n-10-71.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Branded Prescription Drug Sales

Notice 2010-71

This notice provides guidance on the annual fee imposed on covered entities
engaged in the business of manufacturing or importing branded prescription drugs by
section 9008 of the Patient Protection and Affordable Care Act (ACA), Public Law 111-
148 (124 Stat. 119 (2010)), as amended by section 1404 of the Health Care and
Education Reconciliation Act of 2010 (HCERA), Public Law 111-152 (124 Stat. 1029
(2010)). All references in this notice to section 9008 are references to section 9008 of
the ACA, as amended by section 1404 of HCERA.
Part I of this notice describes a proposed methodology for calculating the section
9008 fee. Part II of this notice describes how the Internal Revenue Service (IRS) will
use this proposed methodology to provide each covered entity with a preliminary 2011
fee calculation. The IRS and Treasury Department intend that a covered entity’s
preliminary fee calculation for 2011 will serve as a basis for comments by the covered
entity on the proposed methodology. Part III of this notice solicits public comments on
all aspects of the notice.

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Part I – Proposed Methodology for Calculating the Fee
Section 9008(b)(4) sets an applicable fee amount for each year, beginning with
2011, that will be allocated among covered entities with aggregate branded prescription
drug sales of over $5 million to specified government programs or pursuant to coverage
under such programs. Section 9008(e)(2) provides that “branded prescription drug”
means (i) any prescription drug the application for which was submitted under section
505(b) of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 355(b)), or (ii) any
biological product the license for which was submitted under section 351(a) of the
Public Health Service Act (42 U.S.C. 262(a)). The specified government programs are
the Medicare Part B program, the Medicare Part D program, the Medicaid program, any
program under which branded prescription drugs are procured by the Department of
Veterans Affairs, any program under which branded prescription drugs are procured by
the Department of Defense, and the TRICARE retail pharmacy program (collectively,
the Programs). The applicable fee amount is allocated among the covered entities
using a formula specified in section 9008(b) based on sales to the Programs, which
sales data is to be provided by the Centers for Medicare and Medicaid Services of the
Department of Health and Human Services (CMS), the Department of Veterans Affairs
(VA), and the Department of Defense (DOD) (collectively, the Agencies).
There are two years relevant to the calculation of the section 9008 fee – the
calendar year in which the fee must be paid (herein referred to as the fee year) and the
calendar year of the branded prescription drug sales, which will be used to determine
the amount of the fee (herein referred to as the sales year). As discussed more fully

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below, the IRS and Treasury Department are proposing to use the second calendar
year preceding the fee year as the sales year for purposes of calculating the section
9008 fee. An adjustment amount will also be calculated as discussed below.
Definition of Covered Entity

Section 9008(a) imposes the fee on each covered entity engaged in the business
of manufacturing or importing branded prescription drugs. Section 9008(d)(1) defines a
covered entity as “any manufacturer or importer with gross receipts from branded
prescription drug sales.” For purposes of section 9008(a), a manufacturer or importer is
the person identified in the Labeler Code of the National Drug Code (NDC) for a
branded prescription drug. The NDC is an identifier assigned by the Food and Drug
Administration (FDA) to a branded prescription drug, as well as other drugs. The
Labeler Code is the first five numeric characters of the NDC or the first six numeric
characters when the available five-character code combinations are exhausted.
Section 9008(d)(2) provides a controlled group rule under which all persons
treated as a single employer under section 52(a), 52(b), 414(m), or 414(o) of the
Internal Revenue Code (Code) shall be treated as a single covered entity. For this
purpose, a foreign entity subject to tax under section 881 is included within a controlled
group under section 52(a) or 52(b). This controlled group rule will be applied as of the
end of the day on December 31 of the sales year. All persons treated as a single
employer under section 9008(d)(2) are jointly and severally liable for the fee. See
section 9008(d)(3).
In the case of a controlled group that is treated as a single covered entity under

