[Federal Register Volume 59, Number 92 (Friday, May 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11643]


[[Page Unknown]]

[Federal Register: May 13, 1994]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Public Health Service

 

Final Notice Regarding Section 602 of the Veterans Health Care 
Act of 1992 Entity Guidelines

AGENCY: Public Health Service, HHS.

ACTION: Final notice.

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INFORMATION: Section 602 of Public Law 102-585, the ``Veterans Health 
Care Act of 1992,'' enacted section 340B of the Public Health Service 
Act, ``Limitation on Prices of Drugs Purchased by Covered Entities.'' 
Section 340B provides that a manufacturer who sells covered outpatient 
drugs to eligible entities must agree to charge a price that will not 
exceed the amount determined under a statutory formula. The purpose of 
this notice is to inform interested parties of final program guidelines 
regarding eligible covered entities.

FOR FURTHER INFORMATION CONTACT:
Marsha Alvarez, R.Ph., Director, Drug Pricing Program, Bureau of 
Primary Health Care, Health Resources and Services Administration, East 
West Towers rm 10-3A1, Bethesda, Maryland 20814, Phone: (301) 594-4353.

EFFECTIVE DATE: June 13, 1994.

SUPPLEMENTARY INFORMATION:

(A) Background

    Proposed entity guidelines were announced in the Federal Register 
at 58 FR 68922 on December 29, 1993. A comment period of 30 days was 
established to allow interested parties to submit comments. The Office 
of Drug Pricing received 7 letters with comments concerning 
confidential drug pricing information, retroactive discounts,drug 
diversion, audit requirements, entity participation, group purchasing, 
purchasing agents, manufacturer contracts, and 4 general comments.
    The following section presents a summary of all major comments, 
grouped by subject, and a response to each comment. All comments were 
considered in developing this final notice. Changes were also made to 
increase clarity and readability.

(B) Comments and Responses

Confidential Drug Pricing Information

    Comment: Establish specific sanctions for entities which knowingly 
make unauthorized disclosures.
    Response: No change. The quoted price or the actual price given by 
the manufacturer to the covered entity is not confidential. Covered 
entities do not have access to confidential drug pricing information 
(i.e., average manufacturer price and best price).

Eligibility for Retroactive Discounts

    Comment: Do not impose a deadline on requesting retroactive 
discounts.
    Response: No change. It is a reasonable administrative decision to 
establish a time limit for requesting refunds. Manufacturers were given 
sufficient time in which to implement the discount program, and 
entities were given an adequate opportunity to elect whether to 
participate in the program. An entity may preserve its right to 
retroactive discounts, after the deadline, by sending each manufacturer 
a letter requesting such refunds and providing adequate documentation 
of drug purchases.
    Comment: Exclude from eligibility for retroactive discounts any 
disproportionate share hospital (DSH) which purchased its outpatient 
drugs through a group purchasing organization (GPO).
    Response: No change. The Office of Drug Pricing considers the 
outpatient drug purchases of DSHs bought through a GPO or any group 
purchasing arrangement ineligible for retroactive discounts.
    Comment: Allow covered entities to request an extension of the 
deadline for retroactive discounts for good cause (e.g., offsite DSH 
clinics whose eligibility has not yet been determined).
    Response: We have amended part 3 of the notice to permit a DSH 
outpatient clinic which was not participating in a GPO or any group 
purchasing arrangement during the period for which it is requesting 
retroactive discounts to preserve its right by sending manufacturers a 
letter requesting such refunds and providing adequate documentation of 
purchases.
    Comment: Extend the deadline for those manufacturers which have 
refused to give PHS pricing to the date on which the manufacturer 
begins discounting its covered outpatient drugs in accordance with the 
law.
    Response: No change. At every opportunity, the Office of Drug 
Pricing has communicated its willingness to assist entities with 
problems of accessing PHS pricing. It has responded to all entity 
complaints dealing with manufacturer noncompliance. We believe that one 
year is a reasonable time in which to have resolved any difficulty with 
pricing access.
    Comment: Require manufacturers to respond within 30 days to 
requests for retroactive discounts, even if the response is just a 
request for additional information, or face possible termination from 
the Medicaid program.
    Response: No change. Because this issue deals with manufacturer 
guidelines, it is beyond the scope of this notice. However, should a 
covered entity have difficulty obtaining retroactive discounts, we 
encourage the entity to contact the Office of Drug Pricing for 
assistance.
    Comment: Establish that a DSH, which did not submit its Medicaid 
provider number for the period for which it is requesting retroactive 
discounts, would be ineligible for the refund.
    Response: No change. A DSH which did not submit its Medicaid 
provider number may still be eligible for retroactive discounts if it 
(1) did not bill Medicaid for the drugs, (2) billed for covered 
outpatient drugs using an all-inclusive rate, or (3) has adequate 
documentation proving that drugs for which retroactive discounts are 
being requested did not generate Medicaid rebates.

