Navigating the Complex Landscape: Bona Fide Service Fees, Government Price Reporting, and the Inflation Reduction Act

“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.” ¹

In the pharmaceutical product supply chain, distribution partners such as wholesaler distributors, group purchasing organizations (GPOs) and similar third parties comprise a vital, yet complex, element of the business model. Relationships with these entities are often governed by nuanced and frequently evolving agreements that cover a range of capabilities, support functions and services - some of which may, and often do, fill a gap between a pharmaceutical manufacturer’s needs and independent capabilities but which the manufacturer would otherwise perform on its own in the absence of outsourced vendor support. 

Numerous and varied service descriptions, fee classifications, and rates are often contemplated in these arrangements. The nature and terms of services may be subject to frequent renegotiation, and the network of channel partners at any given manufacturer is typically subject to fluctuation. The dynamic nature of these arrangements, the significant amount of products and services at issue, and the high operating cost represented in these arrangements engender inherent business risk. Additionally, the compensation paid to channel partners by manufacturers who participate in U.S. Federal healthcare programs is subject to legal and regulatory scrutiny under the federal False Claims Act,² in particular because the nature of fees paid to third-party customers in exchange for certain services may impact pricing calculations,³ introducing healthcare compliance risk. To evaluate the potential or actual impact on a manufacturer’s government price calculations and reporting, an assessment of whether the CMS standards for bona fide services are satisfied informs whether fees should be treated as a pricing discount, or not. 

Bona fide service fees for pharmaceutical companies are payments made to third-party customers for legitimate, necessary services that are reasonable and performed by an entity other than the manufacturer. These fees are not intended to induce purchases or increase sales but are instead compensation for specific services rendered. Common examples include distribution services; specialty pharmacy enhanced services; patient support services; inventory management; data collection and reporting; and market research. The services should provide a tangible benefit to the company, separate from sales and marketing efforts.

To be considered bona fide, a service fee must satisfy each of the following four criteria, as set forth by the Centers for Medicare & Medicaid Services (CMS) and first introduced in the 2007 Medicaid Program; Prescription Drugs Final Rule: ⁴

1. The fee paid must be for a bona fide, itemized service that is actually performed on behalf of the manufacturer;
2. The manufacturer would otherwise perform or contract for the service in the absence of the service arrangement;
3. The fee represents Fair Market Value (FMV) for the services rendered; and
4. The fee is not passed on in whole or in part to a client or customer of any entity.

Bona fide service fee assessments are an important component of government price reporting compliance for pharmaceutical companies. The determinations made by manufacturers resulting from the analyses may directly impact the calculation of key pricing metrics used to determine reimbursement rates and compliance with government programs. For example, following an assessment a company may develop assurances that specific specialty pharmacy services provided in connection with a patient support program meet all of the four-part bona fide services test, and therefore the associated fees should be excluded from a manufacturer’s Average Manufacturer Price (AMP) calculations. Conversely, an analysis may also identify additional lines of inquiry to inform whether that is indeed the appropriate calculation methodology.

Here is why bona fide service fees matter:

1. Exclusion from Price Calculations: Bona fide service fees can be excluded from the calculations of the Average Manufacturer Price (AMP), and potentially Average Sales Price (ASP) and Best Price (BP).⁴ This exclusion helps prevent the artificial inflation of these prices, which could otherwise lead to higher reimbursement costs for government programs and affect a company's competitiveness.
2. Compliance with Regulations: Proper classification of service fees as bona fide is crucial for compliance with regulations set by agencies like the CMS. Non-compliance can result in recalculations, restatements, penalties, and legal issues.
3. Financial Impact: Excluding bona fide service fees from price calculations can significantly affect the financial outcomes for pharmaceutical companies by influencing the rebates they must pay to Medicaid and other government programs.
4. Pricing Strategy: Understanding and appropriately establishing bona fide service fees allows companies to maintain more accurate and strategic pricing models, which are crucial for maintaining market competitiveness and ensuring profitability.
5. Audit and Risk Management: Properly documented and bona fide service fees supported by periodic review, internal auditing, and monitoring can help companies during external audits and reduce the risk of disputes with government agencies over price reporting.

Overall, a bona fide service fee assessment of relevant third-party arrangements is a critical component of effective risk management and compliance with government price reporting obligations, as proactive and periodic evaluations help ensure accurate price reporting, compliance with legal and regulatory requirements, and effective market access strategy and management.

