[Federal Register Volume 61, Number 165 (Friday, August 23, 1996)]
[Notices]
[Pages 43549-43556]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21485]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Health Resources and Services Administration
RIN 0905-ZA96


Notice Regarding Section 602 of the Veterans Health Care Act of 
1992; Contract Pharmacy Services

AGENCY: Health Resources and Services Administration, 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 (covered) entities must sign a 
pharmaceutical pricing agreement with the Secretary of Health and Human 
Services (HHS) in which the manufacturer agrees to charge a price for 
covered outpatient drugs that will not exceed an amount determined 
under a statutory formula.
    The purpose of this notice is to inform interested parties of final 
guidelines regarding contract pharmacy services.

FOR FURTHER INFORMATION CONTACT: Annette Byrne, R. Ph., M.S., Director, 
Drug Pricing Program, Bureau of Primary Health Care, Health Resources 
and Services Administration, 4350 East West Highway, 10th Floor, 
Bethesda, MD 20814, Phone (301) 594-4353, FAX (301) 594-4982.

EFFECTIVE DATE: August 23, 1996.

SUPPLEMENTARY INFORMATION:

(A) Background

    Proposed guidelines for contract pharmacy services were announced 
in the Federal Register at 60 FR 55586 on November 1, 1995. A comment 
period of 30 days was established to allow interested parties to submit 
comments. The Health Resources and Services Administration, Bureau of 
Primary Health Care, acting through the Office of Drug Pricing (ODP), 
received eleven letters including comments concerning the scope of the 
340B Program, contractor certification, contractor and entity penalties 
for drug diversion, creation of an agency relationship between the 
entity and the contractor, entity responsibilities including price 
establishment, reimbursement, inventory control, and the like.
    Although some manufacturers expressed concerns regarding the 
potential for drug diversion, the Department has received no evidence 
of diversion that has required an official Departmental investigation. 
This includes the various drug distribution systems, among them those 
using contract pharmacy services. However, in response to 
manufacturers' concerns, the Department intends to study the use of 
contracted pharmacy services for accessing 340B drugs to determine if 
there is evidence of drug diversion. In particular, the Department will 
examine closely documented complaints, including the results of 
manufacturers' audits, will use other analyses as deemed appropriate, 
and will consider whether additional safeguards are necessary.
    We received some very positive comments in support of the 
mechanism. These comments discussed the many covered entities which do 
not operate their own licensed pharmacies; therefore, the guidelines 
encourage these entities to participate in the program. Because these 
covered entities provide medical care for many individuals and families 
with incomes well below 200% of the Federal poverty level and subsidize 
prescription drugs for many of their patients, it was essential for 
them to access 340B pricing. Covered entities could then use savings 
realized from participation in the program to help subsidize 
prescriptions for their lower income patients, increase the number of 
patients whom they can subsidize and expand services and formularies. 
One commenter described the guidelines as straightforward, clear and 
consistent with section 340B. Another commenter stated that the ``use 
of contract pharmacies by covered entities is fundamental to the 
success of the VHCA [Veterans Health Care Act] drug pricing program.'' 
The commenter supported the guidelines and urged the Department to 
expedite their completion, as the importance of the contract pharmacy 
option to their members could not be overstated.
    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, with changes made to 
increase clarity and readability. In addition, to provide further 
technical assistance and guidance to covered entities interested in 
using this mechanism, examples of report contents, a suggested system 
to ensure an adequate drug tracking system, and a method to ensure 
patient eligibility are included. Various commenters, and in particular 
drug manufacturers, suggested the need for detailed systems. The 
National Association of Community Health Centers suggested some of the 
specific examples.

(B) Comments and Responses

(1) General

    Comment: The use of contract pharmacy services is inconsistent with 
section 340B of the PHS Act and results in an unauthorized expansion of 
the program.
    Response: Section 340B, which established the Drug Pricing Program, 
requires manufacturers to sell to covered entities at or below a 
ceiling price determined by a statutory formula. The statute is silent 
as to permissible drug distribution systems. There is no requirement 
for a covered entity to purchase drugs directly from the manufacturer 
or to dispense drugs itself. It is clear that Congress envisioned that 
various types of drug delivery systems would be used to meet the needs 
of the very diversified group of 340B covered entities.
    It has been the Department's position that if a covered entity 
using contract pharmacy services requests to purchase a covered drug 
from a participating manufacturer, the statute directs the manufacturer 
to sell the drug at the discounted price. If the entity directs the 
drug shipment to its contract pharmacy, we see no basis on which to 
conclude that section 340B precludes this type of transaction or 
otherwise

[[Page 43550]]

