage increase in average per capita aggregate expenditures that we use to calculate the deductible for certain low-income subsidy eligible individuals is calculated as provided in § 423.104(d)(5)(iv). Second, we propose to streamline the regulation text at § 423.782(b)(3) so that it directly cross references the updated maximum copayment amounts that apply for years subsequent to 2006. Section 1860D-2(b)(4)(A)(i)(I) is implemented in regulation at § 423.104(d)(5)(i)(A)(2). We propose to replace the description in § 423.782(b)(3) of the annual process for updating maximum copayments with a cross reference to § 423.104(d)(i)(A)(2).

7. Changes to GCPDC and Allowable Reinsurance Cost Definitions To Include Costs Paid by the MDP (§ 423.308)

Section 1860D-15(b)(3) of the Act defines “gross covered prescription drug costs” as, “with respect to a part D eligible individual enrolled in a prescription drug plan or MA-PD plan during a coverage year, the costs incurred under the plan, not including administrative costs, but including costs directly related to the dispensing of covered part D drugs during the year and costs relating to the deductible. Such costs shall be determined whether they are paid by the individual or under the plan . . . regardless of whether the coverage under the plan exceeds basic prescription drug coverage.” Section 1860D-15(b)(2) of the Act defines allowable reinsurance costs as “. . . such costs that are actually paid (net of discounts, chargebacks, and average percentage rebates) by the sponsor or organization or by (or on behalf of) an enrollee under the plan . . .” GCPDC and allowable reinsurance costs are defined and used at section 1860D-15(b) of the Act for the purpose of describing the methodology for calculating the reinsurance payment amount.

In the January 2005 Medicare Final Rule (70 FR 4194), we codified the definition of “gross covered prescription drug costs” at § 423.308. This regulatory definition referred to “gross covered prescription drug costs” as “actually paid costs.” In the final rule that appeared in the

Federal Register

on April 12, 2023(70 FR 22120), we revisited the regulatory definition of GCPDC by amending the definition at § 423.308 to remove the phrase “actually paid.” We made this change because the term “actually paid” has a specific meaning in Medicare Part D and is separately defined at § 423.308 to mean costs actually incurred by the plan that are net of direct and indirect remuneration (DIR), including discounts, rebates, or other price concessions typically received and applied after the point of sale (POS). However, unlike the statutory definitions of “allowable reinsurance costs” and “allowable risk corridor costs” at sections 1860D-15(b)(2) and 1860D-15(e)(1)(B) of the Act, respectively, the statutory definition of “gross covered prescription drug costs” at section 1860D-15(b)(3) of the Act does not use the phrase “actually paid” or otherwise specify that such costs must be net of all DIR. As we explained in the December 2022 proposed rule (87 FR 79611), because the definition of “gross covered prescription drug costs” was codified in regulation for the sole purpose of describing the methodology for calculating the reinsurance payment amount, in using the phrase “actually paid” in the regulatory definition of “gross covered prescription drug costs,” We were incorporating a requirement from the statutory definition of “allowable reinsurance costs” to emphasize that DIR would be netted out

in the calculation of costs eligible for Part D reinsurance. As we explained in the proposed rule, the proposed revisions to the definition would not change the fact that Part D reinsurance is ultimately based on net drug costs or change the final reinsurance payment amount a Part D sponsor receives. Rather, allowable reinsurance costs would continue to be defined at § 423.308 as the subset of gross covered prescription drug costs actually paid.

Manufacturer discounts, among other costs, paid under the Coverage Gap Discount Program (as described in section 1860D-14A of the Act) were always included in the calculation of GCPDC. This policy was consistent with the statutory and regulatory definition of GCPDC, which generally requires the inclusion of all costs incurred under the plan, including those paid on behalf of the Part D beneficiary. The IRA sunset the Coverage Gap Discount Program as of January 1, 2025. As such, these costs are no longer included in the calculation of GCPDC. Section 11201(b)(3) of the IRA amended section 1860D-15(b)(3) of the Act in two places to also require the inclusion of manufacturer discounts paid under the Manufacturer Discount Program in the calculation of GCPDC (first, by specifying that the definition of GCPDC is subject to paragraph (2)(B) of section 1860D-15(b) of the Act and second, by adding language specifying that, in the case of an applicable drug, as defined at § 423.100, GCPDC shall be determined whether the costs are paid by the individual, under the plan, or by a manufacturer). Moreover, section 11201(b)(2) of the IRA also amended section 1860D-15(b)(2) of the Act to require the inclusion of manufacturer discounts paid under the Manufacturer Discount Program under section 1860D-14C of the Act in the calculation of allowable reinsurance costs in 2025.

In the Final CY 2025 Part D Redesign Program Instructions, under the requirement in section 11201(f) of the IRA that we use program instruction or other forms of program guidance to implement section 11201 of the IRA for 2025 and to mirror the statutory language in sections 1860D-15(b)(2) and (3) of the Act, as amended by the IRA, we stated that the regulatory definition of “gross covered prescription drug costs” at § 423.308 would be considered to have been revised for CY 2025 to include “all amounts paid by manufacturers under the Manufacturer Discount Program (as defined in section 1860D-14C of the Act).” Additionally, we stated that the regulatory definition of “allowable reinsurance costs” at § 423.308 would be considered to have been revised for CY 2025 to include “the portion of the negotiated price (as defined in section 1860D-14C(g)(6) of the Act) of an applicable drug (as defined in section 1860D-14C(g)(2) of the Act) paid by manufacturers under the Manufacturer Discount Program (as defined in section 1860D-14C of the Act).”

We propose to codify the policy that we established in the Final CY 2025 Part D Redesign Program Instructions for CY 2025 and applied via the Final CY 2026 Part D Redesign Program Instructions for CY 2026 with the limited modifications mentioned later in this section. Specifically, we propose that the regulatory definition of “gross covered prescription drug costs” at § 423.308 be revised to include “all amounts paid by manufacturers under the Manufacturer Discount Program (as defined at § 423.100).” We also propose to add the phrase “for years prior to 2025” before the phrase “amounts between the initial coverage limit and the out-of-pocket threshold” and the phrase “because the enrollee is between the initial coverage limit and the out-of-pocket threshold” to reflect that the coverage gap phase does not exist for 2025 and subsequent years. Additionally, we propose to revise the regulatory definition of “allowable reinsurance costs” at § 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 § 423.100) paid by manufacturers under the Manufacturer Discount Program (as defined at § 423.100).”

