Major Changes to U.S. Government Pricing Requirements Finalized, With Some Wins for Pharma and Biotech

On Friday, October 31, the U.S. Centers for Medicare & Medicaid Services (CMS) released a display copy of the Calendar Year (CY) 2026 Medicare Physician Fee Schedule (PFS) Final Rule (PFS Final Rule). CMS finalized several notable proposals from the CY 2026 PFS Proposed Rule that will have a substantial impact on pharmaceutical manufacturer government price reporting under Medicare Part B. These include new pass-through and fair market value (FMV) documentation requirements for pharmaceutical manufacturers in connection with bona fide service fees (BFSFs) under the Average Sales Price (ASP) calculation, the inclusion of units of selected drugs sold at the Maximum Fair Price (MFP) in the ASP calculation, and new provisions related to duplicate discounts under the 340B Drug Pricing Program (340B Program). CMS also finalized substantial changes to the Medicare Part B payment methodology for skin substitutes. However, in response to significant commenter objections, CMS also declined to finalize a number of proposals, including several proposed requirements for FMV assessments for purposes of the ASP treatment of fees and proposals related to payments by manufacturers of certain cell and gene therapies. 

The PFS Final Rule is effective January 1, 2026. Below, we address certain key proposals that CMS finalized and also that it declined to finalize, but which may inform future rulemaking. CMS’s proposals are also described in more detail in our Sidley Updates on the CY 2026 PFS Proposed Rule, available here and here.

Provisions Impacting Pharmaceutical Manufacturer Government Price Reporting

BFSFs

Finalized: CMS finalized changes that impose significant new obligations on manufacturers to demonstrate that certain fees meet the definition of BFSFs that may be excluded from the ASP calculation, including the following:

1. Pass-Through Certifications and Warranties. CMS finalized its proposal to require manufacturers to obtain a “certification or warranty” from service providers receiving fees for services performed for prospective contracts in order for the manufacturer to classify such fees as BFSFs. The certification or warranty must state that such fees will not be passed on to a client or customer of the entity. However, CMS did not specify the form such certifications or warranties must take. This certification letter from the recipient of a fee must be submitted by the manufacturer along with quarterly ASP data. CMS stated that it did not agree with commenters that the requirement to receive a certification or warranty would add “substantive burden” to manufacturers and that “[u]ntil [CMS] observe[s] evidence that service providers are unwilling to provide such certifications,” CMS does not find commenters’ concerns to be “substantiated.” 
2. Fair Market Value Documentation Requirements. CMS finalized its proposal to require manufacturers to submit documentation of the methodology used to determine whether fees the manufacturer treats as BFSFs for the ASP calculation are consistent with FMV. 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.” CMS clarified that the “FMV documentation is not due quarterly” but that all FMV determinations for current contracts will be due by April 30, 2026. CMS also stated that “[t]o reduce administrative burden, [CMS] will accept well-detailed summaries of FMV methodologies that clearly describe the data sources, assumptions, and rationale supporting the documentation.” CMS further stated that it will provide manufacturers with “a template of the reasonable assumptions letter for manufacturers to document FMV analyses.”

Not finalized: CMS also declined to finalize certain proposals that would have implemented substantial changes to the definition of BFSFs, including the following:

1. Percent-Based and Other Fees Presumed to be Price Concessions. In a significant win for manufacturers, CMS declined to finalize its proposal that percent-based or other fees that vary directly with the amount or price of a manufacturer’s drugs be “presumed to be price concessions deducted from the calculation of [ASP] unless such manufacturer determines such fees to be FMV using a cost-based approach.” CMS noted that it would take stakeholder comments “under consideration in future rulemakings.” CMS also declined to finalize its proposed list of fees that should be considered price concessions, which included distribution fees that exceed FMV, credit card processing fees, and data sharing fees that exceed FMV or are otherwise not bona fide, noting that it appreciated “commenters’ concerns that providing examples of fees could have unintended implications.”
2. FMV Methodology. In response to commenter objections, CMS declined to finalize several new requirements intended to specify the methodology for FMV analyses, as discussed in more detail in our prior Sidley Update here. CMS acknowledged that it “would be time-intensive to implement a new FMV methodology under the proposed timeline” and stated that it 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.” However, CMS also 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.”
3. Addition of “Affiliate.” In response to commenter objections, CMS declined to finalize its circular proposal to add the term “affiliates” to the list of entities to which a BFSF cannot be passed on, noting that it “will further consider whether to incorporate this term in future rulemaking.” 

