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Annual Fee on Branded Prescription Drug Manufacturers and Importers

Background

Section 9008 of the Patient Protection and Affordable Care Act (ACA), Public Law 111-148 (124 Stat. 119 (2010)), as amended by section 1404 of the Health Care and Education Reconciliation Act of 2010 (HCERA), Public Law 111-152 (124 Stat. 1029 (2010)), imposes an annual fee on each covered entity engaged in the business of manufacturing or importing branded prescription drugs, to be paid not later than September 30th of each year.  On Aug. 18, 2011, the Internal Revenue Service (IRS) issued temporary regulations (26 CFR Parts 51 and 602) on the fee.  The temporary regulations describe the rules related to the fee, including how the IRS computes it and how covered entities pay it. The fee applies to calendar years beginning after December 31, 2010.

In general, the fee is imposed on each covered entity with aggregated branded prescription drug sales of over $5 million to specified government programs or pursuant to coverage under such programs. 

Terms Defined

Branded prescription drug (BPD) means (1) any prescription drug the application for which was submitted under section 505(b) of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 355(b)); or (ii) any biological product the license for which was submitted under section 351(a) of the Public Health Service Act (42 U.S.C. 262(a)).  

Covered entity means any manufacturer or importer with gross receipts from BPD sales, including a single-person covered entity or a controlled group. 

Specified government programs (Programs) are the Medicare Part B program, the Medicare Part D program, the Medicaid program, any program under which BPDs are procured by the Department of Veterans Affairs (VA), any program under which BPDs are procured by the Department of Defense (DOD), and the TRICARE retail pharmacy program. 

Reporting

Sales data for the fee is generally provided by the Centers for Medicare and Medicaid Programs of the Department of Health and Human Services (CMS), VA and DOD (Agencies).  In addition, each covered entity may provide information relevant to the determination of the fee by annually submitting Form 8947, “Report of Branded Prescription Drug Information.”  Submission of Form 8947 is voluntary.

Generally, covered entities may report the National Drug Code (NDC) of each BPD that the covered entity sold to the Programs (or pursuant to coverage under those Programs), Medicaid state rebate information, section 45C orphan drug information, members of controlled groups, and designated entity information on Form 8947.

For the 2014 fee year, a covered entity that chose to submit Form 8947 must have filed the form by November 1, 2013. 

Related Terms Defined

Controlled group means a group of at least two covered entities that are treated as a single employer under Internal Revenue Code section 52(a), 52(b), 414(m), or 414(o). 

Designated entity means the person that acts for a controlled group regarding the fee by (i) filing Form 8947; (ii) receiving IRS communications about the fee for the group; (iii) filing an error report for the group, if applicable; and (iv) paying the fee to the IRS.

Orphan drug means any branded prescription drug for which any person claimed a credit under Internal Revenue Code section 45C and that credit was allowed for any taxable year, but does not include (i) any drug for which there has been a final assessment or court order disallowing the full section 45C credit taken for the drug; or (ii) any drug for any sales year after the calendar year in which the Federal Drug Administration (FDA) approved the drug for marketing for any indication other than the treatment of a rare disease or condition for which a section 45C credit was allowed, regardless of whether a section 45C credit was allowed for the drug either before, in the same year as, or after this FDA designation.

For a complete list of terms and definitions, please see 26 CFR §51.2T.

Fee Calculation

The fee for each covered entity is calculated by determining the ratio of (i) the covered entity’s BPD sales taken into account during the sales year to (ii) the aggregate BPD sales taken into account for all covered entities during the same year, and applying this ratio to the applicable amount.

Related Terms Defined

Applicable amount means the aggregate fee amount each year for all covered entities under section 9008(b)(4).  The applicable amounts for fee years are:

Fee Year

Applicable Amount

2011

$2.5 billion

2012

$2.8 billion

2013

$2.8 billion

2014

$3 billion

2015

$3 billion

2016

$3 billion

2017

$4 billion

2018

$4.1 billion

2019 and thereafter

$2.8 billion

Fee year means the calendar year in which the fee for a particular sales year must be paid to the government. For example, for the fee year of 2014, the sales year is 2012.

Sales taken into account means BPD sales after the application of the percentage adjustment table in section 9008(b)(2) (relating to annual sales less than $400,000,001), as shown below under Preliminary Fee.

Sales year means the second calendar year preceding the fee year. 

Allocation of Applicable Amount

Every fee year, the IRS will compute the fee for each covered entity based on the BPD sales data for each NDC reported by the Agencies, the exclusion of qualifying orphan drugs sales, and any rebate data for each NDC reported by the covered entity.  Each NDC will be attributed to the covered entity that owns the NDC as of the end of the day on December 31st of the sales year.

BPD sales for a covered entity for each Program equal:

  • The sum of all BPD sales reported by the Program for the sales year,
  • Minus the sum of all BPD sales reported by the Program for the sales year for which the entity has appropriately claimed the orphan drug exclusion,
  • Minus the sum of Medicaid state supplemental rebates on sales to the Program reported by the covered entity on Form 8947 for the sales year.

In general, the fraction used to allocate the applicable amount among the covered entities is determined as follows:

Step 1: Numerator – Covered Entity Sales Taken into Account

For each sales year and for each covered entity, the IRS will calculate BPD sales taken into account by:  (1) adding the covered entity’s BPD sales for each Program and (2) multiplying this amount by the appropriate percentage from the chart below:

Each covered entities branded prescription drug sales for the calendar year that are:

Percentage of branded drugs sales taken into account is:

Not more than $5 million

0

More than $5 million but not more than $125 million

10%

More than $125 million but not more than $225 million

40%

More than $225 million but not more than $400 million

75%

More than $400 million

100%

The resulting product is the sales taken into account for a covered entity.  It is also the numerator of the fraction to be applied to the applicable amount to determine a covered entity’s fee liability.