8. Reinsurance Methodology (§ 423.329)

Section 1860D-15(b) of the Act, originally enacted into law by the MMA, sets forth rules for the calculation and payment of federal reinsurance subsidies for Part D plans. For years preceding CY 2025, the reinsurance amount for a Part D eligible individual was an amount equal to 80 percent of the allowable reinsurance costs attributable to that portion of gross covered prescription drug costs incurred after that individual reached the catastrophic phase of the benefit. In the January 2005 Medicare Final Rule, we codified this calculation at § 423.329(c)(1).

Under section 1860D-15(b)(2) of the Act, we make reinsurance payments to Part D plan sponsors based on the GCPDC that were actually paid during the coverage year. “Actually paid,” defined at § 423.308, means that the costs must be actually incurred by the Part D sponsor and must be net of any DIR. Each year, sponsors report their DIR to us as part of the annual DIR reporting process, and we use this information, along with cost data reported on PDE records, to allocate a portion of the DIR towards reducing allowable reinsurance costs. Historically, we allocated DIR to reduce allowable reinsurance costs and calculate final reinsurance subsidy payments in accordance with the methodology provided in the CY 2006 Advance Notice.

The IRA significantly modifies the reinsurance subsidy under the Part D benefit in CY 2025. Specifically, under section 1860D-15(b) of the Act, as amended by section 11201(b) of the IRA, in 2025, the reinsurance payment amount for a Part D beneficiary will decrease from 80 percent of the allowable reinsurance costs incurred after the beneficiary exceeds the annual OOP threshold to 20 percent for applicable drugs or 40 percent for drugs that are not applicable drugs.

Covered Part D drugs that are not applicable drugs and which are eligible for reinsurance payments amounts equal to 40 percent of the allowable reinsurance costs incurred include selected drugs (as defined in section 1192(c) of the Act and as we propose to define at § 423.100) during a price applicability period (as defined in section 1191(b)(2) of the Act and as we propose to define at § 423.100), as well as non-applicable drugs (as defined in section 130 of the Medicare Part D Manufacturer Discount Program Final Guidance and section II.C. of this proposed rule).

Therefore, a different calculation applies to applicable drugs versus non-applicable and selected drugs for the reinsurance payment amount, and the methodologies for calculating the reinsurance subsidy and allocating direct and indirect remuneration (DIR) towards reinsurance, must also be reconsidered.

In the Final CY 2025 Part D Redesign Program Instructions, we established a methodology to calculate the reinsurance subsidy separately for applicable and non-applicable drugs and allocate the share of DIR for applicable and non-applicable drugs based on their respective gross drug costs that fall in the catastrophic phase. The methodology otherwise aligns with

our historical approach for apportioning DIR.

Specifically, we stated that after the end of the coverage year, we would reconcile reinsurance subsidies for applicable drugs as follows:

• Identify incurred reinsurance costs for applicable drugs above the annual OOP threshold at the individual beneficiary level (from PDE records).

• Sum incurred reinsurance costs for applicable drugs at the plan level.

• Allocate DIR for applicable drugs to incurred reinsurance costs for applicable drugs by applying the ratio of total DIR to total allowed costs. (The allocated DIR for reinsurance is referred to as “reinsurance DIR.”)

• Subtract reinsurance DIR for applicable drugs from incurred reinsurance costs for applicable drugs, then multiply the difference by 20 percent (the reinsurance payment amount percentage for applicable drugs).

Similarly, after the end of the coverage year, we stated that we would reconcile reinsurance subsidies for non-applicable drugs as follows:

• Identify incurred reinsurance costs for non-applicable drugs above the annual OOP threshold at the individual beneficiary level (from PDE records).

• Sum incurred reinsurance costs for non-applicable drugs at the plan level.

• Allocate DIR for non-applicable drugs to incurred reinsurance costs for non-applicable drugs by applying the ratio of total DIR to total allowed costs.

• Subtract reinsurance DIR for non-applicable drugs from incurred reinsurance costs for non-applicable drugs, then multiply the difference by 40 percent (the reinsurance payment amount percentage for non-applicable drugs).

The sum of the adjusted reinsurance amounts for applicable and non-applicable drugs will then be reconciled with prospective reinsurance payment amounts made to plans during the coverage year.

In the Final CY 2026 Part D Redesign Program Instructions, we updated the methodology applied in CY 2025 to account for selected drugs, as the selected drug subsidy program begins in 2026. Specifically, we stated that, for CY 2026, we would calculate the reinsurance subsidy separately for applicable drugs. Because the percentage of allowable reinsurance costs to calculate the reinsurance payment amount for a Part D beneficiary is the same for non-applicable and selected drugs, the reinsurance subsidy for non-applicable and selected drugs would be calculated together. Additionally, we stated that, for CY 2026, we would allocate the share of DIR for applicable drugs and non-applicable and selected drugs based on their respective share of gross drug costs that fall in the catastrophic phase.

After the end of CY 2026, we stated that we would reconcile reinsurance subsidies for non-applicable and selected drugs as follows:

• Identify incurred reinsurance costs for non-applicable and selected drugs above the annual OOP threshold at the individual beneficiary level (from PDE records).

• Sum incurred reinsurance costs for non-applicable and selected drugs at the plan level.

• Allocate DIR for non-applicable and selected drugs to incurred reinsurance costs for non-applicable and selected drugs by applying the ratio of total DIR to total allowed costs. (The allocated DIR for reinsurance is referred to as “reinsurance DIR.”)

• Subtract reinsurance DIR for non-applicable and selected drugs from incurred reinsurance costs for non-applicable and selected drugs, then multiply the difference by 40 percent (the reinsurance payment amount percentage for non-applicable and selected drugs).

The sum of the adjusted reinsurance amounts for applicable drugs and non-applicable and selected drugs for CY 2026 will then be reconciled with prospective reinsurance payment amounts made to plans during the coverage year. To determine the appropriate category (applicable, non-applicable, or selected) for drugs, we stated we would use the 11-digit NDC submitted on each PDE record and assign it with an applicable, non-applicable, or selected designation based on the marketing category listed for that NDC in the U.S. Food and Drug Administration (FDA)'s NSDE file used for PDE processing and the list of NDCs referenced in the Medicare Drug Price Negotiation Program guidance.

For CY 2026, the calculation formulas for applicable drugs are:

Reinsurance DIR for applicable drugs = (total DIR/total allowed costs) × incurred reinsurance costs for applicable drugs.

Adjusted reinsurance for applicable drugs = (incurred reinsurance costs for applicable drugs−reinsurance DIR for applicable drugs) × 0.20.

For CY 2026, the calculation formulas for non-applicable and selected drugs are:

Reinsurance DIR for non-applicable and selected drugs = (total DIR/total allowed costs) × incurred reinsurance costs for non-applicable and selected drugs.

