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IRS Releases Guidance Addressing the Dispute Resolution Process for the Preliminary Annual Pharmaceutical Fee

Written error reports must be filed by June 1, 2011

Overview

The Internal Revenue Service has just released guidance addressing the dispute resolution process for the preliminary calculation of the 2011 annual fee on manufacturers and importers of brand name drugs that was included in the landmark health care legislation enacted in 2010.1

Rev. Proc. 2011-24 (May 2, 2011) sets forth the exclusive procedure covered entities must use to dispute the IRS’s preliminary fee calculation and obtain any change to data that would be reflected in the final fee calculation. The IRS is planning to mail the preliminary fee calculations to the covered entities by May 16, 2011. Affected taxpayers must prepare and submit a written error report by June 1, 2011. The IRS will send the final fee calculation by August 15, 2011 and the fee is due on or before September 30, 2011.

The IRS is also soliciting comments on Notice 2011-9 by June 15, 2011.

Observations:

The annual fee is allocated to entities with aggregate branded prescription drug2 sales exceeding $5 million to the following specified government programs: Medicare Part B; Medicare Part D; Medicaid; the Department of Veterans Affairs; the Department of Defense; and the TRICARE retail pharmacy program (“Programs”). The IRS will compute the preliminary fee using use sales data the following government agencies provided: Heath and Human Services, Veterans Affairs and Department of Defense (“Agencies”).

Companies should carefully review the data included in the preliminary fee calculation to confirm it is accurate. In addition to reviewing the Program drug sales data, companies should review the preliminary fee calculation for mathematical accuracy, proper exclusion of orphan drugs, and accuracy of credited rebates. Rev. Proc. 2011-24 also includes specific guidance as to the number, nature, and format of the error reports that are to be submitted. Affected taxpayers need to analyze the preliminary computation to determine that the error reports comply with the guidance set forth in the Revenue Procedure.

Although the Revenue Procedure generally contemplates that covered entities can challenge discrepancies between its previously filed IRS Form 8947 and the IRS’s preliminary calculation, covered entities that did not file IRS Form 8947 may not have the same rights. Notice 2011-9 (February 7, 2011) specifically states that rebate information will be considered only if the covered entity filed IRS Form 8947.

How the dispute resolution process works

Upon receiving the preliminary fee calculation from the IRS, a covered entity should review the data contained in the calculation. If the entity determines that the calculation contains any errors, the entity or its designee must provide a written error report to the IRS postmarked by June 1, 2011. If a covered entity does not file an error report by June 1 2011, the IRS will not correct any claimed error(s). If a designated entity filed IRS Form 8947 on behalf of the covered entity, the designated entity must file any error report(s) for the covered entity by June 1, 2011.

Program drug sales data errors

If a covered entity asserts that there have been one or more errors in drug sales data, the entity must submit a separate error report for each Program with its asserted errors. Each report must include the following information:

1. Entity name, address, and Employer Identification Number (EIN) as reported on IRS Form 8947.

2. Contact information for employees or representatives of the entity with whom the Agencies may discuss the claimed errors. If the representative is not an employee of the entity, the entity must include IRS Form 2848, Power of Attorney and Declaration of Representative, with the error report.

3. The name of the Program that reported the data, the national drug code (“NDC”), the specific amount of sales data disputed, the proposed corrected amount, an explanation of why the Agency should use the proposed corrected data instead, and documentation of any Program drug sales data or other information used to establish the existence of any errors.

Errors other than Program drug sales errors

If a covered entity asserts that there has been one or more errors in the mathematical calculation of the fee, the rebate data, the listing of an NDC for an orphan drug, or any other error (other than Program drug sales data errors), the entity must submit one error report, separated into sections by type of error, and must include the following information:

1. Entity name, address, and Employer Identification Number (EIN) as reported on IRS Form 8947.

2. Contact information for employees or representatives of the entity with whom the Agencies may discuss the claimed errors. If the representative is not an employee of the entity, the entity must include IRS Form 2848 with the error report.

3. For a mathematical calculation error, the specific calculation element(s) that the entity disputes and its proposed corrected calculation.

4. For a rebate data error or an error related to an orphan drug, the name and NDC for the drug to which it relates; a discussion of whether the data used in the preliminary fee calculation matches previously reported IRS Form 8947 data on rebates; and if the data used in the preliminary fee calculation does match the IRS Form 8947 data, an explanation of why the IRS Form 8947 data was erroneous and why the IRS should use the proposed corrected data instead.

5. For any other asserted error, an explanation of the nature of the error, how the error affects the fee calculation, an explanation of how the entity established that an error occurred, the proposed correction to the error, and an explanation of why the IRS or Agency should use the proposed corrected data instead.

6. If an entity is using data to establish the existence of an error and that data was not reported on IRS Form 8947 or contained in the notification of the preliminary fee calculation, a description of what the data is, how the entity acquired the data, and who maintains it.

7. Documentation of any rebate and orphan drug data, or other information used to establish the existence of any errors.

IRS Review of Error Reports

If a claimed error involves a mathematical calculation or a correction to orphan drug or rebate data, the IRS will review the information and determine whether to make a correction. If a claimed error involves drug sales data provided by a Program, the IRS will provide the information sent by the covered entity to the Agency with jurisdiction over the appropriate Program to determine whether to make a correction. For any other claimed error, the IRS will review the information and determine whether the IRS or an Agency should determine whether to make a correction.

The IRS will notify the covered entity in writing of the final determination with respect to error reports when the IRS sends the covered entity the final fee calculation no later than August 15, 2011. The IRS will base a covered entity’s final fee determination solely on the data used for the preliminary fee calculation together with any adjustments to that data made as a result of the dispute resolution process described in Rev. Proc. 2011-24. Any changes will be reflected in the covered entity’s final fee calculation for 2011, which the IRS is planning to mail by August 15, 2011. The fee is due on or before September 30, 2011.

Contact:

For additional guidance, contact David Green, Michelle Davis, or Bill Stoddard. For more information on Deloitte’s Life Sciences practice visit www.deloitte.com.

This alert does not constitute tax, legal, accounting, or other advice from Deloitte Tax LLP, which assumes no responsibility with assessing or advising the reader as to tax, legal, or other consequences arising from the reader’s particular situation.

1 The fee was enacted 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).

2 "Branded prescription drug" means (1) 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 (2) 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)).

 

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