[Federal Register Volume 59, Number 180 (Monday, September 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23095]


[[Page Unknown]]

[Federal Register: September 19, 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 Outpatient Hospital Facilities

AGENCY: Public Health Service, HHS.

ACTION: Final 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, Department of Health and Human Services, in which the 
manufacturer agrees to charge a price for covered outpatient drugs 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 concerning the inclusion of outpatient 
disproportionate share hospital (DSH) facilities in the PHS drug 
discount program.

FOR FURTHER INFORMATION CONTACT: Marsha Alvarez, R. Ph., Director, 
Office of Drug Pricing, Bureau of Primary Health Care, 4350 East West 
Highway, West Tower, 10th Floor, Bethesda, MD 20814, tel: (301) 594-
4353.

EFFECTIVE DATE: October 19, 1994.

SUPPLEMENTARY INFORMATION:

(A) Background

    Proposed guidelines were announced in the Federal Register at 59 FR 
29300 on June 6, 1994. A period of 30 days was established to allow 
interested parties to submit comments. The Office of Drug Pricing 
received 8 letters with comments concerning legal authority for 
developing the proposed guidelines, responsibility for determining 
eligibility, the inclusion of non-traditional outpatient facilities, 
the need for a definition of eligible hospital facility, ambiguity in 
the policies of the Health Care Financing Administration (HCFA) 
regarding the Medicare cost report, possible exceptions for unique 
circumstances, a retroactive effective date, and general comments 
concerning the definition of ``patient'' and a contracted pharmacy 
service mechanism.
    The following section presents a summary of all major comments, 
grouped by subject, and a response to each comment. All comments were 
considered, and the guideline is adopted as proposed, with minor 
changes to increase clarity.