Bundled Arrangements

CMS finalized a definition of “bundled arrangement” that generally aligned with the definition of that term under the Medicaid Drug Rebate Program (MDRP), including that discounts must be allocated proportionally to the total dollar value of all drugs or products in the bundle. In response to comments that the undefined terms “purchasing patterns” and “prior purchases,” which appeared among the examples of “performance requirements” in the proposed definition of “bundled arrangement,” were not aligned with the MDRP definition and created ambiguity, CMS removed those terms from the final definition.

CMS also addressed specific areas highlighted in the December 2022 OIG report focused on consistency in ASP calculations across manufacturers.

1. Bundles Involving Noncovered Products. CMS finalized, as proposed, that manufacturers must allocate discounts proportionally for bundled sales that include both Medicare Part B–covered and noncovered products. While the Medicare Payment Advisory Commission recommended a “lower-of” approach, under which ASP could be “the lower of (1) ASP with price concessions allocated across all products in the bundle; or (2) ASP with price concessions allocated only among Part B drugs in the bundle that are required to report ASP data,” CMS declined to adopt this recommendation but stated that it may revisit the issue in future rulemaking.
2. Outcomes- and Value-Based Arrangements. CMS finalized its proposal not to adopt the portion of the MDRP definition recognizing that value-based purchasing arrangements may qualify as a bundled sale. CMS stated that it is continuing to evaluate how value-based arrangements should be considered for drugs payable under Medicare Part B and will monitor manufacturers’ reasonable assumptions addressing such arrangements.

Reasonable Assumptions for Calculation of ASP

CMS finalized its proposal to require manufacturers to submit any reasonable assumptions used in calculating ASP as part of the quarterly data submission to CMS, including documentation of the methodology used to determine FMV for current, new, and renewed BFSF contracts and the certification letter from fee recipients that the fee is not passed-on, as discussed above. 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.”

Skin Substitutes

CMS finalized significant changes to the Medicare Part B payment methodology and price reporting for skin substitutes that are not licensed under Section 351 of the Public Health Service Act (i.e., the traditional premarket review pathway for biologics via Biologics License Applications (BLAs)):

