Thursday, July 13, 2017

Is the PPACA Annual Tax on Branded Drugs Contributing to Higher Drug Costs?

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Hidden in the many pages of the original  2010  Patient Protection and Affordable Care Act (ACA), is Section 9008 from the Internal Revenue Service, which requires an annual fee on each covered entity engaged in the business of manufacturing or importing branded prescription drugs to “specific government programs”, to be paid not later than September 30th of each year.    “Specific government programs” refers to Medicare Parts B and D, Medicaid, Department of Veterans Affairs, Department of Defense and the Tricare retail pharmacy program.
On July 28, 2014, the Internal Revenue Service (IRS) issued final regulations (26 CFR Parts 51 and 602) on the fee, which is treated as an excise tax for purposes of subtitle F of the Internal Revenue Code (Code) (sections 6001-7874).  The final regulations describe the rules related to the fee, including how the IRS computes it and how covered entities pay it.  The fee is assessed, collected, enforced, subject to examination and summons and subject to confidentiality rules in the same manner as taxes imposed by the Code.  The fee applies to calendar years beginning after December 31, 2010.  

In general, the fee is imposed on each covered entity with aggregated branded prescription drug sales of over $5 million to specified government programs or pursuant to coverage under such programs.
There were a few articles in June about the rising drug costs by Pfizer – 91 drugs rose by an average of 20% in 2017.   How much of that price increase is due to the IRS’s required brand fee/excise tax?   Obviously the brand manufacturers are going to pass this fee down the chain of payers including pharmacies, wholesalers, plan sponsors and, of course, consumers.    

The Washington Examiner article dated June 2, 2017, commented that pharmaceutical companies price their drugs high to recoup the soaring research and development costs. Consumer and patient advocacy groups complain that there is no way to determine how much of the revenue goes to actual research versus marketing.  However, few mention the required fee/tax, payable to our government by covered entities, i.e. pharmaceutical manufacturers , as being another contributor of the two to four  increases in Average Wholesale Prices on drugs per year.

If you would like to learn more about these fee calculations, please go the IRS website at:

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