[Federal Register Volume 61, Number 240 (Thursday, December 12, 1996)]
[Notices]
[Pages 65406-65413]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31541]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Health Resources and Services Administration


Manufacturer Audit Guidelines and Dispute Resolution Process 
0905-ZA-19

AGENCY: Health Resources and Services Administration, HHS.

ACTION: Final notice.

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INFORMATION: Section 602 of Public Law 102-585, the ``Veterans Health 
Care Act of 1992,'' enacted section 340B of the Public Health Service 
Act (the ``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 the amount determined 
under a statutory formula.
    Section 340B(a)(5) of the PHS Act identifies certain requirements 
for covered entities concerning potential double price reductions and 
drug diversion. A covered entity must permit the manufacturer of a 
covered outpatient drug to audit the records of the covered entity 
directly pertaining to the entity's compliance with the requirements of 
section 340B(a)(5) (A) and (B) as to drugs purchased from the 
manufacturer. These audits must be conducted in accordance with 
guidelines established by the Secretary, acting through the Health 
Resources and Services Administration, Bureau of Primary Health Care, 
the Office of Drug Pricing (the ``Department''). Section 340B(a)(5)(C) 
states that the Secretary shall establish guidelines relating to the 
number, scope and duration of the audits. The Department has defined 
these terms and provided suggested audit steps.
    Further, the Department anticipates that disputes may arise between 
covered entities and participating manufacturers regarding 
implementation of the provisions of section 340B. To resolve these 
disputes in an expeditious manner, the Department has developed a 
voluntary dispute resolution process.
    The purpose of this notice is to inform interested parties of final 
program guidelines concerning manufacturer audit guidelines and the 
dispute resolution process.

FOR FURTHER INFORMATION CONTACT: Director, Office of Drug Pricing, 
Bureau of Primary Health Care, Health Resources and Services 
Administration, 4350 East-West Highway, West Towers, 10th Floor, 
Bethesda, Maryland 20814, Phone: (301) 594-4353.

EFFECTIVE DATE: January 13, 1997.

SUPPLEMENTARY INFORMATION:

(A) Background

    Proposed manufacturer audit guidelines and the proposed informal 
dispute process were announced in the Federal Register at 59 FR 30021 
on June 10, 1994. A comment period of 30 days was established to allow 
interested parties to submit comments. The ODP received comments from 
12 sources including pharmaceutical manufacturers, a covered entity, 
organizations representing pharmaceutical manufacturers or covered 
entities, and the American Institute of Certified Public Accountants.
    The following section presents a summary of all major comments, 
grouped by subject, and a response to each comment. All comments were 
considered in developing this final notice. Changes were also made to 
increase clarity and readability.

(B) Comments and Responses--Manufacturer Audit Guidelines

    Comment: A number of commenters addressed the requirement that a 
manufacturer establish reasonable cause and obtain approval from the 
Department before conducting an audit. While some commenters believe 
that the statute gives manufacturers the right to routinely conduct an 
audit as a normal business practice without the need for Departmental 
approval, other commenters indicated that manufacturers should be 
required to provide objective documentation that a violation has 
occurred before being granted permission to audit.
    Response: Section 340B(a)(5)(C) provides that audits will be 
performed in accordance with procedures established by the Secretary 
relating to the number, duration, and scope of the audits. These audits 
must pertain directly to the entity's compliance with the prohibitions 
against drug diversion and the generation of duplicate drug rebates and 
discounts with respect to drugs of the manufacturer. See Section 
340B(a)(5)(A) & (B). In order to ensure that the audits pertain to 
compliance with the prohibitions in the aforementioned subparagraphs, 
it is appropriate to require manufacturers to submit an audit work plan 
for the Department's review and to establish reasonable cause. Although 
the Department will not require pre-approval of the plan, this will 
ensure that the audits are performed where there are valid business 
concerns and are conducted with the least possible disruption to the 
covered entity. Significant changes in quantities of specific drugs 
ordered by a covered entity and complaints from patients/other 
manufacturers about activities of a covered entity may be a basis for 
establishing reasonable cause.
    Comment: Omit the requirement to submit an audit plan for the 
Department's approval.
    Response: The requirement for approval of an audit plan has been 
dropped. The Department's review of the audit workplan is necessary to 
ensure that audit work performed is relevant to the audit objectives 
while protecting patient confidentiality and information of the covered 
entity which is considered proprietary. If after this review the 
Department has concerns regarding the audit plan it will work with the 
manufacturer to incorporate mutually agreed-upon revisions to the plan.
    Comment: Commenters indicated that audits would not be meaningful 
without