Drug Diversion

    Comment: Develop and publish a mechanism whereby manufacturers can 
report to the Office of Drug Pricing when they suspect an entity of 
diversion.
    Response: No change. The Office of Drug Pricing has currently 
developed a proposed dispute resolution process which will be published 
in the Federal Register with a public comment period.
    Comment: Require PHS preclearance of all safeguard systems 
developed by entities to deter diversion and require this information 
to be supplied to the manufacturers upon request.
    Response: No change. Guidelines concerning separate purchasing 
accounts and dispensing records are quite specific, and procedures in 
these areas need no prior approval. If a manufacturer believes that a 
covered entity is involved in drug diversion, it has the statutory 
authority to audit the entity records that directly relate to drugs of 
that manufacturer purchased at PHS pricing. Proposed audit guidelines 
have been developed and will be published in the Federal Register with 
a public comment period.
    Comment: Issue criteria for measuring the adequacy of the 
safeguards.
    Response: No change. If a manufacturer believes that a covered 
entity has established inadequate safeguards and is involved in drug 
diversion, then the manufacturer can either audit the entity or file a 
complaint with the Office of Drug Pricing.
    Comment: Develop a broad definition of ``patient'' to include all 
necessary services provided to individuals served by the covered 
entities.
    Response: No change. The notice does not address the definition of 
patient. The Office of Drug Pricing is in the process of developing a 
definition of patient, which will be published in the Federal Register. 
Public comment will be invited, and this comment will be considered at 
that time.
    Comment: Do not require separate inventories, as this would place a 
hardship on most hospitals.
    Response: No change. There is no requirement for separate 
inventories.
    Comment: Do not permit entities to develop alternate tracking 
systems or develop criteria for these systems by March 1, 1994.
    Response: No change. It is essential that the Office of Drug 
pricing maintain some flexibility during this period of implementation. 
Because these alternate tracking systems require prior approval from 
the Office of Drug pricing before they can be implemented, sufficient 
control is maintained. The Office will develop criteria at a later date 
and welcomes all suggestions.

Audit Requirements

    Comment: Specify the statutory basis for the Secretary to authorize 
manufacturer audit guidelines.
    Response: We have amended part 5 of the notice to include a 
reference to section 340B(a)(5)(C) of the PHS Act, which gives the 
Secretary the authority to establish procedures relating to the number, 
duration, and scope of manufacturer audits.
    Comment: Move quickly to develop procedures to allow manufacturers 
to audit records of entities' purchases of covered outpatient drugs and 
of Medicaid claims for reimbursement for such drugs.
    Response: No change. The Office of Drug Pricing is developing 
proposed audit guidelines which will be published in the Federal 
Register with public comment invited. All comments regarding suggested 
audit procedures, currently received, will be considered at that time.

