Bona Fide Service Fees: A 2026 Outlook
Regulatory Framework Governing BFSFs
Historically, CMS guidance on BFSFs was principles-based, allowing manufacturers discretion in how services were valued and documented. More recent guidance and rulemaking have shifted expectations toward greater consistency, documentation, and auditability.
CMS focus areas now include:
- Clear service descriptions
- Defensible FMV methodologies
- Ongoing review and refresh cadence
- Transparency regarding pass-through behavior
This evolution reflects broader enforcement trends, as BFSFs are increasingly viewed as a mechanism that could obscure true net pricing if not properly governed.
BFSFs are governed by a combination of statutory provisions, federal regulations, and administrative guidance centered around how manufacturers report pricing to federal programs such as Medicare Part B and Medicaid. The regulatory baseline for BFSFs in the context of Average Sales Price (ASP) reporting derives from CMS rules that define which fees may be excluded from price concession treatment.
For decades, BFSFs were generally excluded from ASP calculations10 if they satisfied a four-part test. However, the CY 2026 Medicare Physician Fee Schedule Final Rule has introduced formal documentation expectations around FMV methodologies and required manufacturers to submit reasonable assumptions and certifications for new contracts that fees are not passed on. These changes do not redefine BFSFs but raise the evidentiary standard for excluding fees from price concession treatment.
It bears emphasis that the CY 2026 Final Rule did not redefine BFSFs or alter the substantive four-part test. The underlying standard for what qualifies as a bona fide service fee remains unchanged. What changed is the evidentiary bar: manufacturers must now affirmatively demonstrate compliance through documented methodologies and certifications rather than relying on principles-based interpretations. Existing BFSF classifications do not necessarily require wholesale re-evaluation, but they do require documentation sufficient to withstand CMS scrutiny.
Although CMS has not yet finalized specific requirements for FMV methodologies or independent valuation criteria, it did require that FMV documentation and periodic reviews be included in ASP data submissions to CMS for drugs payable under Medicare Part B5, effective January 1, 2026. The rule also codifies the need for provider certifications for new BFSF arrangements that fees will not be passed through to clients or customers.
The regulatory framework is intersectional: BFSFs are defined for ASP reporting purposes, but similar definitions and tests apply to other programs such as Medicaid’s AMP and BP calculations. While the Medicaid Drug Rebate Program has its own regulatory structure, BFSFs that qualify under Medicare often align with treatment under Medicaid’s rebate rules, though operational practices differ.
The regulatory environment continues to evolve, influenced by broader drug pricing reforms (e.g. the Inflation Reduction Act) which tie accurate pricing inputs to rebate and negotiation mechanisms. With increasing emphasis on documentation, FMV evidence, and certification, the BFSF regulatory framework now demands operational discipline alongside contractual compliance.
Fair Market Value (FMV): The Foundation of BFSF Defensibility
Fair market value sits at the center of BFSF compliance and is often the most challenging aspect for manufacturers to defend. CMS expects BFSFs to reflect compensation that is reasonable, commercially justifiable, and directly tied to the value of the services provided, independent of drug price, volume, or market performance.
Manufacturers rely on FMV methodologies such as cost-plus analyses, third-party benchmarking studies, or hybrid approaches. While each may be appropriate, risk arises when methodologies are applied inconsistently, rely on outdated assumptions, or fail to reflect changes in services over time. A manufacturer’s one-time FMV assessment conducted years prior may no longer be defensible in today’s regulatory environment. CMS scrutiny increasingly focuses not only on whether an FMV analysis exists, but whether it clearly explains how conclusions were reached, how assumptions were validated, and how frequently the analysis is refreshed4. For manufacturers, strengthening FMV governance is less about selecting the “perfect” methodology and more about ensuring consistency, transparency, and repeatability across BFSF arrangements.
Manufacturers commonly use the following approaches to determine FMV:
Cost-Plus Models
A cost-plus model calculates the actual cost to perform the service and adds a reasonable profit margin. The analysis includes direct labor, supporting systems or technology, and an appropriate allocation of overhead. This approach is especially common for BFSFs because it ties compensation directly to service activity rather than drug price or volume.