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section 9008(d)(2), the controlled group must identify a single person as the “designated
entity” that may act for the controlled group with respect to the section 9008 fee. If the
controlled group, without regard to foreign corporations included under section
9008(d)(2)(B), is also an affiliated group that filed a consolidated return for federal
income tax purposes, the designated entity is the common parent of the affiliated group
as identified on the tax return filed for the sales year. In all other situations, the
controlled group must select a person as the designated entity on Form 8947, Report of
Branded Prescription Drug Information
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(discussed further below), which is signed by
the designated entity under penalties of perjury, stating that all the manufacturers or
importers of branded prescription drugs who are members of the covered entity have
consented to the selection of the designated entity.
Sales Taken Into Account

Section 9008(b) provides that the annual fee for each covered entity is calculated
by determining the ratio of (i) the covered entity’s branded prescription drug sales taken
into account during the preceding calendar year to (ii) the aggregate branded
prescription drug sales taken into account for all covered entities during the same year,
and applying this ratio to the applicable amount as specified in the statute. “Sales taken
into account” means sales exclusive of certain orphan drugs and after application of the
percentage adjustment table in section 9008(b)(2). Section 9008(b)(1) provides that the
calculation of the fee in any given year is based on branded prescription drug sales in
the immediately preceding calendar year.

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The Office of Management and Budget approved Form 8947 under control number 1545-2192.

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Section 9008(b)(3) provides that the Secretary of the Treasury shall determine
the amount of each covered entity’s fee. In determining that amount, the Secretary may
rely on reports submitted by the Agencies and any other source of information. Section
9008(i) also provides the Secretary with regulatory authority to carry out the purposes of
the statute.
The IRS and Treasury Department have determined that, although the DOD and
VA are expected to have complete data on branded prescription drug sales for the
calendar year immediately preceding the fee year within the time frame necessary to
administer the fee, CMS is not expected to have comparable data because it cannot
complete its data processing within the necessary time frame. Accordingly, the IRS and
Treasury Department will calculate the fee based on the branded prescription drug
sales data provided by the Agencies for the second calendar year preceding the fee
year. Because the use of the second preceding year, rather than the immediately
preceding year, as the sales year may affect the amount of the fee paid by any
particular covered entity, the fee due in every year after 2011 will include an adjustment
amount.
Adjustment Methodology

An adjustment amount will be calculated for each NDC and will be added or
subtracted, as appropriate, to the fee otherwise payable by the covered entity
responsible for the NDC in the fee year in which the adjustment is calculated. The
adjustment amount added or subtracted to the amount payable in a fee year will reflect
the difference between the fee determined for the NDC in the immediately prior fee

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year, using data from the second calendar year preceding that fee year, and what the
fee for that NDC would have been for the immediately prior fee year using data from the
calendar year immediately preceding that prior fee year. For example, the amount due
from a covered entity in the 2012 fee year will include an adjustment amount for each
NDC for which the covered entity is responsible in 2012 equal to the difference between
the 2011 fee associated with that NDC using 2009 data, and what the 2011 fee for that
NDC would have been using 2010 data.
To calculate the adjustment amount for an NDC, the IRS will first determine two
ratios: one based on data from the second preceding calendar year; and the other
based on data from the third preceding calendar year. In both cases, the numerator of
the ratio is the sales taken into account for the particular NDC during the relevant
calendar year, and the denominator of the ratio is aggregate branded prescription drug
sales taken into account for all NDCs during the relevant calendar year. For each NDC,
the IRS will then take the difference between the ratio using second preceding year data
and the ratio using third preceding year data and multiply that amount by the applicable
amount of the fee for the relevant fee year, as set forth in section 9008(b)(4), to
determine an adjustment for the NDC. The adjustment amount for any particular NDC
will then be added to, or subtracted from, as appropriate, the amount of the fee
otherwise payable by the covered entity associated with the NDC for the fee year in
which the adjustment amount is calculated.
For example, in 2012 the fee payable by each covered entity will consist of two
components. First, the applicable amount for 2012 will be allocated to the covered

