From Research to Revenue: Coverage and Reimbursement for Life Sciences Products – Proposed Regulations on Branded Prescription Drug Fee for Sales to Government Payors, Contributed by Demetrios L. Kouzoukas, Anna D. Kraus, and Katherine Sauser, Covington & Burling LLP
On August 18, 2011, the Internal Revenue Service (IRS) issued Proposed Regulations regarding the Branded Prescription Drug Fee (the Fee) that will be charged to manufacturers beginning in 2011. The Proposed Regulations are the same as the Temporary Regulations put in place by IRS on the same date, to enable it to administer the Fee while the Proposed Regulations are being finalized.1 These regulations supplant the proposed guidance on the branded prescription drug fee issued by IRS on November 29, 2010.2 The regulations affect all manufacturers of branded prescription drugs for which reimbursement is made by a government payor.
The Fee was established by the Patient Protection and Affordable Care Act of 2010 (Affordable Care Act).3 It requires all branded prescription drug manufacturers to pay a portion of a set aggregate fee on an annual basis. All covered entities with aggregate branded prescription drug sales of over $5 million to Medicare Part D and Part B, Medicaid, the Department of Veterans Affairs (VA), the Department of Defense (DOD), and the TRICARE retail pharmacy program must pay the Fee. The proportion of the Fee to be paid by each manufacturer is determined by that manufacturer’s share of total drug sales to the specified government programs in the sales year. Thus, government reimbursement for a manufacturer’s branded prescription drugs relative to government reimbursement for all branded prescription drugs determines how much of the Fee that manufacturer will end up paying.
The proportion of the Fee is determined on a National Drug Code (NDC) level, and the Fee will be calculated based on NDCs owned by the manufacturer (referred to in the regulations as a “covered entity”) as of December 31 of the “sales year.” For example, in fee year 2012, the 2010 sales of a given NDC will be attributed to the entity that owns that NDC as of December 31, 2010. Therefore, companies seeking to acquire branded prescription drugs should keep in mind the effect the acquisition of that product may have on its branded prescription drug fee in future years.
Each covered entity’s branded prescription drug sales for the purpose of the Fee will be calculated as follows: (1) the sum of all the covered entity’s branded prescription drug sales to the specified government programs, less (2) the sum of all branded prescription drug sales to the specified government programs for which the covered entity has appropriately claimed the orphan drug tax credit, less (3) the sum of rebates to the specified government programs reported by the covered entity on Form 8947. The entity’s sales will be divided by the total of government sales for all covered entities and multiplied by the applicable total fee for that year as set forth in the statute to arrive at the fee for the covered entity. The fee set forth in the statute varies from year to year, beginning at $2.5 billion in 2011.
Data Lag Leads to Annual Adjustment of Covered Entity’s Fee
The Affordable Care Act requires that the branded prescription drug fee be calculated based on the “covered entity’s branded prescription drug sales taken into account during the preceding calendar year.”4 Due to a delay in collecting and processing the data from government payors, however, the Proposed Regulations provide that covered entities will pay the branded prescription drug fees based on data from two years prior, rather than from the immediately preceding year. The following year’s fee will then be adjusted based on what the previous year’s fee would have been had it been calculated using data from the prior year.5 This adjustment will be applied to the current year’s fee as an addition or subtraction, depending on what adjustment is required, bringing the total paid to the IRS to the correct amount.
The Proposed Regulations provide that the adjustment is “only taken into account by adding it to or subtracting it from the fee computed for the current fee year,” indicating that there will be no lump sum payments to account for an adjustment. This system of adjustment may present problems for entities that find that their sales drop dramatically in a given year, creating a large difference between the data from two years prior and the preceding year. Such a dramatic decrease in sales could occur where, for example, a particular NDC goes off patent and the sales of the drug decrease dramatically, or a particular NDC is subject to withdrawal from the market, halting its sales entirely. Covered entities in such situations may end up paying a large up-front sum based on data from two years prior that cannot later be accounted for by an adjustment, as the following year’s fee would be a significantly lower amount. IRS has not clarified how it will handle such situations, where the required adjustment is larger than the fee to be paid in a given fee year.
Reporting Government Sales
IRS Form 8947 is used to gather information from covered entities regarding their branded prescription drug sales. Entities must provide the following information: all of the NDCs for branded prescription drugs under its labeler code(s), the brand name and NDC for each orphan drug for which the covered entity was allowed a section 45C credit, and (for each NDC) the rebates paid to Medicare Part D plans and to the states under the Medicaid program. The Proposed Regulations explicitly state that the submission of the form is voluntary. One reason a covered entity may choose to submit Form 8947 is that the Centers for Medicare & Medicaid Services (CMS) may not have complete information regarding rebates paid by drug manufacturers and manufacturers may wish to report rebates using the form in order to ensure that their sales numbers are appropriately reduced to reflect rebates paid. Those entities that choose to submit Form 8947 must do so by December 15 of the year preceding the fee year.
