The Centers for Medicare & Medicaid Services (“CMS”) recently finalized a Medicare payment rule with significant implications for life sciences companies, particularly biotech and pharmaceutical manufacturers.
The Medicare final rule (the “Final Rule”), which governs payment under the physician fee schedule (“PFS”) for calendar year (“CY”) 2026, adopts most of CMS’s proposed policies with targeted modifications to key payment reforms. (For background on the proposed rule (the “Proposed Rule”), see our prior Alert here.) The finalized changes will affect several areas of interest to life sciences companies, including:
Drug price reporting and reimbursement
Cell and gene therapy
Digital mental health treatment devices used to support behavioral health services
Unless otherwise noted, these policies take effect January 1, 2026.
Drug Pricing and Reimbursement
Bona Fide Service Fees (“BFSFs”)
CMS retained the current definition of BFSFs, but finalized new requirements for manufacturers to substantiate that certain fees qualify as BFSFs, which may be excluded from the Medicare average sales price (“ASP”) calculation.
CMS declined to move forward with some of the more contested components of its proposal to revise the longstanding definition of BFSFs used for purposes of calculating ASP. BFSFs are and will continue to be defined under Medicare regulations as fees paid by a manufacturer to an entity that (1) represent fair market value (“FMV”), (2) for a bona fide, itemized service actually performed on behalf of the manufacturer, (3) that the manufacturer would otherwise perform (or contract for) in the absence of the service arrangement, and (4) are not passed on in whole or in part to a client or customer of an entity, whether or not the entity takes title to the drug. A fee must meet all four conditions of the definition to be considered a BFSF rather than a price concession to be deducted from ASP.
CMS’s finalized changes, however, will alter what evidence is required to show that a fee is not passed on to a client or customer, as well as what documentation is required to support FMV analyses:
Pass-through certifications and warranties. Beginning January 1, 2026, for all future service fee contracts, manufacturers must obtain and submit to CMS certification letters from BFSF recipients confirming that the fees are not passed on to clients or customers (regardless of whether the entity takes title to the drug). In implementing this requirement, CMS seemingly departs, for purposes of Medicare ASP, from longstanding Medicaid guidance dating back to 2007 that manufacturers could presume, in the absence of any evidence or notice to the contrary, that a fee paid is not passed on to a client or customer of any entity.
FMV documentation. CMS finalized its proposed data submission requirements to require that manufacturers submit the following documentation to CMS in connection with each quarter’s ASP submission: (1) reasonable assumptions for calculating ASP, including a summary of the methodology used to determine FMV for service fee arrangements and periodic reviews of FMV; and (2) certification letters from BFSF recipients that fees are not passed on (as discussed above). CMS recognized that the submission of ASP reasonable assumptions used to be voluntary but would now become mandatory. CMS stated that the requirement should not “impose an undue burden on manufacturers” because “[m]anufacturers should already maintain sufficient internal documentation to support their FMV assessments.” With regard to the description of FMV in the reasonable assumption, CMS stated that it will accept well-detailed summaries of FMV methodologies that clearly describe the data sources, assumptions, and rationale supporting the documentation and will provide manufacturers with a template to document FMV analyses. CMS also stated that reasonable assumptions will be used to “review industry-wise [sic] issues for potential future policy development and, in certain instances, to make referrals to law enforcement partners.”
The above requirements apply to sales occurring on or after January 1, 2026, i.e., for Q1 2026 ASP price reporting submissions due to CMS by April 30, 2026. To illustrate the new requirements, manufacturers must provide a reasonable assumption describing the FMV methodology used in connection with all existing service fee arrangements, including new arrangements entered into between January 1 and March 31 in the Q1 2026 ASP report. In addition, for all service fee contracts entered into on or after January 1, 2026, a no-pass-through certification must be provided in the Q1 2026 ASP submission.
CMS did not finalize the following proposals that would have affected the definition and determination of BFSFs:
FMV methodology and presumptions regarding percentage-based fees. CMS declined to finalize several new, contested requirements that would have specified the methodology for FMV analyses. CMS had proposed the following – none of which was adopted in the Final Rule:
For fees paid by a manufacturer to an entity that do not vary directly with the amount of drug sold or price of a manufacturer’s drug, FMV would need to be determined either based on: (1) comparable market transactions that generally reflect current market conditions, or (2) the cost of the service plus a reasonable markup to the total cost.
For fees paid by a manufacturer to an entity that do vary directly with the amount of drug sold or price of a manufacturer’s drug, FMV would need to be determined by an independent third-party valuator, using the cost of the service and adding a reasonable markup to the total cost. If any material portion of cost data would not be available, manufacturers would need to follow a market-based approach based on verifiable market data until such time as sufficient cost data would become available.
Manufacturers would need to conduct periodic updates of any FMV analyses for service arrangements that are ongoing, at a frequency no less than the renewal frequency of the agreement.
CMS declined to finalize these FMV methodological requirements. The agency acknowledged that it “would be time-sensitive to implement a new FMV methodology under the proposed timeline” and stated that the agency would “like to further engage with manufacturers regarding determination of FMV that could address [CMS’s] concerns while also achieving the goal of accuracy and transparency when classifying costs for the calculation of ASP.” Although CMS did not finalize these proposals, the agency encouraged manufacturers to “document in their reasonable assumptions which service fees are tied to costs that do not depend on the drug’s price or volume and which service fees do,” as this information “will aid with informing future policy development.” Relatedly, CMS declined to finalize its proposal that, if fees paid by a manufacturer to an entity vary directly with the amount or price of a manufacturer’s drugs, they are “presumed to be price concessions to be deducted from the calculation of…ASP unless such manufacturer determines such fees to be FMV using a cost-based approach.” Commenters had noted that percentage-based fees are “widely used across the pharmaceutical supply chain” and that “this presumption would result in the under-exclusion of BFSFs ASP calculations.” CMS said it would consider these comments in future rulemakings.
Disallowing pass-through of service fees to affiliates. CMS had proposed to add the term “affiliates” to the list of entities to which BFSFs cannot be passed on. In response to objections, CMS declined to finalize this addition and noted it “will further consider whether to incorporate this term in future rulemaking.”
List of examples of fees that would not be regarded as BFSFs. CMS did not finalize its proposed specific, non-exhaustive list of fees that would not be regarded as BFSFs and instead would be treated as price concessions. Commenters had expressed concern that the proposal was confusing and ambiguous, created uncertainty and compliance risks, and could reduce provider reimbursement. CMS acknowledged that providing fee examples could have unintended implications and therefore did not finalize the list.
Bundled Sales Arrangements
CMS finalized its proposal to define a bundled sale arrangement for ASP purposes, making slight modifications to its proposal as described below. Prior to the Final Rule, there was no regulatory definition of “bundled sale” for ASP purposes, and CMS instructed manufacturers to make reasonable assumptions in this area in the absence of specific guidance. Some manufacturers had adopted the Medicaid “bundled sale” arrangement for such purposes, but there was no requirement to do so. CMS’s final definition of “bundled arrangement” is generally consistent with the definition under the Medicaid Drug Rebate Program (“MDRP”). In fact, the agency removed from the Proposed Rule the terms “purchasing patterns” and “prior purchases,” given as examples of “performance requirements,” after commenters said that these terms did not align with the MDRP definition. The final definition reads as follows:
“Bundled Arrangement[”] means an arrangement regardless of physical packaging under which the rebate, discount, or other price concession is conditioned upon the purchase of the same drug or biological or other drugs or biologicals or another product or some other performance requirement (for example, the achievement of market share, inclusion or tier placement on a formulary), or where the resulting discounts or other price concessions are greater than those which would have been available had the bundled drugs or biologicals been purchased separately or outside the bundled arrangement.
This definition will require manufacturers to allocate discounts proportionally across all products in a bundled sale arrangement. Despite finalizing a definition largely the same as the MDRP definition, CMS declined to adopt the Medicaid portion of the bundled sale definition that addresses value-based purchasing arrangements.
Including Maximum Fair Price Units (“MFP”) in ASP
CMS reiterated its clarification from the Proposed Rule that units of drugs subject to the Inflation Reduction Act (“IRA”) Medicare Negotiation Program and sold at MFP are included in the calculation of ASP. Additionally, CMS rebranded the quarterly pricing files, commonly referred to as the “ASP drug pricing file,” as the Medicare Part B Drug Payment Limit File. For quarters in which the Medicare payment is based on MFP, the Medicare Part B Drug Payment Limit File will display the MFP-based payment limit.
Excluding 340B Units from IRA Medicare Part D Inflation Rebates
CMS finalized its proposed claims-based methodology, with slight modifications, to exclude 340B units from Medicare Part D drug inflation rebate calculations. Exclusion of the 340B units from the rebate calculation reduces manufacturer rebate liability by reducing the total number of units on which a rebate must be paid. CMS had proposed to evaluate whether a Medicare Part D prescription drug event (“PDE”) record is potentially 340B-eligible by examining the affiliation of the National Provider Identifier (“NPI”) of the prescriber associated with the PDE record, the designation of the dispensing pharmacy associated with the PDE, and 340B data available from the Health Resources and Services Administration (“HRSA”). To address the limitation raised by commenters regarding the use of Medicare Provider Numbers (“MPNs”) to identify covered entities and providers affiliated with them, CMS will map HRSA-provided organizational NPIs to corresponding individual NPIs and MPNs using data sources such as the CMS Integrated Data Repository to establish a supplemental list of prescriber NPIs associated with covered entities. CMS stated this methodology is more likely to overestimate 340B units and will likely remove about 10% to 35% of total Part D units.
Additionally, CMS finalized its proposal to create a voluntary data repository for covered entities to submit data on Medicare Part D 340B claims beginning in fall 2026. This data repository will allow CMS to assess such data for use in identifying units of Medicare Part D rebatable drugs for which a manufacturer provides a discount under the 340B Program in a future applicable period. In its initial Medicare Part D Drug Inflation Rebate Guidance, CMS had solicited comments on the best mechanism to identify 340B units dispensed under Medicare Part D.1 Commenters had suggested a mechanism through which covered entities would retrospectively submit data to CMS. In the Final Rule, CMS stated that the voluntary submissions during this “testing period” will not be used to remove 340B claims but rather allow CMS to assess data completeness and accuracy for future use. The agency noted that it was “actively considering options for mandatory reporting to the 340B repository in the near future” but did not specify a timeline. Instead, CMS recommended covered entities take advantage of the voluntary reporting period to prepare for future developments.
Cell and Gene Therapy Payment
CMS finalized its proposal to include preparatory procedures for tissue procurement for autologous cell-based immunotherapies or gene therapies in the payment of the product itself. CMS noted that this policy reflects a “continuation of the existing bundled payment policy for CAR-T cell therapies.” In response to “concerns about potential payment adequacy, practice viability, and site-or-service shifts,” CMS stated that it will “continue to evaluate and monitor claims data, clinical practice patterns, and site-of-service trends to determine whether additional refinements may be warranted in future rulemaking.”
However, CMS did not finalize its proposal that any preparatory procedures for patient-specific cell or tissue procurement required for manufacturing an autologous cell-based immunotherapy or gene therapy that are paid by the manufacturer be included in the calculation of the manufacturer’s ASP. Instead, when the four-part BFSF test is satisfied, these manufacturer-paid amounts may be treated as BFSFs and appropriately excluded from ASP. CMS noted that it cannot predict the exact financial impact on Medicare payment because it has “little information about how manufacturers currently factor in the cost of cell or tissue procurement into pricing these products.”
Coverage Opportunities for Behavioral Health and Chronic Illness
In the CY 2025 PFS final rule, CMS established Medicare payments to billing practitioners for digital mental health treatment (“DMHT”) devices furnished “incident to” professional behavioral health services used in conjunction with ongoing behavioral healthcare treatment. DMHT devices refer to software devices cleared, approved, or granted de novo authorization by the FDA that are intended to treat a mental health condition, in conjunction with ongoing behavioral healthcare treatment, by generating and delivering a mental health treatment intervention with a demonstrable positive therapeutic impact. Effective January 1, 2025, CMS finalized three HCPCS G-codes for DMHT devices, to be billed by physicians and practitioners who are authorized to furnish services for the diagnosis and treatment of mental illness.
In the CY 2026 PFS Proposed Rule, CMS clarified that, for coverage, the patient must have a mental health condition diagnosis, but the billing practitioner does not need to be the practitioner who made the diagnosis. CMS repeated this clarification in the Final Rule, underscoring its ongoing vigilance for fraud, waste, and abuse in the DMHT device space. Additionally, CMS finalized three newly proposed G-codes to integrate behavioral health services into advanced primary care management (“APCM”) when the APCM base code is reported by the same practitioner in the same month, so as to not require time-based documentation. CMS also finalized its proposal to expand coverage to include FDA-classified attention-deficit/hyperactivity disorder digital therapy devices, provided they are adjuncts to clinician-supervised care and meet special control requirements.
CMS stated that while it is not further expanding payment under its DMHT policy, the agency will continue to solicit input from interested parties for coding and payment policies to expand payment for FDA cleared and authorized DMHT devices, and that input may inform future rulemaking.
For questions regarding these finalized changes and their impact, please contact one of the authors or your Ropes & Gray advisor.