Adjusted reinsurance for non-applicable and selected drugs = (incurred reinsurance costs for non-applicable and selected drugs−reinsurance DIR for non-applicable and selected drugs) × 0.40.

In this proposed rule, we propose to codify at § 423.329 the policies we established in the Final CY 2025 Part D Redesign Program Instructions for CY 2025 and the Final CY 2026 Part D Redesign Program Instructions for CY 2026 with respect to the reinsurance methodology without modification. Specifically, we propose to redesignate paragraph (c)(1) as paragraph (c)(1)(i) and revise the introductory language to state “general rule for years preceding 2025” and add a new paragraph (c)(1)(ii) to codify the rules described previously for 2026 and future years.

9. Selected Drug Subsidy (§§ 423.265, 423.315, 423.329, 423.343)

Section 11201 of the IRA added section 1860D-14D to the Act, creating a new selected drug subsidy program, which began in CY 2026. Under the selected drug subsidy program, the Secretary must, periodically and on a timely basis, provide Part D plan sponsors with a subsidy for selected drugs, as defined under section 1192(c) of the Act, equal to 10 percent of the drug's negotiated price. The selected drug subsidy applies to a covered Part D drug that would otherwise meet the definition of an applicable drug but for being a selected drug under the Medicare Drug Price Negotiation Program during a price applicability period. The subsidy is paid on behalf of an applicable beneficiary who is enrolled in a PDP or an MA-PD plan, has not incurred costs that are equal to or exceed the annual OOP threshold, and is dispensed a selected drug.

Under the selected drug subsidy program, once an enrollee incurs costs exceeding the annual deductible specified in section 1860D-2(b)(1) of the Act (that is, the deductible under the defined standard benefit) the selected drug subsidy is available in the initial coverage phase of the benefit. The selected drug subsidy lowers Part D plan sponsor liability on the negotiated price of the drug.

Because of the intertwined structure and wording of the Manufacturer Discount Program and selected drug subsidy program provisions at sections 1860D-14C and 1860D-14D of the Act, we interpret the statute as establishing the selected drug subsidy as a substitute for the Manufacturer Discount Program discount for a covered Part D drug that would otherwise meet the definition of an applicable drug but for being a

selected drug under the Medicare Drug Price Negotiation Program during a price applicability period. As such, we propose to treat claims that are subject to the selected drug subsidy as coterminous with claims that would qualify for applicable discounts under the Manufacturer Discount Program, but for the drug's status as a selected drug during a price applicability period. In other words, the selected drug subsidy will apply if the selected drug that otherwise would be an “applicable drug” would have received an applicable discount under the Manufacturer Discount Program for the particular claim at issue under the rules of the Manufacturer Discount Program. Conversely, the selected drug subsidy will not apply if the applicable discount under the Manufacturer Discount Program otherwise would not have applied to that particular claim. For example, as discussed in section II.C. of this proposed rule, certain claims involving an applicable drug, such as Medicare Secondary Payer claims, are not subject to discounts under the Manufacturer Discount Program; in these situations, the selected drug subsidy would also not apply.

Because certain actual expenses can only be fully known after all costs have been incurred for a payment year, we make final payment for these costs after a coverage year after obtaining all the information necessary to determine the amount of payment. We currently make monthly prospective payments of certain estimated costs submitted with bids, including reinsurance costs and low-income cost-sharing subsidy (LICS) costs, to mitigate cash-flow concerns that plans could experience if such payments were made wholly on a retrospective basis.

In the Final CY 2026 Part D Redesign Program Instructions, we stated that similar concerns suggested that we should also make monthly prospective payments for the selected drug subsidy program. We accordingly established a process where Part D plan sponsors are required to submit estimates of selected drug subsidy amounts with their annual bids and we pay Part D plan sponsors prospective selected drug subsidy amounts equal to these estimated amounts. We use the actual selected drug subsidy amounts that Part D plan sponsors report on PDE data to determine actual costs incurred for selected drug subsidy payments.

After the deadline for PDE submissions for a year, we will calculate the difference between the prospective payments made by us to the Part D plan sponsor and the actual payments made by the Part D plan sponsor to determine a selected drug subsidy reconciliation amount. We will make a lump-sum adjustment to monthly payments based on the calculated reconciliation amount in the same manner as is done for other Part D reconciliation payments. Specifically, we will recover payments made for a coverage year if prospective selected drug subsidy payments exceed the selected drug subsidy costs actually incurred by the plan or if the Part D plan sponsor does not provide the data requested by us to verify the plan's actual selected drug subsidy amount; similarly, we will make a lump sum payment if the actually incurred subsidy amount exceeds the prospective selected drug subsidy payments.

In this proposed rule, we propose to codify the policies we established in the Final CY 2026 Part D Redesign Program Instructions with respect to the selected drug subsidy for 2026 and subsequent years without modification. Specifically, we propose to codify at new § 423.265(d)(2)(vi) a requirement that assumptions regarding selected drug subsidy amounts payable be included in Part D bids submitted to us. We also propose to codify at new § 423.315(h) that we would provide prospective selected drug subsidy payments on a monthly basis. We also propose to codify at new § 423.329(e) the determination of selected drug subsidy payments. Finally, we propose to codify at § 423.343(e) that we would make final payment for selected drug subsidy payments after a coverage year after obtaining all information necessary to determine the amount of payment.

10. Technical Correction—Retroactive Adjustments and Reconciliations (§§ 423.336 and 423.343)

In the course of this rulemaking, we noticed the need for a technical correction at § 423.343(d)(2). The final sentence of this paragraph states that in the event Part D sponsors do not provide adequate data to us for the calculation of risk corridor payments, we assume that the Part D plan's adjusted allowable risk corridor costs are 50 percent of the target amount. This sentence is incorrectly placed in § 423.343, which describes payments of low-income cost-sharing subsidies, and should instead be placed in § 423.336, which describes risk sharing arrangements. Thus, we propose to revise § 423.343 to remove this sentence and revise § 423.336(c) to add this sentence in its proper context.

11. Base Beneficiary Premium (§ 423.286)

Section 1860D-13(a)(2) of the Act, as established by the MMA, describes the statutory formula for calculating plan-specific basic Part D premiums under the Part D program. The national base beneficiary premium (BBP) is the starting point for calculating a plan-specific basic Part D premium. Prior to the enactment of the IRA, the BBP was calculated as the product of the beneficiary premium percentage and the national average monthly bid amount. The beneficiary premium percentage (“applicable percentage”) is a fraction, with a numerator of 25.5 percent and a denominator equal to 100 percent minus a percentage equal to (i) the total reinsurance payments that we estimate will be paid for the coverage year, divided by (ii) that amount plus the total payments that we estimate will be paid to Part D plans based on the standardized bid amount during the year, taking into account amounts paid by both CMS and plan enrollees. In the January 2005 Medicare Final Rule, we codified the statutory formula for calculating the BBP at § 423.286.

