Medicare Drug Rebate Rules Get an Update: Bill Shifts Calculations to 2016 Price Baseline

This legislation, specifically Section 2 of the "Lower Drug Costs for Families Act," changes how inflation rebates are calculated for certain prescription drugs covered under Medicare Part B (drugs administered in a doctor's office) and Part D (drugs picked up at the pharmacy). The core change involves shifting the base year used to measure price inflation from 2021 back to 2016. It also adjusts how drug units are counted for these rebate calculations and specifies certain drug sales that won't be included. These changes are set to take effect starting October 1, 2025, for Part D drugs and January 1, 2026, for Part B drugs.

Rewinding the Rebate Clock

The biggest shift here is the base year change for calculating inflation rebates. Currently, rebates kick in if a drug's price rises faster than general inflation compared to its price in 2021. This bill pushes that comparison year back to 2016 (specifically, October 2016 for Part D and January 2016 for Part B). What does this mean? If a drug's price jumped significantly between 2016 and 2021, using the earlier 2016 baseline could result in larger rebates owed by the manufacturer, potentially leading to savings for Medicare and beneficiaries. However, if a drug's price was already high in 2016 or saw most of its increases before 2016, this change might result in smaller rebates compared to using the 2021 baseline. The actual impact will vary drug by drug, depending on its specific price history.

Fine-Tuning the Count: Units In, Units Out

The bill also gets specific about how to count drug units when figuring out rebates. For Part B drugs, it switches from counting general "units" to "billing units," aiming to align the rebate system more closely with how Medicare actually pays doctors and hospitals. For Part D drugs, it bases the count on units reported for calculating the Average Manufacturer Price (AMP). More importantly, the bill specifies certain drug units that won't count towards rebate calculations. This includes drugs paid for by state Medicaid plans and, starting in 2026, drugs sold at a discount under the federal 340B Drug Pricing Program, which supports safety-net hospitals and clinics. Excluding these units simplifies things for manufacturers but also means fewer units are subject to rebates, potentially reducing the total dollar amount collected. The exclusion of 340B drugs, in particular, could impact the financial stability of clinics serving low-income patients starting in 2026.

The Bottom Line: What It Means for Costs

The goal stated in the Act's title is lower drug costs, and larger inflation rebates could contribute to that by pressuring manufacturers on price increases. However, the effectiveness depends heavily on individual drug price trends since 2016. The exclusions, especially for 340B drugs, might reduce overall rebate amounts collected by Medicare, potentially offsetting some savings or impacting funding streams for safety-net providers. The bill also requires the government to set up a way for drug makers to revise submitted data, which could improve accuracy but needs careful oversight to ensure fairness. Ultimately, while aiming to curb inflation's impact on drug costs, these specific calculation changes introduce variables that could lead to different outcomes for different drugs and patient groups once implemented in 2025 and 2026.