The Inflation Reduction Act and generic drugs

When Medicare's redesigned drug benefit started on Jan. 1, 2025, makers of brand-name drugs began paying a 10 percent discount on their products in the benefit's initial coverage phase and 20 percent once an enrollee reached catastrophic coverage, according to KFF's analysis of the Inflation Reduction Act⁷. Makers of generic drugs pay neither discount.

That split runs through the whole 2022 law. Its three big drug provisions (Medicare price negotiation, the Part D redesign and inflation rebates) were aimed at brand-name spending, which is where Medicare's money goes. Generics fill most prescriptions but sit at the edges of each provision, and in one of them the arrival of a generic is the exit door.

With the third round of negotiation closed on Nov. 1 and the out-of-pocket cap rising again in 2027, this piece lays out where generics fall in each part of the law and what the rules say about the exceptions.

The timeline so far

Dates come from CMS fact sheets on the first cycle², the second³ and the third⁴, the 2023 inflation rebate fact sheet⁵ and KFF's summary of the Part D changes⁷.

Negotiation ends where generic competition begins

Price negotiation targets older, high-spending drugs that still face no generic or biosimilar competitor. For the third cycle, a drug had to be at least 7 years past FDA approval (11 years for a biologic) and lack generic or biosimilar competition, CMS's selected drug list fact sheet⁴ explains. CMS ranked the eligible drugs by total Medicare spending and took the top 15. The law also excludes certain orphan drugs, low-spend drugs and plasma-derived products, and a July 2025 law (Public Law 119-21) widened the orphan exclusion to cover products with several rare-disease indications.

Each round has been bigger than the last. The first 10 drugs, all in Part D, took negotiated prices on Jan. 1, 2026. CMS estimated² that had those prices applied in 2023, net Medicare spending on the 10 drugs would have been about 22 percent lower, roughly $6 billion, with about $1.5 billion in savings for people with Part D coverage.

For the second set of 15 drugs, effective Jan. 1, 2027, CMS announced³ a net savings of 44 percent, or $12 billion, against the prior year's negotiated spending. About 5.3 million Part D enrollees used those drugs in 2024, when they accounted for about $42.5 billion in gross covered prescription drug costs, about 15 percent of the Part D total. The third set of 15 accounted for $27.0 billion in Part B and Part D spending from November 2024 through October 2025, about 6 percent of the total⁴.

For generic manufacturers the important point is structural. A generic or biosimilar launch is the event that removes a drug from eligibility, and CMS's renegotiation rules start by setting aside any previously selected drug for which it has found a generic or biosimilar on the market, the third-cycle fact sheet⁴ says. Negotiation and generic entry are two tools for the same job of bringing down the price of an aging drug. What happens to prices after that entry is covered in why generic prices fall as competitors enter, and new generic approvals are counted on GxRadar's approvals page.

The redesigned Part D benefit

Enrollees notice the out-of-pocket cap first. From 2025, spending by an enrollee on covered Part D drugs was capped at $2,000 a year. The cap is indexed to growth in Part D costs, and CMS set the 2026 figure at $2,100¹, with a standard deductible of $615. In 2024, the transition year, the 5 percent coinsurance in the catastrophic phase disappeared, which left brand-only users paying about $3,300 before reaching that phase, KFF estimated⁷.

Generics count toward the cap like any other covered Part D drug. In practice it matters most to people on expensive brand or specialty products; someone whose prescriptions are all low-cost generics may never come near it. GxRadar's guide to Part D changes in 2025 and 2026 covers the cap, the new monthly payment option and the 2027 amounts.

Behind the counter, the redesign moved financial responsibility around, and here brands and generics are treated differently.

Figures are from KFF's analysis⁷. Plans now carry 60 percent of catastrophic costs, up from 15 percent under the old design, which gives them a larger stake in what high-cost enrollees take. The new manufacturer discount program replaced the old 70 percent coverage gap discount on brands, and generic makers fund neither.

Inflation rebates mostly skip generics

The third provision requires manufacturers to pay Medicare a rebate when a drug's price rises faster than inflation. CMS's 2023 fact sheet⁵ sets out the clock: in Part D the measurement runs in 12-month periods starting Oct. 1, 2022; in Part B it runs by quarter from Jan. 1, 2023, and since April 1, 2023, Part B coinsurance for affected drugs is based on the inflation-adjusted amount.

Which Part D drugs count is spelled out in 42 CFR 428.101⁶. A drug approved through a generic application (an ANDA) is included only in narrow circumstances, and the regulation runs through a series of tests.

• Whether the reference brand drug, or an authorized generic of it, is still marketed.
• Whether any therapeutically equivalent generic is marketed.
• Whether the manufacturer is a first applicant during its 180-day exclusivity period.
• Whether the drug's average annual cost per user clears a low-cost threshold, set at $100 for the first period and adjusted for inflation after that.

A typical multi-source generic falls outside the program. In effect the rebate reaches a generic only when it has become a sole-source product, with no brand, authorized generic or equivalent generic on the market. Medicaid has run its own inflation rebate on generics since 2017, described in Medicaid and generic drug prices.

A $2 generic list that did not go ahead

Separately from the law, the CMS Innovation Center developed a Medicare $2 Drug List Model that, in the agency's words⁸, "would aim to standardize cost sharing for low-cost generics" in participating Part D plans. It took public comment on a sample drug list through Dec. 9, 2024. CMS announced on March 12, 2025⁸ that the model would not be implemented.

Next on the calendar is Nov. 30, 2026, the deadline for CMS to publish any prices agreed in the third negotiation cycle, the first to include Part B drugs, with those prices due to take effect in 2028. For generic makers, the questions to watch are how quickly generic entry pulls selected drugs out of the program and how plans, now carrying most of the catastrophic bill, set their formularies for generic tiers.