Entity Participation

    Comment: An entity should be viewed as not participating in the 
program (and therefore as ineligible to receive its discounts) if it 
has not given its Medicaid provider number of the Office of Drug 
Pricing.
    Comment: We have amended part 2 of the notice to require entities 
to provide one of the following: (1) A pharmacy Medicaid number (the 
number which the entity uses to bill Medicaid for medications), or (2) 
their all-inclusive Medicaid number (e.q., ``FQ'' number), or (3) 
notification that it does not bill Medicaid for all outpatient drugs. 
These numbers will be posted on the electronic bulletin board 
(Electronic Data Retrieval System or EDRS), maintained by the Office of 
Drug Pricing, to indicate which covered entities have elected to 
participate in the program. For access to the EDRS call (301) 549-4992.
    Comment: All covered entities should be required to notify 
manufacturers 30 days before they wish to access PHS pricing.
    Response: We have amended part 6 of the notice to provide that 
entities will be added to or deleted from the eligibility list on a 
quarterly basis only. The Office of Drug Pricing will update the list 2 
weeks before each calendar quarter, giving lead time for pricing 
changes and appropriate communications with wholesalers, GPOs, and 
purchasing agents.

Group Purchasing Arrangements

    Comment: Allow eligible DSHs to continue GPO participation for 
manufacturers who are not offering PHS pricing and prohibit GPO 
participation with respect to all complying manufacturers.
    Response: No change. Generally, we have found that entities are 
receiving PHS pricing. The Office of Drug Pricing has, at every 
opportunity, communicated its willingness to assist entities when there 
are problems with accessing PHS pricing. The Office has investigated 
all complaints of manufacturer noncompliance immediately and was and is 
willing to take appropriate enforcement action if necessary. This is 
the proper course for dealing with any manufacturer non-compliance, 
rather than attempting to compensate for continued non-compliance by 
disregarding the statutory GPO provisions.

Purchasing Agents

    Comment: Distinguish clearly between a purchasing agent and a GPO 
for purposes of the DSH/GPO prohibition, only.
    Response: We have amended part 8 of the notice to distinguish a 
purchasing agent from a group purchasing arrangement for purposes of 
the DSH/GPO prohibition. A purchasing agent would not be considered 
operating as a group purchasing arrangement if the following conditions 
are met: (1) the purchasing agent is not associated with a group 
purchasing organization; (2) no collective bargaining by a group of 
hospitals occurs; (3) the negotiations of PHS pricing are separate 
activities for each individual DSH; (4) a separate agreement with each 
DSH is executed; (5) as part of the agreement, there will be no sharing 
or pricing information; and (6) all final decisions concerning product 
and price acceptance will be made by each individual DSH.
    Comment: Do not require manufacturers to sell directly to a 
purchasing agent, a GPO, or a contract pharmacy, but solely to covered 
entities and their wholesalers.
    Response: No change. It is a customary business practice for 
manufacturers to sell to intermediaries as well as directly to the 
entity. Entities often use purchasing agents or contract pharmacies, or 
participate in GPOs. By placing such limitations on sales transactions, 
manufacturers could be discouraging entities from participating in the 
program.
    Manufacturers may not single out covered entities from their other 
customers for restrictive conditions that would undermine the statutory 
objective.

Manufacturer Contracts Which Require Entity Compliance

    Comment: Permit a manufacturer to require the covered entities to 
sign a contract containing only the manufacturer's normal business 
policies (e.g., routine information necessary to set up and maintain an 
account) if this is a usual business practice of the manufacturers.
    Response: We have amended part 11 of the notice to state that this 
prohibition against a contract between a manufacturer and a covered 
entity regarding entity compliance with section 340B provisions or the 
Office of Drug Pricing program guidelines does not encompass entity/
manufacturer contracts that contain provisions relating to normal 
business activities, requests for standard information, or other 
appropriate contract provisions.
    Comment: Declare null and void provisions in manufacturer contracts 
signed by entities pursuant to section 340B which deal with assurances 
of entity compliance with section 340B.
    Response: No change. While the Office of Drug Pricing has no legal 
authority to declare null and void provisions of contracts between 
covered entities and manufacturers, it is our position that 
manufacturers may not enforce such provisions.