exempts the manufacturer from statutory compliance. However, the entity 
must comply, under any distribution mechanism, with the statutory 
prohibition on drug diversion.
    During the early period of program implementation, it became 
apparent that only a very small number of the 11,500 covered entities 
used in-house pharmacies (approximately 500), although additional 
entities participated by buying drugs for their physician dispensing 
activities. In addition, many of the larger groups of covered entities, 
including community and migrant health centers, hemophilia clinics and 
most of the Ryan White HIV service programs (e.g., State AIDS Drug 
Assistance Programs) depend upon outside pharmacy services. Yet, 
because the delivery of pharmacy services is central to the mission of 
(and a legal mandate in some instances for) these providers, they rely 
on outside pharmacies to fill the need. It would defeat the purpose of 
the 340B program if these covered entities could not use their 
affiliated pharmacies in order to participate in the 340B program. 
Otherwise, they would be faced with the untenable dilemma of having 
either to expend precious resources to develop their own in-house 
pharmacies (which for many would be impossible) or forego participation 
in the program altogether. Neither option is within the interest of the 
covered entities, the patients they serve, or is consistent with the 
intent of the law.
    As early as 1993, several covered entity groups and a home care 
company came forward to assist the Department in developing a workable 
mechanism to use outside pharmacies under arrangements which would 
decrease the drug diversion potential. The result was the November 1 
proposed notice, which articulates a voluntary model agreement. 
Currently, contract pharmacies are used by a number of large 
organizations, such as the American Red Cross, several community health 
centers, and the New York Blood Consortium.
    It must be understood that the use of contract services is only 
providing those covered entities (which would otherwise be unable to 
participate in the program) a process for accessing 340B pricing. The 
mechanism does not in any way extend this pricing to entities which do 
not meet program eligibility. However, it has permitted more eligible 
entities to participate in the program with a reasonable assurance that 
the potential for drug diversion is eliminated.
    Comment: The guidelines were proposed without a comprehensive 
notice and comment period.
    Response: During the early months following enactment, it became 
clear that there were many gaps in the legislation and some form of 
program structure was necessary to move the program forward. There were 
approximately 11,500 eligible entities, 500 participating 
manufacturers, numerous wholesalers and many Federal programs affected 
by this legislation and all seeking guidance. It was incumbent upon the 
Department to implement this difficult Congressional mandate in an 
expeditious manner.
    Interpretive rules and statements of policy were developed to 
provide necessary program guidance. The Department has published these 
guidelines in the Federal Register, used a Federal clearance process 
(including the Office of Management and Budget's clearance) and 
provided a public comment period to obtain both Federal as well as 
public input into guideline development. The Department considered all 
comments in developing these final guidelines.
    The guidelines explain how the Department intends to administer the 
340B, further explain the statutory language by clarifying the meaning 
given by the Department to particular words or phrases, and do not 
exceed the purpose of 340B or conflict with any of its provisions. We 
believe that these guidelines create no new law and create no new 
rights or duties; therefore, they are not subject to the Administrative 
Procedure Act's requirement of notice and comment. Nevertheless, the 
Department chose to solicit and respond to public comment.
    Comment: As a matter of State law, entities possess the right to 
hire retail pharmacies to act as their agents in providing 
pharmaceutical care to their patients. As a general rule, a person or 
entity privileged to perform an act may appoint an agent to perform the 
act unless contrary to public policy or an agreement requiring personal 
performance. Restatement of Agency 2d Sec. 17 (1995). Hence, even in 
the absence of Federal guidelines, covered entities have the right to 
contract with retail pharmacies for the purpose of dispensing 340B 
drugs. By issuing guidelines in this area, ODP is not seeking to create 
a new right but rather is simply recognizing an existing right that 
covered entities enjoy under State law.
    Response: We agree. However, entities, under any distribution 
system, must comply with the statutory prohibition against diversion of 
340B drugs to individuals who are not patients of the covered entities. 
Further, the dispensing of drugs, purchased with a 340B discount, must 
not result in the generation of a Medicaid rebate.
    Comment: Participation in the contract pharmacy mechanism by 
hemophilia treatment centers funded under the Maternal and Child Health 
Block Grant Program would contravene the central goals of that program 
and could result in grant termination or non-renewal.
    Response: Block grant funds are designed for formula allocation to 
the States to meet specific defined needs in the legislation. Congress 
recognized that the Maternal and Child Health Bureau (MCHB) had other 
needs that should be met more flexibly; therefore, fifteen percent of 
the appropriation is a discretionary set-aside. These funds are not 
subject to the specific parameters of block grant funds but instead are 
used to fulfill other goals within the MCHB mission. This includes the 
provision of services (including pharmaceuticals) to individuals with 
hemophilia disorders and their families. Therefore, the purchase of 
pharmaceuticals by hemophilia centers does not contravene grant 
principles.
    Comment: The contract pharmacy mechanism contravenes Federal and 
State laws and regulations (e.g., Prescription Drug Marketing Act and 
the Anti-kickback Statute).
    Response: We found no indication that the guidelines contravene 
Federal or State law. Regarding allegations that the guidelines 
contravene the Prescription Drug Marketing Act (PDMA), it is clear that 
the guidelines fall squarely within the PDMA resale exception that 
allows the dispensing of a prescription drug purchased by a health care 
entity when dispensing is pursuant to a prescription. See 21 U.S.C. 
353(c)(3)(B)(v). Under the guidelines, the contract pharmacy would 
dispense 340B drugs to patients of the covered entity pursuant to a 
prescription. The contract pharmacy would act as an agent of the 
covered entity, in that it would not resell a prescription drug but 
rather distribute the drug on behalf of the covered entity. This 
situation is akin to a covered entity having its own pharmacy. 
Moreover, the guidelines include controls intended to prevent diversion 
and provide for accountability of drug stocks. For these reasons, the 
guidelines are consistent with both the letter and the spirit of the 
PDMA.
    We believe it necessary to ensure that covered entities contracting 
with pharmacies to dispense 340B drugs are aware of the requirements of 
the Federal anti-kickback statute and the way in

[[Page 43551]]