(B) Comments and Responses

    Comment: Manufacturers should not be required to provide discounts 
to outpatient facilities that are included on the Medicare cost reports 
of eligible DSHs until the PHS Office of Drug Pricing includes the 
names of the eligible outpatient facilities on the master list of 
eligible covered entities.
    Response: When an eligible DSH submits the list of all outpatient 
facilities (on-site and off-site) included on its Medicare cost report 
and Medicaid billing status information to the Office of Drug Pricing 
and the Office adds these facilities to the master list of eligible and 
participating entities during regular quarterly updates, the facilities 
will then be able to access PHS discount pricing. This information will 
be posted on the Electronic Data Retrieval System (EDRS), maintained by 
the Office of Drug Pricing. To access this information call (301) 594-
4992.
    Comment: The proposed guidelines have created a new definition of 
``DSH'' which appears to be within the realm of legislating as opposed 
to rulemaking.
    Response: Section 340B(a)(4) of the PHS Act lists the various 
groups of entities eligible to receive PHS discount pricing. Section 
340B(a)(4)(L) describes a subset of ``hospitals'' as defined in section 
1886(d)(1)(B) of the Social Security Act as eligible to participate in 
the program. Because section 1886 addresses Medicare payment for 
hospital inpatient services only, the scope of the term ``hospital'' 
has been limited to the hospital inpatient services. However, section 
340B deals exclusively with outpatient drugs. Although Congress clearly 
intends this narrow definition be used to identify the Medicare 
disproportionate share hospitals which are eligible for section 340B 
drug discounts, we do not believe it is reasonable to use this same 
definition to limit where the section 340B outpatient drugs can be 
used. Some disproportionate share hospitals offer outpatient services 
in off-site or satellite outpatient facilities. Further, the movement 
of nonprofit hospitals in recent years has been to reorganize and offer 
a variety of services, other than traditional inpatient hospital 
services, through separate divisions, lines of business, or entities. 
Therefore, for purposes of section 340B drug discounts, a further 
interpretation of ``hospital'' is needed.
    Comment: In some instances, the Medicare cost report does not 
include all of the clinics and services which should be eligible for 
the PHS discount pricing. For example, hospitals refer patients for 
specific types of treatments to other hospitals, such as large teaching 
hospitals which have specialized equipment and medical personnel. 
Further, hospitals are establishing separate primary care services in 
different areas of the community. These facilities are often free-
standing and not included on the DSH Medicare cost report, but 
generally are customers of the hospitals and have limited financial 
resources.
    Response: Although it is understandable that the DSH would desire 
to obtain PHS pricing for these various facilities, the statute clearly 
states that it is only the DSH that qualifies for discount pricing. We 
have attempted to define DSH in a manner consistent with HCFA policy 
guidelines (Provider Certification, State Operation Manual, section 
2024). Only outpatient facilities which are an integral component of 
the DSH will be included on the DSH Medicare cost report, and only 
these facilities will be eligible for PHS discount pricing.
    Comment: The proposed guidelines would permit any health care 
entity, by means of its business relations with other health care 
entities, to make itself eligible for PHS pricing. Any clinic, 
facility, or community hospital affiliated with a DSH could consolidate 
its cost reporting requirements and use the Medicare provider number of 
the DSH to make itself eligible for PHS pricing. This is not consistent 
with Congress's intent in precisely defining a list of entities 
eligible for the PHS discount pricing.
    Response: Congress referred to section 1886 of the Social Security 
Act (Medicare inpatient hospital payment) for the definition of DSH; 
therefore, it is reasonable to utilize existing Medicare rules to 
determine eligibility for PHS discount pricing. The proposed Medicare 
cost report test was developed by Medicare officials and used, in part, 
to determine whether a facility is a component of a hospital. If an 
outpatient facility does not share in the hospital cost report, it is 
properly viewed as an independent, free-standing facility.
    When a DSH attempts to certify multiple components as a single 
hospital for purposes of Medicare certification, it must follow 
guidelines developed by HCFA. These guidelines (Provider Certification, 
State Operation Manual, section 2024) establish tests to determine 
whether an additional hospital facility, geographically separated but 
in the same metropolitan area, is a separate facility from or a 
component of a single hospital. These tests include: (a) all components 
subject to the control and direction of one common owner (i.e., 
governing body) which is responsible for the operational decisions of 
the entire hospital enterprise; (b) one chief medical officer who 
reports directly to the governing body and who is responsible for all 
medical staff activities of all components; (c) integration of the 
organized medical staff (e.g., all medical staff members having 
privileges at all components); and (d) one chief executive officer 
through whom all administrative authority flows and who exercises 
control and surveillance over all administrative activities of all 
components. This does not preclude the establishment of a deputy or 
assistant executive officer position.
    If the off-site clinic meets these tests, it would be included in 
the DSH Medicare cost report. This test clearly determines whether a 
facility is an integral part of a DSH hospital, and is an appropriate 
standard to determine eligibility. It incorporates Medicare criteria 
that are not ambiguous and forms an independent and objective basis on 
which to determine eligibility.
    Comment: The proposed guidelines should be applied uniformly to all 
DSH outpatient facilities, regardless of whether they fit the common 
perception of a traditional hospital outpatient clinic (e.g., include 
facilities that serve prison inmates, HMOs, home infusion and home 
health patients). Anything short of this would be extremely difficult 
to administer since separating traditional from non-traditional 
facilities would be a highly subjective and time-consuming exercise. 
Further, PHS should include in the final notice a specific definition 
for eligible ``outpatient facility.''
    Response: Section 340B(b) of the PHS Act refers to section 1927(k) 
of the Social Security Act for the definition of ``covered outpatient 
drug.'' This definition does not include any limitations on outpatient 
settings, and there is no requirement that the covered drug be used in 
a ``traditional'' outpatient setting. Any outpatient facility included 
on an eligible DSH's Medicare cost report can access PHS pricing if it 
is included on the master list of eligible entities.
    Comment: There are certain circumstances which might prevent an 
otherwise eligible outpatient facility from billing under the DSH's 
provider number (e.g., State or local laws requiring a facility or 
pharmacy to bill all third party payers directly). In these instances, 
the facility should be permitted to access PHS discount pricing if the 
eligible DSH facility can demonstrate that the pharmacy would meet the 
proposed Medicare test but for the unique circumstances.
    Response: The test used to determine the eligibility of hospital 
outpatient facilities must incorporate criteria that form an 
independent and objective basis. This will provide fair and easy 
administration. To include a ``but for'' test would create a difficult 
standard to administer. If an outpatient facility is not included on 
the eligible DSH's Medicare cost report, it will not meet the 
requirements for eligibility.
    Comment: The effective date of this notice should be made 
retroactive to December 1, l992. Further, the June 13 deadline for 
requesting retroactive rebates or credits should be extended.
    Response: In a Federal Register notice, dated May 13, l994, a 
deadline was announced for requesting retroactive discounts. Eligible 
and potentially eligible covered entities could request these discounts 
until June 13, 1994. See 59 FR 25112. The notice permits an off-site 
outpatient DSH facility to receive retroactive discounts if it meets 
the following requirements: (1) is included on an eligible DSH's 
Medicare cost report, (2) has not participated in a group purchasing 
arrangement for covered outpatient drugs, (3) has not billed Medicaid 
for the covered outpatient drugs for which retroactive discounts are 
being requested, and (4) has preserved its right to such discounts by 
sending manufacturers a letter requesting such refunds and providing 
adequate documentation of drug purchases by June 13, l994. After this 
date, the right to retroactive discounts ceased. See 59 FR 25112. 
(``Any DSH outpatient clinic which is or will be eligible for 
retroactive discounts may preserve its right by sending manufacturers a 
letter requesting such refunds and providing adequate documentation of 
purchases.'')
    Comment: There is no definition of the term ``patient,'' thereby 
permitting a DSH to distribute discounted drugs to virtually anyone it 
can argue is a patient without running afoul of the drug resale 
prohibition of section 340B(a)(5)(B) of the PHS Act.
    Response: PHS will address this issue in a future Federal Register 
notice which will request public comment. All comments concerning the 
definition of ``patient'' will be addressed at that time.
    Comment: PHS has approved a contracted pharmacy service model 
without public notice and an opportunity to comment.
    Response: PHS will discuss the contracted pharmacy service model in 
a future Federal Register notice which will invite public comment. All 
comments concerning this issue will be addressed at that time.

