[Federal Register Volume 59, Number 111 (Friday, June 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14089]


[[Page Unknown]]

[Federal Register: June 10, 1994]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Public Health Service

 

Notice Regarding Section 602 of the Veterans Health Care Act of 
1992; Manufacturer Audit Guidelines and Informal Dispute Resolution

AGENCY: Public Health Service, HHS.

ACTION: Notice.

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SUMMARY: Section 602 of Public Law 102-585, the ``Veterans Health Care 
Act of 1992'' (the ``Act''), enacted section 340B of the Public Health 
Service Act (``PHS 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 sign a 
pharmaceutical pricing agreement (the ``Agreement'') with the Secretary 
of Health and Human Services (the ``Secretary'') in which the 
manufacturer agrees to charge a price for covered outpatient drugs that 
will not exceed an amount determined under a statutory formula.
    Section 340B(a)(5) of the PHS Act identifies certain requirements 
for covered entities concerning potential double price reductions and 
drug diversion. A covered entity must permit the manufacturer of a 
covered outpatient drug that has signed the Agreement, to audit the 
records of the covered entity directly pertaining to the entity's 
compliance with the requirements of section 340B(a)(5) (A) and (B) as 
to drugs purchased from the manufacturer. These audits must be 
conducted in accordance with guidelines established by the Secretary, 
as stated in section 340B(a)(5)(C).
    Further, the Office of Drug Pricing anticipates that disputes may 
arise between covered entities and participating manufacturers 
regarding implementation of the provisions of section 340B. To resolve 
these disputes in an expeditious manner, the Office of Drug Pricing has 
developed a proposed informal dispute resolution process.
    The purpose of this notice is to invite public comment on the 
proposed manufacturer audit guidelines and the proposed informal 
dispute resolution process.

DATES: The public is invited to submit comments on the proposed audit 
guidelines and dispute resolution process by July 11, 1994. After 
consideration of the comments submitted, PHS will issue the final audit 
guidelines and the dispute resolution process.

ADDRESSES: Submit comments to Ms. Alvarez at the address noted below.

FOR FURTHER INFORMATION CONTACT: Marsha Alvarez, R. Ph., Director, 
Office of Drug Pricing, Bureau of Primary Health Care, 4350 East West 
Highway, West Towers, 10th Floor, Bethesda, MD 20814, Tel: (301) 594-
4354.

SUPPLEMENTARY INFORMATION:

Manufacturer Audit Guidelines

    Covered entities which choose to participate in the section 340B 
drug discount program must comply with the requirements of section 
340B(a)(5) of the PHS Act. Section 340B(a)(5)(A) prohibits a covered 
entity from accepting a discount for a drug that would also generate a 
Medicaid rebate. Further, section 340B(a)(5)(B) prohibits a covered 
entity from reselling or otherwise transferring a discounted drug to a 
person who is not a patient of the entity. The participating entity 
must permit the manufacturer of a covered outpatient drug who has 
signed the Agreement with the Secretary to audit its records that 
directly pertain to the entity's compliance with section 340B(a)(5) (A) 
and (B) requirements with respect to drugs of the manufacturer. 
Manufacturer audits must be conducted in accordance with guidelines 
developed by the Secretary as required by section 340B(a)(5)(C). This 
notice does not include the audit guidelines to be used by Government 
auditors where the Government performs the audit of the records of the 
covered entity's compliance with the requirements of section 340B(a)(5) 
(A) and (B).
    The following is the proposed ``Compliance Audit Guide'' concerning 
manufacturer audit guidelines as developed by the Secretary pursuant to 
section 340B(a)(5)(C):

I. General Guidelines

    A manufacturer shall conduct an audit only when the Office of Drug 
Pricing determines that there is reasonable cause to believe a 
violation of section 340B(a)(5) (A) or (B) has occurred. The 
manufacturer must submit a request for an audit of a covered entity to 
the Office of Drug Pricing. [See section II for audit steps]. Auditors 
have an ethical and legal responsibility to perform quality audits 
conducted in accordance with Government Auditing Standards, Current 
revision, developed by the Comptroller General of the United States. 
Patient confidentiality requirements must also be observed. Audit 
reports must be prepared at the completion of the audit. Copies of the 
audit report shall be prepared in accordance with the reporting 
standards for performance audits in Government Auditing Standards, 
Current Revision. The cost of a manufacturer audit will be borne by the 
manufacturer, as provided by section 340B(a)(5)(C) of the PHS Act.
(a) Number of Audits
    Consistent with Government auditing standards, the organization 
performing the audit shall coordinate with other auditors, when 
appropriate, to avoid duplicating work already completed or that may be 
planned. Only one audit will be permitted at any one time. When 
specific allegations involving the drugs of more than one manufacturer 
have been made concerning an entity's failure to comply with section 
340B(a)(5) (A) and (B), the Office of Drug Pricing will determine 
whether an audit should be performed by the (1) Government or (2) the 
manufacturer.
(b) Scope of Audits
    The manufacturer must submit an audit workplan describing the audit 
to the Office of Drug Pricing for review. The workplan will be reviewed 
for reasonable purpose and scope. Further, a determination will be made 
that only those records of the covered entity that directly pertain to 
the potential violation(s) will be accessed including those systems and 
processes (e.g., purchasing, distribution, dispensing, and billing) 
that would assist in identifying a violation.
(c) Duration of Audits
    Audits shall be performed in the minimum time necessary with the 
minimum intrusion on the covered entity's operations.