The Orphan Drug Exclusion
Covered entities may exclude sales of orphan drugs for which a 45C credit was claimed from their overall calculation of branded prescription drug sales. Orphan drugs are drugs that are used by a very small population and thus tend to have lower sales. In IRS Notice 2010-71, the IRS gave proposed guidance regarding the calculation of the Fee that covered entities could use prior to the enactment of the Temporary and Proposed Regulations. Commenters on the proposed guidance preceding the Proposed Regulations suggested that IRS allow entities to exclude not only orphan drugs for which a 45C credit was actually claimed but for which such a credit was allowable.6 This would avoid the consequence of penalizing manufacturers of orphan drugs that decide not to claim a 45C credit for business reasons. However, IRS concluded that the statute contained an exception only for orphan drugs for which the credit was actually claimed, and the Proposed Regulations adopt this requirement. The Proposed Regulations also restrict the definition of orphan drug to exclude “any drug for which there has been a final assessment or court order disallowing the full section 45C credit taken for the drug” and any drug that the FDA has approved for any indication other than the treatment of a disease “for which a 45C credit was allowed.” Therefore, if a drug is approved for any indication other than those for which a 45C credit was claimed, it can no longer be excluded when calculating a covered entity’s sales for purposes of the branded prescription drug fee.
Preliminary Fee Calculation
IRS provides a preliminary fee calculation to covered entities based on information from government payors and from any Form 8947 submitted. The preliminary fee calculation includes: (1) the covered entity’s fee, (2) the covered entity’s branded prescription drug sales by NDC for each government agency, (3) the covered entity’s branded prescription drug sales after rebates are accounted for, and (4) the total branded prescription drug sales for all covered entities. The Proposed Regulations provide for a dispute resolution process by which a covered entity may then correct errors in the preliminary fee calculation. A covered entity may submit an error report to correct errors or omissions on Form 8947. These reports may be considered by IRS when making the final fee calculation. However, once the final fee calculation is made, there is no procedure for disputing it or correcting errors. The preamble to the regulations stated that no dispute process was provided in the interest of finality. Preliminary fee calculations were sent out on May 16, 2011, but the IRS anticipates sending them out earlier in future years, on dates to be announced in the Internal Revenue Bulletin.
Final Fee Calculation
IRS will send final fee calculations to covered entities no later than August 31 of the fee year. The covered entity must pay the fee by September 30th of the fee year by electronic funds transfer, according to the temporary regulations. The fee is treated as an excise tax under the statute; thus the temporary regulations provide that the deficiency procedures of sections 6211 to 6216 of the Internal Revenue Code, 26 U.S.C. § 6211 to 6216, do not apply and only civil actions for refund under procedures of subtitle F will apply. Consistent with the statute, the temporary regulations provide that the fee is not deductible.
Branded prescription drug manufacturers that wish to submit Form 8947 should prepare to do so by December 15. Comments on the Proposed Regulations were due on November 16, 2011, but branded prescription drug manufacturers and other stakeholders should watch for the release of the Final Regulations in early 2012 and be aware of how they might impact their Fee.
Demetrios L. Kouzoukas is of counsel at Covington & Burling LLP and a member of the Health Care, Food & Drug, and Election & Political Law Practice groups. Most recently, Mr. Kouzoukas served as Principal Associate Deputy Secretary of the U.S. Department of Health and Human Services (HHS). In that role, he was responsible for regulatory policy across HHS, with particular emphasis on Medicare & Medicaid reimbursement, food and drug regulation, and health information technology. Mr. Kouzoukas oversaw the programs and operations of the Centers for Medicare and Medicaid Services, Food and Drug Administration, and several other HHS agencies. He can be reached at firstname.lastname@example.org or 202-662-5057.
Anna D. Kraus is of counsel at Covington & Burling LLP and chairs the firm’s Health Care practice. She regularly advises clients on Medicare reimbursement matters, particularly those arising under Medicare Part B and Medicare Part D. Ms. Kraus also has extensive experience with the Medicaid Drug Rebate program. In addition, she is an expert in health information privacy issues, including those arising under the Health Insurance Portability and Accountability Act (HIPAA). Prior to joining Covington, Ms. Kraus was Deputy General Counsel to the U.S. Department of Health and Human Services. She can be reached at email@example.com or 202-662-5320.
Katherine Sauser is an associate at Covington & Burling LLP, where she practices in the areas of health care and antitrust. She can be reached at firstname.lastname@example.org or 202-662-5638.
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. Bloomberg Finance L.P. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.
© 2011 Bloomberg Finance L.P. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of Bloomberg Finance L.P.