The newly released branded prescription drug fee regulations finalize regulations that were proposed in August 2011 and remove corresponding temporary regulations. There are also “new” temporary regulations (2014 temporary regulations) regarding the definition of “controlled group” applicable beginning on January 1, 2015, and cross-referenced proposed regulations.
Read the final and 2014 temporary regulations—T.D. 9684 [PDF 294 KB] and proposed regulations—REG-123296-14 [PDF 220 KB]
The related IRS notice—Notice 2014-24 [PDF 24]—provides guidance on the branded prescription drug fee for the 2015 fee year related to: (1) the submission of Form 8947, Report of Branded Prescription Drug Information; (2) the time and manner for notifying covered entities of their preliminary fee calculation; (3) the time and manner for submitting error reports for the dispute resolution process; and (4) the time for notifying covered entities of their final fee calculation.
Overview of regulations
The branded prescription drug fee regulations finalize rules as provided in the 2011 temporary regulations, including rules related to:
- Providing the method by which each covered entity’s annual fee is calculated
- Defining certain terms—for example, the “fee year” is defined as the calendar year in which the fee for a particular sales year must be paid and the “sales year” is defined as the second calendar year preceding the fee year
- Providing that annually, each covered entity may submit a completed Form 8947, Report of Branded Prescription Drug Information, that solicits information from covered entities on National Drug Codes, orphan drugs, designated entities, rebates, and other information
- Stating that for each sales year, the IRS will make a preliminary fee calculation for each covered entity and will notify each covered entity of this calculation—a “notice of preliminary fee calculation”
- Explaining that, upon receipt of its preliminary fee calculation, each covered entity will have an opportunity to dispute this calculation by submitting to the IRS an error report with prescribed information, and that each covered entity must submit its error report(s) in the form and manner as prescribed by the IRS
- Providing that the IRS will send each covered entity its final fee calculation no later than August 31 of each fee year and also provides that covered entities must pay their fee by September 30 of the fee year
Temporary and, by cross-reference, proposed regulations were issued in August 2011 as guidance under section 9008 of the Affordable Care Act (ACA) relating to the fee on branded prescription drugs.
Comments were received in response to the August 2011 regulations, and a public hearing was held in November 2012. As noted by the preamble, the new final regulations are generally consistent with the proposed regulations, but reflect certain “minor changes” (that are briefly described below).
Important information in 2014 final regulations and 2014 temporary regulations
With respect to the following topics (as discussed in the preamble), the 2014 final regulations provide for the following measures:
- Manufacturer or importer (the regulations decline to change the definition of manufacturer or importer) - Covered entities are encouraged to review and update their National Drug Code (NDC) data with the FDA to reflect changes in the manufacturer or importer of a branded prescription drug.
- Covered entity and adjustment amount - The regulations clarify that an entity is treated as a covered entity for any year in which the entity has branded prescription drug sales and for any year for which those sales must be taken into account in calculating the fee and determining the adjustment amount. Therefore, an entity’s status as a covered entity begins in the first year it has branded prescription drug sales to the programs, even though the fee does not take those sales immediately into account, and continues until all sales for that entity have been taken into account for both fee calculation and adjustment amount purposes. The final regulations also include an example illustrating this point.
- Controlled group
- Through December 31, 2014 - A “controlled group” is defined as part of a covered entity to mean a group of at least two covered entities that are treated as a single employer under section 52(a), 52(b), 414(m), or 414(o). This definition applies for purposes of determining who is in the controlled group through the 2016 fee year because the fee for the 2016 fee year is based upon data from the 2014 sales year.
- Beginning January 1, 2015 - The 2014 temporary regulations define the term “controlled group” to mean a group of two or more persons, including at least one person that is a covered entity, that is treated as a single employer under section 52(a), 52(b), 414(m) or 414(o). This definition applies for purposes of determining who is in the controlled group beginning with the 2017 fee year because the fee for the 2017 fee year is based upon data from the 2015 sales year. The preamble states that this broader definition of controlled group (in the 2014 temporary regulations) is supported by the statutory language and is consistent with how controlled group rules with similar statutory language are applied, including how controlled group is defined for purposes of the health insurance providers fee under ACA section 9010. The Treasury Department and IRS expect that the broader definition in the 2014 temporary regulations will primarily affect joint and several liability for the fee and will not otherwise affect the administration of the fee.
- Conforming changes to the provision for joint and several liability - Joint and several liability applies to all members of the controlled group under both the 2014 final and temporary regulations.
- Designated entity - The rules are modified to allow for better coordination with the consolidated return regulations, and provide that the designated entity of a controlled group, without regard to foreign corporations, that is a consolidated group is the agent for the group.
- Orphan drugs - Treasury and the IRS declined to adopt suggestions to expand the definition of orphan drugs; no changes were made from the rules set forth in the 2011 temporary regulations.
- Information requested from covered entities -
- A rule requiring separate reporting of Medicare and federal Medicaid rebates by covered entities is eliminated, and Form 8947 no longer requests information on these rebates, but the regulations retain the provision that permits separate reporting of Medicaid state supplemental rebate data by covered entities on Form 8947.
- Pre-1984 generic drugs - Comments are requested on whether a special rule is appropriate regarding treatment of generic drugs for which applications were submitted under section 505(b) prior to 1984.
- Information provided by the agencies - There are revised descriptions of the data and computations used to calculate branded prescription drug sales and provide background on methodologies used by the agencies.
Covered entities that may have transferred a drug to another covered entity or engaged in a transaction, such as a reorganization or a bankruptcy, that results in a different entity selling the drug are encouraged to review and update their National Drug Code (NDC) data with the FDA to reflect changes in the manufacturer or importer of a branded prescription drug.
Covered entities are reminded that November 3, 2014, is the due date to submit Form 8947, Report of Branded Prescription Drug Information, for the 2015 fee year (relating to sales year 2013). The optional form solicits information from covered entities on National Drug Codes, orphan drugs, designated entities, rebates, and other information specified by the form or its instructions. This year, covered entities will report any Medicaid state supplement rebate data, but not Medicare and federal Medicaid rebates, unlike previous years.
For more information, contact a tax professional with KPMG’s Excise Tax Practice group:
(202) 533 6188
(202) 533 5965