Key considerations for pharmaceutical companies regarding bona fide service fees in the context of government price reporting include:

1. Clearly Define and Document: Clear definition of which types of services or arrangements are subject to review for bona fide service fee assessment and determination, and a clear understanding of what constitutes a bona fide service fee, and how or why a service might be considered necessary as a component of the company’s business model. These fees are paid for services that are necessary, reasonable, and performed by an entity other than the manufacturer and which would otherwise be performed by the manufacturer (or contracted to a different third party). Proper documentation of an arrangement relative to the CMS bona fide service fee criteria supports a company’s decisions regarding the classification of certain payments as bona fide service fees.
    
2. Compliance with Regulations: Compliance with federal and state regulations, including those set by the CMS involves understanding the guidelines for which types of fees and in what amounts (i.e., fees within fair market value) are appropriate to exclude from applicable government price calculations, and which are more appropriately considered pricing discounts.
    
3. Exclusion from Government Price Calculations: Bona fide service fees that meet the established criteria can be excluded from AMP and potentially ASP and BP calculations. Ensuring that these fees are treated appropriately to avoid inflating government price metrics is key to timely, accurate, and efficient reporting.
    
4. Contractual Clarity: Contracts with service providers that clearly outline the services to be provided, fees, and proof of performance standards facilitate smooth business relationships with key channel parties such as wholesale distributors, GPOs, and specialty pharmacies. 
    
5. Audit and Monitoring: Regular audits and compliance monitoring ensure that fees categorized as bona fide service fees comply with relevant guidelines and are consistently applied across the organization, and that contract compliance is well managed.
    
6. Transparency and Reporting: Transparency in manufacturer pricing and fee structures facilitates accurate reporting to government agencies. This includes timely and accurate submission of pricing data and any changes in fee structures that may impact price calculations and reporting.
    
7. Impact on Pricing Strategies: The classification of fees can impact pricing strategies and the calculation of government prices AMP, ASP, and BP. Companies need to consider how service fees affect their overall pricing strategy and government price reporting.
    
8. Legal and Financial Risk Management: Misclassification of fees can lead to legal and financial penalties not to mention intensive operational disruption. Fostering working and oversight relationships between contract managers (e.g., market access and trade), and legal and compliance teams can enhance streamlined communications, reinforce understanding of applicable legal and regulatory compliance standards, and mitigate risks associated with government price reporting.

Creating policies that focus on these considerations will help pharmaceutical companies effectively manage their service fee arrangements and government price reporting obligations.

Impact of the Inflation Reduction Act (IRA)

Having a robust bona fide service fee analysis for each relevant arrangement is especially important in the context of the IRA as there is heightened scrutiny on the details of drug price calculations. The IRA impacts government price reporting for pharmaceutical companies in several ways, primarily through its provisions designed to control drug costs and enhance transparency. 

Here are the key impacts:

• Medicare Drug Price Negotiation: The IRA allows Medicare to negotiate prices for certain high-cost drugs, which will require pharmaceutical companies to report specific pricing information to facilitate these negotiations. This increases the need for accurate and transparent price reporting.
• Inflation Rebates: Under the IRA, drug manufacturers are subject to pay rebates to Medicare (according to the rules established by the Secretary of Health and Human Services) if prices increase faster than inflation. This necessitates detailed price reporting to track price changes over time and ensure compliance with rebate requirements.
• Increased Reporting Requirements: The IRA and implementing regulations may lead to more stringent methodologies and internal oversight to ensure compliance with new pricing rules and rebate calculations. Pharmaceutical companies are well advised to maintain meticulous records and reporting systems.
• Impact on AMP and Best Price Calculations: While the IRA focuses on Medicare, it may indirectly affect Medicaid pricing metrics like AMP and Best Price, as companies adjust their pricing strategies in response to IRA provisions. Accurate reporting of these metrics remains critical.
• Transparency and Accountability: The IRA emphasizes transparency in drug pricing, which could lead to increased scrutiny of price reporting practices. Companies may face additional audits or reviews of their reported prices and pricing methodologies.

Overall, the Inflation Reduction Act increases the importance of precise and transparent government price reporting for pharmaceutical companies. Firms should evaluate compliance efforts to determine if enhancements are necessary surrounding their compliance efforts and reporting systems to align with the requirements and objectives of the IRA.

For more information, contact:

CJ DeKreek 
Managing Director
cj.dekreek@ankura.com

Julie DeLong 
Senior Managing Director
julie.delong@ankura.com

<sup>[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</sup>

^{[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}

Sign up to receive all the latest insights from Ankura. Subscribe now

^{© Copyright 2024. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.}