Branded Prescription Drug Fee – Payment Deadline Approaching

Friendly reminder to all of our industry colleagues! The final Branded Prescription Drug Fee invoices should be mailed soon. No later than August 31st of each year, the IRS mails the final fee calculation to covered entities and that payment is due no later than September 30th.

If you’re not familiar with the Branded Prescription Drug Fee, it could be that your company doesn’t manufacture branded prescription drugs, or your company hasn’t had more than $5 million in net federal government sales. Or maybe, this fee has been outside of your role/responsibility, so you haven’t seen it in the past.

Either way, this overview of the fee and how it works will enhance your understanding and eliminate potential confusion should you receive an invoice in the future.

OVERVIEW

The Branded Prescription Drug Fee originated from the Affordable Care Act. It imposes a fee on each covered entity that manufactures or imports branded prescription drugs and sells to the federal government. The government programs considered are Medicare Part B, Medicare Part D, Medicaid, the Department of VA, the Department of DOD, and Tricare.

Drug manufacturers who receive a fee calculation should receive a preliminary notice in the mail in early March if there is a fee to be paid. This fee is quite different from other government fees that you might be used to paying, as it is structured similarly to paying a tax and is administered by the IRS

It’s important to note that this fee notice is delayed by a substantial period. For example, a fee for 2022 is actually based off the sales from 2020 (two calendar years ago).

WHAT TO EXPECT

Pharmaceutical manufacturers can expect the following unique elements:

  1.  The first fee that you owe will be inclusive of the fees owed for the year of utilization referenced in the letter and will also include estimated fees for the following year. In the example of the fee for 2022, the 2020 year’s sales will be used to calculate the current fee and that same fee must be paid in advance for the preliminary fee calculation for 2023’s invoice. This is similar in concept to prepaying your taxes to the IRS.
  2. After your initial fee is paid, the following year (in this example, 2023) will be calculated as taking the difference from the actual fee calculation (based off 2021 data) and the preliminary fee (based off 2020 data). Then, the IRS will add in the preliminary fee amount (based on the 2023 fee owed using the 2021 data) to determine the total fee amount owed for the current year (in this example, 2023).
  3. The fees vary based upon your sales to the government. Similar in nature to tax tiers, the fees that manufacturers pay are tiered based upon the volume of sales to the government. The calculation has five tiers of fees owed that range from $0 for sales less than $5 million, all the way up to taking into account 100% of the sales for manufacturers who sell more than $400 million worth of prescription drugs to the federal government in a year. Note that this doesn’t mean you pay everything back to the government – I’ll show an example of how this works later in the white paper.
  4. There is an established dollar amount that the government wants to collect from all branded drug manufacturers each year and the total of all fees paid will be equal to that. For all years following 2019, the IRS will collect a total target amount of $2.8 billion dollars from drug manufacturers.

EXAMPLE

Let’s use an example of a manufacturer who sells $175 million of branded prescription drugs to the federal government to show what this looks like. First, it’s important to understand those tiers that I talked about. Below is a table that shows what the government considers in its fee calculation.

Each covered entity’s branded prescription drug sales for the calendar year that are: Percentage of branded drugs sales taken into account is:
Less than $5 million 0%
$5 million or more, but less than $125 million 10%
$125 million or more, but less than $225 million 40%
$225 million or more, but less than $400 million 75%
$400 million or more 100%

With $175 million in sales as our example, here’s how we tier our calculation:

  • Less than $5 million in sales: $0
  • $5 million – $125 million in sales: $12 million ($120 million x 10%)
  • $125 million to $175 million in sales: $20 million ($25 million x 40%)

This means that of the $175 million in sales (in 2020), $32 million will get factored into the fee calculation. Next comes the actual calculation. The fee owed is going to be the manufacturer’s allocation divided by the total branded prescription drug sales for all manufacturers. That gets multiplied by the total fee that the IRS wants to collect ($2.8 billion) to determine the drug manufacturer’s responsibility for that year.

Branded Prescription Drug Fee Example

In this example, the total fee owed for the current year (2022 in this example) would be $616,000. If this was the first time the manufacturer was paying, it would owe this fee plus an additional $616,000 for the preliminary fee for the following year of sales. Meaning in 2022, this manufacturer would owe $1,232,000 to the IRS.

In 2023, if a fee of $700,000 was owed, the manufacturer would owe $700,000 for the current year which is then reduced by $616,000 in prepaid fees. Then, we would add an additional $700,000 to the fee to cover the preliminary fee for the following year, resulting in the manufacturer owing a total of $784,000 in 2023.

Once validated and calculated, all fees must be paid by September 30th using an electronic funds transfer. The system that is used for submitting payroll taxes will be used for this payment as well.

NEED SUPPORT?

Make sure you have a knowledgeable team or partner to support this critical calculation.

Prescription Analytics is accustomed to helping clients navigate and validate the Branded Prescription Drug Fee, as well as many other challenging government programs. Please contact us if you would like some support or simply have questions.

Jeremy LaJoice - Prescription Analytics

Jeremy LaJoice
Chief Compliance Officer