CMS Implements Major Drug Pricing Changes in CY 2026 Physician Fee Schedule Final Rule

Last Friday, October 31, the Centers for Medicare & Medicaid Services (CMS) released the Calendar Year (CY) 2026 Medicare Physician Fee Schedule (PFS) Final Rule, which contained important changes in regulations governing the calculation of average sales price (ASP) for drugs covered under Medicare Part B.  The most significant of these are new policies regarding bundled sales arrangements and new documentation and submission requirements related to bona fide service fees (BFSFs).  Although some of these provisions impose new burdens, manufacturers were given a reprieve on some of the most intrusive requirements in the July 2025 proposed rule (see our prior blog post on the proposed rule here).

The rule will become effective on January 1, 2026, despite numerous comments raising concerns about the proposed rule’s compliance timeline.  Below we summarize the key provisions that CMS finalized (and point out those that CMS chose not to finalize).

I.  Average Sales Price

Currently, 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.  Among other requirements, ASP must reflect sales to all U.S. purchasers, except sales exempt from Medicaid best price and sales that are merely nominal in amount.  In addition, price concessions must be deducted from the ASP calculation, while BFSFs are not considered price concessions and are not deducted from the ASP calculation.  In other words, excluding BFSFs increases the ASP and therefore the Part B payment limit, which is generally 106% of the ASP.

Bundled Arrangements

Manufacturers may offer certain price concessions as part of a “bundled arrangement,” in which the price concessions are conditioned upon the purchase of the same drug or biological or other drugs or biologicals or another product.  ASP calculations must account for such bundled price concessions.

In the proposed rule, CMS proposed to add a definition of “bundled arrangement” to the existing ASP regulations at 42 C.F.R. § 414.802, which the final rule adopted with slight modifications:

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 of tier placement on a formulary) 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 tracks the definition that has appeared in the Medicaid Drug Rebate Program (MDRP) regulations since 2007.  See 42 C.F.R. § 447.502.  However, unlike the Medicaid definition of “bundled arrangement,” which states that value-based purchasing arrangements may qualify as a bundled sale, CMS refrained from expressly including value-based purchasing arrangements in the ASP definition in order to “provide[] the agency the opportunity to monitor and assess how such a definition may affect ASP . . . .

In addition, CMS finalized regulations similar to the Medicaid counterpart regarding how to allocate discounts under bundled arrangements.  Specifically, under the final rule, discounts in a bundled sale, including those resulting from a contingent arrangement, are allocated proportionally to the total dollar value of the units of all drugs or products sold under the bundled arrangement.  However, CMS has apparently reversed its guidance regarding agreements that contain both contingent and non-contingent discounts.  Whereas prior CMS guidance under the MDRP appeared to indicate that only contingent discounts need be proportionally allocated, CMS stated in the final rule preamble that “the ‘unbundling’ of both contingent and non-contingent discounts is appropriate because ‘all the discounts’ in the bundled arrangement should be proportionally allocated.”

Bona Fide Service Fees

Bona fide service fees have historically been excluded from ASP because, as noted above, ASP excludes prices excluded from Medicaid best price, and BFSFs, as defined in the MDRP regulations, are excluded from best price.  CMS proposed to add a definition of BFSF to the ASP regulations, which would have tracked the MDRP definition:  fees paid by a manufacturer to an entity, that (1) represent FMV (2) for a bona fide, itemized service 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.  CMS also proposed a number of significant changes to the policies regarding BFSFs, which would have imposed substantial new obligations on manufacturers.

Responding to commenters’ objections, CMS finalized only some of these policies.  CMS was persuaded not to finalize its proposed BFSF definition, which would have mandated a specific methodology for evaluating fair market value and would have required manufacturers to retain an independent firm to evaluate fair market value for every new or renewed percentage-based fee agreement.  CMS also decided not to finalize a proposed list of examples of fees that are not considered BFSFs (e.g., credit card fees, certain data fees, certain percentage-based distribution fees, and tissue procurement fees).

