IRS Issues Notice to Implement Annual Fee on Brand Drugs

By Alan M. Kirschenbaum –

Individuals may have their tax cuts extended, but a new tax on the drug industry is about to begin in 2011, and the IRS has issued a notice to implement it.  As we explained in our summary of the Patient Protection and Affordable Care Act ("ACA"), the ACA imposes an industry-wide tax on companies that manufacture or import branded prescription drugs or biologics (i.e., those approved under an NDA or BLA) for sale in the U.S.  The aggregate annual fee for all such companies is specified in the statute, and ranges from $2.5 billion to $4.1 billion each year, then remains at $2.8 billion in 2019 and subsequent years.  Each manufacturer’s share of the fee is based on the ratio of its branded drug sales to the branded drug sales of all covered entities during the prior year.  Branded drug sales are sales of brand (i.e., NDA or BLA) prescription drugs (excluding orphan drugs) made to or reimbursed by Medicare, Medicaid, the Department of Veterans Affairs ("VA"), the Department of Defense ("DoD"), and the TRICARE retail pharmacy program. 

On November 27, the IRS issued Notice 2010-71 explaining how the drug industry fee will be implemented.  Although the statute specifies that the fee is to be based on sales during the prior year, the Notice explains that CMS is unable to provide data on Medicaid and Medicare drug utilization during a calendar year in time to set the fee for the following year.  Therefore, the sales used to establish the fee for any calendar year will be sales for the second year preceding the fee year – in other words, the sales data will be two years old.  To address the problem of basing the fee on data that is somewhat stale, the IRS proposes an adjustment to the fee that is derived from the increase (or decrease) in a company’s sales from the third to second year preceding the fee year.  Perhaps the IRS reasons that, if a drug’s sales increased (or decreased) between those two years, this justifies a presumption that sales continued to increase (or decrease) from the second to the first year preceding the fee year, so that the sales data from the second preceding year should be adjusted upward (or downward) to set the fee.

The Notice describes how sales to the VA, DOD, Medicaid, and Medicare Parts B and D will be calculated.  A company’s sales will be reduced by rebates the company paid to Medicaid (i.e., the Medicaid rebate but not Medicaid supplemental rebates) and Medicare Part D plans. 

Issued with the Notice was Form 8947, which covered manufacturers must submit to the IRS by January 20, 2011 to provide corporate information and data on orphan drugs, rebates paid to Part D plans, and other drug information.  The IRS will then provide each covered manufacturer with a preliminary fee calculation by May 2, 2011.  Comments on the Notice will be accepted until June 2, 2011, after which a final Notice will be issued.  A final fee calculation (taking into account any methodology changes) will be sent to manufacturers by August 15, 2011.