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entities based on sales data for 2010 (i.e., the second preceding calendar year).
Second, an adjustment amount will be calculated in 2012 for each NDC with respect to
the 2011 fee year, by multiplying (i) the difference between the sales ratio determined
using 2010 data and the sales ratio determined using 2009 data by (ii) the applicable
amount of the fee for 2011. The adjustment amount for each NDC will then be added
to, or subtracted from, as appropriate, the fee otherwise payable in 2012 by the covered
entity associated with the NDC for the 2012 fee year.
The adjustment amount is applied only with respect to the amount of the fee
otherwise payable by the relevant covered entity in the year in which the adjustment is
calculated, and is not a refund, credit, or recalculation of a fee payable by any covered
entity in any preceding fee year. In any given fee year, the amount assessed by the
IRS will be based on data provided to it by the Agencies. The IRS does not intend to
recalculate either the fee allocations or the adjustment amounts based on data that
becomes available after those amounts are assessed.
Information Requested from Covered Entities

Annually, each covered entity should submit a Form 8947 and provide the
information specified by the form and instructions. The designated entity for a covered
entity described in section 9008(d)(2) submits a single form for the covered entity. A
covered entity should submit a completed Form 8947 by December 15 of each year
unless an alternative date is prescribed by the form or instructions. The Form 8947
information is return information subject to the confidentiality protections of section
6103. Form 8947
is available at http://www.irs.gov.

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Form 8947 solicits the following information from each covered entity:
1. For a single-person covered entity, the covered entity’s name, address, and
employer identification number. For a covered entity described in section 9008(d)(2),
the name, address, and employer identification number of the designated entity and
each manufacturer or importer with gross receipts from the sale of branded prescription
drugs that was included in the covered entity as of the end of the day on December 31
of the sales year.
2. All of the NDCs for branded prescription drugs in which the covered entity is
identified in the labeler code as of the end of the day on December 31 of the sales year.
For a covered entity described in section 9008(d)(2), this includes all NDCs in which a
member of the covered entity is identified in the labeler code as of the end of the day on
December 31 of the sales year.
3. The brand name and NDC for each orphan drug for which the covered entity
was allowed a section 45C credit. For purposes of section 9008(e)(3), the credit was
“allowed” for any particular drug if the covered entity claimed the credit and there has
not been a final assessment or a court order disallowing the full credit taken for the
drug. In addition, even if the credit has been allowed, a covered entity must not report
an NDC for an orphan drug for any sales year following the calendar year in which the
FDA approved the drug for marketing for any indication other than the treatment of the
rare disease or condition for which the section 45C credit was allowed.
4. The rebates for each NDC paid in the sales year by the covered entity to
Medicare Part D with respect to sales occurring in that sales year. For this purpose, a

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rebate is considered paid in the sales year if it is taken into account on the covered
entity’s tax return(s) for the sales year. This information is needed for the 2009 sales
year because, at this time, CMS does not have rebate data on branded prescription
drug sales by NDC. However, starting in 2011, CMS is planning to collect this rebate
information by NDC for the 2010 and subsequent sales years. It is therefore possible
that covered entities will not report this rebate information for years following 2009.
5. The state supplemental rebates for each NDC paid in the sales year by the
covered entity with respect to sales under Medicaid occurring in that sales year. For
this purpose, a rebate is considered paid in the sales year if it is taken into account on
the covered entity’s tax return(s) for the sales year. This information is needed because
Medicaid data will not include state supplemental rebates.
Information Provided by the Agencies

The IRS will compile a list of branded prescription drugs by NDC using the data
submitted on Forms 8947. Appropriate due diligence will be performed to check for
potential oversights. For example, the IRS may use information published by the FDA
identifying drugs for which applications were submitted under section 505(b) of the
Federal Food, Drug, and Cosmetic Act. The IRS will provide the Agencies with the
compiled list of branded prescription drugs.
For each year in which the fee is due, the Agencies will provide data to the IRS
on the branded prescription drug sales during the sales year by Program and NDC.
The calculation methodology for each Program, including any reasonable estimation
techniques and assumptions that the Agencies expect to use, are described below.