Section 11201 of the IRA amended section 1860D-13(a)(2) of the Act such that the statutory formula described in the preceding paragraph would apply subject to a newly added section 1860D-13(a)(8)(A) of the Act, which states that, for a prescription drug plan for a month in 2024 through 2029, the BBP shall be equal to the lesser of the BBP for the preceding year increased by 6 percent or the amount computed under the formula described at section 1860D-13(a)(2) of the Act. In the Advance Notice of Methodological Changes for CY 2024 for Medicare Advantage (MA) Capitation Rates and Part C and Part D Payment Policies (2024 Advance Notice)

and the July 31, 2023 HPMS memorandum titled, “Annual Release of Part D National Average Bid Amount and Other Part C & D Bid Information”,

we stated that it would calculate the BBP as the lesser of the prior year's BBP increased by 6 percent, or the BBP as it would have been calculated if the IRA's premium stabilization provision had not been enacted, to determine the CY 2024 BBP. In the July 29, 2024, HPMS memorandum titled, “Annual Release of Part D National Average Bid Amount and Other Part C & D Bid Information,” we applied the revised formula described in this paragraph to determine the CY 2025 BBP.

https://www.cms.gov/files/document/2024-announcement-pdf.pdf.

https://www.cms.gov/files/document/july-29-2024-parts-c-d-announcement.pdf.

In this proposed rule, we propose to codify the statutory amendments to section 1860D-13(a) of the Act.

Specifically, we propose to redesignate § 423.286(b) as § 423.286(b)(1) and codify the BBP formula for 2024 through 2029 at new § 423.286(b)(2).

12. Low-Income Cost-Sharing Subsidy (§ 423.782)

The Part D low-income subsidy (LIS) helps individuals with Medicare who meet certain statutory income and resource criteria pay for prescription drugs and lowers the costs of prescription drug coverage. Prior to the enactment of the IRA, individuals who qualified for the full LIS received assistance to pay their full premiums and deductibles (in certain Part D plans) and have reduced cost sharing. Individuals who qualified for the partial LIS paid reduced premiums (on a sliding scale based on their income) and also had reduced deductibles and cost sharing. Section 11404 of the IRA amended section 1860D-14 of the Act to expand eligibility for the full LIS to individuals who are determined to have incomes below 150 percent of the FPL and who meet either the resource standard in paragraph (3)(D) or paragraph (3)(E) of section 1860D-14(a) of the Act, with respect to plan years beginning on or after January 1, 2024. Thus, beginning in CY 2024, individuals who previously would have qualified for the partial subsidy now receive the full LIS.

In the final rule titled, “Medicare Program; Contract Year 2024 Policy and Technical Changes to the Medicare Advantage Program, Medicare Prescription Drug Benefit Program, Medicare Cost Plan Program, and Programs of All-Inclusive Care for the Elderly,” which appeared in the April 12, 2023

Federal Register

(88 FR 22120), and therewithin, we codified the applicable rules under §§ 423.773 and 423.780 to expand eligibility for the LIS under Part D. In this rule, we propose to also amend the eligibility criteria for LIS cost sharing reductions at § 423.782 to align with the IRA's amendments to section 1860D-14(a)(1) of the Act and the changes to §§ 423.773 and 423.780. Specifically, we propose to update the FPL limit specified in § 423.782(a)(2)(i)(B) to 150 percent for plan years beginning on or after January 1, 2024.

In addition, we propose to amend paragraph (a)(2) of § 423.782 to state that for years preceding 2025, LIS cost sharing reductions applied to covered Part D drugs obtained after the initial coverage limit and below the OOP limit.

13. Retiree Drug Subsidy Parameters (§§ 423.882 and 423.884)

Section 1860D-22 of the Act provides for subsidy payments to sponsors of qualified retiree prescription drug plans, provided that the employment-based retiree health coverage is at least actuarially equivalent to the standard prescription drug coverage under Medicare Part D. In the January 2005 Medicare Final Rule, we established regulations at 42 CFR part 423 Subpart R to, in part, determine which group health plans may qualify as qualified retiree prescription drug plans and, therefore, be eligible to receive retiree drug subsidy payments for a qualifying covered retiree.

Per section 1860D-22(a)(2)(A) of the Act, qualified retiree prescription drug plans are required to annually attest that the actuarial value of prescription drug coverage under the plan (as described in section 1860D-11(c) of the Act) is at least equal to the actuarial value of standard prescription drug coverage, not taking into account the value of any discount provided under the Manufacturer Discount Program as established in section 1860D-14C of the Act, and disclose that coverage under the plan is creditable in accordance with section 1860D-13(b)(6)(B) of the Act.

In the Final CY 2025 Part D Redesign Program Instructions, we addressed the implications of the amendments to the parameters of the standard prescription drug coverage made by the IRA for the retiree drug subsidy parameters described at Subpart R and summarized the IRA policies in effect for 2025 that are considered in determining the actuarial value of the defined standard benefit. While the IRA amends the parameters of the standard prescription drug coverage and makes other changes to the Part D benefit, we stated that there are no changes to the requirements for qualified retiree prescription drug plans.

In the Final CY 2026 Part D Redesign Program Instructions, we stated that certain policies described in the Final CY 2025 Part D Redesign Program Instructions, including the guidance related to the retiree drug subsidy parameters, also applied in CY 2026.

The majority of the IRA policies in effect for CY 2027 and subsequent years do not require updates to Subpart R; however, there are certain conforming edits required to reflect the proposed revisions to the definitions of “gross covered prescription drug costs” and “allowable reinsurance costs” as well as revisions needed to reflect the sunsetting of the Coverage Gap Discount Program and the establishment of the Manufacturer Discount Program. Specifically, we propose to revise the definitions of “gross covered retiree plan-related prescription drug costs” and “allowable retiree costs” at § 423.882 to reflect the proposed revisions to the definitions of “gross covered prescription drug costs” and “allowable reinsurance costs” at § 423.308. We also propose to replace all references in § 423.884(d) to “not taking into account the value of any discount or coverage provided during the coverage gap” with the statement “for years prior to 2025, not taking into account the value of any discount or coverage provided during the coverage gap and for 2025 and subsequent years, not taking into account the value of any discount provided under the Manufacturer Discount Program.”