[[Page 65407]]

a clear definition of a ``patient of the entity.''
    Response: Because sufficient criteria must be provided by which 
auditors (and others) can determine if consumers of drugs purchased at 
the mandated prices are eligible to receive covered drugs, a definition 
of ``patient of the entity'' is necessary. ODP has addressed this issue 
by means of Federal Register final notice dated October 24, 1996 (61 FR 
55156)
    Comment: Establish a timeframe or deadline for the various steps in 
the process. The commenters are concerned that the process could be 
unreasonably delayed should the Department, the covered entity, or the 
dispute resolution committee not act in a timely manner. For example, 
an audit cannot begin until the Department grants permission and 
approves the audit workplan, while a covered entity's refusal to 
respond to an audit report would preclude the next step in the process 
from taking place. The suggestions for timeframes included to shorten 
from 60 to 30 days the timeframe for covered entities to respond to a 
manufacturer's audit findings and apply a 30-day timeframe for each 
step except for the act of performing the actual audit.
    Response: There should be timeframes applicable to the actions 
required by the covered entities and the Department. The following 
timeframes have been incorporated into the guidelines:
     The Department will review an audit work plan submitted by 
a manufacturer within 15 days of submission;
     The requirement for covered entities to respond to audit 
findings and recommendations within 60 days has been reduced to 30 
days;
    Comment: Access to records should include the records of any 
organization employed by the covered entity to purchase or dispense 
drugs or file Title XIX claims on the entity's behalf.
    Response: The auditors must have access to all records necessary 
for identifying and determining the eligibility of the ultimate 
consumer of drugs purchased at the discount price and whether Medicaid 
rebates were also claimed for those drugs. The guidelines have been 
revised to indicate that any organization purchasing or dispensing 
covered drugs or filing Title XIX claims on behalf of a covered entity 
is subject to the same audit requirements as the covered entity.
    Comment: There were concerns with the Department's March 1994 
Guideline Letter concerning the contracted pharmacy mechanism. These 
commenters believe that unforeseen business relationships and 
activities by covered entities under these guidelines could result in 
new patterns of fraud and abuse.
    Response: The Department has addressed the contracted pharmacy 
mechanism in a separate Federal Register final notice on August 23, 
1996 at 61 FR 43549.
    Comment: Compliance with the requirements outlined in the 
Government Auditing Standards will significantly increase the cost of 
performing audits and require the use of independent accountants rather 
than internal audit staff. It was suggested that manufacturers use 
their own internal auditing standards or those of the Institute of 
Internal Auditors.
    Response: Conducting audits in accordance with the Government 
Auditing Standards will provide assurances that audits will be 
performed in accordance with generally accepted auditing standards 
relating to professional qualifications of the auditors, independence, 
due professional care, field work, and reporting of the audit findings. 
Compliance with these standards will also ensure audit uniformity and 
consistency and adequacy of documentation to permit independent review 
in cases where disputes arise.
    Comment: The guidelines should stipulate the record retention 
requirements for covered entities (i.e., indicate how long records must 
be maintained for possible audit).
    Response: Covered entities should maintain records to demonstrate 
the distribution and use of covered drugs for a period of not less than 
3 years.
    Comment: There should be greater audit latitude and cooperation 
between manufacturers and entities as allowed by the ``Medicaid 
Agreement.''
    Response: The ``Medicaid Agreement'' permits manufacturers to audit 
the Medicaid utilization information reported by the State. In this 
instance, manufacturers are auditing information received by the State 
and are permitted to develop mutually beneficial procedures with the 
State. This is a very different situation from the audits permitted by 
section 340B. Pursuant to section 340B authority, a manufacturer may 
audit an entity whose only connection to the State or Federal 
government is in the form of a grant or reimbursement that it receives. 
In this instance, the manufacturer is permitted to audit only pursuant 
to guidelines established by the Secretary.
    Comment: In order to maximize profits, covered entities could 
require patients to purchase covered drugs from them, thus infringing 
on patients' rights to choose their own providers.
    Response: Patients of covered entities have the right to fill their 
prescriptions at the pharmacy of their choice. Of course, if the 
patient chooses to have the prescription filled at a location other 
than with the covered entity, discount pricing cannot be guaranteed.
    Comment: The guidelines should focus only on the number, duration, 
and scope of audits.
    Response: The guidelines stipulate that (1) audits are to be 
performed only when there is a reasonable cause to believe that there 
has been a violation of section 340B(a)(5) (A) or (B); (2) audits are 
to be conducted with the least possible disruption to the operations of 
the covered entity with only one audit being permitted during the same 
time period; and (3) the scope of the audits must be sufficient to 
evaluate the covered entity's compliance with the aforementioned 
statutory prohibitions.
    Comment: The guidelines are unfairly burdensome and shift the 
Secretary's responsibility for enforcing the statute to the 
manufacturers.
    Response: In accordance with the intent of the statute, the audits 
should be performed only when there is reasonable cause for their 
performance. Further, the statute also states that the audits should be 
conducted at the expense of the Government or the manufacturer. We 
believe that the party which demonstrates a reasonable cause for the 
audit should commission the audit. However, in cases where more than 
one manufacturer has demonstrated reasonable cause for an audit, then 
the Government may perform the audit in order to protect the 
confidentiality of the manufacturers' proprietary information.
    Comment: Some of the proposed audit steps are duplicative; 
therefore, the proposed audit steps at section II b, c, e, f, g should 
be excised or moved to streamline the proposed guidelines.
    Response: The guidelines have been reorganized to provide a section 
on ``Procedures To Be Followed'' and a section on ``Suggested Audit 
Steps.'' This clearly distinguishes the procedures to be followed by 
the manufacturer from the suggested procedures to be performed by the 
manufacturer's auditors.
    Comment: In cases where the Government elects to perform its own 
audit, the resulting audit report should be made available to the 
manufacturers.
    Response: Audit reports prepared by Government auditors are public 
documents. A copy of the audit report will be made available to the 
manufacturers upon request. Requests