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1. Medicare Part D. Section 9008 requires CMS to report the product of the per-
unit ingredient cost reported by Part D sponsors (net of any per-unit rebate or other
price concessions) and the number of units for each branded prescription drug. CMS
currently collects prescription level encounter data from Part D sponsors on the
Prescription Drug Event (PDE) records. On the PDE records, Part D sponsors report
the NDC, as well as the ingredient cost, dispensing fee, sales tax, and units. CMS will
aggregate the ingredient cost reported in the “Ingredient Cost Paid” field and the units
reported in the “Quantity Dispensed” field of the PDE records for Part D covered drugs.
These amounts will be aggregated at the NDC level for each sales year. Only PDE
data that Part D sponsors have submitted by the PDE submission deadline (within 6
months after the end of the sales year) and have been approved for inclusion in the Part
D payment reconciliation will be included.
2. Medicare Part B
. First, for Healthcare Common Procedure Coding System
(HCPCS) codes that consist solely and exclusively of branded prescription drugs (as
identified by their respective NDCs) manufactured by a single entity, CMS will provide
the total Medicare-allowed charges for the HCPCS code for the appropriate sales year.
Second, for HCPCS codes consisting of a mixture of branded prescription drugs
made by different manufacturers or a mixture of branded prescription and generic drugs,
CMS will determine: (i) the total Medicare-allowed charges for the HCPCS code for the
appropriate sales year; (ii) the entities engaged in manufacturing each NDC assigned to
the HCPCS code; and (iii) those entities (if any) that are manufacturing branded
prescription drugs. CMS will then: (i) estimate the amount of Medicare-allowed charges

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for each manufacturer by applying the utilization percentage attributed to each
manufacturer as determined under the Medicare Part B Program using manufacturer
reported Average Sales Price sales data; (ii) multiply that percentage by the Medicare-
allowed charge for that HCPCS code; and (iii) assign the result to each manufacturer
within that HCPCS code.
Third, for the remainder of HCPCS codes that consist of multiple branded
prescription drugs (as identified by their respective NDCs) manufactured by multiple
entities that cannot be reliably calculated using the two methods above, CMS will
determine: (i) the total Medicare-allowed charges for the HCPCS code for the
appropriate sales year; (ii) the entities engaged in manufacturing each NDC assigned to
the HCPCS code; and (iii) those entities (if any) that are manufacturing branded
prescription drugs. CMS will then: (i) estimate the amount of Medicare-allowed charges
for each manufacturer by applying the utilization percentage attributed to each
manufacturer as determined under the Medicare Part D Program; (ii) multiply that
percentage by the Medicare-allowed charge for that HCPCS code; and (iii) assign the
result to each manufacturer within that HCPCS code.
Thus, the amounts attributed to branded prescription drugs within the HCPCS
code will be estimated. CMS will calculate the sum of these components to arrive at an
estimate of Medicare Part B spending on branded prescription drugs for each
manufacturer.
3. Medicaid
. The branded prescription drug sales for Medicaid may be
determined as the per-unit Average Manufacturer Price less the Unit Rebate Amounts

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(URA) that CMS calculates based on manufacturer-reported pricing data multiplied by
the number of units reported billed by states to manufacturers. This data would be
based on the data reported to Medicaid by covered entities and the states. CMS does
not currently intend to reduce this calculation for state supplemental rebates.
4. Department of Veterans Affairs
. VA will provide, by NDC, the total amount
paid for each branded prescription drug procured by the VA for its beneficiaries. The
basis of this information will be national procurement data reported by VA’s
Pharmaceutical Prime Vendor to the VA Pharmacy Benefits Management Service and
National Acquisition Center. This information will not include procurement data that
resides exclusively at the individual medical treatment facility level.
5. Department of Defense
. The DOD will provide, by Labeler Code, the
manufacturer’s name, the NDC, brand name, and the amount paid (net of rebates) for
each branded prescription drug procured by DOD. TRICARE Management Activity will
provide, by Labeler Code, the manufacturer’s name, the NDC, brand name, and the
amount paid (net of refunds or rebates) for each branded prescription drug procured by
DOD through the TRICARE Retail Pharmacy Program.
Fee calculation

