Medicare Drug Price Negotiation Program: The Inflation Reduction Act “Pill Penalty” and Other IRA Reforms on the Horizon for 2026

When Congress adopted the Inflation Reduction Act (IRA) in 2022, creating the Medicare Drug Price Negotiation Program (MDPNP), the bill did not receive support from any Republican senators.

In 2025, the question remains what Congress and the current administration will do with the MDPNP, and we are starting to find out.

On April 15, 2025, President Trump issued Executive Order 14273, entitled “Lowering Drug Prices by Once Again Putting Americans First.” This comes on the heels of the release of the Final CY 2026 Part D Redesign Program Instructions (“Program Instructions”) by the Centers for Medicare and Medicaid Services (CMS) on April 7—concurrent with the CY 2026 Announcement of Medicare Advantage Capitation Rates and Part C and D Payment Policies (see our recent blog post on the latter.) 

Executive Order 14273 includes a number of provisions addressing the IRA, including:

• Within 60 days, the Secretary of the Department of Health and Human Services (HHS) shall propose and seek guidance on the MDPNP for 2028 and manufacturer effectuation of the Maximum Fair Price (MFP) under the program in 2026, 2027, and 2028.
• HHS is also directed to work with Congress (no specified time frame) to align the treatment of small molecule prescription drugs, which are subject to an earlier negotiation time period, with that of biological products. This will end the so-called “pill penalty”, “ending the distortion that undermines relative investment in small molecule prescription drugs,” the executive order states.
• Within one year, the Secretary is to develop a rulemaking plan and select for testing a payment model to obtain better value for high-cost prescription drugs and biologicals covered by Medicare, including those not subject to the MDPNP.

In an April 15 Fact Sheet, the White House says that the order “delivers lower drug prices for Medicare and the seniors who rely on it by…[improving] the Medicare Drug Pricing Negotiation Program in order to eclipse the 22 [percent] in savings achieved in the program’s first year.”

We discuss Executive Order 14273 and the Part D Redesign Program Instructions as they relate to the IRA, below.

Room for Improvement?

As a result of the IRA, Medicare negotiates directly with drug companies to improve access to Medicare Part B (medical benefit) and Part D (prescription drug benefit) covered drugs. Prices negotiated for the initial ten drugs are slated to go into effect on January 1, 2026. CMS announced in March that it has signed agreements with drug manufacturers for the next 15 drugs in the MDPNP, effective January 1, 2027.

While keeping the program in place, Executive Order 14273 requires that the guidance developed by the Secretary 1) improve MDPNP transparency; 2) prioritize the selection of prescription drugs with high costs to the Medicare program; and 3) minimize any negative impacts of the MFP on pharmaceutical innovation within the United States. The overarching policy is to optimize federal health care programs, intellectual property protections, and safety regulations “to provide access to prescription drugs at lower costs to American patients and taxpayers.”

The directive for the Secretary to work with Congress to end the pill penalty comes from a differential in the IRA’s price-fixing model: Small molecule drugs are eligible for selection to the MDPNP seven years after Food and Drug Administration (FDA) approval, and the price control goes into effect at year nine. Biologics, meanwhile, are eligible for selection 11 years after FDA approval, and the price control goes into effect at year 13.

Congressman Gregory F. Murphy, M.D. (R-NC) has already introduced bipartisan, bicameral legislation to address the problem. H.R. 1492, the “Ensuring Pathways to Innovative Cures (EPIC) Act” simply equalizes the negotiation period in the Social Security Act so that both small molecule drugs and biologics are eligible for selection after 11 years.

“According to a University of Chicago policy brief, due to the 9-13 disparity, 188 fewer small molecule medicines will come to market,” Murphy’s press release states, adding that small molecule funding has dropped by 70 percent since the IRA was introduced in 2021.

Even if the directive for the Secretary and Congress to work together to modify the MDPNP is a simple task, this work will be “coupled with other reforms to prevent any increase in overall costs to Medicare and its beneficiaries,” according to E.O. 14273.

Part D Redesign Program Instructions

The Final CY 2026 Part D Redesign Program Instructions provide guidance regarding 1) the implementation of IRA changes to the defined standard Medicare Part D drug benefit and 2) the successor regulation exception to the IRA that permits formulary substitutions for selected drugs, which relates to both the Part D program and the MDPNP.

The former includes, for 2026, an increased annual out-of-pocket (OOP) threshold of $2100 (up from $2000 in 2025); changes to the liability of enrollees, sponsors, manufacturers, and CMS; and the establishment of the selected drug subsidy program, which lowers Part D sponsor liability on the negotiated price of the selected drug. The IRA allows Part D sponsors to remove a selected drug from their formularies if removal would be permitted under § 423.120(b)(5)(iv)  or any “successor regulation”; the Program Instructions identify updated provisions at §423.120(e)(2)(i), (f)(2), (3), and (4) as the “successor regulation.”

CMS has highlighted other key policies of the Program Instructions—including Prescription Drug Plan (PDP) meaningful difference thresholds (10 to 15 percent); a simplified creditable coverage determination methodology, and more—in a summary of key changes preceding the instructions and in a Fact Sheet of April 7, 2025.

Takeaways

The current administration’s defense of the MDPNP in a brief filed in February indicated a likelihood that President Trump was going to maintain the MDPNP while aiming to achieve even higher savings, to outshine the Biden administration. This has proven to be largely true. Interested parties should remain on the lookout for Secretary Robert F. Kennedy’s rulemaking seeking public comment on the MDPNP by June 15 and be prepared to comment if impacted.

Epstein Becker Green Attorney Ann W. Parks contributed to the preparation of this post.