II. Audit Steps

    (a) The manufacturer shall notify the covered entity in writing 
when it believes the covered entity has violated provisions of section 
340B. The manufacturer and the covered entity shall have at least 30 
days from the date of notification to attempt in good faith to resolve 
the matter.
    (b) The manufacturer has the option to proceed to the informal 
dispute resolution process described later in the notice without an 
audit, if it believes it has sufficient evidence of a violation absent 
an audit. If the matter is not resolved and the manufacturer desires to 
perform an audit, the manufacturer must file a request for a covered 
entity audit with the Office of Drug Pricing. [See section ``For 
Further Information'' for address.] The request must set forth a clear 
description of the reasonable cause to believe that a violation of 
section 340B(a)(5) (A) or (B) has occurred, along with sufficient facts 
and evidence in support of the request. In addition, the manufacturer 
shall provide copies of any documents supporting its claims.
    (c) The Office of Drug Pricing will conduct a preliminary review of 
the documentation submitted to determine if reasonable cause exists. If 
the Office of Drug Pricing finds that there is reasonable cause to 
believe that a violation of section 340B(a)(5) (A) or (B) has occurred, 
the audit will be permitted, and the manufacturer will be notified 
accordingly. In cases where the Office of Drug Pricing determines that 
the audit shall be performed by the Government, the Office of Drug 
Pricing will so advise the manufacturer and the covered entity.
    (d) The filing of a request for an audit does not affect any 
statutory obligations of the parties as defined in section 340B of the 
PHS Act. During the audit process, a manufacturer must continue to sell 
covered outpatient drugs at or below the section 340B ceiling price to 
the covered entity being audited.
    (e) Upon approval of the request for a covered entity audit, the 
manufacturer shall then submit an audit workplan to the Office of Drug 
Pricing for approval. The Office of Drug Pricing, after consultation 
with the PHS Office of Cost and Audit Management, will evaluate the 
manufacturer's workplan, and approval will be based on criteria set 
forth in the Audit Program section, Field Work Standards for 
Performance Audits, Government Audit Standards, Current Revision. The 
audit workplan shall describe in detail the following:

    (1) Audit objectives (what the audit is to accomplish), scope 
(type of data to be reviewed, systems and procedures to be examined, 
officials of the covered entity to be interviewed, and expected time 
frame for the audit), and methodology (processes used to gather and 
analyze data and to provide evidence to reach conclusions and 
recommendations);
    (2) Skill and knowledge of the audit organization's personnel to 
staff the assignment, their supervision, and the intended use of 
consultants, experts, and specialists;
    (3) Tests and procedures to be used to assess the covered 
entity's system of internal controls;
    (4) Procedures to be used to determine the amounts to be 
questioned should violations of section 340B(a)(5) (A) and (B) be 
discovered; and
    (5) Procedures to be used to protect patient confidentiality.

    (f) When the audit workplan has been approved, the Office of Drug 
Pricing shall notify the: (1) Manufacturer of the approval of the 
audit, and (2) covered entity of a pending manufacturer audit. The 
covered entity will have at least 15 days from the date of receipt of 
the notice to prepare for the audit.
    (g) Suggested audit procedures include the following:

    (1) Review the covered entity's policies and procedures 
regarding the procurement, inventory, distribution, dispensing, and 
billing for covered outpatient drugs.
    (2) Assess internal controls applicable to the policies and 
procedures identified above (#1) when necessary to satisfy the audit 
objectives.
    (3) Review the covered entity's policies and procedures to 
prevent the resale or transfer of drugs to a person or persons who 
are not patients of the covered entity.
    (4) Test compliance with the policies and procedures identified 
above (#3) when necessary to satisfy the audit objectives.
    (5) Review the covered entity's records of drug procurement and 
distribution and determine whether the covered entity obtained a 
discount only for those programs authorized to receive discounts by 
section 340B of the PHS Act.
    (6) If a covered entity does not use an all inclusive billing 
system (per encounter or visit), but instead bills outpatient drugs 
using a cost based billing system, determine whether the covered 
entity has provided its Medicaid provider number to the Office of 
Drug Pricing and billed Medicaid at the actual acquisition cost.