which such requirements could apply to their arrangements with 
contracting pharmacies. To this end, we inserted into the guidelines a 
discussion of the statute's requirements and its potential application 
in this type of contracting situation.
    In addition, provision (e) of the guidelines provides that the 
``contractor and the covered entity will adhere to all Federal, State, 
and local laws and requirements.'' As a general matter, we found it 
impossible to discuss each State's laws and regulations regarding drug 
purchase, distribution, and dispensing in relation to the many 
different types of entities and their individual needs. We believe it 
appropriate that the guidelines include a provision that requires each 
entity and contractor to be responsible for ensuring that their 
particular contracting arrangements and operations conform to the 
requirements of all applicable laws and regulations.
    Comment: The ODP should develop a uniform contractual agreement and 
distribute this agreement to covered entities for use without 
modification.
    Response: The guidelines propose a model format only. The 
Department has included in the guidelines provisions necessary to 
ensure that covered entities and contract pharmacies understand and 
agree not to violate 340B provisions. Because of the wide diversity of 
covered entities (including hemophilia clinics, large hospitals, 
migrant health clinics, family planning service programs and State AIDS 
drug assistance programs), it would be impossible to include provisions 
responsive to the needs of all entities.
    Comment: ODP should keep a list of all acceptable contract 
pharmacies.
    Response: Any pharmacy licensed by a State Board of Pharmacy is 
acceptable.
    Comment: Some State laws require that manufacturers ensure that a 
buyer is licensed to purchase pharmaceuticals. Covered entities that do 
not have pharmacy operations would not be licensed, and thus, in some 
States, manufacturers could not receive from the covered entity the 
assurance required by State law.
    Response: Provision (e) provides that the covered entity will 
adhere to all Federal, State and local laws and requirements. 
Accordingly, if State X requires an entity to be licensed to purchase 
drugs and a covered entity subject to the laws of State X does not have 
a pharmacy license, it may not be able to purchase drugs. However, if 
State X permits a covered entity to use contract pharmacy services to 
purchase drugs on its behalf, the entity could presumably use this 
mechanism. To the extent the guidelines may be inconsistent with a 
State's distributor licensing requirements, this same reasoning would 
apply.
    Comment: Covered entities may bill insurers for 340B drugs at the 
usual price, resulting in the savings not being passed on to the 
patients.
    Response: Section 340B does not limit the pricing behavior of 
covered entities. It is our understanding that covered entities have a 
variety of drug pricing approaches. While some may pass all or a 
significant part of the discount to their patients, others may set the 
price slightly higher than the actual acquisition cost plus a 
reasonable dispensing fee, using the savings to reach more eligible 
patients and provide more comprehensive services. The Department 
intends to examine the section 340B drug pricing activities of covered 
entities to determine the various approaches used and the rationale for 
these approaches. However, until it completes its examination of this 
issue, the Department notes that a modest section 340B price markup, 
with saving realized from the discounts used by covered entities only 
for purposes of the federal program (including certain disproportionate 
share hospitals) which provides its section 340B eligibility does not 
appear to be inconsistent with the drug pricing program.
    Comment: There should be a limitation to only those covered 
entities that do not have the capability under State pharmacy law to 
purchase and dispense prescription drugs.
    Response: The guidelines have been revised to read that the 
``mechanism is designed to facilitate program participation for those 
eligible covered entities that do not have access to an appropriate 
`in-house' pharmacy services.'' However, this is not a bar to the use 
of the mechanism by any covered entity.
    Comment: A covered entity should use only one form of 
participation, and if it purchases in its own right for some patients, 
it should not use a contractor for others.
    Response: Some covered entities may receive nominal pricing 
directly from a manufacturer (e.g., family planning) for specific 
drugs, may obtain certain drugs through promotional discounts, or have 
a manufacturer-specific indigent free drug program which could 
necessitate the procurement of other pharmaceuticals from a retail 
pharmacy. The statute does not limit the covered entities' access to 
these avenues of drug purchasing.
    Comment: The Department should establish criteria that a contractor 
and a covered entity must meet in order to be in compliance with 
section 340B provisions and receive 340B pricing.
    Response: The contracted pharmacy mechanism does establish these 
criteria in that it includes provisions for purchasing only by the 
entity and not contractor, identifies customary and adequate records 
that can provide an audit trail, preclusion of the filling of Medicaid 
prescriptions (thus preventing duplicate discounting), and three 
provisions related to the potential for drug diversion (agreement not 
to divert with specified penalties, customary drug tracking systems, 
and an agreement to permit manufacturer and HHS audits).
    Comment: The reference to ``facility'' in provision (b) should be 
changed to ``entity'' for clarification.
    Response: The guidelines were revised accordingly.
    Comment: The Department should review all contracts between covered 
entities and pharmacies or develop a procedure for certifying that each 
contract pharmacy arrangement meets the mechanism criteria.
    Response: The Department has added a provision to the guidelines 
which suggests that covered entities utilizing contract pharmacy 
services submit to the ODP a certification that they have signed and 
have in effect an agreement with the pharmacy contractor containing 
provisions (a) through (k) as outlined in the guidelines. For the 
convenience of participating drug manufacturers, the names of covered 
entities which submit a certification, or have submitted an alternate 
mechanism to reduce the potential for drug diversion which has been 
approved by ODP, will be placed on the program electronic bulletin 
board (EDRS) for public access.
    Comment: Covered entities should be permitted to contract with more 
than one site and contractor. Although we understand that the 
limitation of one contractor (with multiple sites) was intended to 
address drug diversion concerns, covered entities will have the 
incentive of directing their patients to the contract pharmacy site 
participating in the program, even though there may be several 
nonparticipating sites of contractors that would be more convenient for 
the patients.
    Response: Covered entities are unlikely to select a contract 
pharmacy that is not convenient for their patients. See also the 
discussion of patient choice, below.
    Comment: PHS is moving from a direct purchase discount program to 
an indirect charge-back contracting system.

[[Page 43552]]

    Response: All 340B drugs will be sold to covered entities; 
therefore, there are no additional charge backs involved.

(2) Patient Choice

    Comment: Provision (c) provides that the patient may obtain the 
prescription from the pharmacy provider of his or her choice. Pharmacy 
providers cannot provide prescriptions, as only a physician can write a 
prescription. The guidelines should permit the patient to obtain the 
prescription from the covered entity physician and then be able to fill 
that prescription at the pharmacy of his or her choice. Further, the 
covered entity physician should inform each patient that he or she has 
the freedom to choose any pharmacy to fill the prescription.
    Response: The use of the word ``prescription'' may be somewhat 
confusing. We have revised this provision to read ``may obtain the 
prescription from the covered entity and then obtain the drug(s) from 
the pharmacy provider of his or her choice.'' In addition, a provision 
is added to address the responsibility of the covered entity physician 
to inform the patient of his or her freedom of choice.
    Comment: Wording should be added to provision (c) to make it clear 
that when a patient obtains a drug from a retail pharmacy other than 
the entity's contract pharmacy, the manufacturer does not have to offer 
this drug at 340B pricing.
    Response: The guidelines were revised accordingly.