However, CMS did finalize several other proposed policies that have significant implications for BFSFs.  CMS finalized its proposed requirement that manufacturers must obtain letters from the recipient of a BFSF certifying that the fee is not passed on in whole or in part to a client or customer of the recipient of the fee, regardless of whether the entity takes title to the drug.  Letters must be obtained for all new agreements entered into prospectively on or after January 1, 2026, and must be submitted to CMS along with the ASP submission for the relevant quarter.  This is an unusual requirement given that CMS did not finalize an ASP definition of BFSF, so there is no prohibition on pass-through of fees in the first place.

Perhaps most notably, CMS finalized its proposal to require manufacturers to submit reasonable assumptions as part of manufacturers’ quarterly ASP data submissions to CMS.  Previously, submission of reasonable assumptions was optional.  These reasonable assumptions must include summary information on FMV assessments, including documentation of the methodology used to determine FMV for current, new, and renewed BFSF contracts, and periodic reviews of FMV.  CMS advised that summaries should be “well-detailed summaries of FMV methodologies that clearly describe the data sources, assumptions, and rationale supporting the determination.”   CMS noted that it will provide a template for manufacturers to use to document their FMV analysis summaries.  CMS expects manufacturers to document and submit the FMV summaries for all current BFSF arrangements by the April 30, 2026 deadline for ASP data submissions for the first quarter of 2026.  After that, FMV summaries must be submitted if there were new or renewed BFSF agreements during the quarter.

Units Sold at Maximum Fair Price

The Inflation Reduction Act of 2022 established the Medicare Drug Price Negotiation Program, which requires the Secretary of Health and Human Services (HHS) to negotiate a maximum fair price (MFP) with drug companies for certain high expenditure, single source drugs covered under Medicare Part D (starting in 2026) and Part B (starting in 2028).   Beginning in initial price applicability year 2028, for selected drugs payable under Part B, the Medicare Part B payment limit during the price applicability period is 106% of MFP.  In the final rule, CMS confirmed that it will publish only the actual MFP-based payment limit for selected drugs, and no ASP information will be displayed.  Although the payment limit for selected drugs will be based on the MFP rather than ASP, manufacturers of such drugs will still be required to calculate and submit ASP.

As described above, manufacturers of drugs payable under Part B are required by statute to include in ASP sales to all U.S. purchasers, with two exempted categories of sales: (1) sales exempt from best price; and (2) sales that are merely nominal in amount.  Units of drugs sold at MFP are included in the determination of best price.  Because the statutory language does not expressly or implicitly exempt units of drugs sold at MFP from the manufacturer’s ASP calculation, CMS clarified that units of selected drugs sold at MFP are included in the ASP calculation.  As a result, manufacturers’ ASP calculations will be required to include units of selected drugs sold at MFP on or after January 1, 2026, as applicable.

II.  Changes to Medicare Inflation Rebate Programs

In addition to the changes in ASP regulations, the CY 2026 PFS final rule revised the regulations implementing the Medicare inflation rebate program established under the Inflation Reduction Act.

Medicare Part B inflation rebates

The changes to the Medicare Part B inflation rebate program are relatively minor fixes, which include the following.

• Under pre-existing regulations, the benchmark quarter is defined as 3Q 2021 for a drug with a first marketed date on or before December 1, 2020, and for a drug with a first marketed date after that date, the benchmark quarter is the third full quarter after the first marketed date. Under the final rule, if data needed to calculate the payment amount in those quarters are not available, the benchmark quarter will become the third full quarter after the drug is assigned a billing and payment code.
• Under pre-existing regulations, if a published payment limit is not available for a benchmark quarter, CMS will use the lower of 106% of the manufacturer reported ASP or WAC (or, if those are not available, 106% of WAC reported in other sources). To avoid the use of a negative ASP reported by a manufacturer, CMS revised the rule to state that, in the absence of a published payment limit for the benchmark quarter, CMS will use positive ASP or WAC reported by manufacturers to CMS (and WAC from other sources if these are not available).