14. Medical Loss Ratio (§ 423.2420)

Section 1103 of Title I, Subpart B of the Health Care and Education Reconciliation Act (Pub. L. 111-152) amended section 1857(e) of the Act to add a medical loss ratio (MLR) requirement to Medicare Part C (MA program). An MLR is expressed as a percentage, generally representing the percentage of revenue used for patient care rather than for such other items as administrative expenses or profit. Because section 1860D-12(b)(3)(D) of the Act incorporates by reference the requirements of section 1857(e) of the Act, these MLR requirements also apply to the Medicare Part D program. In the final rule titled “Medicare Program; Medical Loss Ratio Requirements for the Medicare Advantage and the Medicare Prescription Drug Benefit Programs,” which appeared in the May 23, 2013

Federal Register

(78 FR 31284) (hereinafter referred to as the May 2013 Medicare MLR final rule), in which we codified the MLR requirements for MA organizations and Part D prescription drug plan sponsors (“Part D sponsors”) (including organizations offering cost plans that offer the Part D benefit) in the regulations at 42 CFR part 422, subpart X, and part 423, subpart X.

Generally, the MLR for each Part D contract reflects the ratio of costs (numerator) to revenues (denominator) for all enrollees under the contract. The MLR for a Part D contract reflects the percentage of revenue received under the contract spent on incurred claims for all enrollees for Part D prescription drugs and on quality initiatives that meet the requirements at § 423.2430. The percentage of revenue that is used for other items such as administration, marketing, and profit is excluded from the numerator of the MLR for MA and

Part D (

see

§§ 423.2401; 423.2420(b)(4); 423.2430(b)).

The MLR regulations at § 423.2420(c) specify that the following Part D plan payments from the federal government are included in the MLR denominator: the direct subsidy, prospective Federal reinsurance subsidy, reconciliation adjustments to the Federal reinsurance subsidy, low-income premium subsidy (LIPS) amount, and risk corridor payments. In the May 2013 Medicare MLR final rule, we explained that we viewed LICS and Coverage Gap Discount Program payments as pass-through payments for which plans do not retain any liability, and that these amounts should therefore be excluded from the MLR calculation (78 FR 31290); accordingly, LICS and Coverage Gap Discount Program payments are excluded from both the MLR numerator and denominator.

The IRA introduced new categories of Part D plan payments from the Federal government. These include the Manufacturer Discount Program payment, the Inflation Reduction Act Subsidy Amount (IRASA), and the selected drug subsidy payment. The payment process for the Manufacturer Discount Program payments includes a cost-based reconciliation intended to make Part D sponsors whole for the manufacturer discount amounts they advance on behalf of the manufacturer. The IRASA is a Part D payment specific to CY 2023 that we provided to Part D plan sponsors. This temporary retrospective subsidy was paid to Part D plans for the reduction in cost sharing and elimination of the deductible for ACIP-recommended adult vaccines and covered insulin products during the 2023 plan year (that is, to cover the difference between the beneficiary cost sharing for the covered insulin, or ACIP-recommended adult vaccine, under the plan's 2023 benefit design, and the applicable statutory maximum cost sharing ($35 for a one month-supply of covered insulin products and $0 for vaccines)). Finally, under the selected drug subsidy program, the government provides a subsidy to Part D plan sponsors for selected drugs dispensed to enrollees in the initial coverage phase.

In the Final CY 2025 Part D Redesign Program Instructions, we stated that for CY 2025 and prior years, the new Part D plan payments for the Manufacturer Discount Program and IRASA are excluded from the denominator of the MLR calculation, and associated expenditures are excluded from the numerator of the MLR calculation. In the Final CY 2026 Part D Redesign Program Instructions, we stated that the new Part D plan payments for the selected drug subsidy are excluded from the denominator of the MLR calculation, and associated expenditures are excluded from the numerator of the MLR calculation. In the Final CY 2026 Part D Redesign Program instructions, we applied certain policies described in the Final CY 2025 Part D Redesign Program Instructions, including the treatment of the Manufacturer Discount Program payments, in CY 2026.

In this proposed rule, we propose to codify for CY 2027 and subsequent years the policies established in the Final CY 2025 Part D Redesign Program Instructions and Final CY 2026 Part D Redesign Program Instructions with respect to the treatment of the Manufacturer Discount Program payments, IRASA, and selected drug subsidy program payments for MLR purposes. These policies are currently in effect. Specifically, we propose to codify the exclusion of the Manufacturer Discount Program payments, IRASA, and selected drug subsidy program payments at § 423.2420(b)(4)(iii), (iv), and (v) respectively.

15. Severability

The Medicare Part D redesign provisions proposed herein are separate and severable from one another. If any of these provisions, once finalized, is held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further agency action, it is our intention that such provision shall be severable from this rule and not affect the remainder thereof, or the application of such provision to other persons not similarly situated or to other, dissimilar circumstances.

B. Medicare Coverage Gap Discount Program

The Patient Protection and Affordable Care Act (Pub. L. 111-148) amended Title XVIII of the Act by adding sections 1860D-14A and 1860D-43, establishing the Medicare Coverage Gap Discount Program. The Coverage Gap Discount Program, which began on January 1, 2011, was initially implemented through program instruction, and program requirements were codified in the “Medicare Program; Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs for Contract Year 2013 and Other Changes” final rule (77 FR 22072) under subpart W of 42 CFR part 423.

The Coverage Gap Discount Program made manufacturer discounts available at the point of sale (POS) to Part D enrollees who are not eligible for the low-income subsidy (LIS) under section 1860D-14 of the Act when receiving applicable drugs (as defined at § 423.100) while in the coverage gap phase of the Part D benefit. Under Coverage Gap Discount Program rules, pharmaceutical manufacturers were required to enter into a Coverage Gap Discount Program agreement with CMS in order for their applicable drugs to be covered under Part D. In general, the discount was 70 percent of the negotiated price (as defined at § 423.2305) of the applicable drug.

The Inflation Reduction Act of 2022 (Pub. L. 117-169) (IRA) made significant changes to the Part D benefit design, which are discussed in more detail in section II.A. of this proposed rule. These changes included eliminating the coverage gap phase of the Part D benefit after 2024 and adding section 1860D-14C to the Act, which established the Manufacturer Discount Program, under which manufacturers pay discounts for applicable drugs when dispensed to Part D enrollees during the initial and catastrophic coverage phases. Our proposal to codify the Manufacturer Discount Program is discussed in section II.C. of this proposed rule.

