On 24 July 2014, the Internal Revenue Service (IRS) released final regulations to implement Section 9008 of the Affordable Care Act (as amended by section 1404 of the Health Care Education and Reconciliation Act), which imposes an annual fee on manufacturers and importers of branded prescription drugs based on their sales under specified federal health care programs. The final regulations largely retain the provisions of the temporary and proposed rule that the IRS issued on 18 August 2011, with certain revisions and clarifications described in further detail below. The final regulations are effective 28 July 2014, and are available here.

Definition of Manufacturer or Importer

The final regulations retain the temporary rule’s definition of a “manufacturer or importer” as the person identified in the Labeler Code of the National Drug Code (NDC) for a branded prescription drug. The IRS declined to adopt a rule that would require it to allocate drug sales to another entity when a drug is transferred to another entity or when a transaction such as a reorganization or bankruptcy leads to a different entity selling the drug.

Controlled Group

The temporary rule defined an entity covered under the branded prescription drug fee to include a single manufacturer or importer as well as a “controlled group,” which the temporary rule defined as “a group of at least two covered entities that are treated as a single employer” under specified Internal Revenue Code provisions. The IRS finalizes this definition of a “controlled group” through sales year 2014. For sales year 2015 and beyond, the IRS adopts a new proposed and temporary rule that would define a “controlled group” as “a group of two or more persons, including at least one person that is a covered entity, that is treated as a single employer” under the specified Internal Revenue Code provisions. This change is primarily aimed at broadening joint and several liability for the fee within the corporate group.

Two-Year Lag and Adjustment

The statute requires each manufacturer’s share of the annual fee to be based on that manufacturer’s branded prescription drug sales in the previous year. Due to the Centers for Medicare & Medicaid Services' (CMS) continuing inability to process sales data quickly enough to base each year’s fee on the previous year’s sales, the final regulations retain the two-year lag and adjustment process described in the temporary rule. Thus, in a given year, each manufacturer’s share of the annual fee will continue to be based on that manufacturer’s branded prescription drug sales for the year two years before the fee is assessed, with an adjustment applied the following year to bring the final fee amount in line with the previous year’s sales as required by the statute. For example, the 2014 fee will initially be based on sales in 2012, but the IRS will apply an adjustment in 2015 (by which point 2013 sales data will be available) so that each manufacturer’s 2014 fee is ultimately based on its sales in 2013.

The IRS also finalizes the methodology for calculating the annual adjustment. The final regulations clarify that the IRS does not consider the adjustment to be an overpayment or underpayment of tax and, therefore, the IRS will not pay interest on overpayments or require filing of Form 843 to receive reimbursement of an overpayment. Rather, the overpayment or underpayment for a given year will simply be subtracted from or added to the manufacturer’s fee in the following year. If the adjustment results in a negative fee amount, the IRS will automatically pay that amount to the manufacturer.

Orphan Drug Sales

The final regulations retain the temporary rule’s narrow interpretation of the statutory exemption for sales of “orphan drugs” by finalizing the definition of an “orphan drug” as one for which a section 45C tax credit was actually claimed and allowed. In finalizing this definition, the IRS rejects comments that suggested broadening the exemption to cover, for example, a drug for which a section 45C credit was allowable but not actually allowed or a drug that has been designated by the FDA as an orphan drug.

Pre-1984 Generic Drugs

Section 9008 limits the branded prescription drug fee to drugs approved under section 505(b) of the federal Food, Drug, and Cosmetic Act (FDCA) and biologicals licensed under section 351(a) of the Public Health Service Act. Currently, FDCA section 505(b) governs applications for new drugs, while generic drugs are approved under FDCA section 505(j). In the preamble to the final regulations, the IRS recognizes that the separate approval process for generic drugs under section 505(j) was not available before a 1984 revision to the FDCA, so many generic drugs that would be approved under section 505(j) today were approved under section 505(b) instead and therefore could be subject to the fee. The IRS seeks comment on whether it should create a special rule to address generic drugs approved before the 1984 law and, if so, how it should distinguish such drugs from other prescription drugs in a manner that is administrable and consistent with section 9008.

Information Collected from Manufacturers

The final regulations clarify that CMS (rather than manufacturers) will provide the IRS with data on Medicare and federal Medicaid rebates, but retain a provision allowing manufacturers to report Medicaid state supplemental rebates via submission of IRS Form 8947. State-only pharmaceutical program rebates, however, are not netted out of Medicaid sales and should not be reported. Submission of Form 8947 remains voluntary, but manufacturers must continue to certify that the information provided is true, correct, and complete.

Information Collected from Agencies

The final regulations provide additional detail regarding the data sources and calculation methodologies for a manufacturer’s sales under each of the specified federal healthcare programs.

  • Medicare Part D: The IRS finalizes that Part D sales will be calculated by aggregating the ingredient cost reported in the “Ingredient Cost paid” field of Prescription Drug Event (PDE) records at the NDC level, net of discounts, rebates, and other price concessions. The IRS will use PDE records as well as the detailed Direct and Indirect Remuneration (DIR) report, both of which will be obtained from Part D plan sponsors.

The final regulations add a definition of “discounts, rebates, and other price concessions” that explicitly includes DIR, which covers any and all rebates, subsidies, or other price concessions from any source that serve to decrease the costs incurred by a Part D sponsor for a Part D drug. The final regulations also clarify that Part D sales will be calculated net of amounts paid under the Coverage Gap Discount Program, beginning with fee year 2014, but will include sales in Puerto Rico and other U.S. territories. The final regulations remove the reference to the “Quantity Dispensed” field of PDE records, which is no longer necessary because CMS will calculate sales and discounts at the NDC level.

  • Medicare Part B: The IRS finalizes that Part B sales will be calculated by multiplying the Average Sales Price (ASP) reported by manufacturers and the number of allowed billing units reported in the Medicare Part B National Summary Data File. The final regulations also confirm that CMS will use Part D utilization to attribute Part B sales where a Healthcare Common Procedure Coding System (HCPCS) code consists of more than one manufacturer’s branded prescription drugs and CMS is unable to reliably determine what percentage is attributable to each drug. The IRS notes that CMS has not yet had to use this backup method.
  • Medicaid: The IRS finalizes that Medicaid sales will be calculated by multiplying the manufacturer-reported per-unit Average Manufacturer Price (AMP) (less the Unit Rebate Amount (URA)) and the number of units reported billed by the states to manufacturers, adjusted as necessary to include only the Medicaid portion of total reimbursement. The final regulations also clarify that Medicaid sales data will include all sales for drugs paid for by the states under the Medicaid Drug Rebate Program, including units paid under fee for service and managed care organization plans as well as drugs administered in a physician’s office, clinic, hospital, or other non-retail setting. Finally, the preamble acknowledges manufacturers’ concerns about the accuracy of the state Medicaid rebate data used to calculate Medicaid sales, and advises manufacturers to use the reconciliation process established by the IRS and CMS to resolve discrepancies between the rebate data reported by states to CMS and rebate data reported by states to manufacturers.
  • VA/DOD/Tricare: The IRS finalizes the calculation methodologies for each of these programs. For VA and DOD sales, the IRS declines to accept commenters’ request to exclude the Industrial Funding Fee (IFF) and Cost Recovery Fee (CRF) from the sales data.

Dispute Resolution

The IRS largely finalizes the dispute resolution process adopted in the temporary rule, with minor changes to the form and process for submitting error reports.