Medicare Part D inflation rebates

CMS’s revisions to the Medicare Part D inflation rebate regulations are more significant, and relate to the statutory exclusion of sales under the 340B drug discount program from Part D inflation rebates beginning with plan year 2026.  See 42 U.S.C. § 1395-114b(b)(1)(B).  The problem in implementing this exclusion is that a Part D drug’s status as having been purchased under the 340B program is generally not known at the time of dispensing, so that covered entities can only identify the drug’s Part D status retrospectively.  Accordingly, CMS has finalized a “claims-based methodology” to remove 340B units from its Part D inflation rebate calculations.  Under this methodology, CMS will start with the prescriber NPI number from the Prescription Drug Event (PDE) record (i.e., the Part D dispensing record); then find the provider’s Medicare Provider Number (MPN) by crosswalking the NPI number with Medicare Part A and B claims; then filter the NPI and MPN numbers using the 340B Office of Pharmacy Affairs Information System (OPAIS) database, which identifies the MPN numbers for 340B covered entities.  Another process will be used to link NPIs of 340B contract pharmacies in the PDE record to contract pharmacies listed in the OPAIS database.  These processes will result in a file of 340B-affiliated NPIs, which will be used to exclude unit dispensed by entities with these NPIs from the inflation rebates.

CMS estimates that approximately 10-35% of total units will be removed from the rebate calculation.  Under the statute, the exclusion of 340B units is not subject to administrative or judicial review, and CMS has decided not to permit disputes regarding excluded 340B units under the Suggestion of Error process, explaining that this process is limited to mathematical errors.

In the hope of improving the accuracy of 340B unit exclusions, CMS is establishing a voluntary 340B claims repository as of January 1, 2026, initially for usability testing.  The repository will receive voluntary submissions each quarter from 340B covered entities of several simple data elements (e.g., NPI, date of service, fill number) from all of their claims submitted to Medicare Part D plans.  CMS would match these data to PDE records for each drug during a period to identify which units to exclude from inflation rebate calculations.  The preamble explained that CMS is considering mandatory reporting in the near future, but declined to give a timeline for such requirement.  During the initial usability test period, the repository will not be used to actually exclude any units, and it will not be used for that purpose until a policy to do so is proposed and finalized.

III.  Autologous Cell-Based Immunotherapy and Gene Therapy

The rule finalized the continuation of the existing bundled payment policy for CAR T-cell therapies (which was initially finalized in the CY 2025 PFS final rule) and extended the policy to autologous cell-based immunotherapies and gene therapies.  As a result, under the final rule, preparatory procedures for patient-specific cell or tissue procurement and processing required for manufacturing are bundled into the product payment and are not paid separately.

Prior to the final rule, payment for procedures required for manufacturing other autologous cell-based immunotherapies and gene therapies (other than CAR T-cell therapies) had not been explicitly addressed by CMS.  In the final rule, CMS acknowledged that the tissue procurement step for all autologous cell-based therapies is “a pivotal part” of the manufacturing process and the overall cost of the product (i.e., COGS), and therefore should not be paid separately.

Consistent with this policy to include preparatory procedures for manufacturing an autologous cell-based immunotherapy or gene therapy in the payment of the product itself, CMS had initially proposed that such payments not be considered a BFSF for purposes of calculating the manufacturer’s ASP, and proposed to require their inclusion in ASP starting January 1, 2026.  However, CMS decided not to finalize either of these proposals based on public comments.  Instead, under the final rule, manufacturer-paid preparatory services may be treated as BFSFs—and thus be excluded from ASP—when they are itemized, represent fair market value, are performed on behalf of the manufacturer, and are not passed through to a purchaser.

IV. Conclusions

Although the final rule may be seen as a partial win for the pharmaceutical industry and other concerned stakeholders who objected to a number of proposals that CMS decided not to finalize, the final rule still contains major policy changes with substantial impacts on manufacturers and their government pricing activities and obligations, with a fast-approaching deadline of January 1, 2026 for manufacturers to come into compliance with the new data submission requirements.

Looking to the future, CMS will soon be issuing a template for use in submitting “detailed summaries” of fair market value methodologies to be submitted with the ASP submission for 1Q 2026 and subsequent quarters.  Beyond the immediate future, CMS has expressly stated that it will continue to consider a number of its non-finalized proposals in a future rulemaking, including proposals related to FMV determinations and extending the no pass-through requirement to “affiliates” of the service provider.  We expect CMS eventually to finalize a definition of bona fide service fees for ASP purposes.  Moreover, regulations under the MDRP will almost certainly be revised so that the two definitions are consistent.

We will continue to monitor developments on this rule, including any legal challenges, as they arise.