1. Separate Payment as “Incident-to” Supplies. CMS finalized its proposal “to separately pay” for covered skin substitute products as “incident-to” supplies in both the non-facility and hospital outpatient settings. The CY 2026 PFS Final Rule focuses on implementation of this policy under the PFS. The policy applies to skin substitute products that are (1) determined to be human cells, tissues, and cellular and tissue-based products (HCT/Ps) under Section 361 of the Public Health Service Act; (2) devices requiring 510(k) clearance from the U.S. Food and Drug Administration (FDA); and (3) subject to premarket approval (PMA) applications by the FDA. CMS also finalized its proposal that this policy will not apply to any product licensed under Section 351 of the Public Health Service Act, as CMS considers such products to be “biologicals,” which CMS will continue to pay under the ASP-based methodology under Section 1847A of the Social Security Act. CMS stated in the PFS Final Rule that “[u]nder this policy, as finalized, skin substitute products (other than those approved via BLA under section 351 of the [Public Health Service] Act) will no longer be payable as drugs or biologicals under Medicare Part B and will no longer be required to report ASP data to CMS.”
   1. CMS acknowledged the “significance of reclassifying these products” for purposes of Medicare Part B payment but emphasized its position that “these products are more appropriately categorized as incident-to supplies rather than as drugs and biologicals.”
   2. CMS further “clarif[ied] that skin substitute products that are not regulated as drugs or biological products under section 351 of the [Public Health Service] Act and that are paid as incident to supplies” under this finalized policy “are not subject to the Medicare discarded drug policy.” CMS also noted that “[a]t this time, skin substitutes are excluded from Part B inflation rebates as described in at § 427.101(b)(5) and as finalized in the CY 2025 PFS final rule (89 FR 98235).”
2. Payment Categories Based on FDA Regulatory Pathway. CMS finalized its proposal to create three payment groups to pay for covered skin substitute products based on their FDA regulatory categories, as discussed in more detail in our prior Sidley Update here. Specifically, CMS will now group skin substitutes into the following three categories: PMA, 510(k), and HCT/P.
   1. CMS stated in the PFS Final Rule that the “FDA’s regulatory framework in this context provides an objective and consistent basis on which to group these products for purposes of developing payment rates.” CMS noted that it considered possible alternative payment categories, including grouping skin substitutes by product cost, but ultimately rejected this alternative because providers “could potentially have a financial incentive to use the least expensive skin substitute or the product offering the greatest discount, which could negatively affect patient outcomes and disincentivize innovation in this space if clinical differences are not recognized and differential payments rates are not set.” 
3. Calculation of Payment Rates. CMS finalized its proposal to establish the same initial payment rate for each group of skin substitutes for CY 2026, including registered 361 HCT/Ps, 510(k)-cleared devices, and PMA-approved devices. For CY 2026, the final payment rate is approximately $127.28 per cm², which is slightly higher than the originally proposed rate for CY 2026 of $125.38 per cm². CMS also finalized a policy “to update the rates for the skin substitute categories annually through rulemaking using one or more recently available calendar quarter(s) of ASP data, when available,” or, if ASP data is not available, using hospital mean unit cost data, wholesale acquisition cost (WAC), or 89.6% of the average wholesale price, as discussed in our Updates here and here. CMS also stated that “in future notice and comment rulemaking, [CMS] intend[s] to propose using claims data to set payment rates for products in these three categories, which would likely result in payment valuations that diverge based on the updated data.”
   1. CMS noted that many commenters stated that the proposed payment rate of approximately $125 per cm2 under the CY 2026 PFS Proposed Rule was “far too low and unsustainable”; CMS also summarized several suggestions from commenters for higher payment rates. CMS expressed appreciation for “the many detailed comments” it received on this issue but stated that it does “not agree that higher payment rates are warranted at this time for several reasons,” which it discusses further in the PFS Final Rule. After describing those reasons, CMS stated that “[o]nce updated use patterns reflecting [the new] policy are available to calculate rates,” CMS will “use all relevant products and the combined product utilization patterns” from both non-facility and hospital outpatient settings “to determine a weighted average per-unit cost by category to set separate payment rates for each of the three categories.” CMS further stated that it will “continue to monitor this product class and propose additional adjustments to the policy as necessary in future rulemaking.”
4. Non-Sheet Products: In the CY 2026 PFS Proposed Rule, CMS sought comments on whether “products that are not in sheet form” (such as gels, liquids, powders, foams) are appropriately considered skin substitute products for the purpose of providing separate payment under this policy. In the CY 2026 PFS Final Rule, CMS stated it is “finalizing a policy to consider products that are not in sheet form to be skin substitutes for purposes of providing separate payment as incident-to supplies” but also states that it “will maintain the current coding mechanism for these products and will direct the Medicare Administrative Contractors to determine appropriate payment, which is generally consistent with how these products are currently paid.” CMS also stated that it “will continue to evaluate payments for these products to determine if an alternative payment methodology may be better suited to non-sheet products.” In the meantime, CMS stated that it is “also revising HCPCS code A4100 (Non-sheet form skin substitute, FDA cleared as a device, not otherwise specified (list in addition to primary procedure)[)] to allow billing for non-sheet form skin substitute products that do not yet have a more specific code.”
5. CMS finalized its proposal to evaluate all complete HCPCS Level II applications for skin substitutes on the biannual cycles that apply to nondrugs/nonbiologicals. For any products that come to market under the BLA, New Drug Application, or Abbreviated New Drug Application pathways that could be considered skin substitutes, CMS stated that it will review HCPCS applications for such products as part of the quarterly HCPCS coding cycles that apply to drugs and biologicals.

