Drug coverage in Medicare involves a variety of stakeholders, with federal regulations governing benefit design, claim liability, medication access, and other key components. The nine concepts discussed here provide life science companies with the key information to better understand the Medicare drug benefit and facilitate more informed conversations with other stakeholders.

1. Medicare Part B. In general, prescription drugs administered by a provider in a healthcare setting are covered under Medicare Part B. In Part B, providers are generally reimbursed based on average sales prices (ASPs) plus a markup percentage, and rates for a given drug are consistent across all providers. In addition to payment for the drug itself, providers also receive a separate payment for administering the drug. Patients typically pay 20% of their drug costs after their deductible is met.
2. Medicare Part D. Typically, self-administered prescriptions obtained through pharmacies are covered under Part D. In Part D, pharmacies are reimbursed based on various pricing structures, and reimbursement varies based on contracts between pharmacies and plan sponsors. As part of the standard benefit design, beneficiaries move through different benefit phases based on their total out-of-pocket spend incurred during the year. Within each benefit phase, the share of the total drug cost varies among the key stakeholders: the beneficiary, the plan sponsor, manufacturers, and the government.
3. Allowed cost. The total reimbursement to a provider or pharmacy for a given drug is referred to as the allowed cost. In Part D, the allowed cost is typically calculated as the average wholesale price (AWP) minus a discount plus a dispensing fee, if any, as contracted with the pharmacy. The allowed cost forms the basis from which all stakeholder liabilities are determined. That is, the amounts paid by manufacturers sharing in the cost through the manufacturer discount program (MDP), beneficiaries for cost sharing, and the government through the federal reinsurance program are all based on a predetermined percentage multiplied by the total allowed cost for each drug claim. The allowed cost is determined prior to the effect of any post-point of sale concessions, such as manufacturer rebates.
4. The Manufacturer Discount Program (MDP). Beginning in calendar year (CY) 2025, additional Part D claim liability shifts to pharmaceutical manufacturers as the MDP replaces the Coverage Gap Discount Program (CGDP). The MDP requires manufacturers to cover 10% of Part D applicable (i.e., brand) drug claims in the initial coverage phase of the Part D benefit, increasing to 20% in the catastrophic phase. While the CGDP applied only to applicable claims for non-low income (NLI) beneficiaries, the MDP applies to applicable claims for both NLI and low income (LI) beneficiaries.
5. Specified and specified small. The MDP is phased in for manufacturers designated as “specified” or “specified small,” reaching the full discount amounts in 2031. A specified manufacturer is one in which Medicare’s associated expenditures for all of the manufacturer’s drugs account for less than 1% of total expenditures in Part D and Part B. For specified manufacturers, the liability for claims for LI beneficiaries is phased in. A specified small manufacturer is both specified and has more than 80% of total Part D expenditures attributable to a single drug. For specified small manufacturers, the liability for claims for all beneficiaries is phased in. As the phase-in occurs, the plan sponsor picks up any additional liability, creating additional considerations for formulary design.
6. Federal reinsurance. High-cost Part D beneficiaries who reach the maximum out-of-pocket (MOOP) threshold enter the catastrophic phase, in which the government shares in the liability via federal reinsurance. Federal reinsurance amounts to 40% of the allowed cost for non-applicable (i.e., generic) drugs and 20% for applicable drugs. Plan sponsors are required to share a portion of any post-point of sale concession they receive with the government to reduce the federal reinsurance. This reduction is determined in aggregate for each benefit plan and is not specific to any individual beneficiary, drug, or drug claim.
7. Medicare Drug Price Negotiation Program (MDPNP) and maximum fair prices (MFPs). The MDPNP introduces a new reimbursement model in the form of MFPs for an annually expanding list of Part B and Part D single-source drugs. Drugs are selected for the program based on having the highest gross Medicare drug spend and meeting a minimum duration on the market. Beginning in 2026, MFPs take effect for Medicare beneficiaries accessing ten of the top Part D drugs by spend and represent discounts of approximately 40% to 80% off pre-MDPNP list prices in CY 2026. Selected drugs are exempt from manufacturer discount program payments and remain in the program until generic or biosimilar drugs become available, excluding authorized generic and unbranded versions produced by the same manufacturer as the single-source drug.
8. Net plan liability (NPL). The plan sponsor’s final net cost for a drug after accounting for the share of the liability picked up by the other stakeholders is often referred to as the NPL. NPL is determined as the allowed cost minus the beneficiary’s cost sharing and any post-point of sale concessions. For Part D drug claims, the NPL is further reduced for manufacturer payments received through the MDP and federal reinsurance amounts. Because the share of the total drug cost varies by stakeholder as the beneficiary moves through different phases, and because that movement is affected by a beneficiary’s total spend, plan sponsors evaluate the total NPL for beneficiaries based on each beneficiary’s entire medicine cabinet. NPL is a key consideration for plan sponsors when making formulary design and coverage decisions.
9. Formulary design and manufacturer rebates. In the Part D market, formulary design is a lever for plan sponsors to manage drug spend by steering patients to cost-effective therapies. In classes with multiple therapeutic alternatives, manufacturers may offer rebates in exchange for favorable placement of their products, including exclusive or at-parity coverage on formulary and placement on lower patient cost-sharing tiers than competitors’ products. Manufacturers may vary or discontinue Part D rebates in response to changing economics affected by biosimilar launches, material list prices changes, and mandated formulary coverage for MDPNP-selected drugs. In response, pharmacy benefit managers (PBMs) may propose changes, on behalf of plan sponsors, to formulary design and manufacturer rebate contracts to optimize from an NPL perspective.

With the various dynamics described here, there are multiple strategies for life science companies to consider when evaluating their place in the Medicare market. An understanding of these concepts can help facilitate a more meaningful dialogue among stakeholders.