General

    Comment: Post Medicaid provider numbers of all eligible DSH 
outpatient clinics on the electronic bulletin board.
    Response: No change. The Office of Drug Pricing has developed 
proposed criteria to determine the eligibility of DSH outpatient 
clinics. These criteria will be published in the Federal Register, and 
the public will be invited to comment.
    Comment: Might certain activity generate a new Medicaid Best Price?
    Response: No change. Because the Health Care Financing 
Administration (HCFA) Medicaid Rebate Program deals with Best Price 
calculations, the Office of the Drug Pricing will refer all Best Price 
questions to the agency. For further information in this regard, please 
call Al Beachley, Branch Chief, Medicaid Drug Rebate Operations Branch, 
HCFA, at (410) 966-3225.
    Comment: Establish a procedure whereby manufacturers will be able 
to determine which purchasing groups are eligible to purchase on behalf 
of covered entities and receive the PHS pricing.
    Response: We have amended part 7 of the notice to require any group 
which purchases covered outpatient drugs at OHS pricing on behalf of an 
eligible covered entity to have written authority from the entity to 
purchase its covered outpatient drugs. The purchasing group must 
provide documentation of this purchase authority to the manufacturer 
upon request. This rule does not supersede the statutory limitations 
regarding DSH participation in GPOs or group purchasing arrangements.
    Comment: Establish a prime vendor program designating certain 
wholesalers to service PHS covered entities similar to programs 
established with the Department of Veterans Affairs (VA), Department of 
Defense (DOD), and the Bureau of Prisons (BOP).
    Response: No change. The Office of Drug Pricing is in the early 
stages of developing a pilot prime venter program and has considered, 
among others, the various programs of VA, DOD, and BOP.

(C) Revised Entity Guidelines

    Set forth below are the final entity guidelines, revised based on 
the analysis of the comments described above.

(1) Confidential Drug Pricing Information

    ``Confidential drug pricing information'' includes both ``best 
price'' and ``average manufacturer price.'' The quoted price and the 
actual price given by the manufacturer to the covered entity are not 
confidential.

(2) Duplicate Discount/Rebate Potential

    First, a covered entity billing on a cost basis for drug purchases 
must provide the Office of Drug Pricing with a pharmacy Medicaid number 
(the number which the entity uses to bill Medicaid for medications). 
Second, a covered entity using an all-inclusive rate (either per 
encounter or visit) must submit its all-inclusive Medicaid number 
(e.g., ``FQ'' number). Third, if a covered entity does not bill 
Medicaid for outpatient drugs, then the entity must notify the Office 
of this decision. Fourth, a large facility which houses many different 
clinics, only several of which are eligible, must obtain a separate 
Medicaid provider number for the eligible clinics. For those States 
which cannot generate additional Medicaid provider numbers for 
entities, covered entities must discuss an alternative arrangement with 
the States to accomplish this objective.
    This information will be posted on the Electronic Data Retrieval 
System (EDRS), maintained by the Office of Drug Pricing, to indicate 
which covered entities have elected to participate in the program. For 
access to the EDRS call (301) 594-4992.
    If a drug is purchased by or on behalf of a Medicaid beneficiary, 
the amount billed may not exceed the entity's actual acquisition cost 
for the drug, as charged by the manufacturer at a price consistent with 
the Veterans Health Care Act of 1992, plus a reasonable dispensing fee 
established by the State Medicaid agency.