[[Page 65408]]

should be addressed to: Director, HRSA, Office of Drug Pricing, Bureau 
of Primary Health Care, 4350 East West Highway, West Towers, 10th 
Floor, Bethesda, MD 20814.
    Comment: Because audits will be permitted only when the 
manufacturer can demonstrate that there is ``reasonable cause'' to 
believe that a violation of section 340B(a)(5) has occurred, 
``reasonable cause'' should be defined.
    Response: The guidelines have been revised to provide a definition 
of ``reasonable cause.''
    Comment: A covered entity should be given an opportunity to respond 
to a manufacturer's request for an audit before the Department 
determines whether an audit may be performed and should be permitted to 
review and comment on the manufacturer's proposed audit workplan before 
it is approved by the Department.
    Response: The guidelines provide for a 30 day period before the 
manufacturer submits to the Department an audit work plan in which the 
manufacturer and the covered entity must attempt in good faith to 
resolve the matter. When the manufacturer submits its audit work plan, 
it has already discussed the matter with the covered entity; therefore, 
we do not believe there is a need for the covered entity to comment on 
a manufacturer's submission of an audit workplan. The Department, at 
its discretion, may contact the covered entity as part of the review 
process of the proposed manufacturer's audit. Likewise, we do not 
believe that there is a need for the covered entity to review and 
comment on the manufacturer's proposed workplan once it has been 
reviewed by the Department.
    Comment: The guidelines should be clarified to indicate that the 
manufacturer's independent public accountant should perform the audit. 
This is necessary to comply with the ``independence standard'' 
contained in the Government Auditing Standards.
    Response: The guidelines have been modified to indicate that a 
manufacturer's auditor shall be an independent public accountant 
employed by a manufacturer to perform the audit.
    Comment: Refer to reviews as ``attestation engagements'' rather 
than ``audits,'' and perform them as agreed-upon procedures in 
accordance with the Statement on Standards for Attestation Engagements 
No. 3, Compliance Attestation. The procedures to be performed could be 
jointly developed and agreed upon by the Department, the covered 
entity, manufacturer, and the independent accountant.
    Response: Although some of the work to be performed by the 
independent public accountant or government auditor may involve some 
attestation procedures, the statute calls for an audit of the covered 
entity's records. Therefore, the term audit has been used in the 
preparation of the guidelines. Further, we agree that the opinions and 
views of all interested parties should be considered in the preparation 
of the guidelines. This has been achieved through the publication of 
the proposed guidelines in the Federal Register, requesting public 
comment.
    Comment: The notice should include the guidelines to be followed by 
Federal auditors.
    Response: Federal auditors will perform audits in accordance with 
the Government Auditing Standards. The Notice has been clarified.
    Comment: Covered entities should have the right to submit newly 
compiled or discovered information following the manufacturer's audit 
for consideration by the review committee.
    Response: The guidelines provide that when a covered entity 
disagrees with the audit report's findings and recommendations, the 
covered entity should provide its rationale for the disagreement to the 
manufacturer. The manufacturer and the covered entity must make a good 
faith effort to resolve the issue before requesting review using the 
dispute resolution process. Newly compiled or discovered information 
can be provided to the manufacturer during this period of good faith 
effort. If the parties are still unable to reach agreement, the newly 
compiled or discovered information can be submitted to the Department 
along with the other information that was developed as part of the 
audit. The Department will consider the auditor's findings and 
recommendations as well as the covered entity's rationale for 
disagreeing during the review process.
    Comment: All covered entity records and information identified in 
the audit process should be held in strict confidence by the 
manufacturer.
    Response: Confidential patient information and proprietary 
information will be protected.
    Comment: Manufacturers should not be required to continue to sell 
to a covered entity at the mandated price once an audit has been 
initiated, particularly since reasonable cause has already been 
demonstrated.
    Response: Manufacturers must continue to sell at the statutory 
price during the audit process. Once the audit has been completed and 
the manufacturer believes that there is sufficient evidence to indicate 
prohibited entity activity, then the manufacturer may bring the claim 
to the Department through the informal dispute process. Not until the 
entity is found guilty of prohibited activity and a decision is made to 
remove the entity from the covered entity list, will the manufacturers 
no longer be required to extend the discount.
    Comment: Each manufacturer, wronged by the same business practices 
of the same entity, must wait its turn to audit the entity and pursue 
its case through the dispute process in order to recover. This could 
result in a failure to enforce the statute.
    Response: The guidelines have been revised to permit the 
Department, if deemed necessary, to provide for corrective action as to 
other manufacturers wronged by prohibited entity activity.
    Comment: Include the hospital prohibition against participation in 
any group purchasing arrangement as a permissible audit subject.
    Response: The statute clearly limits the audit subjects to 
potential entity diversion (section 340B(a)(5)(B)) and entity activity 
that could generate a rebate on a drug that was discounted under the 
Act (section 340B(a)(5)(A)).
    Comment: Provide for access to different records depending upon the 
record keeping system of the entity.
    Response: The notice has been revised to permit access to primary 
records which would be included in a reasonable audit trail.
    Comment: There is a requirement that an informational copy of the 
audit be provided to the Department and the Inspector General. Why 
cannot the entire report be provided to these offices?
    Response: The guidelines have been revised to require that the 
entire report be submitted to the Department and the Office of the 
Inspector General.
    Comment: The guidelines should not preclude the entity and the 
manufacturer from both voluntarily developing mutually beneficial audit 
procedures.
    Response: The guidelines have been revised to include a statement 
that the guidelines do not preclude the entity and the manufacturer 
from both voluntarily developing mutually beneficial audit procedures.
    Comment: The auditor should be able to confirm with the Department 
that the entity has provided its Medicaid provider number.
    Response: The guidelines have been revised to permit the auditor to 
confirm with the Department that the entity being audited does not 
generate a Medicaid rebate while accepting 340B