Cost-plus models are generally viewed as highly defensible when the underlying cost data is current, verifiable, and clearly linked to the services provided. However, they require detailed documentation and regular refreshes to remain compliant.
Market Benchmarking
Market benchmarking compares the proposed service fee to rates charged by independent third parties for similar services in the marketplace. Manufacturers may rely on published benchmarking studies, third-party valuation firms, or comparable vendor contracts to support pricing.
This approach is useful when reliable external data exists, but can be challenging if services are highly customized, or benchmark data lacks sufficient detail. CMS scrutiny often focuses on whether the selected benchmarks are truly comparable and appropriately adjusted.
Hybrid Methodologies
Hybrid methodologies combine internal cost-plus analysis with external market benchmarks. For example, a manufacturer may calculate a cost-based fee and then validate it against industry benchmarks to ensure the resulting amount falls within a reasonable market range.
Hybrid approaches are increasingly common because they balance operational realism with market validation. When well-documented, they can be particularly persuasive in demonstrating FMV under CMS’s new heightened documentation expectations.
Documentation & Operational Expectations
Documentation is no longer a “check-the-box” exercise. CMS now expects manufacturers to maintain clear, comprehensive records supporting BFSF arrangements. Operationally, BFSFs often span multiple teams: contracting negotiates them, finance pays them, pricing reports them, and compliance defends them. Without centralized ownership, documentation gaps are common. Legacy contracts pose particular risk, as many were created under dated guidance and may not meet current expectations.
Documentation expectations under CMS include the following:
Detailed Service Descriptions:
Service fees should be tied explicitly to clearly defined work streams, with deliverables, performance standards, and outputs articulated in contracts and supporting documents. Merely naming a fee without contextual evidence of the underlying services invites regulatory scrutiny because it obscures the economic reality of the arrangement.
FMV Methodology Explanations and Support:
Although CMS did not finalize prescriptive FMV methodologies in the final rule, the agency now requires that manufacturers submit reasonable assumptions, including FMV analyses and periodic reviews, as part of quarterly ASP data submissions5. These FMV analyses should explain how the fee amount was determined, including data inputs, assumptions, comparison points (e.g., market benchmarking or cost-plus analyses), and rationale for concluding that the fee reflects FMV independent of drug price or volume.
It is important to note that FMV documentation is not required to be refiled with every quarterly ASP submission. Rather, manufacturers must have current FMV methodology documentation on file and available for submission for all current, new, and renewed contracts. Note that the Q1 2026 submission deadline (originally April 30, 2026) was waived by CMS due to a Paperwork Reduction Act delay in finalizing the required forms. The first live submission deadline is July 30, 2026, covering Q2 2026 sales. Going forward, documentation should be refreshed at contract renewal or on a defined internal cadence to reflect current market conditions.
Pass-Through Attestations from Service Providers:
Documentation for all new contracts executed on or after January 1, 2026 requires non-pass-through certifications5. These certifications, provided by the service provider, affirm that the fee will not be passed through to clients, affiliates, or customers. This requirement formalizes what was previously presumed in the absence of evidence to the contrary and is a material change in operational expectations.
CMS has further clarified that the certification requirement applies only to BFSFs that are directly related to drug sales. A fee is considered directly related to a Part B drug when it is paid for services specifically associated with that product, such as distribution and logistics, administrative functions, or data reporting specific to the drug. Manufacturers with broadly scoped service agreements spanning multiple products or therapeutic areas should evaluate each fee arrangement at the product level to determine whether the certification requirement applies.
Iterative Quality and Completeness Reviews:
Internal audit and compliance functions should periodically review documentation quality and completeness. These reviews should assess whether FMV assumptions are aligned with current market conditions, whether certifications are up to date, and whether service descriptions remain accurate as contract scopes evolve.
Strong documentation and operational discipline do more than satisfy regulators; they bolster internal price reporting integrity and provide a defensible basis for pricing decisions, reducing the likelihood of recalculation, audits, or enforcement actions.
