CMS Proposals Would Raise the Bar on Bona Fide Service Fees for Average Sales Price

The Calendar Year 2026 Medicare Physician Fee Schedule (PFS) proposed rule (here), which was issued yesterday by CMS, contained important amendments to the regulations on Medicare Part B average sales price (ASP) reporting.   One amendment would add provisions for bundled sales that are consistent with those under the Medicaid Drug Rebate Program (MDRP), with which manufacturers are familiar.  However, the other amendment, which addresses bona fide service fees (BFSFs) that are excluded from the ASP calculation, would impose substantial new obligations on manufacturers.

By way of background, payment limits for separately payable drugs covered under Medicare Part B are calculated on a quarterly basis by CMS.  The payment limit for most Part B drugs is ASP plus 6 percent.  Manufacturers are required to report ASP to CMS quarterly and calculate ASP for each NDC in accordance with the methodology specified by statute and CMS regulations.  Essentially, ASP is calculated as a weighted average price to commercial customers in the U.S, with certain exceptions.  Among other requirements, price concessions must be deducted from the ASP calculation (thereby lowering the ASP and the payment limit).  BFSFs, on the other hand, are not deducted from the ASP calculation, and thus do not lower the ASP.  Inappropriately classifying a price concession as a BFSF, then, artificially increases the manufacturer’s ASP, which, in turn, results in Medicare overpayments and higher coinsurance amounts for Medicare beneficiaries.  According to CMS, the new proposed policies are intended to avoid inaccurate calculations of a manufacturer’s ASP and its effects on Medicare and its beneficiaries.

Bundled Arrangements

Bundled arrangements are one type of price concession common in the industry.   CMS proposes to add a definition of “bundled arrangement” to the existing ASP regulations at 42 C.F.R. § 414.802:

Bundled Arrangement means an arrangement regardless of physical packaging under which the rebate, discount, or other price concession is conditioned upon the purchase of the same drug or biological or other drugs or biologicals or another product or some other performance requirement (for example, the achievement of market share, inclusion or tier placement on a formulary, purchasing patterns, prior purchases), or where the resulting discounts or other price concessions are greater than those which would have been available had the bundled drugs or biologicals been purchased separately or outside the bundled arrangement.

This definition is familiar to drug manufacturers because it is substantially identical to the definition that has existed under the MDRP since 2007.   See 42 CFR 447.502.   To remain consistent with the MDRP, CMS also proposes to adopt the additional Medicaid language on how to allocate discounts under bundled arrangements:  “The discounts in a bundled arrangement . . . , including those discounts resulting from a contingent arrangement, are allocated proportionately to the dollar value of the units of all drugs or products sold under the bundled arrangement.”

Recognizing the range of potential structures of bundled arrangements, which may vary based on, inter alia, the number and type of products included in the arrangement and the timing of the price concessions, CMS is soliciting comments on methods of allocating discounts for bundled sales containing both Part B-covered and non-covered products.  CMS is also soliciting comments regarding how discounts associated with sales that may be considered bundled across time periods (e.g., outcomes-based arrangements or value-based purchasing arrangements) could be accounted for in ASP calculations.

BFSFs

Under the existing four-prong test in 42 C.F.R. § 414.802, BFSFs are defined as fees paid by a manufacturer to an entity that:

1. represent fair market value
2. for bona fide, itemized services actually performed on behalf of the manufacturer,
3. that the manufacturer would otherwise perform (or contract for) in the absence of the service arrangement, and
4. that are not passed on in whole or in part to a client or customer of an entity, whether or not the entity takes title to the drug.

The fee must meet all four criteria to be considered a BFSF rather than a price concession that is deducted from ASP.   In the proposed rule, CMS makes significant changes to criteria 1 (fair market value) and 4 (“not passed on”).