[[Page 65409]]

discounts (e.g., has provided its Medicaid provider number, does not 
bill Medicaid, or utilizes an all-inclusive rate billing system). 
Manufacturers are free to challenge a hospital's eligibility as a 
covered entity by corresponding with the Department.
    Comment: The Department must act independently to assure 
compliance.
    Response: The Department will investigate all documentation 
submitted regarding both entity and manufacturer noncompliance and, 
when appropriate, take the necessary steps to remove the entity from 
``covered entity'' status or terminate the Pharmaceutical Pricing 
Agreement which the manufacturer signed with HHS, thus preventing 
further participation in the program.
    Comment: Set a specific time limit for a manufacturer to have audit 
personnel at the entity facility with the possibility of an extension 
for good cause.
    Response: Because of the many variables (e.g., size of the covered 
entity and scope of the audit), it would be impossible to set specific 
time limits. However, if an entity believes that auditors are exceeding 
a reasonable time period, it may notify the Department for assistance.
    Comment: You fail to require entities to allow audits.
    Response: Please refer to the section entitled, ``Supplemental 
Information, Manufacturer Audit Guidelines,'' where we begin the 
discussion with the statement, ``Covered entities which choose to 
participate in the section 340B drug discount program must comply with 
the requirements of section 340B(a)(5) of the PHS Act.'' Section 
340B(a)(5)(C) provides that a covered entity shall permit the 
manufacturer of a covered outpatient drug to audit the records of the 
entity that pertain to the entity's compliance with section 340B(a)(5).
    Comment: Guidelines regarding scope should be expanded to include 
procedures to assure that manufacturers not have access to information 
that identifies specific patients or transaction records concerning the 
products of other manufacturers.
    Response: The guidelines require that audits be performed in 
accordance with the Government Auditing Standards (GAS) developed by 
the Comptroller General of the United States. These standards require 
auditors to prepare the audit reports in a manner that protects 
privileged and confidential information. Confidential patient 
information and/or proprietary information which auditors may access in 
the performance of an audit will not be disclosed to the manufacturer.
    Comment: In the new section III(b), change the word ``access'' to 
``obtain an understanding of,'' and in section III(e) change the word 
``determine'' to ``test.''
    Response: We have revised the notice accordingly.

(C) Revised Manufacturer Audit Guidelines

    Set forth below are the final manufacturer audit guidelines, 
revised based upon an analysis of the comments above.

Manufacturer Audit Guidelines

    Covered entities which choose to participate in the section 340B 
drug discount program shall comply with the requirements of section 
340B(a)(5) of the PHS Act. Section 340B(a)(5)(A) prohibits a covered 
entity from accepting a discount for a drug that would also generate a 
Medicaid rebate. Further, section 340B(a)(5)(B) prohibits a covered 
entity from reselling or otherwise transferring a discounted drug to a 
person who is not a patient of the entity. The participating entity 
shall permit the manufacturer of a covered outpatient drug to audit its 
records that directly pertain to the entity's compliance with section 
340B(a)(5) (A) and (B) requirements with respect to drugs of the 
manufacturer. Manufacturer audits shall be conducted in accordance with 
guidelines developed by the Secretary, as required by section 
340B(a)(5)(C). Not only will the records of any organization working 
with a covered entity to purchase or dispense covered drugs, or to 
prepare Medicaid reimbursement claims for the covered entity be subject 
to the same audit requirement, but also any primary record that could 
be part of a reasonable audit trail.
    This notice does not include the complete audit guidelines to be 
used by Government auditors in cases where the Government performs its 
own audit. Federal auditors shall perform audits in accordance with the 
Government Auditing Standards. The Government auditors' authority to 
audit the covered entity's compliance with the requirements of section 
340B(a)(5) (A) and (B) shall not be limited by the manufacturer's audit 
guidelines.
    The following is the ``Compliance Audit Guide'' concerning 
manufacturer audit guidelines as developed by the Secretary pursuant to 
section 340B(a)(5)(C): (These guidelines do not preclude the entity and 
the manufacturer from voluntarily developing mutually beneficial audit 
procedures.)

