In its 2026 Medicare Physician Fee Schedule proposed rule, the Centers for Medicare & Medicaid Services (CMS) has proposed additional guidance for how manufacturers will calculate their average sales prices (ASP) for drugs that are payable under Medicare Part B (the section that covers physician office visits and services ancillary to those visits).

The proposed guidance involves two aspects of the drug price calculation: (1) specifying when fees are considered price concessions instead of bona fide service fees and (2) how manufacturers should allocate pricing for drugs sold under a bundled arrangement. These changes could have significant implications for manufacturers, not only in how they calculate prices, but also in the coordination and operational burdens of changing their methodology. In this post, we outline proposed changes and highlight key steps industry participants should take to prepare, should these changes be finalized.

The changes are included in the Proposed Calendar Year 2026 Payment Policies under the Physician Fee Schedule. The proposed rule is available for public comment until September 12, 2025, and the final version is expected to be published in November.

Price Concessions in ASP Calculation

Drugs reimbursed under Medicare Part B are subject to payment limits set by a statutory methodology that in most cases is based on the ASP plus a mandated 6 percent add on. But as part of the calculation of ASP, manufacturers are required to deduct “price concessions”, including volume discounts, prompt pay discounts, cash discounts, contingently provided goods, chargebacks, and certain rebates.

Importantly, CMS did not define how price concessions should be designated within bundled arrangements. In those cases, where the discounts might be related to the purchase of multiple units of a single drug or a group of drugs, manufacturers have since begun looking to a similar methodology under the Medicaid program to allocate discounts across all products.

What is not included in the price concession deductions are items that are considered bona fide service fees. In a 2007 final rule, CMS adopted a definition of bona fide service fees to mean “fees paid by a manufacturer to an entity that represent fair market value for a bona fide, itemized service actually performed on behalf of the manufacturer that the manufacturer would otherwise perform (or contract for) in the absence of the service arrangement, and that 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.”

However, a 2022 report from the Office of Inspector General (OIG) recommended that CMS provide additional guidance on aspects of the ASP calculation. In particular, the report indicated that more guidance was required on how to treat price concessions involved in bundled arrangements and how manufacturers should interpret the definition of bona fide service fee.

The 2026 proposed rule attempts to provide guidance on both of those elements.

Bundled Sales

In the proposed rule, CMS has suggested adding a definition of “bundled arrangement” and providing guidance to manufacturers regarding pricing of bundled price concessions, with the goal of assisting manufacturers when calculating ASP for bundled arrangements.

The proposed definition of bundled arrangement states that such an arrangement exists when a rebate, discount, or other price concession is conditioned on purchasing a drug or other product – or achieving a performance metric (e.g., market share, formulary placement) – and results in greater discounts than would be available through individual purchases.

Additionally, CMS proposed adopting Medicaid’s proportional allocation method for all of Medicare Part B. That is to say that all discounts, including contingent discounts, would be allocated across all bundled products based on dollar value.

Bona Fide Service Fees

CMS has also proposed to clarify ways in which fees can be considered bona fide service fees and thus exempt from the price concession calculation.

• Revised fair market value (FMV) methodology for all bona fide service fees: For fees that vary based on volume or price, FMV must be based solely on the cost of the service plus a reasonable markup. But, for fees that don’t vary with purchases, FMV may be based on either a market-based comparable reflecting current conditions or the cost of the service plus a reasonable markup. When applying either methodology, if any material portion of cost data is not available, manufacturers should use market-based data until sufficient cost data becomes available.
• Independent third-party valuation requirement for FMV valuations: Any FMV assessments for price or volume-dependent fees must be performed by an unconflicted, independent third party. The valuator must have no financial relationship or stake in the outcome other than performing the valuation itself. Additionally, analyses must be clearly documented, including a description of the methodology used.
• Increased frequency of FMV valuations: Manufacturers must update FMV valuations at least as frequently as the renewal schedule of the agreement. The updated FMV analysis must be documented and included in the reasonable assumptions file for the quarter in which the reassessment occurs.
• Presumption of fees tied to price or volume as price concessions: Any fee linked to drug price or volume will be considered a price concession, and not a bona fide service fee – unless FMV is established with a cost-based analysis that can be validated with market-based data.
• Pass-through certification requirement: Manufacturers can no longer presume fees are not passed through to an affiliate, client, or customer Manufacturers must instead obtain a certification from entities receiving the fee verifying that no part of the fee is passed on.

As part of the proposed rule, CMS did not present a complete list of fees that would qualify as bona fide service fees under the new guidance. However, it did provide a series of examples:

What would NOT qualify as a bona fide service fee:

• Credit card processing fees to distributors would not qualify as bona fide service fees and would instead be considered price concessions that would have to be removed from ASP calculations. CMS referenced a 2024 DOJ case alleging that a manufacturer misclassified payments that waived fees for buyers using credit cards as bona fide service fees instead of price concessions to inflate ASP. Since the fees removed a cost to purchasers that would otherwise incur, they constitute ASP-deductible price concessions.
• Tissue procurement payments for autologous products would also not qualify as bona fide service fees and would instead be considered price concessions. CMS said that it considers these to be integral manufacturing costs.

What MAY qualify as a bona fide service fee:

• Data-sharing fees may be considered bona fide service fees if the fees exceed FMV, or they are legally required (e.g., for legal compliance and audit purposes under a services agreement) and lack a no pass-through certification.
• Distribution service fees would be considered a bona fide service fee, but the fees must be assessed for FMV and supported by a no pass-through certification.

What Does This Mean?

For manufacturers, these changes could impose substantial burdens to align their business processes in time for the new rule’s  effective date in January. Additionally, many fees that were previously included in ASP calculations as bona fide service fees may now be considered price concessions and excluded from the ASP calculation. This could result in significantly reduced reimbursements for Medicare Part B drugs.

Among the operational burdens potentially raised by the new rules, will be the quarterly data submissions required starting in April 2026. Additionally, manufacturers will have to assess their existing fee arrangements and reporting practices to ensure compliance. Manufacturers will also have to engage independent FMV valuation experts and seek certifications of no pass-through for fees that would be classified as bona fide service fees. This last requirement could be complicated by vendor entities that would likely be reluctant to provide those certifications given the fungibility of funds and the difficulty of establishing that particular funds did not finance vendors’ independent financial relationships with their customers or affiliates.

Reed Smith will continue to follow developments with regard to Medicare reimbursement. If you have any questions about this aspect of the physician fee schedule or would like to comment on the rule, please do not hesitate to reach out to the authors of this post or to your health care lawyers at Reed Smith.