Consistent with the elimination of the coverage gap phase of the Part D benefit, section 11201 of the IRA added section (h) to section 1860D-14A of the Act, which sunset the Coverage Gap Discount Program and terminated all Coverage Gap Discount Program agreements, effective January 1, 2025. Section 1860D-14A(h)(2) of the Act further specifies that the provisions of section 1860D-14A of the Act, including all responsibilities and duties under such agreements continue to apply with respect to applicable drugs dispensed prior to January 1, 2025. Accordingly, we propose to amend § 423.2300 by adding a new paragraph to specify that the requirements of Subpart W apply before January 1, 2025 and, with respect to applicable drugs dispensed prior to that date, continue to apply on and after January 1, 2025. To make this change, we propose to redesignate the existing text of § 423.2300 as paragraph (a) and redesignate existing paragraphs (a) through (h) as § 423.2300(a)(1) through (8), respectively. We propose to add the new text at § 423.2300(b). We also propose to revise § 423.2315(c)(2) to reflect the sunset of the Coverage Gap Discount Program by limiting this provision specifying the effective date of a Coverage Gap Discount Program agreement to 2012 and subsequent years prior to 2025. Finally, in accordance with section 1860D-14A(h)(1) of the Act, we propose to amend § 423.2345 by adding a new paragraph (f) to specify

that, subject to § 423.2300(b), as redesignated, all Coverage Gap Discount Program agreements under this subpart are terminated as of January 1, 2025.

As discussed in more detail in section II.C. of this proposed rule, “discounted price” is defined at section 1860D-14A(g)(4) of the Act for purposes of the Coverage Gap Discount Program and at section 1860D-14C(g)(4) of the Act for purposes of the Manufacturer Discount Program. Because the percentage of the negotiated price that the manufacturer agrees to pay is different under the two programs, the statutory term “discounted price” as well as its corresponding regulatory term “applicable discount” have different meanings between the two programs. To address the programmatic difference, we propose to revise the regulation text at § 423.2305 to clarify that the definitions in this section apply only for purposes of the Coverage Gap Discount Program. Further, we propose to revise the definition of “applicable discount” at § 423.2305 to specify that it refers to 50 percent of the negotiated price with respect to a plan year before 2019 and 70 percent of the negotiated price with respect to plan year 2019 through plan year 2024. This clarification further distinguishes the definition of “applicable discount” at § 423.2305 under the Coverage Gap Discount Program from the definition of “applicable discount” (proposed at § 423.2712 as part of this proposed rule) under the Manufacturer Discount Program.

Lastly, for clarity and readability, we propose technical changes throughout Subpart W to replace the shorthand term “Discount Program” with “Coverage Gap Discount Program,” to better distinguish it from the Manufacturer Discount Program.

C. Medicare Part D Manufacturer Discount Program

1. Background

The Medicare Part D Manufacturer Discount Program (Manufacturer Discount Program) was enacted into law in section 11201 of the Inflation Reduction Act of 2022, Public Law 117-169 (IRA) and codified in sections 1860D-14C and 1860D-43 of the Act. Section 11201(f) of the IRA directed the Secretary to implement the Manufacturer Discount Program by program instruction or other forms of program guidance for 2025 and 2026. In accordance with the law, on November 17, 2023, CMS released the Medicare Part D Manufacturer Discount Program Final Guidance. On December 20, 2024, we released the Revised Medicare Part D Manufacturer Discount Program Final Guidance (Manufacturer Discount Program Final Guidance).

Available at:

https://www.cms.gov/files/document/revised-manufacturer-discount-programfinal-guidance122024.pdf.

The IRA made significant changes to the Part D benefit, which are discussed in detail in section II.A. of this proposed rule. The IRA eliminated the coverage gap phase of the Part D benefit after 2024 and added subsection (h) to section 1860D-14A of the Act, which sunset the Coverage Gap Discount Program and terminated all Coverage Gap Discount Program agreements effective January 1, 2025. Our proposal to update the Part D regulations to reflect the statutory sunsetting of the Coverage Gap Discount Program and termination of Coverage Gap Discount Program agreements is discussed in section II.B. of this proposed rule.

In this proposed rule, we would codify the Manufacturer Discount Program Final Guidance, with the refinements and changes discussed herein, to be effective beginning CY 2027. Under the Manufacturer Discount Program, for applicable drugs and selected drugs to be coverable under Part D, manufacturers of such drugs are required to enter into a Manufacturer Discount Program agreement with CMS and agree to provide discounts on their applicable drugs when dispensed to Part D enrollees who are in the initial and catastrophic coverage phases of the Part D benefit. Similar to the Coverage Gap Discount Program which the Manufacturer Discount Program replaces, the discounts under the Manufacturer Discount Program are advanced at the point of sale by the Part D plan sponsor, and manufacturers are invoiced quarterly based on the amounts submitted by plan sponsors on Prescription Drug Event (PDE) records. CMS provides prospective payments to plan sponsors to ensure they are able to advance the discounts and adjusts the payments through an annual reconciliation.

Unlike the Coverage Gap Discount Program, discounts under the Manufacturer Discount Program generally reduce the amount the Part D sponsor pays for the drug versus reducing the out-of-pocket amount for the enrollee, and discounts are paid for all Part D enrollees who have exceeded the annual Part D deductible specified in section 1860D-2(b)(1) of the Act. While the discounts are a lower percentage of the negotiated price of the applicable drug than under the Coverage Gap Discount Program (10 percent in the initial coverage phase and 20 percent in the catastrophic coverage phase), they continue through the end of the plan year once the enrollee exceeds the deductible. The discount percentages manufacturers are required to pay are phased in over the first several years of the program for manufacturers that meet statutory criteria for specified manufacturers and specified small manufacturers.

Many of the other policies currently in effect pursuant to the Manufacturer Discount Program Final Guidance, which we propose to codify in this rule, mirror longstanding policies under the Coverage Gap Discount Program, including use of a third party administrator (TPA) to facilitate program operations such as invoicing and payment, use of the Health Plan Management System (HPMS) to execute agreements and house data, and the manufacturer dispute resolution process. All of these policies are discussed in more detail later in this section.

2. Basis and Scope (§ 423.2700)

We propose to codify the requirements for the Manufacturer Discount Program under sections 1860D-14C and 1860D-43 of the Act as new subpart AA of part 423. Proposed § 423.2700(a) and (b) set forth the basis and scope, respectively.

We propose a conforming change at § 423.1 to incorporate section 1860D-14C of the Act into the scope of part 423.

3. Definitions (§§ 423.100, 423.1002, 423.2305, and 423.2704)

In this proposed rule, we propose to codify the definition of frequently used terms consistent with section 1860D-14C of the Act or established in the Manufacturer Discount Program Final Guidance, as well as new definitions based on the policies in this proposed rule.

