Big Surprises Unveiled In CMS's Proposed 2026 Medicare Physician Fee Schedule: Major Implications For FMV And Bona Fide Service Fee Assessments

On July 16, 2025, the Centers for Medicare & Medicaid Services (CMS) proposed significant changes to the definition and treatment of bona fide service fees (BFSFs) within its 2026 Medicare Physician Fee Schedule Proposed Rule (Proposed Rule). These changes, if implemented, carry significant implications for the analysis and treatment of channel partner arrangements and related drug price reporting obligations.

Within the Proposed Rule, CMS outlines proposals to (1) make modifications to the criteria for determining fair market value (FMV) of BFSFs in channel partner agreements and (2) add new certification and reporting requirements with submission of average sales price (ASP) calculations.

What are bona fide service fees? When life sciences manufacturers engage channel partners to support product distribution, they often engage in complex arrangements with third-party logistics providers (3PLs), wholesale and specialty distributors, and others.

Within these arrangements, a mix of standard and custom services are often included, and those fee arrangements give rise to scrutiny under the False Claims Act as they may impact a manufacturer's ASP and corresponding Medicare drug price reporting obligations.

To ensure services included in these arrangements are properly accounted for within the context of ASP reporting, whether as BFSFs (exempt from ASP calculation) or product discounts (not exempt from ASP calculation), an evaluation of the nature, value, and disposition of each fee is necessary.

How these services and related fees are examined, valued, and characterized is the subject of careful analysis steeped in current regulation which stems back to 2007.¹ CMS's current proposal would upend several well-established practices in this area which, notably, zero in on aspects of BFSF assessments where manufacturer judgment relating to methodology, timing and self-assessment are concerned, coupled with related internal reporting requirements.

Currently, BFSFs are defined as fees paid by manufacturers to entities for bona fide services that meet four criteria: (1) they must represent FMV, (2) be for bona fide services performed on behalf of the manufacturer, (3) be services the manufacturer would otherwise perform, and (4) not be passed on to clients or customers.² In practice, evaluation of fee structures and amounts through this lens is often referred to as the "four part test." If service fees are determined to be bona fide, these fees are excluded from ASP calculations, thus reducing rebate obligations.

FMV Methodology and Determination: The Proposed Rule introduces a more structured approach to BFSFs, emphasizing the need for standardized methodologies and procedures when conducting FMV analyses. Currently, manufacturers are empowered to select the appropriate FMV methodology for a given arrangement and payment structure. Under the proposal, methodology selection and certain procedures would be conditioned as follows:

Certification Requirements and Submission Documentation: To ensure BFSFs are not passed on to an affiliate, client, or customer of any entity, CMS proposes stringent evidence requirements whereby manufacturers must obtain certification from BFSF recipients, affirming that fees are not passed on. With this change, it will no longer be appropriate for a manufacturer to assume, in absence of any evidence or notice to the contrary, that a fee paid is not passed on to an affiliate, client, or customer of any entity. Under this proposal, these certifications will be required to be submitted to CMS for sales occurring on or after January 1, 2026.

In addition, CMS proposes that manufacturers be required to submit the FMV analyses of the BFSFs included in the manufacturer's ASP calculations along with descriptions of methodologies utilized to determine FMV for sales occurring on or after January 1, 2026, with the first submission due on April 30, 2026.

Guidance and Non-Exhaustive Examples: CMS has previously considered but does not currently provide examples of fees that should, or should not, be considered bona fide. This is because CMS recognized that such a list would require persistent review and refinement, given the dynamic nature of the industry and, accordingly, manufacturer arrangements with channel partners.

The scope, complexity, and variety of service arrangements are highly varied – particularly in specialty markets. Nevertheless, under the current proposal, CMS provides non-exhaustive examples to assist manufacturers in correctly classifying fees. CMS includes, by way of notable examples, payments for credit card processing that have the effect of lowering distributor prices, tissue procurement for certain therapies, and fees for data sharing and other distribution services that appear to be non-compliant with FMV. These examples provide some guidance to manufacturers as they navigate the complexities of BFSF classification and help to ensure compliance.

Navigating Complexities and Ensuring Compliance: In practice, we regularly observe channel partner arrangements that vary widely among the ecosystem of third parties doing business with any given manufacturer, in addition to frequent revisions to fee structures, services, and potentially FMV and BFSFs within those arrangements. Embedding a periodic and, potentially, "look back" process to examine these arrangements in line with today's FMV and BFSF standards with an eye toward the Proposed Rule could enhance visibility and improve risk mitigation for companies subject to ASP reporting requirements.

With the Proposed Rule planned to become effective in 2026, manufacturers may wish to evaluate their current practices related to their fee-for-service arrangement review and approval processes to ensure robust compliance frameworks that align with the new FMV and BFSF requirements. This may involve:

• Conducting thorough audits of current practices and procedures
• Revising contractual agreements
• Examining class of trade status
• Analyzing affiliated party structures
• Updating FMV analyses and related documentation requirements for BFSFs
• Implementing certification and reporting protocols
• Ensuring FMV methodologies, analyses, and assessments are disclosure-ready
• Implementing comprehensive training programs to ensure all stakeholders understand and adhere to the updated guidelines.

Footnotes

1 CMS, Medicaid Program; Prescription Drugs, 72 Fed. Reg. 39,142 (July 17, 2007)

2 (42 C.F.R. § 414.802)

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