(3) Bill to/Ship to

    Comment: The type of ``bill to, ship to'' arrangement proposed in 
the notice is not a ``purchase'' by the covered entity.
    Response: Please note provision (a) of the notice which states 
``the covered entity will purchase the drug.'' The contract pharmacy 
does not purchase the drug. Title to the drugs passes to the covered 
entity.
    Comment: A ``ship to, bill to'' arrangement may not be lawful in 
many States (e.g., state distributor licensing requirements).
    Response: The Department obtained information from both the 
American Pharmaceutical Association and the National Association of 
Boards of Pharmacy which suggests that no State would consider this 
type of activity unlawful.
    Comment: If the ``ship to, bill to'' procedure is implemented 
through wholesalers, there are no procedures in place that can enable a 
manufacturer to conduct an adequate audit.
    Response: The guidelines provide that the covered entity will 
verify, using the contractor's (readily retrievable) customary business 
records, that a tracking system exists which will ensure that drugs 
purchased under the Act are not diverted to individuals who are not 
patients of the covered entity. These records will be maintained for 
the period of time required by the State law and regulations. The 
guidelines provide that the contractor will provide the covered entity 
with reports consistent with normal business practices as well as 
maintain records separate from it's own operation. In addition, the 
contractor will agree to be subject to audits by both the manufacturers 
and the Department. In light of these provisions, audits will be 
possible, regardless of whether drugs are shipped by manufacturers or 
wholesalers.
    Comment: A ``ship to, bill to'' procedure could interfere with 
marketing arrangements that an individual manufacturer may have 
established as part of its usual business practices.
    Response: Because the manufacturer is still selling to the covered 
entities, we can see no interference with marketing arrangements. The 
manufacturer will be using its usual business practices. Only the 
delivery of the drug will be altered.
    Comment: The covered entity (not its contractor) will place all 
orders for drugs based upon its projections of the needs of its 
patients.
    Response: Because the covered entity will have no knowledge of the 
inventory levels of the pharmacy, it would be unrealistic to include a 
provision that the covered entity will order 340B drugs.
    Comment: The covered entity, consistent with customary business 
practices in wholesale purchases, should make timely payment of 
invoices for drugs shipped to the contractor pursuant to the entity's 
order.
    Response: We have included this concept in the guidelines, Section 
1 of Appendix.

(4) Penalties

    Comment: The penalty for the contract pharmacy which violates the 
agreement not to resell or transfer a drug purchased at 340B pricing is 
inadequate. Knowing violators should be fined beyond their unjust 
profit and criminal and fraud penalties should be imposed.
    Response: The Department has no statutory authority to assess 
additional penalties beyond the authority provided in section 340B. 
However, to the extent the Department is aware that improper action by 
an entity or a contract pharmacy may be a violation of law, we will 
refer such cases to appropriate authorities.

(5) Potential Drug Diversion

    Comment: PHS should conduct an annual audit of each contract 
pharmacy to ensure compliance with all Departmental rules and 
regulations.
    Response: Subject to the availability of funds, the Department 
intends to conduct a study of the contract pharmacy mechanism. 
Depending upon the results of this analysis and the availability of 
funds, further study may result. Annual audits of each contract 
pharmacy situation would be burdensome and are not feasible.
    Comment: Contract pharmacies will be motivated to identify patients 
other than those of the covered entity whose drug usage can afford the 
contractor a profit opportunity. The covered entity should be 
responsible to the manufacturer for any diversion by the contractor of 
340B drugs to individuals who are not patients of the covered entity.
    Response: The guidelines contains provision (h), in which both 
parties agree to not ``resell or transfer a drug purchased at section 
340B prices to an individual who is not a patient of the covered 
entity.'' In addition, this provision provides that if diversion has 
occurred, the contractor will pay the amount of the discount in 
question so that the covered entity can reimburse the manufacturer, as 
required by section 340B(a)(5)(D).
    Comment: The mechanism should include provisions for ensuring that 
the agreement will, in fact, be enforced.
    Response: The Department does have the authority to remove a 
covered entity from the eligibility list if it (or its contract 
pharmacy) is found to have diverted 340B drugs to individuals who are 
not patients of the entity. To this end, the Department has developed a 
mechanism to receive and investigate complaints concerning drug 
diversion. This mechanism was published in the Federal Register for 
notice and comment on June 10, 1994 (59 FR 30021). In addition, the 
Department, at various public meetings concerning the implementation of 
340B, has requested documentation of any covered entity drug diversion. 
To date, the Department has received no indication of drug diversion in 
relation to drugs purchased at 340B discount pricing that has required 
an official Departmental investigation.
    Comment: The manufacturer appears to bear the sole risk arising 
from abuses of the program and has no recourse if such abuse occurs. 
The manufacturer

[[Page 43553]]