Conclusion
Bona fide service fees are no longer a narrow contracting detail. They are a pricing integrity issue with far-reaching implications across Medicaid, 340B, ASP, and IRA-driven reforms. Manufacturers that reassess BFSF structures, strengthen FMV support, and improve governance will be better positioned as regulatory scrutiny continues to intensify.
Proactive engagement with legal and external advisors can help interpret evolving guidance, stress-test interpretations, and prepare for potential inquiries or audits by CMS. These preparations can reduce regulatory risk, support defensible reporting, and enable manufacturers to respond confidently to scrutiny as pricing oversight intensifies.
Northridge supports manufacturers by helping translate evolving BFSF requirements into practical, defensible, and operationally sound solutions, bridging the gap between regulatory interpretation and execution.
Resources
1 PART B DRUG PAYMENT LIMITS OVERVIEW Background [Internet]. Available from: https://www.cms.gov/files/document/part-b-drug-payment-limits-overview.pdf-0
2 Medicare and Medicaid Programs; CY 2026 Payment Policies Under the Physician Fee Schedule and Other Changes to Part B Payment and Coverage Policies; Medicare Shared Savings Program Requirements; and Medicare Prescription Drug Inflation Rebate Program [Internet]. Federal Register. 2025 [cited 2026 Feb 21]. Available from: https://www.federalregister.gov/d/2025-19787/p-2142
3 Medicare Program; Revisions to Payment Policies, Five-Year Review of Work Relative Value Units, Changes to the Practice Expense Methodology Under the Physician Fee Schedule, and Other Changes to Payment Under Part B; Revisions to the Payment Policies of Ambulance Services Under the Fee Schedule for Ambulance Services; and Ambulance Inflation Factor Update for CY 2007 [Internet]. Federal Register. 2006 [cited 2026 Feb 10]. Available from: https://www.federalregister.gov/d/06-9086/p-956
4 “FAQs: BFSF Certification and ASP Reasonable Assumptions | CMS.” Cms.gov, 2026, https://www.cms.gov/files/document/frequently-asked-questions-faqs-bfsf-certification-asp-reasonable-assumptions.pdf
5 42 CFR 414.804 — Basis of payment. [Internet]. Ecfr.gov. 2026 [cited 2026 Feb 10]. Available from: https://www.ecfr.gov/current/title-42/part-414/section-414.804#p-414.804(a)(5)(iii)
6 Medicare and Medicaid Programs; CY 2026 Payment Policies Under the Physician Fee Schedule and Other Changes to Part B Payment and Coverage Policies; Medicare Shared Savings Program Requirements; and Medicare Prescription Drug Inflation Rebate Program [Internet]. Federal Register. 2025 [cited 2026 Feb 21]. Available from: https://www.federalregister.gov/d/2025-19787/p-2203
8 Medicare and Medicaid Programs; CY 2026 Payment Policies Under the Physician Fee Schedule and Other Changes to Part B Payment and Coverage Policies; Medicare Shared Savings Program Requirements; and Medicare Prescription Drug Inflation Rebate Program [Internet]. Federal Register. 2025. Available from: https://www.federalregister.gov/d/2025-19787/p-2240
9 Medicare and Medicaid Programs; CY 2026 Payment Policies Under the Physician Fee Schedule and Other Changes to Part B Payment and Coverage Policies; Medicare Shared Savings Program Requirements; and Medicare Prescription Drug Inflation Rebate Program [Internet]. Federal Register. 2025 [cited 2026 Feb 21]. Available from: https://www.federalregister.gov/d/2025-19787/p-2270
10 Medicare and Medicaid Programs; CY 2026 Payment Policies Under the Physician Fee Schedule and Other Changes to Part B Payment and Coverage Policies; Medicare Shared Savings Program Requirements; and Medicare Prescription Drug Inflation Rebate Program [Internet]. Federal Register. 2025 [cited 2026 Feb 21]. Available from: https://www.federalregister.gov/d/2025-19787/p-2141
11 CMS. “Frequently Asked Questions (FAQs): BFSF Certification and ASP Reasonable Assumptions.” January 7, 2026. Available at: https://www.cms.gov/medicare/payment/part-b-drugs/asp-education-outreach/faqs-bfsf-certification-asp-reasonable-assumptions