I. General Guidelines

    The manufacturer shall submit a work plan for an audit which it 
plans to conduct of a covered entity to the Department. (See section 
III for suggested audit steps.) The manufacturer's auditor shall be an 
independent public accountant employed by the manufacturer to perform 
the audit. The auditor has an ethical and legal responsibility to 
perform a quality audit in accordance with Government Auditing 
Standards, Current Revision, developed by the Comptroller General of 
the United States. Patient confidentiality requirements also must be 
observed. At the completion of the audit, the auditors must prepare an 
audit report in accordance with the reporting standards for performance 
audits in Government Auditing Standards, Current Revision. The cost of 
a manufacturer audit shall be borne by the manufacturer, as provided by 
section 340B(a)(5)(C) of the PHS Act.
(a). Number of Audits
    A manufacturer shall conduct an audit only when it has 
documentation which indicates that there is reasonable cause. 
``Reasonable cause'' means that a reasonable person could believe that 
a covered entity may have violated a requirement of section 340B(a)(5) 
(A) or (B) of the PHS Act (i.e., accepting a 340B discount on a covered 
outpatient drug at a time when the covered entity has not submitted its 
Medicaid billing status to the Department or transferring or otherwise 
reselling section 340B discounted covered drugs to ineligible 
recipients).
    Consistent with Government auditing standards, the organization 
performing the audit shall coordinate with other auditors, when 
appropriate, to avoid duplicating work already completed or that may be 
planned. Only one audit of a covered entity will be permitted at any 
one time. When specific allegations involving the drugs of more than 
one manufacturer have been made concerning an entity's compliance with 
section 340B(a)(5) (A) and (B), the Department will determine whether 
an audit should be performed by the (1) Government or (2) the 
manufacturer.
(b). Scope of Audits
    The manufacturer shall submit an audit workplan describing the 
audit to the Department for review. The Department will review the 
workplan for reasonable purpose and scope. Only those records of the 
covered entity (or the records of any organization that works with the 
covered entity to

[[Page 65410]]

purchase, dispense, or obtain Title XIX reimbursement for the covered 
drug) that directly pertain to the potential 340B violation(s) may be 
accessed, including those systems and processes (e.g., purchasing, 
distribution, dispensing, and billing) that would assist in determining 
whether a 340B violation has occurred.
(c). Duration of Audits
    Normally, audits shall be limited to an audit period of one year 
and shall be performed in the minimum time necessary with the minimum 
intrusion on the covered entity's operations.

II. Procedures To Be Followed

    (a). The manufacturer shall notify the covered entity in writing 
when it believes the covered entity has violated provisions of section 
340B. The manufacturer and the covered entity shall have at least 30 
days from the date of notification to attempt in good faith to resolve 
the matter.
    (b). The manufacturer has the option to proceed to the dispute 
resolution process described later in the notice without an audit, if 
it believes it has sufficient evidence of a violation absent an audit. 
If the matter is not resolved and the manufacturer desires to perform 
an audit, the manufacturer must file an audit work plan with the 
Department. (See section For Further Information for address.) The 
manufacturer must set forth a clear description of why it has 
reasonable cause to believe that a violation of section 340B(a)(5) (A) 
or (B) has occurred, along with sufficient facts and evidence in 
support of the belief. In addition, the manufacturer shall provide 
copies of any documents supporting its claims.
    (c). The Department will review the documentation submitted to 
determine if reasonable cause exists. If the Department finds that 
there is reasonable cause to believe that a violation of section 
340B(a)(5) (A) or (B) has occurred, the Department will not intervene. 
In cases where the Department determines that the audit shall be 
performed by the Government, the Department will so advise the 
manufacturer and the covered entity within 15 days of receipt of the 
audit work plan.
    (d). The filing of a audit work plan does not affect the statutory 
obligations of the parties as defined in section 340B of the PHS Act. 
During the audit process, the manufacturer must continue to sell 
covered outpatient drugs at the section 340B ceiling price to the 
covered entity being audited, and the covered entity must continue to 
comply with the requirements of section 340B(a)(5).
    (e). Upon receipt of the manufacturer's audit work plan, the 
Department, in consultation with an appropriate audit component, will 
review the manufacturer's proposed workplan. As requested by GAS, the 
audit workplan shall describe in detail the following:

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

    (f). Within 15 days of receipt of the proposed audit workplan, the 
Department shall review the work plan. If after this review the 
Department has concerns about the work plan, it will work with the 
manufacturer to incorporate mutually agreed-upon revisions to the plan. 
The covered entity will have at least 15 days to prepare for the audit.
    (g). At the completion of the audit, the auditors must prepare an 
audit report in accordance with reporting standards for performance 
audits of the GAS. The manufacturer shall submit the audit report to 
the covered entity. The covered entity shall provide its response to 
the manufacturer on the audit report's findings and recommendations 
within 30 days from the date of receipt of the audit report. When the 
covered entity agrees with the audit report's findings and 
recommendations either in full or in part, the covered entity shall 
include in its response to the manufacturer a description of the 
actions planned or taken to address the audit findings and 
recommendations. When the covered entity does not agree with the audit 
report's findings and recommendations, the covered entity shall provide 
its rationale for the disagreement to the manufacturer.
    (h). The manufacturer shall also submit copies of the audit report 
to the Department (see section For Further Information Contact for the 
address) and the Office of Inspector General, Office of Audit Services, 
PHS Audits Division at Room 1-30, Park Building, 12420 Parklawn Drive, 
Rockville, MD 20857.
    (i). If a dispute concerning the audit findings and recommendations 
arises, the parties may file a request for dispute resolution with the 
Department. All dispute resolution procedures developed by the 
Department shall be followed.