has limited ability to verify an arrangement between the covered entity 
and the contract pharmacy. Under the statute, the manufacturer's only 
remedy is to demand an audit; however, the lack of final audit 
guidelines has effectively prevented manufacturers from undertaking 
this type of activity. PHS should make arrangements for injunctive 
relief to prevent damages from ongoing violations of the statute, or 
provisions for terminating the participation of covered entities or 
their contractors.
    Response: The manufacturer has sufficient remedies available to 
detect and eliminate abuse of the program. First, the manufacturer may 
audit the entity. Although the audit guidelines were not published in 
final form, we consider the proposed guidelines, published in the 
Federal Register, a sufficient statement of Department guidelines to 
allow manufacturers to proceed with an entity audit. Second, the 
Department has developed a dispute resolution process to provide 
parties with an informal mechanism to bring before the Department 
allegations of behavior that is in violation of 340B. Third, the 
contract pharmacy guidelines provide that if the covered entity or its 
contractor is found to have violated the 340B prohibition against drug 
diversion (and duplicate discounting), the covered entity could be 
removed from the list of covered entities and could no longer access 
340B pricing.
    Comment: The covered entity should establish a process for a 
quarterly reconciliation of its prescribing records with the 
contractor's inventory and dispensing records to provide for early 
detection of diversion and remediation of irregularities.
    Response: We have included a provision that covered entity will 
establish a process for a quarterly random (sample) comparison of its 
prescribing records with the contractor's dispensing records to detect 
potential irregularities.
    Comment: The covered entity should establish prior authorization 
protocol, assuring that the individual's status as a patient of the 
entity is confirmed by the entity in advance of product dispensing.
    Response: The contractor should have some type of assurance that 
the patient to whom the contractor is dispensing the 340B drug is a 
patient of a covered entity participating in the 340B Program. To that 
end, we have added a provision to the guidelines stating that the 
covered entity and the contractor will develop a system to verify 
patient eligibility (e.g., eligible patient list or a validated 
prescription). Additionally, we have included a suggested contract 
provision which states, ``(pharmacy) will dispense covered drugs only 
in the following circumstances: (1) Upon presentation of a prescription 
bearing the (covered entity's) name, the eligible patient's name, a 
designation that the patient is an eligible patient, and the signature 
of a legally qualified health care provider affiliated with the 
(covered entity); or (2) receipt of a prescription ordered by telephone 
on behalf of an eligible patient by a legally qualified health care 
provider affiliated with the (covered entity) who states that the 
prescription is for an eligible patient. The (covered entity) should 
provide a list to the (pharmacy) of all such qualified health care 
providers and will update the list of providers to reflect any changes, 
which is consistent with customary business practice.''
    Comment: The contract agreement should restrict pharmacy services 
to only those patients who receive their medical care from the covered 
entity.
    Response: Provision (g) of the guidelines provides that the 
contractor will not resell or transfer a 340B drug to an individual who 
is not a patient of the entity. The Department issued proposed 
guidelines to define the word ``patient'' in a Federal Register notice 
on August 3, 1995. See 60 FR 39762. Provision (2) of the definition 
provides that an individual is a patient of a covered entity if, among 
other requirements, the ``individual receives health care services from 
a health care professional who is either employed by the covered entity 
or provides health care under contractual or other arrangements (e.g., 
referral for consultation) such that the responsibility for the care 
provided remains with the covered entity.'' Currently, the Department 
is analyzing the comments received in response to that notice and is 
developing final guidelines.
    It must be noted that the covered entity is responsible for any 
diversion of its drugs to ineligible individuals; therefore, it must 
make every effort to thoroughly scrutinize the contractor's dispensing 
records, to determine if the 340B drugs were dispensed to only eligible 
recipients. If a manufacturer believes that a covered entity contractor 
is diverting 340B drugs to ineligible recipients, the manufacturer 
should immediately contact the Department with this information and 
submit all supporting documentation so that a thorough investigation 
can be initiated.
    Comment: PHS should oversee contractors' compliance with the 
contracts regarding the 340B prohibition against drug diversion and 
duplicate discounting.
    Response: Because the covered entity purchases the drug, retaining 
title, and directs shipment to its contractor, it retains 
responsibility for the drug. If the drug generates a Medicaid rebate or 
is diverted to an individual who is not a patient of the covered 
entity, the entity will be responsible for such activity. The 
Department and a participating manufacturer have the authority to audit 
the records of the covered entity and the contractor that directly 
relate to that manufacturer's drugs and to the 340B prohibitions 
against drug diversion and duplicate discounting. See proposed Audit 
Guidelines, 59 FR 30021, June 10, 1994. Further, the Department has 
proposed a dispute resolution process in which a manufacturer may bring 
a claim against an entity for drug diversion or duplicate discounting. 
See Dispute Resolution, 59 FR 30023. If the entity (or its contractor) 
is found to have violated such prohibitions, the entity is required by 
340B(a)(5)(D) to pay the manufacturer the amount of the discount in 
dispute, and, pursuant to 340B(a)(4), the Department may determine that 
the entity is no longer a ``covered entity'' eligible to access 340B 
pricing.
    We have added several suggested contract provisions that are 
consistent with normal business practices to the guidelines (Appendix) 
to provide further technical assistance in this area. One provision 
concerning potential discrepancies in ordering and shipping states, 
``the pharmacy will compare all shipments received to the orders and 
inform the covered entity of any discrepancy within five (5) business 
days of receipt.'' Concerning an appropriate tracking system to prevent 
drug diversion, another provision states, ``prior to the pharmacy 
providing pharmacy services pursuant to this agreement, the (covered 
entity) will have the opportunity, upon reasonable notice and during 
business hours, to examine the tracking system and may require (the 
pharmacy) to make any modifications to such system as the (covered 
entity) may, in its sole discretion, require. Such a system may include 
sample quarterly comparisons of eligible patient prescriptions to the 
dispensing records and a six (6) month comparison of 340B drug 
purchasing and dispensing records. The (pharmacy) will permit the 
(covered entity) or its duly authorized representatives to have 
reasonable access to (pharmacy's) facilities and records during the 
term of this agreement in order to make periodic checks regarding the 
efficacy of such tracking systems. (Pharmacy) agrees to