(3) Eligibility for Retroactive Discounts

    Until 30 days after publication of this notice, eligible covered 
entities included on the initial eligibility list may request 
retroactive discounts (discounts, rebates, or account credit) for 
covered outpatient drugs purchased retroactive to December 1, 1992. 
Entities added to the eligibility list at a later date may only request 
discounts retroactive to the date of their inclusion on the list. Of 
the entities listed on the eligibility list, only the following may 
request these discounts: The covered entity that--(1) has billed for 
covered outpatient drugs using an all-inclusive rate (either per visit 
or per encounter), or (2) has not billed Medicaid for covered 
outpatient drugs since December 1, 1992, (or since its inclusion on the 
eligibility list), or (3) has submitted its Medicaid provider number 
and is requesting refunds for subsequent periods, or (4) has adequate 
documentation proving that drugs for which a retroactive discount is 
being requested have not generated Medicaid rebates.
    A DSH is not eligible for retroactive discounts for covered 
outpatient drugs purchased through a group purchasing organization 
(GPO) or any group purchasing arrangement. Any DSH outpatient clinic 
which is or will be eligible for retroactive discounts may preserve its 
rights by sending manufacturers a letter requesting such refunds and 
providing adequate documentation of purchases.

(4) Entity Guidelines Regarding Drug Diversion

    Covered entities are required not to resell or otherwise transfer 
outpatient drugs purchased at the statutory discount to an individual 
who is not a patient of the entity. There are several common situations 
in which this might occur. First, if individuals other than patients of 
the covered entity obtain covered outpatient drugs from its 
pharmaceutical dispensing facility, the entity must develop and 
institute adequate safeguards to prevent the transfer of discounted 
outpatient drugs to individuals who are not eligible for the discount 
(e.g., separate purchasing accounts and dispensing records). Second, a 
larger institution which contains an eligible entity within its 
structure is required to establish separate purchasing accounts and 
maintain separate dispensing records for the eligible entity. Third, 
the covered entity itself may not use the covered outpatient drug in 
excluded services (e.g., inpatient services). If an entity offers 
services excluded from the drug discount program, the entity must 
develop a separate method for purchasing and dispensing drugs for 
excluded services.
    The covered entity may, at its option, develop an alternative 
system, short of tracking each discounted drug through the purchasing 
and dispensing process, by which it can prove compliance. If an 
alternate system of tracking is proposed to be used, this system must 
be approved by the Drug Pricing Program. The Office will develop 
criteria for alternative systems at a later date and welcomes all 
suggestions.

(5) Audit Requirement

    All entities receiving statutory prices are required to maintain 
records of purchases of covered outpatient drugs and of any claims for 
reimbursement submitted for such drugs under title XIX of the Social 
Security Act. The entity must permit HHS and the manufacturer to audit 
any record of a covered drug purchase that was subject to the discount, 
as provided by section 340B(a)(5)(C) of the PHS Act. Manufacturer 
audits will be conducted in accordance with procedures developed by the 
Secretary of HHS. The Office of Drug Pricing is developing proposed 
audit guidelines which will be published in the Federal Register with 
public comment invited. The notice will address only audits related to 
purchases as a covered entity; it does not address other audit 
requirements related to participation in State Medicaid programs or 
receipt of Federal funding.

(6) Entity Participation

    Covered entity participation in the section 340B drug discount 
program is voluntary. Once an entity has elected to participate in the 
program, it must wait to enter or withdraw from the program until the 
next official updating of the eligible entity list. The Office of Drug 
Pricing will update this list two weeks before each calendar quarter. 
The entity must comply with all program guidelines until the date it is 
removed from the eligibility list.

(7) Group Purchasing

    A DSH may participate in a group purchasing arrangement for 
inpatient drug use without affecting its eligibility to purchase 
section 340B discounted drugs. If a DSH participates in a GPO or other 
group purchasing arrangement for covered outpatient drugs, the DSH will 
no longer be an eligible covered entity and cannot purchase covered 
outpatient drugs at the section 340B discount prices.
    States, or other groups, which purchase drugs for covered entities 
(other than disproportionate share hospitals) are not included on the 
list of covered entities; however, they are eligible to purchase at the 
section 340B discount if the following requirements are met: (1) the 
group purchasing arrangement must be comprised of only covered 
entities, (2) if group purchasing arrangements contain entities which 
are not eligible for the discount, separate purchasing accounts and 
dispensing/distribution must be maintained, and (3) the purchasing 
group has written authority from the covered entity to purchase covered 
outpatient drugs on its behalf.