Several of these terms are also used for purposes of the Coverage Gap Discount Program. In some cases, the same term has a different meaning for the Manufacturer Discount Program than for the Coverage Gap Discount Program because of differences in the programs reflected in sections 1860D-14C and 1860D-14A of the Act, respectively. Where possible under the statutory requirements, we propose to use the same terms, defined in the same way, for both programs. Because some of the terms are applicable to both subpart W and proposed subpart AA, we propose to revise certain definitions in existing §§ 423.100, 423.1002, and 423.2305, move certain definitions from § 423.2305 to § 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 § 423.2704.

At § 423.100, we propose to revise a number of existing definitions as discussed below.

• “Applicable beneficiary”;

We propose to revise the definition of “applicable beneficiary” to reflect the statutory definition of such term under the Coverage Gap Discount Program and the Manufacturer Discount Program. Specifically, we propose adding that for the purposes of the Coverage Gap Discount Program, applicable beneficiary means an individual who on the date of dispensing a covered Part D drug is not entitled to an income-related subsidy under section 1860D-14(a) of the Act; has reached or exceeded the initial coverage limit under section 1860D-2(b)(3) of the Act during the year; has not incurred costs for covered Part D drugs in the year equal to the annual out-of-pocket threshold specified in section 1860D-2(b)(4)(B) of the Act; and has a claim that is within the coverage gap or straddles or spans the coverage gap. We also propose adding to the definition that for the purposes of the Manufacturer Discount Program, applicable beneficiary means an individual who on the date of dispensing a covered Part D drug has incurred costs, as determined in accordance with section 1860D-2(b)(4)(C) of the Act, for covered Part D drugs in the year that exceed the annual deductible specified in section 1860D-2(b)(1) of the Act.

• “Applicable drug”;

We propose to modify the existing definition of “applicable drug” to specify that compounded drug products (as described in § 423.120(d)) containing an applicable drug are excluded. This proposed change would codify both longstanding CMS policy under the Coverage Gap Discount Program that excluded compounds as well as the policy established in section 40.1 of the Manufacturer Discount Program Final Guidance. As stated in the guidance, while plans may cover compounds that include at least one Part D ingredient, and that ingredient would be an applicable drug if dispensed on its own, we believe that the applicable drug determination must be made with respect to the compound as a whole. Because the compound as a whole is not approved under a New Drug Application (NDA) or Biologic Licensing Application (BLA), a compound does not meet the definition of an applicable drug.

Further, for the purposes of the Manufacturer Discount Program, we propose to clarify that applicable drug also includes a Part D drug that is provided to a particular applicable beneficiary as a transition fill under § 423.120(b)(3) or as an emergency supply as may be required for an applicable beneficiary who is a long-term care resident. This clarification would codify our longstanding approach under the Coverage Gap Discount Program where, in practice, such fills have been treated as meeting the definition of “applicable drug.”

Finally, in accordance with the statutory definition of “applicable drug” at section 1860D-14C(g)(2) of the Act and the Manufacturer Discount Program Final Guidance, we further propose to specify in the definition of “applicable drug” that, for the purposes of the Manufacturer Discount Program, an applicable drug is not a selected drug during a price applicability period with respect to such drug.

We propose to add definitions for the following terms at § 423.100:

• “Applicable discount”;

At § 423.100, we propose to add a definition of “applicable discount” that identifies the separate programmatic definitions of such term for the Coverage Gap Discount Program and the Manufacturer Discount Program. Specifically, we propose to define “applicable discount” as, for purposes of the Coverage Gap Discount Program, having the meaning set forth at § 423.2305, and for purposes of the Manufacturer Discount Program, the meaning set forth at § 423.2712.

• “Applicable number of calendar days”;

We propose to remove the definition of “applicable number of calendar days” from § 423.2305 and add it at § 423.100. This definition would apply to both the Coverage Gap Discount Program and the Manufacturer Discount Program.

• “Date of dispensing”;

We propose to remove the existing definition of “date of dispensing” from § 423.2305 and add it, with revisions, at § 423.100. Specifically, we propose to add at the end of the definition, “For long-term care and home infusion pharmacies, the date of dispensing can be interpreted as the date the pharmacy submits the discounted claim for reimbursement.” This proposed revision is consistent with the definition of “date of dispensing” used in the Manufacturer Discount Program Final Guidance and with criteria established under § 423.2325(g) for the Coverage Gap Discount Program.

• “Labeler code”;

We propose to remove the existing definition of “labeler code” from § 423.2305 and add it, with revisions, at § 423.100. Specifically, we propose to remove the phrase “Food and Drug Administration” for conciseness and accuracy.

• “Manufacturer”;

We propose to remove the existing definition of “manufacturer” from § 423.2305 and add it at § 423.100 with a revision removing the phrase “Discount Program” and adding in its place the phrase “Coverage Gap Discount Program and the Manufacturer Discount Program” for accuracy.

• “Manufacturer Discount Program”;

We propose to define “Manufacturer Discount Program” as the Medicare Part D Manufacturer Discount Program established under section 1860D-14C of the Act.

• “Manufacturer Discount Program agreement”;

We propose to define “Manufacturer Discount Program agreement” as the agreement described at section 1860D-14C(b) of the Act.

• “Medicare Coverage Gap Discount Program”;

We propose to remove the definition of “Medicare Coverage Gap Discount Program” from § 423.2305 and add it at § 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)”.

• “Medicare Coverage Gap Discount Program agreement”;

We propose to remove the definition of “Medicare Coverage Gap Discount Program agreement” from § 423.2305 and add it at § 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)”.

• “National Drug Code (NDC)”; and

We propose to remove the definition of “National Drug Code” from § 423.2305 and add it at § 423.100 with revisions to remove the phrase “the product” and add in its place the phrase “the product's manufacturer, product”. This proposed revision aligns with the definition of NDC used in the Manufacturer Discount Program Final Guidance.

• “Non-applicable drug”;

We propose to define “non-applicable drug” to mean any Part D drug that is not an applicable drug and not a selected drug during a price applicability period with respect to such drug.

• “Price applicability period”;

We propose 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.

• “Selected drug”; and

We propose to define “selected drug” as having the meaning given such term in section 1192(c) of the Act and any applicable regulations and guidance. Such definition aligns with the definition used in the Manufacturer Discount Program Final Guidance.

• “Third Party Administrator (TPA)”.

We propose to add at § 423.100 the definition of “Third Party Administrator” that we propose to remove from § 423.2305, with revisions. Specifically, we propose to remove the phrase “section 1860D-14A of the Act” and add in its place the phrase “sections 1860D-14A and 1860D-14C of the Act”.