[[Page 43554]]

make any and all adjustments to the tracking system which (covered 
entity) advises are reasonably necessary to prevent diversion of 
covered drugs to individuals who are not patients of the (covered 
entity).''
    Comment: There should be a process for excluding from the 340B 
Program those contractors that are in violation of the statute and the 
guidelines should explicitly note that the pharmacy contractor will be 
subject to additional civil or criminal penalties if violation of the 
guideline involves a violation of State or Federal law.
    Response: Covered entities which are found to have violated the 
prohibitions of section 340B(a)(5) can be excluded from the 340B 
Program, after an appropriate opportunity to be heard. See Dispute 
Resolution Guidelines in 59 FR 30023, June 10, 1994. However, if the 
program finds that the pharmacy contractor has violated these statutory 
prohibitions, it cannot bar this pharmacy from dispensing 340B drugs 
for a covered entity. Nevertheless, the program intends to alert any 
entity which submits a certification with this particular pharmacy 
listed as the contractor as to this pharmacy's past activities. If the 
covered entity insists upon using this pharmacy, the Department will 
carefully scrutinize its activities. An additional provision was added 
to address the potential for civil or criminal penalties if the 
contractor violates Federal or State law.
    Comment: The agreement should appoint the pharmacy contractor to be 
the agent of the covered entity and discuss the duties to be performed 
by the agent on behalf of the covered entity and the agent's rights.
    Response: We believe that the relationship between the covered 
entity and the contract pharmacy is one of agency. However, the form of 
the relationship will be dictated by the terms of the contract; 
therefore, it is not essential to characterize the relationship as 
meeting or not meeting the standards which would serve under applicable 
law to establish an agency relationship. The contract terms address the 
relative duties of the parties in relation to section 340B and 
diversion and duplicate discount concerns that have been raised by the 
commenters. Accordingly, we have concluded that it is unnecessary to 
label the relationship between the covered entity and the contract 
pharmacy.
    Comment: The contract pharmacy is fully accountable for maintaining 
the security of the PHS inventory.
    Response: There is no requirement for a separate (physical) 
inventory for drugs purchased at a 340B discount, because a separate 
data system will be used to verify appropriate dispensing.
    Comment: Contract pharmacies are most likely Medicaid pharmacy 
providers, while the covered entity likely is not. Because State 
Medicaid programs are unlikely to issue pharmacy numbers to anyone 
other than licensed pharmacies, covered entities that are not licensed 
pharmacies will not be able to bill Medicaid for prescriptions 
dispensed by the contract pharmacies. This task will be completed by 
the contract pharmacy. The mechanism excludes Medicaid drugs; 
therefore, the contract pharmacy must have two Medicaid numbers (i.e., 
340B exclusion package and one to bill Medicaid for its regular 
customers). However, PHS has not required the contract pharmacy to do 
so. Moreover, neither the pharmacy nor the State has any incentive to 
``make arrangements'' to carry out the statute, since both may gain 
from inadequate enforcement.
    Response: The mechanism requires the parties to comply with the 
prohibition on filling Medicaid prescriptions with drugs purchased at 
340B pricing. Neither the covered entity nor the contract pharmacy will 
bill Medicaid for 340B drug reimbursement; therefore, there will be no 
need for two Medicaid numbers. The 340B drugs will not generate 
Medicaid rebates.
    Comment: As the owner of the drug, the covered entity should be 
responsible for establishing the price for each drug sold to a patient 
of the entity (effectively preventing the contractor from charging 
whatever price it chooses) and assuming full responsibility for such 
prices under the terms of the PHS grant and any applicable consumer 
protection laws.
    Response: Even though it is clearly stated in the guidelines that 
the covered entity must purchase the drug (not the contractor), which 
would give to the covered entity title to and responsibility for the 
drug, we have added the following clarifying language to provision (a): 
``* * * will purchase the drug and will assume full responsibility for 
establishing its price, pursuant to terms of a PHS grant (if 
applicable) and any applicable consumer protection laws.''

(6) Records

    Comment: The contractor should assure that all pertinent 
reimbursement accounts and dispensing records maintained by the 
contractor for the covered entity are separate from the contractor's 
own operations and are accessible to the covered entity, PHS, and the 
manufacturers in the event of an audit. The contractor should provide 
these records to the manufacturer upon request.
    Response: We have added the concept of separate records to 
provision (j) to assure the availability of these records in the case 
of an audit by the manufacturer. However, a manufacturer has statutory 
authority to access these entity records by performing an audit; 
therefore, to require the entity to submit records upon demand would be 
unduly burdensome.
    Comment: ODP should establish standards for reporting that will 
ensure consistency of the information and approve whatever ``record-
keeping'' system is used.
    Response: Any reasonable system which will provide an adequate 
audit trail will be acceptable. However, reporting should be consistent 
with State pharmacy laws and other reporting mechanisms. As stated 
earlier in this section, sample contract provisions are suggested which 
describe such records and reports (e.g., prescription files, velocity 
reports, and records of ordering and receipt).
    Comment: Reporting requirements should include some record or 
report that assures that only patients of the covered entity were 
served.
    Response: Provision (f) provides that the contractor will provide 
the covered entity with reports as deemed appropriate using normal and 
customary business records.
    Comment: The agreement should require that the pharmacy contractor 
maintain separate inventories and separate records for patients of the 
PHS entity contracting for pharmacy services.
    Response: The guidelines have been changed to include a provision 
for separate dispensing records for patients of the covered entity. 
However, the requirement for a separate inventory of 340B drugs is 
unnecessary, because the covered entity is required to monitor 
dispensing and inventory records. In addition, these records are also 
subject to Department and manufacturer audits. A separate inventory is 
a wasteful concept with respect to time, space and money. Further, it 
provides little if any additional security, as a separate inventory 
only speaks to what is currently on the shelf and not what should be on 
the shelf. On the other hand, dispensing and other records will 
accurately indicate use of 340B drugs.
    Comment: The covered entity is responsible for making arrangements 
to seek reimbursement from third parties for 340B drugs used in 
treating patients of the entity. If the covered entity receives a PHS 
grant, it would lose its

[[Page 43555]]

grant eligibility for failing to make appropriate arrangements.
    Response: Since the entity purchases the drugs, it has the option 
of seeking reimbursement from third parties itself or contracting for 
this service. However, to the extent that a covered entity (or its 
contract pharmacy acting on its behalf) fails to comply with grant 
conditions, the entity may be subject to grant penalties.
    Comment: To the extent that the covered entity makes arrangements 
for the pharmacy contractor to submit claims for third party 
reimbursement, the covered entity should assume full responsibility 
under State consumer protection laws, insurance, fraud, and State and 
Federal health care laws with respect to any false claims charges or 
allegations of consumer or insurance fraud.
    Response: The ODP is not authorized to enforce or interpret such 
laws. If we become aware of possible violations of such laws, we will 
refer these cases to appropriate authorities.