For example, if Covered Entity A had total BPD sales from all Programs of $150 million, its BPD sales taken into account would be:

$5 million x 0 =                                                        $0

$120 million x 10% =                                              $12 million

$25 million x 40% =                                                $10 million

---------------------------------------------------------------------------------------------

Total                                                                      $22 million

 

Step 2: Denominator – Aggregate Sales Taken into Account

For each sales year, the IRS will total all BPD sales taken into account for each covered entity calculated under Step 1.  This amount is the denominator of the fraction to be applied to the applicable amount.  

The resulting fraction is multiplied by the applicable amount to determine each covered entity’s fee.

For example, if Covered Entity A has $22 million in BPD sales taken into account (Step 1 calculation) and the aggregate amount of BPD sales taken into account for all covered entities (Step 2 calculation) is $440 million, then the fraction is $22 million/$440 million or 0.05. This fraction is then multiplied by the applicable amount for the year to determine Covered Entity A’s fee liability. 

Adjustment Amount

For each fee year after 2011, in addition to a covered entity’s fee, the IRS will also calculate an adjustment amount that is the difference between the allocated fee determined for the covered entity in the immediately preceding fee year, using data from the second calendar year preceding that fee year, and what the allocated fee would have been for that entity for the immediately preceding fee year, using data from the calendar year immediately preceding that fee year.

For example, for 2014, the adjustment amount for a covered entity will be the difference between the entity’s 2013 allocated fee using 2011 data and what the 2013 allocated fee would have been using 2012 data. 

Although the adjustment reflects a revision of the prior year’s fee based on data from the year immediately preceding the prior fee year, the adjustment is only taken into account by adding it to or subtracting it from the fee for the fee year to arrive at the final fee for the fee year.

Preliminary Fee Notice – Letter 4657

For each sales year, the IRS will make a preliminary calculation of the fee for each covered entity. The IRS will notify each covered entity of this preliminary fee calculation   by Letter 4657 that includes:

  • The covered entity’s allocated fee
  • The covered entity’s adjustment amount
  • The covered entity’s BPD sales, by NDC and by Program
  • The covered entity’s BPD sales taken into account
  • The aggregate BPD sales taken into account for all covered entities
  • A reference to the fee dispute resolution procedures set forth in guidance published in the Internal Revenue Bulletin

The IRS will send each covered entity notice of its preliminary fee calculation by the date prescribed in guidance published in the Internal Revenue Bulletin.  For the 2014 Fee Year, the IRS will send the Preliminary Fee Letter by March 3, 2014 (see Notice 2013-51).

Dispute Process

Each covered entity will have an opportunity to dispute the preliminary fee calculation by submitting an error report to the IRS.   The IRS will provide its final determination with respect to error reports no later than the time the IRS provides a covered entity with a final fee calculation.

A covered entity can submit two types of error reports:

  1. Program drug sales errors
  2. Errors other than program drug sales errors that relate to:
    • Mathematical calculation of the fee
    • Rebate data
    • Listing of an NDC for an Orphan Drug
    • Any other asserted error.

The IRS forwards disputes of program drug sales to the appropriate Agencies for review and determination.  CMS has a dedicated website to assist with Medicaid-related drug sales errors.  Covered entities with Medicaid-related drug sales errors may review the information on the CMS website.  All errors other than program drug sales errors are subject to review and determination by the IRS.

For a completion discussion on the dispute process, refer to 26 CFR §51.7T.

Each covered entity must submit its error report(s) in the form and manner that is prescribed in guidance published in the Internal Revenue Bulletin.  This guidance will also prescribe the date by which each covered entity must submit its report(s).  For the 2014 fee year, the error report is due by May 15, 2014.

Any changes made pursuant to the dispute resolution process will be reflected in the final fee calculation.

Final Fee Notice - Letter 4658

No later than August 31st of each fee year, the IRS will send each covered entity its final fee calculation for that year.  In any fee year, the IRS will base its final fee calculation on data provided to it by the Agencies as adjusted pursuant to the dispute resolution process. The notification to a covered entity of its final fee calculation is by Letter 4658 and includes the following:

  • The covered entity’s allocated fee
  • The covered entity’s adjustment amount
  • The covered entity’s BPD sales, by NDC, by Program
  • The covered entity’s BPD sales taken into account
  • The aggregate BPD sales taken into account for all covered entities
  • The final determination with respect to error reports

A covered entity’s final fee calculation may differ from the covered entity’s preliminary fee calculation because of changes made pursuant to the dispute resolution process.  A change made pursuant to the dispute resolution process can affect each covered entity’s fee because each covered entity’s fee is a fraction of the aggregate fee collected from all covered entities.

Each covered entity must pay its final fee by September 30th of the fee year.  The fee must be paid by electronic funds transfer as required by the regulations at 26 CFR §51.6302-1T. 

For a controlled group, the payment must be made using the designated entity’s EIN as reported on Form 8947.  In the case of a controlled group that is liable for the fee, all covered entities within a controlled group are jointly and severally liable for the fee.

There is no tax return to be filed for the fee.

References/Related Topics

 

Page Last Reviewed or Updated: 17-Mar-2014

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