After receiving data from the Agencies and information from the covered entities,
the IRS will calculate each covered entity’s branded prescription drug sales for each
Program by NDC. A covered entity’s branded prescription drug sales for each Program
will equal (i) the sum of all the covered entity’s branded prescription drug sales reported
by the Program, less (ii) the sum of all branded prescription drug sales reported by the

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Program for each NDC for which the covered entity has appropriately claimed the
orphan drug exclusion, less (iii) the sum of rebates reported by the covered entity on
Form 8947 for the sales year.
After calculating the branded prescription drug sales for each Program, the IRS
will calculate each covered entity’s branded prescription drug sales taken into account
for purposes of the ratio set forth in section 9008(b)(1). A covered entity’s branded
prescription drug sales taken into account for purposes of section 9008(b)(1)(A) will
equal the sum of the covered entity’s branded prescription drug sales for all Programs
reduced by the appropriate percentages set forth in section 9008(b)(2). The IRS will
then calculate the aggregate branded prescription drug sales of all covered entities
taken into account for purposes of section 9008(b)(1)(B), which is the sum of all the
covered entities branded prescription drug sales taken into account for purposes of
section 9008(b)(1)(A).
To determine each covered entity’s fee, the IRS will divide each covered entity’s
branded prescription drug sales taken into account for purposes of section
9008(b)(1)(A) by the aggregate branded prescription drug sales of all covered entities
taken into account for purposes of section 9008(b)(1)(B) and multiply that fraction by the
applicable amount for the appropriate year as set forth in section 9008(b)(4).
Part II – Preliminary Fee Calculation for 2011

The IRS will use the proposed methodology described in Part I to provide each
covered entity with a preliminary 2011 fee calculation. The notification of the
preliminary fee calculation will include the following: (1) the covered entity’s fee; (2) the

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covered entity’s branded prescription drug sales, by NDC, for each Program; (3) the
covered entity’s branded prescription drug sales taken into account after application of
section 9008(a)(2); and (4) the aggregate branded prescription drug sales taken into
account for all covered entities.
To facilitate the preliminary 2011 fee calculation, Form 8947 should be submitted
to the IRS by January 20, 2011. From the data on the Forms 8947, the IRS will compile
a list of NDCs and provide that list to the Agencies by March 1, 2011. The IRS will use
the data submitted on the Forms 8947 and the sales data provided by the Agencies to
calculate the preliminary fee and will send to each covered entity notification of its
preliminary fee calculation by May 2, 2011.
If the IRS and Treasury Department subsequently promulgate regulations that
modify the methodology for calculating each covered entity’s fee, the modified
methodology will be adopted in determining the final fee amount for each covered entity
for 2011. Thus, if the methodology changes, the amount of the final fee for 2011 may
vary from the preliminary fee calculation. The IRS will send the final fee calculation to
each covered entity by August 15, 2011.
Part III – Request for comments

The IRS and Treasury Department request comments on the procedures
described in this notice for consideration when promulgating regulations setting forth
procedures for 2011 and the following years. The deadline for submission of comments
is June 2, 2011. This date will give covered entities the opportunity to consider the
information received in their preliminary fee calculation when providing comments. All

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materials submitted will be available for public inspection and copying. Written
comments should be submitted to: Internal Revenue Service, CC:PA:LPD:PR (Notice
2010-71), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2010-71), Courier’s
Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC.
Comments may be transmitted electronically via the following e-mail address:
Notice.Comments@irscounsel.treas.gov
. Please include “Notice 2010-71” in the
subject line of any electronic communications.
Drafting Information
The principal author of this notice is Celia A. Gabrysh of the Office of Associate
Chief Counsel (Passthroughs & Special Industries). For further information regarding
this notice contact Celia A. Gabrysh on (202) 622-3130 (not a toll-free call). For further
information regarding Form 8947 contact Lou Milano on (908) 301-2106 (not a toll-free
call).