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Drug companies that decline to participate in Medicare’s drug price negotiations will have to pay an excise tax under forthcoming regulations that the IRS recently confirmed are on the way.

The new tax is authorized by a provision in last year’s Inflation Reduction Act which allows Medicare to negotiate prices of many medications. Under the program, the federal government must publish a list of selected drugs, enter into agreements with willing manufacturers of these drugs, and negotiate maximum fair prices.

The Centers for Medicare & Medicaid Services (CMS) will publish a list in September of the first 10 Medicare drugs that will be subject to price controls in 2026. CMS will add 15 more drugs for 2027, up to 15 more drugs for 2028 and up to 20 more drugs for each year after that.

The Congressional Budget Office estimates price controls will produce $98.5 billion in Medicare savings over 10 years, but the pharmaceutical industry says the new law will undermine its financial ability to move forward on research and development of new innovative medications.

IRS Notice 2023-53, which was issued Aug. 4, states that the Treasury Department and IRS intend to issue rules on the scope of sales that are to be taxed, as well as the taxable sales price and procedures to help drugmakers meet their tax reporting and payment obligations.

The amount of the tax will depend on a complicated ratio involving the price of the drug and an “applicable percentage” that in turn depends on the number of days within the statutory period, the IRS notice states.