Why We Care About Bona Fide Service Fees

Because cost is such an important factor for manufacturers, specialty pharmacies, and patients, Bona Fide Service Fees--and their impact on Average Manufacturer Price--deserve careful attention.

Bona Fide Service Fees (BFSFs) is one of the most important industry terms today, with a dramatic impact across pharmaceutical manufacturers, wholesalers, specialty pharmacy and specialty distributors, and GPOs, as well as CMS and oversight agencies such as the Office of Inspector General (OIG) and the Department of Justice (DOJ). The significance of BFSFs is related to Medicaid program integrity and compliance, especially from a pharmaceutical manufacturer perspective.

The price that the government reimburses for pharmaceutical products under Medicaid, Medicare, the VA program, and the Public Health Services (PHS) program is impacted by the fees the manufacturer pays to trading partners and how those fees are treated. If a fee is considered a legitimate administrative fee, or a BFSF, it is excluded from statutory pricing calculations that the manufacturer submits to the government, which in turn defines the “Government Price.” If the price is a price incentive (not an excluded BFSF), it also affects pricing. Therefore, the treatment of fees moves pricing and reimbursement up or down.

The government customer is growing as an increasing number of Americans are getting pharmaceutical benefits through one of the government-funded programs. If the government pays more than it thinks it should for pharmaceutical products under these programs, it can apply the False Claims Act, which is legal action related to the pharmaceutical manufacturer submitting incorrect data which causes the government to pay more than it should.

So, the pharmaceutical manufacturer is the one accountable for getting government pricing right. The manufacturer has agreements in place across the supply chain for logistics, distribution, contract and membership management, and managed care formulary and performance. The trading partners who may be performing service functions on behalf of the manufacturer, such as logistics and distribution, aren’t accountable for the fees paid under the agreement that are considered BFSFs.

This is especially critical today under the Patient Protection and Affordable Care Act (PPACA). Under PPACA, Average Manufacturer Price (AMP) was redefined to be based upon the average price paid to the manufacturer for drugs sold to the retail pharmacy classes of trade. Additionally, there was language around what types of agreements could be considered BFSFs, primarily service type fees paid to wholesalers and distributors. By excluding them, the AMP for branded drugs, and therefore the Federal Upper limit (FUL), increases.

AMP is the statutory price that manufacturers submit to the government that directly impacts Medicaid. It is used to determine the Unit Rebate Amount (URA), which is a rebate that the manufacturer pays to the state for Medicaid utilization. It is a core component of state funding for the program. PPACA also defined AMP as a metric to be used for the FUL, the maximum reimbursement from the state to the pharmacy for drugs administered under Medicaid. So, the treatment of fees as BFSFs or not impacts the Medicaid Rebate, the state, and the retail industry. All eyes are on AMP, and thus all eyes are on BFSFs, and the scrutiny is primarily on the manufacturer to interpret and evaluate them correctly.

Manufacturers are between a rock and a hard place for several reasons. First, they cannot take a conservative versus aggressive approach, meaning that if the fees are not clear they make the determination that is in the government’s favor. The problem is that the treatment of fees impacts all of the statutory pricing, Medicaid AMP and Best Price, Medicare Part B ASP, the PHS program, PHS to eligible clinics, and the VA FSS price for federal government purchases. Raising AMP may benefit the government in that the manufacturer pays a higher Medicaid rebate, but it also means that the government can have a higher reimbursement under Medicare Part B ASP and a higher PHS price. Second, the guidance is vague at best. To have a fee qualify as a BFSF it must meet a “four-part test:”

A BFSF is defined as "a fee paid by a manufacturer to an entity, which represents Fair Market Value (FMV) for a bona fide, itemized service actually performed on behalf of the manufacturer, that a manufacturer would otherwise perform (or contract for) in the absence of a service agreement, and that is not passed in whole or in part to a client or customer of an entity, whether or not the entity takes title of the drug." (42 C.F.R.§ 414.802) (2011)

The Proposed Rule for AMP, published by CMS at the end of January 2012, states that they will not define FMV and would put this burden on the manufacturer. This is difficult, as most of the service-type fees paid are based on a percentage of sales. There has always been a serious lack of clear guidance to determine the inclusion or exclusion of fees in the calculation. In the recent court ruling, US v Allergan, the court clearly stated the fact that prior to the 2007 CMS Final Rule, the manufacturer had to make good faith efforts to evaluate the fees paid.

Manufacturer scrutiny related to Medicaid program integrity will continue, and the topic of BFSFs will continue to be one of the most visible areas of scrutiny under audit. Manufacturers must conduct a high level of due diligence to determine the BFSF evaluation. The trading partners, especially wholesalers, have a role and an interest, but the compliance accountability and risk is not on them. CMS has a role in issuing guidance, but that will take a while, and the agency will probably not define FMV. The OIG has established an expectation that manufacturers “get it right.”

Now, wouldn’t that keep you up at night?

About the Author

Chris Coburn is senior vice president of commercial business strategy at Compliance Implementation Services (CIS). He blogs at www.pharmacomplianceblog.com.