Inflation Reduction Act (IRA) Implementation

CMS finalized multiple policies related to implementation of the Medicare Prescription Drug Inflation Rebate Program and Maximum Fair Price program adopted under the IRA. These include the following:

1. Inclusion of Selected Drugs Sold at MFP in Calculation of ASP. CMS clarified in the Final Rule that units of selected drugs sold at the MFP are included in the calculation of ASP, effective January 1, 2026. For quarters in which Medicare payment is based on MFP, the Medicare Part B Drug Payment Limit File will display the MFP-based payment limit.
2. Implementation of the Statutory Requirement to Exclude 340B Units Using a Claims-Based Methodology. Under the statute, Part D claims for which a manufacturer provides a discount under the 340B Program are not included in the units used to calculate inflation rebates. CMS finalized its proposal to identify claims for 340B units using a “Prescriber-Pharmacy Methodology,” where 340B status is determined based on the affiliation of the National Provider Identifier of the prescribing provider and the designation of the dispensing pharmacy. CMS stated that this methodology is more likely to overestimate 340B units than underestimate such units and is also expected to remove about 10% to 35% of total Part D units. 
3. Creation of a Voluntary Data Repository for 340B Covered Entities to Submit Data on Part D Claims Beginning in Fall 2026. CMS stated that the voluntary submissions during this “testing period” will not be used to remove 340B claims at this point but are instead intended to allow CMS to assess data completeness and accuracy for future use. CMS issued an Information Collection Request alongside the PFS Final Rule to collect this data. CMS noted that it may require mandatory reporting in the future but declined to provide a timeline for this transition. Instead, the agency noted that it was “actively considering options for mandatory reporting to the 340B repository in the near future” and recommended that covered entities take advantage of the voluntary reporting period to prepare for future developments.
4. Establishment of Benchmark Payment Amounts When Data Is Unavailable. CMS finalized its proposal to use the third full calendar quarter after a Part B inflation rebate-eligible drug is assigned a billing and payment code as the “payment amount benchmark quarter” for purposes of calculating Part B inflation rebates where data is not available from Q3 2021 or the third full calendar quarter after a drug’s first marketed date. If a published payment limit is not available for the benchmark quarter, CMS will calculate the benchmark quarter payment amount using positive ASP or positive WAC data reported by manufacturers to the ASP Data Collection System.

Autologous Cell-Based Immunotherapy 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.”

Importantly, in response to commenter objections, CMS declined to finalize its proposal to consider any payment by a manufacturer of certain cell and gene therapies to an entity for tissue procurement to be a price concession, rather than a BFSF, for purposes of calculating the manufacturer’s ASP. In response to comments, CMS acknowledged that payments for preparatory procedures may meet the four-part regulatory criteria for BFSFs under § 414.802 when they are itemized, represent FMV, are performed on behalf of the manufacturer, and are not passed through to a purchaser. CMS further stated that this interpretation “is most consistent with the statutory framework for ASP and the regulatory definition at § 414.802, and it avoids unintended downward pressure on ASP-based reimbursement that could impede beneficiary access.” CMS declined to issue rulemaking on allogeneic therapies but noted that it “may consider whether additional clarification is warranted in future rulemaking as allogeneic cell-based therapy evolves.”