Executive summary: Section 5000D excise tax proposed regulations
On Sept. 27, 2023, the Department of the Treasury and IRS issued proposed regulations, REG-15559-23. These regulations offer guidance to manufacturers, producers and importers of certain prescription drugs on the filing process and procedural requirements related to the section 5000D tax. This tax, enacted under the Inflation Reduction Act of 2022, focuses on the sale of designated drugs and is imposed on certain drug manufacturers and importers who do not participate in the Medicare prescription drug price negotiation program. The Medicare prescription drug price negotiation program provides for the government to negotiate maximum fair prices (MFPs) for certain single-source drugs covered under Medicare.
IRS issues proposed regulations on 5000D excise tax
Section 5000D: An overview
The Inflation Reduction Act passed in 2022 requires the Secretary of Health and Human Services (HHS) to establish a Medicare prescription drug price negotiation program to negotiate maximum fair prices (MFPs) for certain single source drugs covered under Medicare. Pursuant to Section 1193(a)(3) of the Social Security Act (SSA), manufacturers of designated drugs opting to enter into agreements with the Secretary of HHS and agree to an MFP agree to provide access to those designated drugs at the negotiated prices to MFP-eligible individuals, pharmacies, hospitals and physicians, as well as other service providers.
The Inflation Reduction Act also added section 5000D which imposes an excise tax on designated drugs sold by the manufacturers, producers or importers (collectively manufacturers) of these drugs during a period of noncompliance. In general, the period of noncompliance for designated drugs is the period in which the manufacturer does not have an MFP drug pricing agreement as part of the Medicare Drug Price Negotiation Program under section 1193 of the SSA. The period of noncompliance begins after the deadline for the drug manufacturer to enter or renegotiate a Medicare drug pricing agreement or MFP for the designated drugs. The noncompliance period concludes once an agreement is reached or when a generic version of the specific designated drug is made available.
The amount of tax levied on a manufacturer during a day that falls within the statutory period of noncompliance is the applicable percentage equal to the ratio of the tax divided by the sum of the tax and the price for which the designated drug is sold.
The applicable percentages are defined by section 5000D as:
- 65% for sales of a designated drug during the first 90 days of the statutory period
- 75% for sales of a designated drug during the 91st through 180th day of the statutory period
- 85% for sales of a designated drug during the 181st through 270th day in a statutory period
- 95% for sales of a designated drug for any subsequent day in a statutory period
This means that the excise tax rate would range from 185.71% to 1,900% of the designated drugs price depending on the duration of non-compliance. The 5000D provision does not specifically state these rates, however, it defines an applicable percentage that equals the share of the post tax sale price attributable to the excise tax. Specifically, using the applicable percentages above, the corresponding tax rates would be calculated as: