Insights and Analysis

2026 Medicare Physician Fee Schedule Final Rule adopts some but not all Average Sales Price proposals and revised Medicare Inflation Rebate regulations

05 November 2025

On October 31, 2025, the Centers for Medicare & Medicaid Services (CMS) issued the physician fee schedule (PFS) final rule for calendar year (CY) 2026 (Final Rule). It has been several years since this annual rulemaking included much detail on average sales price (ASP) reporting, despite the fact that ASP is commonly used as the basis of payment under the PFS. This year it did. The CY 2026 proposed rule proposed a number of changes to the calculation and reporting of ASP, including the treatment of maximum fair price (MFP) transactions in ASP, the definition of bona fide service fee (BFSF), the definition of “bundled sale” arrangements, and new ASP calculation documentation and submission requirements. The Final Rule finalized many of those proposals but notably backed away from or modified others. Among other things, the Final Rule did not finalize several of CMS's previously proposed changes to the BFSF definition. Separately, CMS also revised the regulations governing Medicare Part B and Part D inflation rebates, including largely finalizing a proposed methodology for excluding 340B units from Part D inflation rebate calculations. The Final Rule is effective January 1, 2026.

The PFS Final Rule is published online here, with a CMS fact sheet here. For background, the PFS proposed rule is available here, with a fact sheet here, and our alert on the proposed rule is available here. In our alert on the proposed rule, we also addressed certain proposals under the outpatient prospective payment system (OPPS) for CY 2026. The OPPS has not yet been finalized for CY 2026.

One final note: the Final Rule is over a thousand pages long. Most of its contents are not related to federal government price (GP) reporting. We are highlighting here only the key GP and Medicare inflation rebate components of this Final Rule.

Chapter 1 MFP Units Included in ASP

Proposed Rule: CMS stated it was “clarifying” two issues with respect to the MFP applicable to selected drugs under the Drug Price Negotiation Program:
- CMS stated that MFP units should be included in the calculation of a manufacturer’s ASP given their inclusion in the calculation of Best Price (BP).
- When CMS publishes the payment limits for Part B drugs in quarterly pricing files going forward, which typically are based on ASP, CMS instead would publish an MFP-based payment limit for a selected drug. As a result, there would no longer be a published ASP-based payment limit for a selected drug while it is subject to an MFP.
Final Rule: Adopted as proposed. CMS reiterated its purported “clarifications” to include MFP units in ASP and publish an MFP-based payment limit for each selected drug, without a corresponding ASP-based payment limit. CMS acknowledged feedback from commenters while noting that it did not make a proposal or solicit comments on the clarifying policy statements. CMS rebranded the quarterly pricing files commonly referred to as the “ASP drug pricing file.” Because the file contains payment limits based on pricing metrics other than ASP, going forward the published file will now be referred to as the Medicare Part B Drug Payment Limit File.

Chapter 2 New ASP Reasonable Assumption and Documentation Submission Requirements

Proposed Rule: The PFS proposed rule acknowledged that, historically, manufacturers could voluntarily submit their ASP reasonable assumptions to CMS. Going forward, CMS proposed the mandatory submission of reasonable assumptions on a quarterly basis as part of the ASP reporting process. This change is notable given the Medicaid Drug Rebate Program (MDRP) has long discouraged manufacturers from submitting their reasonable assumptions to that program. In addition to the mandatory submission of a manufacturer’s ASP reasonable assumptions more generally, the PFS proposed rule specifically called out two new categories of documentation to be submitted:
- Reasonable assumptions submissions, including documentation of the FMV analysis for BFSFs: The reasonable assumptions in support of ASP would also need to “includ[e] documentation of the methodology used to determine fair market value [(FMV)] and periodic reviews of fair market value.”
- “Pass-through” compliance certifications: CMS proposed “that it is no longer appropriate that a manufacturer may presume, in absence of any evidence or notice to the contrary, that a fee paid is not passed on to an affiliate, client, or customer of any entity.” Instead, CMS proposed that “the manufacturer be responsible for obtaining a certification or warranty from the entity receiving the fee stating that such fee will not be passed on to an affiliate, client, or customer of any entity.” The submitted reasonable assumptions would also have to include the “certification letter from the recipient of a bona fide service fee . . . as evidence that the fee is not passed on in whole or in part to an affiliate, client or customer of the recipient of the fee, whether or not the entity takes title to the drug.”
Final Rule: CMS finalized the mandatory submission of reasonable assumptions, including FMV documentation and pass-through compliance certifications, but made several modifications to the requirements to ease administrative burden and clarified submission of FMV documentation is not required on a quarterly basis.
- Reasonable assumptions submissions, including documentation of the FMV analysis for BFSFs: CMS clarified that FMV documentation will not be due quarterly but should be submitted for current, new, and renewed contracts. CMS added that “all FMV determinations for current contracts are due by April 30, 2026 with their submission of ASP for first quarter of sales in 2026.” To satisfy the FMV documentation requirement, CMS stated it will accept “well-detailed summaries of FMV methodologies that clearly describe the data sources, assumptions, and rationale supporting [FMV] determination[s].”
- “Pass-through” compliance certifications:
  - CMS finalized the requirement that reasonable assumptions include pass-through compliance certification letters. CMS stated that it disagreed with commenters that the required certification “would add substantive burden,” stating the agency’s belief that this measure “is not a fundamental change . . . .” In response to comments “emphasiz[ing] that manufacturers cannot compel third-party vendors to provide certifications,” CMS stated: “Until we observe evidence that service providers are unwilling to provide such certifications, we do not find these concerns to be substantiated.” CMS did not address whether and how this new requirement applies to the BFSF test as applied under the MDRP.
  - In preamble guidance, CMS indicated this requirement will apply for new contracts (with submission as part of the quarterly ASP data submission). Specifically, CMS stated: “We are also finalizing as proposed to require certification letters from the recipient of a BFSF for prospective contracts” and that it agreed “that the proposed implementation timeline for the BFSF definition proposals does not provide sufficient time for manufacturers to make the necessary system and operational changes. Accordingly, we intend to address this policy area in rulemaking next year. To clarify, the proposed certification requirement applies to new contracts” (emphasis added).
  - As discussed in greater detail below, CMS did not finalize its proposal to extend the prohibition on pass-through of BFSFs to “affiliates.”
- CMS stated it will release mandatory templates for submitting reasonable assumptions and BFSF certifications at an unspecified time following the publication of the finalized rule, and we expect these templates would be subject to a notice and comment period under the Information Collection Request (ICR) process. CMS also stated it will protect information contained in the reasonable assumption letters “to the extent required by law.”
- In a different preamble section of the Final Rule, CMS went out of its way to clarify that: “The requirement that manufacturers submit their reasonable assumptions does not change that manufacturers are responsible for submitting accurate ASP reports, and that we rely on and uses manufacturers’ submission [sic]as submitted to calculate payment limits. 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. Manufacturers should not expect individual feedback from us on their reasonable assumptions submissions, nor should they interpret a lack of response from us as an approval of those submissions” (emphasis added).

Chapter 3 New ASP “Bundled Sale” Standards

Bundled Sale Definition for ASP:
- Proposed Rule: While this term has long been defined in Medicaid regulations for purposes of the Average Manufacturer Price (AMP) and BP calculations, CMS explicitly declined to adopt a definition of this term for purposes of the ASP calculation back in the CY 2007 PFS rulemaking. This year, CMS returned to this topic with the following proposals:
  - A definition that (almost) mirrors the Medicaid definition. CMS proposed to define a bundled sales arrangement for ASP purposes as “an arrangement regardless of physical packaging under which the rebate, discount, or other price concession is conditioned upon the purchase of the same drug or biological or other drugs or biologicals or another product or some other performance requirement (for example, the achievement of market share, inclusion or tier placement on a formulary, purchasing patterns, prior purchases), or where the resulting discounts or other price concessions are greater than those which would have been available had the bundled drugs or biologicals been purchased separately or outside the bundled arrangement.”
  - Reallocating all the discounts in the bundle could mean non-contingent discounts too. In terms of reallocating the discounts in the bundled sale, the proposed definition stated: “The discounts in a bundled arrangement . . . including those discounts resulting from a contingent arrangement, are allocated proportionately to the dollar value of the units of all drugs or products sold under the bundled arrangement.” In a parenthetical, CMS read this language to require that non-contingent discounts be allocated along with contingent discounts: (i.e., “the ‘unbundling’ of both contingent and non-contingent discounts is appropriate because ‘all the discounts’ in the bundled arrangement should be proportionally allocated”).
  - No guidance on VBPs. Finally, CMS expressly noted that it declined “to adopt the portion of the Medicaid definition of bundled sale stating that value-based purchasing arrangements may qualify as a bundled sale.” CMS indicated that it was still evaluating how these arrangements should be considered in ASP with respect to drugs payable under Part B.
- Final Rule: CMS finalized the “bundled arrangement” definition so that it largely mirrors the MDRP definition (removing the “purchasing patterns” and “prior purchases” references) but, unlike the MDRP definition, excludes any reference to VBPs. CMS was persuaded by commenters concerned with the inclusion of "purchasing patterns" and "prior purchases" as examples of performance requirements “not only because of misalignment with the MDRP,” which similarly does not include those examples in the definition, but also because “these words create ambiguity because they are not defined.” CMS added that “[i]t is our objective to adopt a consistent definition of bundled arrangements that is consistent with MDRP.”
  - As to reallocating all the discounts in the bundle, CMS was unclear in the preamble discussion but ultimately parroted the MDRP preamble language from the 2016 Covered Outpatient Drug Final Rule, stating that: “[W]e consider all drugs to be within the bundled sales if: (1) Any drug must be purchased to get a discount on any drug in the bundle regardless of whether any drug is purchased at full price; (2) there is a performance requirement (such as inclusion or tier placement on a formulary or achieving a certain level or percentage of sales for one drug to receive a discount on another drug); or (3) price concessions are greater than those which would have been available had the bundled drugs been purchased separately or outside the bundled arrangement.”
  - As to VBPs, a commenter “recommended CMS consider monitoring for the prevalence of value-based purchasing arrangements via the reasonable assumptions manufacturers submit to CMS.” In response, CMS stated that it intends to review reasonable assumptions to monitor the policy and may follow up with manufacturers if the agency has concerns with their reasonable assumptions.

Chapter 4 Other Proposed BFSF Standards Not Finalized

BFSF Test and Other Documentation Requirements for ASP: As a reminder, a BFSF currently is defined in ASP regulation as follows: “[F]ees paid by a manufacturer to an entity, that represent [FMV] 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.” CMS proposed, but did not finalize, a number of changes to that BFSF definition for purposes of ASP, including the creation of certain documentation requirements, namely:
- Specific requirements as to the type of FMV methodology that must be used, based on the type of fee arrangement.
  - Proposed Rule:
    - For “fees paid by a manufacturer to an entity that do not vary directly with the amount of drug sold or price of a manufacturer’s drug, fair market value must be determined either based on comparable market transactions that generally reflect current market conditions or the cost of the service plus a reasonable markup to the total cost” (emphasis added).
    - For fees “that vary directly with the amount of drug sold or price of a manufacturer’s drug, the fair market value must be determined by using the cost of the service and adding a reasonable markup to the total cost,” except where a “material portion of cost data is not available” in which case “manufacturers should follow a market-based approach based on verifiable market data until such time as sufficient cost data becomes available” (emphasis added). CMS further proposed that assessments for these types of fees must be performed by an independent third-party valuator.
  - Final Rule: CMS did not finalize these FMV requirements, agreeing with comments that it would have been time-intensive to implement a new FMV methodology under the proposed timeline and that more information is needed to determine which parties may determine FMV. CMS also “acknowledged” commenter concerns over whether it has the authority to adopt BFSF standards that conflict with those implemented under the MDRP. And CMS “encourage[d] 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.” CMS will use the information in the mandatory reasonable assumption submission to inform future policy development.
- FMV reassessments to occur at minimum with the renewal frequency of an agreement.
  - Proposed Rule: CMS proposed that FMV reassessments should be conducted and documented “at a frequency no less than the renewal frequency of the agreement (that is, annually for annual renewals).”
  - Final Rule: CMS did not finalize this requirement but intends to use the new mandatory reasonable assumption submission, discussed above, “to better understand the scope and frequency of FMV assessments.”
- Fees presumed to be price concessions instead of BFSFs.
  - Proposed Rule: CMS proposed that percentage-based fees and “fixed fees that are designed in such a way as to approximate percentage-based fees” are presumed to be price concessions unless such fees are determined to be BFSFs. Specifically, CMS proposed to add to the list of price concessions in the ASP calculation regulation “[f]ees paid by a manufacturer to an entity that vary directly with the amount of the manufacturer’s drug sold or price of a manufacturer’s drug unless it meets the definition of [BFSF].”
  - Final Rule: CMS did not finalize this addition to the regulatory list of ASP-eligible price concessions or the proposed presumption of non-bona fide status. CMS did not discuss specific comments or otherwise explain its decision to not finalize the proposal but stated that it “will take these comments and the related issues under consideration in future rulemaking.
- Expansion of entity types to which the pass-through prohibition applies.
  - Proposed Rule: CMS clarified that a BFSF “must not be passed on in whole or in part to an affiliate, client, or customer of an entity whether or not the entity takes title to the drug,” adding the term “affiliate” to the BFSF definition. CMS specified in the preamble to the proposed rule that an affiliate “means an affiliate of an entity that is receiving the fee the tis [sic] providing the service.”
  - Final Rule: CMS did not finalize the application of the pass-through prong to “affiliates” but will further engage with manufacturers on this issue. CMS acknowledged commenters’ concerns that the proposed expansion would be “overly broad, ambiguous, and unauthorized,” and that “unclear definitions could disrupt legitimate business arrangements and conflict with MDRP treatment of affiliates.”
- CMS’s position on specific categories of fees that it believes do not qualify as BFSFs.
  - Proposed Rule: CMS staked out its position that certain categories of fees do not qualify as BFSFs, indicating that:
    - Credit card fees paid for by manufacturers when customers use credit cards to purchase the manufacturer’s product(s) do not qualify as BFSFs.
    - In relation to cell and gene therapies in particular, “any payment by the manufacturer to an entity for tissue procurement is not considered a BFSF” (emphasis added).
    - Certain data sharing fees should not qualify as BFSFs because they appear to exceed FMV or “because the data is required for legal compliance and audit purposes under the services agreement.”
    - Certain fees for distribution services that CMS believes appear to exceed FMV.
  - Final Rule: CMS did not finalize the list of fee examples and how they should be considered in the ASP calculation. CMS specifically reversed its position on tissue procurement fees for cell and gene therapies, agreeing with commenters that, if the four-part BFSF test is met, such fees “are not discounts or rebates that reduce the cost to the purchaser.” CMS further noted that “[w]e do not agree that we have not provided sufficient justification for excluding credit card fees to distributors as BFSFs.” However, as with all of other categories of fees in the proposed rule, the agency was “persuaded by some of the commenters’ concerns that providing examples of fees could have unintended implications” and therefore did not finalize its proposal.

Chapter 5 Medicare Inflation Rebate Programs

Part B Inflation Rebates:
- Calculation of the benchmark quarter payment amount.
  - Proposed Rule:
    - CMS proposed that where data needed to calculate the benchmark quarter payment amount is not available, it would use the “third full calendar quarter after a drug is assigned a billing and payment code as the payment amount benchmark quarter, no earlier than the calendar quarter beginning July 1, 2021, or the third full calendar quarter after such drug’s first marketed date, whichever is later.”
    - CMS also proposed new policies governing the calculation of the payment amount in the payment amount benchmark quarter if a published payment limit is not available:
      - “If a published payment limit is not available for the applicable payment amount benchmark quarter, CMS calculates the payment amount in the payment amount benchmark quarter using positive ASP or positive WAC data from the ASP Data Collection System.”
      - If such data is also not available, “CMS calculates the payment amount in the payment amount benchmark quarter using WAC data from other public sources.”
  - Final Rule: CMS finalized the calculations as proposed. CMS also clarified that, consistent with CY 2025 PFS Final Rule, it will not, at this time, “include [Medicare Advantage (MA)] units in the calculation of the Part B rebates due to operational considerations.”
- Drugs covered as additional preventive services (DCAPS).
  - Proposed Rule: CMS proposed to clarify that DCAPS meet the definition of a Part B rebatable drug and are therefore eligible for Part B inflation rebates.
  - Final Rule: CMS finalized the policy as proposed.
Part D Inflation Rebates:
- Exclusion of 340B units. Beginning January 1, 2026, 340B units are required to be excluded from the Part D rebate calculation. In the CY 2024 PFS Final Rule, CMS backed away from a proposal to exclude 340B units from the Part D inflation rebate using an estimation methodology. Instead, CMS explained that it would consider several other proposals including establishing a 340B repository. This year’s proposed rule included both a proposed methodology for estimating 340B units and the establishment of a voluntarily claims repository.
  - Claims-based methodology.
    - Proposed Rule: CMS proposed to employ a claims-based methodology to estimate and remove 340B units. Specifically, CMS would evaluate whether a Prescription Drug Event (PDE) record is potentially 340B-eligible based on: “(1) the affiliation of the National Provider Identifier (NPI) of the prescriber associated with that PDE record with a registered 340B covered entity, and (2) the designation of the dispensing pharmacy associated with that PDE as a 340B contract pharmacy.”
      - CMS acknowledged that the 340B Office of Pharmacy Affairs Information System (OPAIS) database may not list all pharmacies that dispense 340B drugs, including covered entity in-house pharmacies that are not registered in the database or AIDS Drug Assistance Programs (ADAPs) that collect 340B rebates, and solicits comments on how best to account for this limitation in identifying 340B dispenses.
      - CMS proposed to establish a list of providers considered to be 340B-affiliated as follows:
        
        First, CMS would create a list of prescriber NPIs from PDE records that contain dates of service within each applicable period, generated at the prescriber-month level.
        
        Next, CMS would crosswalk the list of prescriber NPIs and months to the provider fields located on Medicare Fee-For Service (FFS) Part A inpatient claims and Part B outpatient claims and professional claims in order to identify the Medicare Provider Numbers (MPNs) for which each prescriber NPI billed in each month they were active in the PDE data.
        
        The list of prescriber NPI and MPN combinations would then be filtered using the OPAIS database, which lists the available MPNs for 340B covered entity.
        
        Finally, “[e]ach prescriber NPI affiliated with an MPN that was also an active 340B covered entity listed on the OPAIS database for that particular month would be considered a 340B-affiliated prescriber for the month within the applicable period.”
      - CMS acknowledged several scenarios where this methodology may be limited in identifying 340B-affiliated providers, such as where a covered entity does not have an MPN or report such MPN in OPAIS, and proposed several alternative measures aimed at addressing these concerns.
      - CMS proposed to develop a list of contract pharmacies by identifying registered contract pharmacies that have an active agreement with a covered entity on OPAIS. CMS would then merge pharmacy NPIs onto a file list using names and address fields reported to National Council for Prescription Drug Programs (NCPDP). CMS also proposed to utilize a matching algorithm and conduct a manual review of the list to identify and correct any errors or omissions.
    - Final Rule: CMS largely finalized the claims-based methodology as proposed but made modifications to reduce potential undercounting of the 340B units to be removed.
      - In addition to filtering NPI and MPN combinations using the 340B OPAIS database, CMS “will additionally engage in mapping 340B OPAIS-provided organizational NPIs to corresponding individual NPIs and MPNs using data sources such as the CMS Integrated Data Repository to establish a supplemental list of prescriber NPIs associated with covered entities.”
      - As to identifying contract pharmacies, CMS adopted an approach suggested by commenters to identify additional pharmacies, including in-house pharmacies and pharmacies that are not registered as contract pharmacies in the 340B OPAIS database but dispense 340B drugs on behalf of covered entities. Specifically, CMS will use the “Shipping Addresses” listed for each covered entity in the OPAIS database as an additional location that may dispense 340B-eligible drugs on behalf of the covered entity. CMS chose to make the above modifications to the claims-based methodology instead of adopting any of the proposed alternative measures.
  - Claims data repository.
    - Proposed Rule:
      - CMS also proposed to establish a 340B claims data repository for covered entities to voluntarily submit Part D claims with dates of service on or after January 1, 2026, which CMS said would allow the agency to begin testing the feasibility of the repository. CMS proposed that entities participating in the 340B repository would be required to submit five data elements: (1) Date of Service; (2) Prescription or Service Reference Number; (3) Fill Number; (4) Dispensing Pharmacy NPI; and (5) NDC-11.
      - CMS also issued an ICR regarding the data elements for the 340B repository.
    - Final Rule: CMS finalized its policy to establish a 340B claims data repository. CMS clarified that it “will not use the data submitted during the testing period to remove units from Part D inflation rebates unless and until a policy to do so is proposed and finalized.” In addition to the above data elements, CMS is also requiring entities that participate in the repository submit “information identifying the covered entity . . . such as the covered entity’s 340B ID and name as designated in the 340B OPAIS database.”
      - CMS reiterated that it is actively monitoring options for mandatory reporting to the 340B repository in the near future.
      - CMS also issued an updated ICR regarding the data elements for the 340B repository, available here.
- Other changes.
  - Proposed Rule: CMS proposed several other changes and clarifications related to calculation of Part D inflation rebates, including clarifying that the payment amount benchmark period for subsequently approved drugs cannot precede the benchmark period.
  - Final Rule: CMS finalized these changes and clarifications as proposed.

Chapter 6 Skin Substitutes

Proposed Rule: CMS proposed several changes related to reimbursement for skin substitute products, including a significant change that would make ASP reporting voluntary for many skin substitute manufacturers. CMS proposed to change the payment methodology for certain (non-BLA) skin substitutes by separately paying for the products as “incident-to” supplies. Currently, skin substitutes are paid under Medicare Part B as biologicals and thus are subject to ASP reporting requirements. The proposed change would mean that manufacturers of products subject to the new payment methodology would no longer be required to report ASP to CMS.
- The change would impact skin substitute products other than those licensed as biologics by the Food and Drug Administration (FDA) and would apply to products used during covered application procedures in both the non-facility and hospital outpatient settings.
- CMS proposed assigning products to one of three payment categories based on their FDA regulatory pathway: (1) products regulated as “361 HCT/Ps” (products regulated solely under Section 361 of the Public Health Services Act), (2) medical devices requiring 510(k) clearance, and (3) products subject to FDA premarket review. CMS proposed calculating the initial payment rate based on the highest volume-weighted ASP for the products in each category (or mean unit cost (MUC), if ASP is not available). CMS proposed the same initial payment rate for all three categories for CY 2026 with payment rates for subsequent years to be set for each category annually through rulemaking. Updated rates will be set using one or more recently available quarter(s) of ASP data. If ASP data is not available for a particular product, CMS proposed to use hospital outpatient MUC data, or the product’s WAC, or 89.6 percent of average wholesale price, in that order depending on which data is available.
Final Rule: CMS finalized these changes as proposed. CMS finalized the initial payment rate for skin substitute products other than those licensed as biologics at $127.28/cm². Policy details applicable to the hospital outpatient setting will be addressed in the CY 2026 OPPS Final Rule, which is expected to be released imminently. In preamble, CMS stated: “The Consolidated Appropriations Act, 2021, Pub. Law 116–260, division CC, section 401(c), amended section 1847A(f)(A) to state that, manufacturers of drug or biological including items, services, supplies, and products that are payable under Medicare Part B as a drug or biological that have not entered into a National Medicaid Drug Rebate Agreement are required to report ASP (and WAC) data to CMS. Under this policy, as finalized, skin substitute products (other than those approved via BLA under section 351 of the PHS 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” (emphasis added).

Chapter 7 Next steps

As always, it is important that you carefully review the Final Rule in light of considerations that may be relevant to your organization and specific drugs. Please feel free to contact the Hogan Lovells Health Team if you have any questions or concerns.

Authored by Alice Valder Curran, Maura Calsyn, Samantha D. Marshall, Kathleen Peterson, Mahmud Brifkani, Caroline Farrington, Xochitl Halaby, and Sydney Fay.