Understanding Service Fees, Price Reporting & Inflation Act in Gov. Contracts
TL/DR –
Bona fide service fees in the pharmaceutical industry are payments made to third parties for necessary and reasonable services, separate from sales and marketing efforts. These fees are subject to four criteria defined by the Centers for Medicare & Medicaid Services: the fee must be for a bona fide service performed on behalf of the manufacturer, the manufacturer would otherwise perform the service or contract for it, the fee represents fair market value, and it is not passed on in whole or part to a client or customer. Such fees have significant impact on pharmaceutical companies by affecting pricing calculations and compliance with regulations, with the Inflation Reduction Act emphasizing the need for accurate and transparent government price reporting.
The Significance of Bona Fide Service Fees for Pharmaceutical Companies
“Manufacturers are responsible for meeting all four parts of the definition of bona fide service fee before a fee can qualify as a bona fide service fee.”
Pharmaceutical companies often rely on third-party entities like wholesaler distributors and group purchasing organizations (GPOs) to bridge the gap between their needs and independent capabilities. These relationships involve complex, dynamic arrangements that pose significant business risks due to fluctuating channel partners, numerous service descriptions, and high operating costs. Legitimate, necessary service fees, or bona fide service fees, provide compensation for third-party services and should not be seen as incentives to increase sales.
To qualify as bona fide, a service fee must meet four criteria from the Centers for Medicare & Medicaid Services (CMS). These include that the fee must be for a bona fide, itemized service actually performed for the manufacturer; the manufacturer would otherwise perform the service; the fee represents fair market value; and the fee is not passed on to a client or customer.
An understanding of bona fide service fees can significantly impact pharmaceutical companies’ financial outcomes, pricing strategies, risk management, and compliance with government regulations. Misclassification of fees can lead to legal and financial penalties and operational disruption. Therefore, creating policies that focus on clearly defining and documenting service fees, maintaining compliance with regulations, and regular auditing can help pharmaceutical firms manage their service fee arrangements and government price reporting obligations effectively.
Impact of the Inflation Reduction Act (IRA) on Pharmaceutical Companies
With the introduction of the IRA, precise and transparent government price reporting has become even more critical for pharmaceutical companies. The IRA allows Medicare to negotiate prices for certain high-cost drugs, requiring pharmaceutical companies to report specific pricing information. It enforces rebates if prices increase faster than inflation and imposes more stringent methodologies for reporting systems. Consequently, companies may need to reevaluate their compliance efforts and reporting systems to align with the IRA’s requirements and objectives.
Footnotes
1. See e.g., Centers for Medicare and Medicaid Services at https://www.medicaid.gov/faq/must-distribution-service-fees-inventory-management-fees-and-other-services-referenced-bfsf/index.html and 81 FR 5177-5178.
2. See e.g. 42 CFR 447
3. 42 CFR 447
4. Manufacturer interpretations on excludability of bona fide service fees for purposes of ASP and BP calculation may vary, in part due to lack of express guidance on this aspect of calculation methodologies. See e.g., U.S. Department of Health and Human Services Office of Inspector General, “Manufacturers May Need Additional Guidance to Ensure Consistent Calculations of Average Sales Prices.” OEI-BL-21-00330. December 2022. Available at: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://oig.hhs.gov/documents/evaluation/3215/OEI-BL-21-00330-Complete%20Report.pdf
This article provides a general guide to the topic. Specific advice should be sought for individual circumstances.
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