The Centers for Medicare & Medicaid Services (“CMS”) released the Calendar Year 2026 Medicare Physician Fee Schedule (“PFS”) proposed rule on July 16, 2025. (See cms.gov/newsroom/fact-sheets/calendar-year-cy-2026-medicare-physician-fee-schedule-pfs-proposed-rule-cms-1832-p). The proposed rule includes potentially significant changes to what is considered a bona fide service fee (“BFSF”) when calculating average sales price (“ASP”) under Medicare Part B.^[*]

Under Medicare Part B, most drugs are reimbursed based on ASP plus six percent. Manufacturers report ASPs to CMS quarterly. With certain exceptions, ASP is defined as a weighted average price to commercial customers in the United States. Drug manufacturer price concessions are deducted when calculating ASP but BFSFs are not. To support a higher ASP, which increases a drug’s reimbursement, manufacturers seek to avoid price concessions and instead classify programs as BFSFs. Improperly classifying a price concession as a BFSF increases a manufacturer’s ASP, which results in Medicare overpayments and higher coinsurance amounts for Medicare beneficiaries.

Currently, to be considered a BFSF (and not a price concession), fees paid by a manufacturer must meet the following four criteria:

1. The fees represent fair market value;

    

2. The fees are for bona fide, itemized services actually performed on behalf of the manufacturer;

    

3. The manufacturer would otherwise perform (or contract for) the services in the absence of the service arrangement; and

    

4. The fees are not passed on, in whole or in part, to a client or customer of an entity, regardless of whether the entity takes title to the drug.

See 42 C.F.R. § 414.802.

The proposed rule would add processes for determining “fair market value” for fees and for confirming that the fees are “not passed on” by a manufacturer.

“Fair Market Value”

“Fair market value” is not defined. Historically, CMS gave manufacturers broad discretion to determine fair market value. The proposed rule would require manufacturers to provide written support for determining the fair market value of a fixed fee and a variable fee they pay to be considered a BFSF.

For fixed fees (i.e., fees that do not vary based on the quantity of drug sold or the price of the drug), CMS would require manufacturers to determine the fair market value based on comparable market transactions reflecting current market conditions or the cost of the service plus a reasonable markup to the total cost.

For variable fees (i.e., fees that vary based on the quantity of drug sold or price of the drug), fair market value would be determined based on an independent third-party assessment. The assessment must include a description of the methodology used for the valuation which compared the fees paid to the cost of the service plus a reasonable markup.

CMS would require manufacturers to submit supporting documentation on a quarterly basis. And manufacturers would be required to update fair market value analyses for ongoing service arrangements no less than the renewal frequency of the arrangement.

“Not Passed On”

Historically, CMS permitted manufacturers to “assume” that fees paid to service providers are not passed on, absent evidence to the contrary. The proposed rule eliminates this assumption. Manufacturers must obtain a certification or warranty from each service provider stating the fees are not passed on, in whole or in part, to a client, customer, or affiliate of the service provider, regardless of whether the entity takes title to the drug.

Beginning with its April 30, 2026, quarterly ASP submission, manufacturers would be required to submit the certifications/warranties to CMS and then quarterly thereafter along with the fair market value documentation described above and other reasonable assumptions.

CMS Guidance Regarding BFSF Examples

CMS included two examples of manufacturer fees that are not considered BFSFs and two examples of manufacturer fees that require supporting documentation:

1. Fees paid by a manufacturer to a distributor to subsidize credit card processing fees, ordinarily paid by the distributor’s customers, are not BFSFs.

2. Fees paid by a manufacturer for tissue procurement are not BFSFs.

3. Fees paid for product data should be assessed for fair market value and a certification obtained that the fees are not passed on. CMS asserted that product data fees 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.

4. Fees paid for distribution services should be assessed for fair market value.

Drug manufacturers should carefully consider CMS’s proposed rules and their ability to comply with the proposed changes. Because Medicare Part B drug reimbursement is based on ASP, the failure to correctly calculate ASP could subject a manufacturer to exposure that can be avoided. Further, to the extent manufacturers oppose the proposed rules and/or require clarifications, comments are due by September 12, 2025.

^[*] The proposed rule also would add a definition of “bundled arrangement” to the existing ASP regulations. The proposed definition of “bundled arrangement” is consistent with the treatment of bundled arrangements under the Medicaid Drug Rebate Program (“MDRP”). Because drug manufacturers have experience with bundled arrangements under the MDRP, this change should not be controversial.