[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