Fair Market Value

CMS has historically taken a hands-off approach to manufacturers’ determinations of fair market value, consistently declining to define the term.  For example, in 2016, CMS explained that, “[g]iven the continually changing pharmaceutical marketplace, we will  continue to allow manufacturers the flexibility to determine the fair market value of a  service when evaluating whether the service fee is bona fide or not.”  81 Fed. Reg. 5170, 5179 (Feb. 1, 2026).  Now, CMS proposes much more oversight.  To ensure that BFSFs are correctly identified and that the manufacturer’s ASP is not manipulated, the proposed rule would revise the definition of BFSFs to add the following requirements to the existing four-prong test in § 414.802:

1. For fees paid by a manufacturer to an entity that do not vary directly with the amount of drug sold or the price of a manufacturer’s drug, CMS would require the fair market value to be determined either based on comparable market transactions that generally reflect current market conditions or the cost of the service plus a reasonable markup to the total cost; and
2. For fees paid by a manufacturer to an entity that vary directly with the amount of drug sold or price of a manufacturer’s drug, CMS would require:
   • The fair market value to be determined by using the cost of the service and adding a reasonable markup to the total cost (or if any material portion of cost data is unavailable, by using a market-based approach based on verifiable market data until sufficient cost data are available), and
   • The fair market value assessment to be conducted by an independent third-party valuator and documented with a description of the methodology used.

The manufacturer’s documentation  of the methodology used to determine fair market value would have to be submitted, along with other reasonable assumptions, to CMS each quarter.

Service fees based on a percentage of sales are ubiquitous in the industry.  Wholesaler distribution fees are one common example.  Under the proposed rule, in order to exclude distribution service fees paid to a wholesaler, it would no longer be sufficient to compare one wholesaler’s fee percentage to other wholesalers’ fee percentages for similar services.  Instead, a manufacturer would have to use a cost-plus-markup approach to evaluate the fees paid to one wholesaler, even if other wholesalers charged the identical percentage of sales.  Further, a manufacturer must pay the expense of retaining an independent evaluator to conduct this analysis.  The more familiar and simpler market comparison approach may be used if cost data are unavailable, but cost data will typically be available from the third-party consulting firms that must be used.  In short, in order to exclude a wholesale distribution fee from ASP as a BFSF, a manufacturer would have to (1) retain an independent consulting firm; (2) have them determine fair market value using a cost-plus-markup approach; and (3) submit the resulting documentation to CMS.

In addition, CMS would require manufacturers to conduct periodic updates of any fair market value analyses for service arrangements that are ongoing, at a frequency no less than the renewal frequency of the arrangement.

“Not passed on”

Recognizing that manufacturers may not know whether fees they pay to a service provider are passed through to another entity, CMS has, since 2007, permitted manufacturers to assume that service fees are not passed on, absent evidence to the contrary.  Under the proposed rule, that assumption would no longer be permitted.  Instead, manufacturers would be required to obtain from each service provider whose fees are treated as a BFSF a certification or warranty that the fees are not passed on in whole or in part to a client, customer, or affiliate of the service provider, whether or not the entity takes title to the drug.  Beginning with the April 30, 2026 quarterly ASP submission for 1Q 2026, these certification letters must be submitted to CMS every quarter, along with the documentation of fair market value described above and other reasonable assumptions.

CMS’s list of examples

Lastly, CMS offers guidance in the form of four examples of fees that are not, or may not be, BFSFs:

1. Arrangements whereby drug manufacturers make payments to drug distributors to subsidize credit card processing fees that would ordinarily be borne by the distributors’ customers are not BFSFs.
2. Any payment by a manufacturer to an entity for tissue procurement is not a BFSF.
3. Fees paid for data about the product may exceed fair market value for the service or may not be for bona fide services because the data is required for legal compliance and audit purposes under the service agreement (for example, data to validate that a rebate has been earned or is not duplicative ).  Therefore, data fees, like other service fees, should be assessed for fair market value and a certification obtained that the fees are not passed through.
4. Fees paid for distribution services should be assessed for fair market value.

The proposed BFSF amendments would reverse CMS’s decades-old approach to fair market value and passed through fees, and impose a significant new cost and time burden on manufacturers.  Another troubling problem is how the proposed ASP amendments would interact with inconsistent MDRP regulation on BFSFs, which CMS is not proposing to revise as yet.  For example, the proposed regulation would not change the rule that transactions excluded from Medicaid Rebate best price are exempt from ASP.   See 42 CFR 414.804(a)(4)(i).  BFSFs (as defined under the MDRP) are excluded from best price.  Unless the MDRP definition of BFSF is amended, the question arises whether, to be excluded from ASP, a fee must meet the MDRP definition or the new, more exacting ASP definition of a BFSF.

The proposed rule will be published in the Federal Register of July 16, and comments may be submitted here until September 12, 2025.