III. Suggested Audit Steps

    Suggested audit steps include the following:
    (a). Review the covered entity's policies and procedures regarding 
the procurement, inventory, distribution, dispensing, and billing for 
covered outpatient drugs.
    (b). Obtain an understanding of internal controls applicable to the 
policies and procedures identified above (step a) when necessary to 
satisfy the audit objectives.
    (c). Review the covered entity's policies and procedures to prevent 
the resale or transfer of drugs to a person or persons who are not 
patients of the covered entity.
    (d). Test compliance with the policies and procedures identified 
above (step c) when necessary to satisfy the audit objectives.
    (e). Review the covered entity's records of drug procurement and 
distribution and test whether the covered entity obtained a discount 
only for those programs authorized to receive discounts by section 340B 
of the PHS Act.
    (f). If a covered entity does not use an all inclusive billing 
system (per encounter or visit), but instead bills outpatient drugs 
using a cost-based billing system, determine whether the covered entity 
has provided its pharmacy Medicaid provider number to the Department 
and test whether the covered entity billed Medicaid at the actual 
acquisition cost. The auditor is permitted to contact the ODP (at the 
number in the For Further Information Contact section) to determine if 
the entity--(1) has provided its pharmacy Medicaid provider number, (2) 
does not bill Medicaid for covered outpatient drugs, (3) uses an all-
inclusive rate billing system, or (4) is an entity clinic eligible for 
the discount pricing but located within a larger medical facility not 
eligible for the drug discounts and has provided the ODP a separate 
pharmacy Medicaid provider number or an agreement with the State 
Medicaid Agency regarding an operating mechanism to prevent duplicate 
discounting.

[[Page 65411]]

    (g). Where the manufacturer's auditors conclude that there has been 
a violation of the requirements of section 340B(a)(5) (A) or (B), 
identify (1) the procedures or lack of adherence to existing procedures 
which caused the violation, (2) the dollar amounts involved, and (3) 
the time period in which the violation occurred.
    (h). Following completion of the audit field work, provide an oral 
briefing of the audit findings to the covered entity to ensure a full 
understanding of the facts.

(D) Comment and Responses--Informal Dispute Resolution

    Comment: The guidelines should include a mechanism to verify or 
``dispute'' the accuracy of the Department's list of covered entities.
    Response: The notice has been revised to include, as a type of 
dispute covered by the informal dispute mechanism, the accuracy of the 
master list of covered entities.
    Comment: A dispute review committee consisting of only ODP and 
other PHS employees could result in conflict-of-interest concerns. The 
dispute review committee should be an independent body (e.g., an 
administrative law judge), and there should be a mechanism to provide 
for non-PHS members in cases where the dispute involved ODP.
    Response: The Department is overseeing the implementation of 
section 340B of the PHS Act, and as such, is offering a voluntary 
dispute resolution mechanism to expedite this process. No manufacturer 
or covered entity is required to avail itself of this process before 
resorting to other available measures. Further, parties which do 
participate in the dispute resolution process will have an appeal 
opportunity with a HRSA review official or committee.
    Comment: The penalties for covered entities that violate section 
340B(a)(5) requirements are not adequate. For entities to merely repay 
discounts (plus interest) which they obtained and to which they were 
not entitled is not an effective deterrent. It was suggested that 
entities that have violated statutory requirements pay the cost of the 
audits, pay various amounts up to 150 percent of the improperly 
obtained discount (plus interest) and/or be banned from continued 
participation in the program. Further, it was suggested that an 
entity's failure to respond in a timely basis to a manufacturer's audit 
findings should result in a ``summary judgment'' against the entity.
    Response: Section 340B(a) is clear concerning entity penalties for 
reselling or transferring discounted drugs, for generating duplicate 
discounts and rebates and who must bear the cost of auditing. Section 
340B(a)(4) defines ``covered entity'' as one which meets the 
requirements of paragraph (5). This paragraph prohibits drug diversion 
and double price reductions. If an entity is found guilty of either of 
these activities, the entities may be found by the Department no longer 
to be covered under section 340B. Section 340B(a)(5)(D) outlines the 
monetary penalty for violations of these prohibitions and provides that 
entities must pay to the manufacturer the amount of discount received. 
Although section 340B provides for no other penalty, copies of the 
audit results will be submitted to the Office of Inspector General for 
review and possible further investigation. Section 340B(a)(5)(C) 
clearly provides that manufacturer audits are performed at the 
manufacturer expense. We agree that some type of penalty is necessary 
for an entity which does not respond in a timely fashion to a 
manufacturer audit results. We have revised the audit guidelines to 
allow for the manufacturer to submit to the Department a request for 
dispute resolution for entity non-response within given timeframes.
    Comment: Please clarify the meaning of ``final determination'' as 
used in Part III of the Notice entitled, ``Penalties.''
    Response: A ``final determination'' under the Dispute Resolution 
procedure is reached when review by the Administrator of the Health 
Resources and Services Administration (HRSA) is completed and the HRSA 
Administrator or appointee has made a decision on the issue(s) 
involved.
    Comment: It is not clear when an administrative decision can be 
appealed by a covered entity to the Federal courts.
    Response: Covered entities or manufacturers are encouraged to 
participate in this voluntary process for the resolution of disputes 
regarding section 340B. It is expected that once a covered entity or a 
manufacturer submits a request for informal dispute resolution, the 
process will be completed before pursuing other remedies which may be 
available under applicable principles of law. Entities may wish to seek 
legal advice concerning the exhaustion of administrative remedies 
regarding a voluntary administrative process. Section III of the 
Guidelines has been clarified.
    Comment: Additional appeal procedures may be problematic for 
covered entities or manufacturers who must exhaust their administrative 
remedies before seeking remedies in a court of law.
    Response: The dispute resolution process is a voluntary process. 
Manufacturers or entities are only encouraged to participate in the 
process before seeking other remedies.
    Comment: The term ``PHS'' is not defined. It is unclear whether 
this means the ODP or some other office within the PHS.
    Response: The term ``PHS'' means the Public Health Service in its 
entirety. The guidelines have been revised to reflect that the 
Department will be implementing these guidelines through the ODP.
    Comment: A party who is unable to resolve a dispute can submit a 
written request for a review of the dispute. Time deadlines should be 
included to state when that written request can be submitted.
    Response: The guidelines have been changed to include such 
deadlines.
    Comment: Time deadlines and penalties for non-response must be 
included for various steps in the dispute process. First, upon receipt 
of a request for a review, the chairperson of the review committee 
should send a letter to the party alleged to have committed a 
violation. Time deadlines should be included on when the chairperson 
must send this letter. Second, the activities of the review committee 
should also have deadlines. Third, a deadline for the submission of 
additional information should be included.
    Response: The guidelines have been changed to include such 
deadlines.
    Comment: The penalties do not preclude the imposition by the 
Government of other penalties or remedies under other statutes such as 
the Federal False Claims Act.
    Response: The guidelines have been revised to clarify this issue.