(C) Contract Pharmacy Services Revised Final Mechanism

    Covered entities that wish to utilize contract pharmacy services to 
dispense section 340B outpatient drugs are encouraged to sign and have 
in effect a contract pharmacy service agreement between the covered 
entity and the pharmacy. This mechanism is designed to facilitate 
program participation for those eligible covered entities that do not 
have access to appropriate ``in-house'' pharmacy services. See Appendix 
for suggested contract provisions.
    (1) The following is a suggested model agreement format:

    (a) The covered entity will purchase the drug and assume 
responsibility for establishing its price, pursuant to the terms of 
a PHS grant (if applicable) and any applicable consumer protection 
laws.
    A ``ship to, bill to'' procedure may be used in which the 
covered entity purchases the drug, the manufacturer bills the entity 
for the drug that it purchased, but ships the drug directly to the 
contract pharmacy. See section 1 of Appendix.
    (b) The contractor will provide all pharmacy services (e.g., 
dispensing, record keeping, drug utilization review, formulary 
maintenance, patient profile, counseling). Each covered entity which 
purchases its covered outpatient drugs has the option of 
individually contracting for pharmacy services with the pharmacy of 
its choice. The limitation of one pharmacy contractor per entity 
does not preclude the selection of a pharmacy contractor with 
multiple pharmacy sites, as long as only one site is used for the 
contracted services. [The ODP will be evaluating the feasibility of 
permitting these covered entities to contract with more than one 
site and contractor.]
    (c) The covered entity health care provider will inform the 
patient of his or her freedom to choose a pharmacy provider. If the 
patient does not elect to use the contracted service, the patient 
may obtain the prescription from the covered entity and then obtain 
the drug(s) from the pharmacy provider of his or her choice.
    When a patient obtains a drug from a retail pharmacy other than 
the entity contract pharmacy, the manufacturer is not required to 
offer this drug at 340B pricing.
    (d) The contractor may provide the covered entity services, 
other than pharmacy, at the option of the covered entity (e.g., home 
care, reimbursement services). Regardless of the services provided 
by the contractor, access to 340B pricing will always be restricted 
to only patients of the covered entity.
    (e) The contractor and the covered entity will adhere to all 
Federal, State, and local laws and requirements. Additionally, all 
PHS grantees will adhere to all rules and regulations established by 
the grant funding office.
    Both the covered entity and the contract pharmacy are aware of 
the potential for civil or criminal penalties if the covered entity 
and/or the contract pharmacy violate Federal or State law. [The 
Department reserves the right to take such action as may be 
appropriate if it determines that such a violation has occurred.]
    (f) The contractor will provide the covered entity with reports 
consistent with customary business practices (e.g., quarterly 
billing statements, status reports of collections and receiving and 
dispensing records). See Section 2 of Appendix.
    (g) The contractor, with the assistance of the covered entity, 
will establish and maintain a tracking system suitable to prevent 
diversion of section 340B discounted drugs to individuals who are 
not patients of the covered entity. Customary business records may 
be used for this purpose. The covered entity will establish a 
process for a periodic random (sample) comparison of its prescribing 
records with the contractor's dispensing records to detect potential 
irregularities. See Section 3 of Appendix.
    (h) The covered entity and the contract pharmacy will develop a 
system to verify patient eligibility. [The Department's draft 
guidance defining covered entity ``patient'' is set forth in an 
August 3, l995, Federal Register notice. See 60 FR 39762.]
    Both parties agree that they will not resell or transfer a drug 
purchased at section 340B pricing to an individual who is not a 
patient of the covered entity. See section 340B(a)(5)(B). The 
covered entity understands that it can be removed from the list of 
covered entities because of its participation in drug diversion, a 
340B(a)(5) prohibition, and no longer be eligible for 340B pricing. 
See Section 4 of Appendix.
    (i) Both parties will not use drugs purchased under section 340B 
to dispense Medicaid prescriptions, unless the contract pharmacy and 
the State Medicaid agency have established an arrangement to prevent 
duplicate discounting.
    (j) Both parties understand that they are subject to audits (by 
the Department and participating manufacturers) of records that 
directly pertain to the entity's compliance with the drug resale or 
transfer prohibition and the prohibition against duplicate Medicaid 
rebates and 340B discounts. See section 340B(a)(5).
    The contractor will assure that all pertinent reimbursement 
accounts and dispensing records, maintained by the contractor, will 
be separate from the contractor's own operations and will be 
accessible to the covered entity, the Department, and the 
manufacturer in the case of a manufacturer audit.
    (k) Upon request, a copy of this contract pharmacy service 
agreement will be provided to a participating manufacturer which 
sells covered outpatient drugs to the covered entity. All 
confidential propriety information may be deleted from the document.

(2) Certification

    Under section 340B, we believe that if a covered entity using 
contract pharmacy services requests to purchase a covered drug from a 
participating manufacturer, the statute directs the manufacturer to 
sell the drug at the discounted price. If the entity directs the drug 
shipment to its contract pharmacy, we see no basis on which to conclude 
that section 340B precludes this type of transaction or otherwise 
exempts the manufacturer from statutory compliance. However, the entity 
must comply, under any distribution mechanism, with the statutory 
prohibition on drug diversion and duplicating discounting.
    To provide ODP and manufacturers with assurance that the covered 
entity has acted in a manner which limits the potential for drug 
diversion, the covered entity is encouraged to submit to ODP a 
certification that it has signed and has in effect an agreement with 
the contract pharmacy containing the aforementioned provisions. 
However, ODP will review any alternative mechanism which is designed to 
reduce the potential for drug diversion. The names of those covered 
entities which submit a certification, or an alternate mechanism 
approved by ODP, will be placed on the EDRS for the convenience of 
participating drug manufacturers.