At § 423.1002, we propose to revise the existing definition of “affected party” to account for the definition of “manufacturer” under the Coverage Gap Discount Program and the definition of “agreement holder” under the Manufacturer Discount Program. Specifically, we propose that affected party means any Part D sponsor or, for purposes of the Coverage Gap Discount Program, any manufacturer (as defined in § 423.100), or, for purposes of the Manufacturer Discount Program, any manufacturer that is an agreement holder (as defined in § 423.2704), impacted by an initial determination or, if applicable, by a subsequent determination or decision issued under this part, and “party” means the affected party or CMS, as appropriate.

We propose to remove the following definitions from § 423.2305 because, as noted previously, we propose to add definitions for such terms at § 423.100, for purposes of incorporating the Manufacturer Discount Program:

• “Applicable number of calendar days”;

• “Date of dispensing”;

• “Labeler code”;

• “Manufacturer”;

• “Medicare Coverage Gap Discount Program”;

• “Medicare Coverage Gap Discount Program Agreement”;

• “National Drug Code (NDC)”; and

• “Third Party Administrator (TPA)”.

At § 423.2704, we propose to define the following terms for purposes of proposed subpart AA and the Manufacturer Discount Program:

• “Agreement holder”;

We propose to define “agreement holder” as a manufacturer that has executed and has in effect its own Manufacturer Discount Program agreement in accordance with § 423.2708(b)(1).

• “Applicable discount”;

We propose to define “applicable discount” as having the meaning set forth at § 423.2712.

• “Applicable LIS percent”;

We propose to define “applicable LIS percent” as having the meaning set forth at § 423.2712(d)(1).

• “Applicable small manufacturer percent”;

We propose to define “applicable small manufacturer percent” as having the meaning set forth at § 423.2712(d)(2).

• “Covered Part D drug”;

We propose to define “covered Part D drug” as having the meaning set forth at § 423.100.

• “Dispute submission deadline”;

We propose to define “dispute submission deadline” as the date that is 60 calendar days from the date of the invoice containing the information that is the subject of the agreement holder's dispute.

• “Negotiated price”;

We propose to define “negotiated price” as having the meaning set forth at § 423.100, and with respect to an applicable drug under the Manufacturer Discount Program, such negotiated price includes any dispensing fee and, if applicable, any vaccine administration fee and sales tax.

• “Network pharmacy”;

We propose to define “network pharmacy” as having the meaning set forth at § 423.100.

• “Part D drug”;

We propose to define “Part D drug” as having the meaning set forth at § 423.100.

• “Primary manufacturer”;

We propose to define “primary manufacturer” as having the meaning given such term pursuant to applicable regulations and guidance for the Medicare Drug Price Negotiation Program.

• “Specified drug”;

We propose to define “specified drug” as meaning, with respect to a specified manufacturer, for 2021, an applicable drug that is produced, prepared, propagated, compounded, converted, or processed by the specified manufacturer.

• “Specified small manufacturer drug”; and

We propose to define “specified small manufacturer drug” as meaning, with respect to a specified small manufacturer, for 2021, an applicable drug that is produced, prepared, propagated, compounded, converted, or processed by the specified small manufacturer.

• “Total expenditures”.

We propose to define “total expenditures” as meaning, with respect to Part D, the total gross covered prescription drug costs, as defined in § 423.308; and as meaning, with respect to Part B, the total Medicare allowed amount (that is, total allowed charges), inclusive of beneficiary cost sharing, for Part B drugs and biologicals, except that expenditures for a drug or biological that are bundled or packaged into the payment for another service are excluded.

4. Conditions for Coverage of Drugs Under Part D (§ 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 § 423.100) under such agreement. As discussed in section 40 of the Manufacturer Discount Program Final Guidance, CMS maintains a list of all labeler codes that are covered by a Manufacturer Discount Program agreement, which is updated monthly and posted on the CMS website to assist Part D sponsors in accurately adjudicating claims at the point of sale. As described in more detail in section II.C.12. of this preamble, manufacturers are required to provide CMS with a complete list of the labeler codes covered under their agreements.

Any Part D drug that is a selected drug during a price applicability period with respect to such drug, is excluded from the definition of applicable drug under section 1860D-14C(g)(2)(B) of the Act and, therefore, not subject to applicable discounts under the Manufacturer Discount Program when dispensed during a price applicability period. However, a selected drug would otherwise meet the definition of an applicable drug, but for it being in a price applicability period following its selection into the Medicare Drug Price Negotiation Program. Therefore, applying section 1860D-43(a) of the Act's coverage exclusion in the absence of a Manufacturer Discount Program agreement to both applicable drugs and selected drugs provides incentive for manufacturers of brand name drugs and biological products to participate in the Manufacturer Discount Program, while not undermining beneficiary access to generics. Moreover, this interpretation is consistent with the IRA's addition of

section 1860D-43(c)(2) of the Act, which prohibits the Secretary from authorizing coverage for a covered Part D drug of a manufacturer without a Manufacturer Discount Program agreement for any period described in section 5000D(c)(1) of the Internal Revenue Code under the exception for drugs determined to be essential to the health of Part D enrollees. This provision further demonstrates that the statute does not allow for a selected drug to be eligible for Part D coverage in the absence of a Manufacturer Discount Program agreement. As stated in section 40 of the Manufacturer Discount Program Final Guidance and consistent with the policy on applicable drugs, beginning January 1, 2025, Part D coverage for selected drugs during a price applicability period is available only for selected drugs for which the labeler code is covered by a Manufacturer Discount Program agreement with CMS, as described in section 1860D-14C(b) of the Act.

Accordingly, at § 423.2708(a), we propose to codify that, in order for coverage to be available under Part D for a Part D drug of a manufacturer that is an applicable drug or a selected drug during a price applicability period:

• The FDA-assigned labeler code of such drug must be covered under a Manufacturer Discount Program agreement that is in effect;

• The manufacturer must participate in the Manufacturer Discount Program; and

• The manufacturer must have entered into and have in effect a Manufacturer Discount Program agreement.

We expect each manufacturer choosing to participate in the Manufacturer Discount Program to enter into its own Manufacturer Discount Program agreement with CMS. However, we acknowledge a longstanding practice where CMS has permitted manufacturers to cover by their Manufacturer Discount Program agreement (and previously by their Coverage Gap Discount Program agreement) labeler code(s) assigned by the FDA to another manufacturer. CMS does not currently and is not proposing to prohibit this practice, provided all other requirements as discussed in this proposed rule are met. As such, we clarify that a manufacturer is considered to participate in the Manufacturer Discount Program and

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