(E) Revised Informal Dispute Resolution Process

    Set forth below are the final informal dispute resolution 
guidelines, revised based upon the analysis of the comments above.

Dispute Resolution Process

    The Department, acting through the Office of Drug Pricing (ODP), is 
proposing a voluntary process for the resolution of certain disputes 
between manufacturers and covered entities concerning compliance with 
the provisions of section 340B of the PHS Act. Covered entities or 
manufacturers are not required to enter this informal process for 
resolution of disputes regarding section 340B. However, the Department 
expects parties to utilize the

[[Page 65412]]

process before resorting to other remedies which may be available under 
applicable principles of law.

I. Types of Disputes Covered

    Disputes resolved by these procedures include:
    (a) A manufacturer believes a covered entity is in violation of the 
prohibition against resale or transfer of a covered outpatient drug 
(section 340B(a)(5)(B) of the PHS Act), or the prohibition against 
duplicate discounts or rebates (section 340B(a)(5)(A) of the PHS Act).
    (b) A covered entity believes that a manufacturer is charging a 
price for a covered outpatient drug that exceeds the ceiling price as 
determined by section 340B(a)(1) of the PHS Act.
    (c) A manufacturer is conditioning the sale of covered outpatient 
drugs to a covered entity on the entity's provision of assurances or 
other compliance with the manufacturer's requirements that are based 
upon section 340B provisions.
    (d) A covered entity believes that a manufacturer has refused to 
sell a covered outpatient drug at or below the ceiling price, as 
determined by section 340B(a)(1) of the PHS Act.
    (e) A manufacturer believes that a covered entity is dispensing a 
covered outpatient drug in an unauthorized service (e.g., inpatient 
services or ineligible clinics within the same health system).
    (f) A manufacturer believes that a covered entity has not complied 
with the audit requirements under section 340B(a)(5)(c) of the PHS Act 
or the audit guidelines as set forth in this notice.
    (g) A covered entity believes that the auditors of the manufacturer 
have not abided by the approved workplan or audit guidelines.
    (h) A covered entity is unable to obtain covered outpatient drugs 
through a wholesaler because the manufacturer will only sell section 
340B discounted drugs directly from the manufacturer to the entity.
    (i) A manufacturer or covered entity wants to verify the accuracy 
of the master list of covered entities.