(C) DSH Outpatient Facility Guidelines

    Set forth below are the final guidelines regarding the inclusion of 
DSH outpatient facilities: The outpatient facility is considered an 
integral part of the ``hospital'' and therefore eligible for section 
340B drug discounts if it is a reimbursable facility included on the 
hospital's Medicare cost report. For example, if a hospital with one 
Medicare provider number meets the disproportionate share criteria and 
this hospital has associated outpatient clinics whose costs are 
included in the Medicare cost report, these clinics would also be 
eligible for section 340B drug discounts. However, free-standing 
clinics of the hospital that submit their own cost reports using 
different Medicare numbers (not under the single hospital Medicare 
provider number) would not be eligible for this benefit.
    A DSH, eligible for PHS pricing, must first request that the Office 
of Drug Pricing include in the PHS drug discount program the outpatient 
facilities that are included in its Medicare cost report. A list of 
these outpatient facilities along with Medicaid billing status 
information must be included with the request. Second, an appropriate 
official of the DSH must sign a statement that he/she is familiar with 
HCFA guidelines concerning Medicare certification of hospital 
components as one cost center, has examined the list of outpatient 
facilities, and certifies that the facilities are correctly included on 
the DSH's Medicare cost report. When these facilities are added to the 
master list of eligible and participating covered entities, the off-
site facilities will be able to access PHS discount pricing. On-site 
clinics that are not included on the Medicare cost report will not be 
eligible for PHS discount pricing. This information will be posted on 
the Electronic Data Retrieval System (EDRS), maintained by the Office 
of Drug Pricing, on a quarterly basis. To access this information, call 
(301) 594-4992.
    DSHs which have questions concerning this process, or manufacturers 
which have questions concerning the eligibility of certain DSH 
outpatient clinics, should contact Elizabeth Hickey (301-594-4353), at 
the Office of Drug Pricing.

    Dated: September 13, 1994.
James A. Walsh,
Acting Administrator, Health Resources and Services Administration.
[FR Doc. 94-23095 Filed 9-16-94; 8:45 am]
BILLING CODE 4160-15-P