    (h) Where the manufacturer's auditors conclude that there has been 
a violation of the requirements of section 340B(a)(5) (A) or (B), the 
manufacturer's auditors shall identify (1) the procedures or lack of 
adherence to existing procedures which caused the violation, and (2) 
the dollar amounts involved.
    (i) Following completion of the audit field work, the 
manufacturer's auditors shall provide a verbal briefing of the audit 
findings to the covered entity to ensure a full understanding of the 
facts.
    (j) An audit report must be prepared at the completion of the audit 
in accordance with reporting standards for performance audits of the 
Government Auditing Standards, Current Revision. The manufacturer shall 
submit a copy of the audit report to the covered entity. The covered 
entity shall provide its response to the manufacturer on the audit 
report's findings and recommendations within 60 days from the date of 
receipt of the audit report. When the covered entity agrees with the 
audit report's findings and recommendations either in full or in part, 
the covered entity shall include in its response to the manufacturer a 
description of the actions planned or taken to address the audit 
findings and recommendations. When the covered entity does not agree 
with the audit report's findings and recommendations, the covered 
entity shall provide its rationale for the disagreement to the 
manufacturer.
    (k) Informational copies of the audit report shall also be 
submitted to the Office of Drug Pricing (see section For Further 
Information Contact for the address), the Office of Inspector General, 
Office of Audit Services, PHS Audits Division at room 1-30, Park 
Building, 12420 Parklawn Drive, Rockville, MD 20857, and the PHS Cost 
and Audit Management Branch, room 17A-50, Parklawn Building, 5600 
Fishers Lane, Rockville, MD 20857.
    (l) If a dispute concerning the audit findings and recommendations 
arises, the parties may file a request for informal dispute resolution 
with the Office of Drug Pricing. All dispute resolution procedures 
developed by the Office of Drug Pricing shall be followed.

Informal Dispute Resolution

    The Office of Drug Pricing is proposing an informal process for the 
resolution of certain disputes between manufacturers, covered entities, 
and PHS concerning compliance with the provisions of section 340B of 
the PHS Act. PHS expects parties to utilize this informal process 
before resorting to other remedies which may be available.

I. Types of Disputes Covered

    Disputes resolved by these procedures include:
    (a) A manufacturer believes a covered entity is in violation of the 
prohibition against resale or transfer of a covered outpatient drug 
provided in section 340B(a)(5)(B) of the PHS Act, or the prohibition 
against duplicate discounts or rebates provided in section 
340B(a)(5)(A) of the PHS Act;
    (b) A covered entity believes that a manufacturer is charging a 
price for a covered outpatient drug that exceeds the ceiling price as 
determined by section 340B(a)(1) of the PHS Act;
    (c) A manufacturer is conditioning the sale of covered outpatient 
drugs to a covered entity on the entity's provision of assurances or 
other compliance with the manufacturer's requirements that are based 
upon section 340B provisions;
    (d) A manufacturer has refused to sell a covered outpatient drug to 
a covered entity at or below the ceiling price as determined by section 
340B(a)(1) of the PHS Act;
    (e) A manufacturer believes that a covered entity is dispensing a 
covered outpatient drug in an unauthorized service (e.g., inpatient 
services or ineligible clinics within the same health system);
    (f) A manufacturer believes that a covered entity has not complied 
with the audit requirements under section 340B(a)(5)(C) of the PHS Act, 
or the auditors of the manufacturer have not abided by the approved 
workplan or audit guidelines.