II. Dispute Resolution Process

    Prior to the filing of a request for dispute review with the 
Department, the parties must attempt, in good faith, to resolve the 
dispute. All parties involved in the dispute must maintain written 
documentation as evidence of the good faith attempt to resolve the 
dispute. Such evidence includes documentation of meetings, letters, or 
telephone calls between the disputing parties that concern the dispute.
    If the dispute has not been resolved after a good faith attempt, a 
party may submit a written request for a review of the dispute to the 
Director of the ODP within 30 days. [See address in For Further 
Information Contact section.]
    The party requesting the review may not rely only upon allegations 
but is required to set forth specific facts showing that there is a 
genuine and substantial issue of material fact in dispute that requires 
a review.
    The request for review shall include a clear description of the 
dispute, shall identify all the issues in the dispute, and shall 
contain a full statement of the party's position with respect to such 
issue(s) and the pertinent facts and reasons in support of the party's 
position. In addition to the required statement, the party shall 
provide copies of any documents supporting its claim and evidence that 
a good faith effort was made to resolve the dispute. These materials 
must be tabbed and organized chronologically and accompanied by an 
indexed list identifying each document.
    The filing of the dispute does not affect any statutory obligations 
of the parties, as defined in section 340B of the PHS Act. During the 
review process, for example, a manufacturer must continue to sell 
covered outpatient drugs at or below the section 340B ceiling price to 
all covered entities, including the covered entity involved in the 
dispute. Only when the entity is found guilty of prohibited activity 
and a decision is made to remove the entity from the list of covered 
entities, is the manufacturer no longer required to extend the 
discount.
    The Director, Bureau of Primary Health Care, shall appoint a 
committee to review the documentation submitted by the disputing 
parties and to make a proposed determination. A minimum of three 
individuals shall be appointed (one of whom shall be designated as a 
chairperson) either on an ad hoc, case-by-case basis, or as regular 
members of the review committee. The chairperson shall be from the ODP 
and the committee members shall be from other sections of PHS (e.g. 
chief pharmacist, auditor).
    Upon receipt of a request for a review, the chairperson of the 
review committee, within 30 days, will send a letter to the party 
alleged to have committed a violation. The letter will include (1) the 
name of the party making the allegation(s), (2) the allegation(s), (3) 
documentation supporting the party's position, and (4) a request for a 
response to or rebuttal of the allegations within 37 calendar days of 
the receipt of the letter (7 days from the date of the postmark of the 
letter being allowed for mailing and processing through the 
organization).
    Upon receipt of the response or rebuttal, the review committee will 
review all documentation. The request and rebuttal information will be 
reviewed for (1) evidence that a good faith effort was made to resolve 
the dispute, (2) completeness, (3) adequacy of the documentation 
supporting the issues, and (4) the reasonableness of the allegations. 
If the documentation meets these requirements, the review committee 
will consider the matter.
    The reviewing committee may, at its discretion, invite parties to 
discuss the pertinent issues with the committee and to submit such 
additional information as the committee deems appropriate.
    The reviewing committee will propose to dismiss the dispute, if it 
conclusively appears from the data, information, and factual analyses 
contained in the request for a review and rebuttal documents that there 
is no genuine and substantial issue of fact in dispute. Within 30 days, 
a written decision of dismissal will be sent to each party and will 
contain the committee's findings and conclusions in detail, and, if the 
committee decided to dismiss, reasons why the request for a review did 
not raise a genuine and substantial issue of fact.
    With all other proposed findings, within 30 days, the review 
committee will prepare a written document containing the findings and 
detailed reasons supporting the proposed decision. The document is to 
be signed by the chairperson and each of the other committee members. 
The committee's written decision will be sent with a transmittal letter 
to both parties. If the committee finds the covered entity guilty of 
prohibited activity and a decision is made to remove the entity from 
the covered entity list, then the manufacturers will no longer be 
required to extend the discount. If the covered entity or the 
manufacturer does not agree with the committee's determination, the 
covered entity or the manufacturer may appeal within 30 days after 
receiving such a determination to the Administrator of the Health 
Resources and Services Administration, who will appoint a review 
official or committee. The review official or committee will respond to 
appeal requests within 30 days from the receipt of the request.

III. Penalties

    If the final determination is that a manufacturer has violated the 
provisions of section 340B of the PHS Act or the PHS Pharmaceutical 
Pricing Agreement, the manufacturer's agreement with HHS could be 
terminated or other actions taken, as

[[Page 65413]]

deemed appropriate. If the final determination is that an entity has 
violated section 340B prohibitions against the resale or transfer of 
covered outpatient drugs or the prohibition against duplicate discounts 
and rebates (or billing Medicaid more than the actual acquisition cost 
of the drug), the entity shall be liable to the manufacturer of the 
covered outpatient drug that is the subject of the violation in an 
amount equal to the reduction in the price of the drug for the period 
of the violation, as provided by section 340B(a)(5)(D) of the PHS Act. 
After the dispute is resolved, any disputed amounts must be paid or 
credited to an account balance no later than 30 days following a final 
determination. The entity may also be excluded from the drug discount 
program, if the conduct warrants such a sanction. Such penalties do not 
preclude the imposition by the Government of other penalties or 
remedies under other statutes such as the Federal False Claims Act. A 
copy of the findings may be sent to the Office of the Inspector General 
for further action. If it is documented that several manufacturers have 
been wronged by the same prohibited entity behavior, corrective action 
will be afforded such manufacturers. (The reporting and recordkeeping 
requirements of this document are subject to the Paperwork Reduction 
Act of 1995, 44 U.S.C. 3501-3520, and have OMB clearance through 9/30/
97 (OMB Control No. 0915-0176). The Paperwork Reduction Act of 1995 
added disclosure requirements to the list of items needing OMB 
approval. The disclosure requirements in the audit guidelines include: 
section II(a)--the manufacturer shall notify the covered entity in 
writing when it believes the covered entity has violated provisions of 
section 340B; section II(g)--the manufacturer shall submit the audit 
report to the covered entity, and the covered entity shall provide its 
response to the manufacturer on the audit report's findings * * *; and 
section III(h) the manufacturer shall provide an oral briefing of the 
audit findings to the covered entity. The disclosure requirements in 
these sections will not be in force until OMB approval has been 
obtained.

    Dated: December 6, 1996.
Ciro V. Sumaya,
Administrator, Health Resources and Services Administration.
[FR Doc. 96-31541 Filed 12-11-96; 8:45 am]
BILLING CODE 4160-15-P