(3) Anti-kickback Statute

    Contractors and covered entities must be aware of the potential for 
civil or criminal penalties if the contractor violates Federal or State 
law. In negotiating and executing a contracted pharmacy service 
agreement pursuant to these guidelines, contractors and covered 
entities should be aware of and take into consideration the provisions 
of the Medicare and Medicaid anti-kickback statute, 42 U.S.C. 1320a-
7b(b). This statute makes it a felony for a person or entity to 
knowingly and willfully offer, pay, solicit, or receive

[[Page 43556]]

remuneration with the intent to induce, or in return for the referral 
of, Medicare or a State health care program business. State health care 
programs are Medicaid, the Maternal and Child Health Block Grant 
program, and the Social Services Block Grant program. Apart from the 
criminal penalties, a person or entity is also subject to exclusion 
from participation in the Medicare and State health care programs for a 
knowing and willful violation of the statute pursuant to 42 U.S.C. 
1320a-7(b)(7).
    The anti-kickback statute is very broad. Prohibited conduct covers 
not only remuneration intended to induce referrals of patients, but 
also includes remuneration intended to induce the purchasing, leasing, 
ordering, or arranging for any good, facility, service, or item paid 
for by Medicare or a State health care program. The statute 
specifically identifies kickbacks, bribes, and rebates as illegal 
remuneration, but also covers the transferring of anything of value in 
any form or manner whatsoever. This illegal remuneration may be 
furnished directly or indirectly, overtly or covertly, in cash or in 
kind and covers situations where there is no direct payment at all, but 
merely a discount or other reduction in price or the offering of a free 
good(s).
    Arrangements between contractors and covered entities that could 
violate the anti-kickback statute would include any situation where the 
covered entity agrees to refer patients to the contractor in return for 
the contractor agreeing to undertake or furnish certain activities or 
services to the covered entity at no charge or at a reduced or below 
cost charge. These activities or services would include the provision 
of contracted pharmacy services, home care services, money or grants 
for staff or service support, or medical equipment or supplies, and the 
remodeling of the covered entity's premises. For example, if a 
contractor agreed to furnish covered outpatient drugs in return for the 
covered entity referring its Medicaid patients to the contractor to 
have their prescriptions filled, the arrangement would violate the 
anti-kickback statute. Similarly, if the contractor agreed to provide 
billing services for the covered entity at no charge in return for the 
covered entity referring its patients to the contractor for home or 
durable medical equipment, the statute would be violated.
    Pursuant to the authority in 42 U.S.C. 1320a-7b(b)(3), the 
Secretary of HHS has published regulations setting forth certain 
exceptions to the anti-kickback statute, commonly referred to as ``safe 
harbors.'' These regulations are codified at 42 CFR 1001.952. Each of 
the safe harbors sets forth various requirements which may be met in 
order for a person or entity to be immune from prosecution or 
exclusion.

(D) Appendix--Suggested Contract Provisions

    (1) ``The covered entity will order covered drugs directly from the 
manufacturer, from a designated sales representative, or a drug 
wholesaler and arrange to be billed directly for such drugs. The 
covered entity will arrange for shipment of such drugs directly to the 
pharmacy. The pharmacy will compare all shipments received to the 
orders and inform the covered entity of any discrepancy within five (5) 
business days of receipt. The covered entity will make timely payments 
for such drugs delivered to the (pharmacy) pursuant to the entity's 
order.''
    (2) ``The covered entity will verify, using the contractor's 
(readily retrievable) customary business records, that a tracking 
system exists which will ensure that drugs purchased under the Act are 
not diverted to individuals who are not patients of the covered entity. 
Such records can include: prescription files, velocity reports, and 
records of ordering and receipt. These records will be maintained for 
the period of time required by State law and regulations.''
    (3) ``Prior to the pharmacy providing pharmacy services pursuant to 
this agreement, the covered entity will have the opportunity, upon 
reasonable notice and during business hours, to examine the tracking 
system. For example, such a tracking system may include quarterly 
sample comparisons of eligible patient prescriptions to the dispensing 
records and a six (6) month comparison of 340B drug purchasing and 
dispensing records as is routinely done in other reconciliation 
procedures. The pharmacy will permit the covered entity or its duly 
authorized representatives to have reasonable access to pharmacy's 
facilities and records during the term of this agreement in order to 
make periodic checks regarding the efficacy of such tracking systems. 
The pharmacy agrees to make any and all adjustments to the tracking 
system which covered entity advises are reasonably necessary to prevent 
diversion of covered drugs to individuals who are not patients of the 
covered entity.''
    (4) ``The pharmacy will dispense covered drugs only in the 
following circumstances: (a) Upon presentation of a prescription 
bearing the covered entity's name, the eligible patient's name, a 
designation that the patient is an eligible patient, and the signature 
of a legally qualified health care provider affiliated with the covered 
entity; or (b) receipt of a prescription ordered by telephone on behalf 
of an eligible patient by a legally qualified health care provider 
affiliated with the covered entity who states that the prescription is 
for an eligible patient. The covered entity will furnish a list to the 
pharmacy of all such qualified health care providers and will update 
the list of providers to reflect any changes. If a contract pharmacy is 
found to have violated the drug diversion prohibition, the pharmacy 
will pay the entity the amount of the discount in question so that the 
entity can reimburse the manufacturer.''

    Dated: August 14, 1996.
Thomas G. Morford,
Acting Administrator, Health Resources and Services Administration.
[FR Doc. 96-21485 Filed 8-22-96; 8:45 am]
BILLING CODE 4160-15-P