IRS issues guidance on Medicare drug pricing tax

The Internal Revenue Service and the Treasury Department said Friday they will be issuing rules for prescription drug makers and importers about a new tax imposed by a provision in last year's Inflation Reduction Act to allow Medicare to negotiate on the prices of many medications.

Notice 2023-52 says the IRS and the Treasury will propose future regulations to provide rules on the scope of sales subject to the Section 5000D tax, along with rules about the taxable sale price, and procedural rules to help drug makers meet their tax reporting and payment obligations.

Section 5000D of the Tax Code, added by the Inflation Reduction Act, imposes an excise tax on some sales of certain drugs by manufacturers, producers and importers of the drugs.

Andrew Harrer/Bloomberg

The Inflation Reduction Act requires the Department of Health and Human Services to establish a Medicare prescription drug price negotiation program to negotiate maximum fair prices for certain high-price, single-source drugs covered under Medicare. Under the program, HHS has to publish a list of selected drugs, enter into agreements with willing manufacturers of the selected drugs and negotiate maximum fair prices for the selected drugs.

Section 5000D imposes a tax on the sale by the manufacturer, producer or importer of any designated drug during a day that falls within the statutory period. The amount of the tax depends on a ratio involving the price of the drug and an "applicable percentage" that in turn depends on the number of days within the statutory period. In the case of sales of a designated drug during the first 90 days, it's 65%; and during the 91st day through the 180th day, it's 75%.

If companies don't comply with the rules, they can face excise taxes of up to 1,900% on drug sales, according to the Tax Foundation.

HHS issued  a list in June of 43 prescription drugs for which Medicare Part B beneficiaries' coinsurances may be lower between July 1 – Sept. 30, 2023 because of related provisions in the Inflation Reduction Act that require drug makers to pay a rebate to Medicare if a drug's price increase exceeds the rate of inflation.