II. Review Process

    Prior to the filing of a request for review with the Office of Drug 
Pricing, the parties must attempt, in good faith, to resolve the 
dispute. All parties involved in the dispute must maintain written 
documentation as evidence of a good faith attempt to resolve the 
dispute. Such evidence includes documentation of meetings, letters, or 
telephone calls between the disputing parties that concern the dispute.
    If the dispute has not been resolved after a good faith attempt, a 
party may submit a written request for a review of the dispute to the 
Director of the Office of Drug Pricing. [See address in ``For Further 
Information Contact'' section].
    The party requesting the review may not rely only upon allegations 
but is required to set forth specific facts showing that there is a 
genuine and substantial issue of material fact in dispute that requires 
a review.
    The request for review shall include a clear description of the 
dispute, shall identify all the issues in the dispute, and shall 
contain a full statement of the party's position with respect to such 
issue(s) and the pertinent facts and reasons in support of the party's 
position. In addition to the required statement, the party shall 
provide copies of any documents supporting its claim and evidence that 
a good faith effort was made to resolve the dispute. These materials 
must be tabbed and organized chronologically and accompanied by an 
indexed list identifying each document.
    The filing of the dispute does not affect any statutory obligations 
of the parties as defined in section 340B of the PHS Act. During the 
review process, for example, a manufacturer must continue to sell 
covered outpatient drugs at or below the section 340B ceiling price to 
all covered entities, including the covered entity involved in the 
dispute.
    The Director, Bureau of Primary Health Care, shall appoint a 
committee to review the documentation submitted by the disputing 
parties and to make a proposed determination. A minimum of three 
individuals shall be appointed (one of whom shall be designated as a 
chairperson) either on an ad hoc, case-by-case basis, or as regular 
members of the review committee. The chairperson shall be from the 
Office of Drug Pricing and the committee members shall be from other 
sections of PHS (e.g., chief pharmacist, auditor).
    Upon receipt of a request for a review, the chairperson of the 
review committee will send a letter to the party alleged to have 
committed a violation. The letter will include (1) the name of the 
party making the allegation(s), (2) the allegation(s), (3) 
documentation supporting the party's position, and (4) a request for a 
response to or rebuttal of the allegations within 30 calendar days of 
the receipt of the letter. 7 days from the date of the postmark of the 
letter will be allowed for mailing and processing through the 
organization.
    Upon receipt of the response or rebuttal, the review committee 
chairperson will review all documentation. The request and rebuttal 
information will be reviewed for (1) evidence that a good faith effort 
was made to resolve the dispute, (2) completeness, (3) adequate 
documentation supporting the issues, and (4) the reasonableness of the 
allegations. If the documentation is adequate, the review committee 
will be convened to consider the matter.
    The reviewing committee may, at its discretion, invite parties to 
discuss the pertinent issues with the committee and to submit such 
additional information as the committee deems appropriate.
    The reviewing committee will propose to dismiss the dispute, if it 
conclusively appears from the data, information, and factual analyses 
contained in the request for a review and rebuttal documents that there 
is no genuine and substantial issue of fact in dispute. This proposed 
finding of the committee will be submitted to the Director of the 
Office of Drug Pricing for consideration and approval. A written 
decision of dismissal will be sent to each party and will contain the 
Director's findings and conclusions in detail and reasons why the 
request for a review did not raise a genuine and substantial issue of 
fact.
    With all other proposed findings, the review committee will prepare 
a written document containing the findings and detailed reasons 
supporting the proposed decision. The document is to be signed by the 
chairperson and each of the other committee members. The chairperson 
will submit the proposed findings to the Director of the Office of Drug 
Pricing for consideration and approval. The Director's written decision 
will be sent with a transmittal letter to both parties.
    If the covered entity or the manufacturer does not agree with the 
Office of Drug Pricing's determination, the covered entity or the 
manufacturer may appeal within 30 days after receiving such a 
determination to the Administrator of the Health Resources and Services 
Administration who will appoint a review official or committee.

III. Penalties

    If the final determination is that a manufacturer has violated the 
provisions of section 340B of the PHS Act or the PHS pharmaceutical 
pricing agreement, the manufacturer's agreement with PHS could be 
terminated or other actions taken as deemed appropriate. If the final 
determination is that an entity has violated section 340B prohibitions 
against resale or transfer of covered outpatient drugs, the prohibition 
against duplicate discounts and rebates (or billing Medicaid more than 
the actual acquisition cost of the drug), or other statutory 
prohibitions, the entity shall be liable to the manufacturer of the 
covered outpatient drug that is the subject of the violation in an 
amount equal to the reduction in the price of the drug for the period 
of the violation, as provided by section 340B(a)(5)(D) of the PHS Act. 
The entity may also be excluded from the drug discount program, if the 
conduct warrants such a sanction.
    After the dispute is resolved, any disputed amounts plus the rate 
of interest must be paid or credited to an account balance no later 
than 30 days following a final determination. Interest will begin to 
accrue from the time the manufacturer is deemed to have been out of 
compliance with section 340B (or provisions of the PHS Pharmaceutical 
Pricing Agreement) or the entity is deemed to have violated 
prohibitions of section 340B. The interest rate will be based upon an 
annual rate established by the Secretary of the Treasury after 
considering private consumer rates of interest prevailing at the time 
of the violation. This rate, utilized by the Department of Health and 
Human Services (HHS) in the collection of debts owed to the United 
States, may be revised quarterly by the Secretary of the Treasury and 
is published by the HHS Assistant Secretary for Management and Budget 
in the Federal Register. See 45 CFR 30.13 Parties will apply the 
interest rate for the quarter in which the violation occurred, and this 
rate will remain fixed for the duration of the time in which interest 
accrues.

(The reporting requirements of this document are subject to Office 
of Management and Budget (OMB) clearance under the Paperwork 
Reduction Act of 1980, 44 U.S.C. 3501-3520, and will not be 
implemented until such clearance has been obtained)

    Dated: June 6, 1994.
Ciro V. Sumaya,
Administrator, Health Resources and Services Administration.
[FR Doc. 94-14089 Filed 6-9-94; 8:45 am]
BILLING CODE 4160-15-P