(8) Purchasing Agents

    A covered entity is permitted to use a purchasing agent without 
forfeiting its right to the section 340B drug discounts. If a 
purchasing agent is used, the arrangement must be in writing and the 
terms of the agent's relationship with the entity must be clearly 
defined. The entity and the agent should decide whether the agent 
simply negotiates the drug purchasing contracts on behalf of the entity 
or actually receives drug shipments for distribution to the entity. If 
the latter, the transfer of purchased pharmaceuticals from an agent to 
the entity would not be viewed as drug diversion.
    For purposes of the DSH/GPO prohibition only, a purchasing agent 
may be distinguished from and would not be considered operating as a 
GPO or other group purchasing arrangement if the following conditions 
are met: (1) the purchasing agent is not associated with a GPO or other 
purchasing arrangement; (2) no collective bargaining by a group of 
hospitals occurs; (3) the negotiations for PHS pricing are separate 
activities for each individual DSH; (4) a separate agreement with each 
DSH is executed; (5) as part of the agreement, there will be no sharing 
of pricing information; and (6) all final decisions concerning product 
and price acceptance will be made by each individual DSH.

(9) Definition of Covered Outpatient Drug

    Section 1927(k)(2) of the Social Security Act defines ``covered 
outpatient drug'' to include most drugs and biologicals which may be 
dispensed only by prescription and which require approval by the Food 
and Drug Administration or a license under section 351 of the PHS Act. 
Section 1927(k)(3) limits the definition of ``covered outpatient drug'' 
to exclude certain settings (e.g., such services as emergency room, 
hospice, dental, physician, nursing facilities, x-ray, lab, and renal 
dialysis) in some instances. In these settings, if a covered drug is 
included in the per diem rate (i.e., bundled with other payments in an 
all-inclusive, per visit, or an encounter rate), it will not be 
included in the section 340B discount program. However, if a covered 
drug is billed and paid for instead as a separate line item as an 
outpatient drug in a cost basis billing system, this drug will be 
included in the program.

(10) Dealing Direct or Through a Wholesaler

    If a manufacturer has customarily dealt directly with a particular 
covered entity, then requiring the manufacturer to continue this form 
of purchasing with the covered entity is reasonable. When dealing 
directly with a covered entity, manufacturers must offer covered 
outpatient drugs at or below the section 340B discount prices. If a 
manufacturer customarily uses a wholesaler as a means of distribution, 
then requiring the manufacturer to continue this form of purchasing 
with covered entities is also reasonable. If the manufacturer's drugs 
are available to covered entities through wholesalers, the discount 
must be made available through that avenue. Manufacturers may not 
single out covered entities from their other customers for restrictive 
conditions that would undermine the statutory objective. Manufacturers 
must not place limitations on the transactions (e.g., minimum purchase 
amounts) which would have the effect of discouraging entities from 
participating in the discount program.

(11) Manufacturer's Contracts Requiring Entity Compliance

    A manufacturer may not condition the offer of statutory discounts 
upon an entity's assurance of compliance with section 340B provisions. 
Covered entity assurances regarding the following activities may not be 
required: (1) eligibility to participate in the program; (2) 
utilization of covered outpatient drugs only in authorized services; 
(3) maintaining the confidentiality of the drug pricing information; 
(4) permitting the manufacturers to audit purchase, inventory, and 
related records prior to the publication of approved PHS guidelines; 
and (5) submitting information related to drug acquisition, purchase, 
and inventory systems. Entities are not required to sign agreements 
assuring manufacturers of their compliance with section 340B 
provisions. (If a manufacturer asks a covered entity whether the entity 
is in fact participating in the section 340B discount program, the 
entity must supply the manufacturer with this information). This 
prohibition does not include provisions that address customary business 
practice, request standard information, or include other appropriate 
contract provisions.

    Dated: May 9, 1994.
John H. Kelso,
Acting Administrator, Health Resources and Services Administration.
[FR Doc. 94-11643 Filed 5-12-94; 8:45 am]
BILLING CODE 4160-15-P-M