[Federal Register Volume 69, Number 227 (Friday, November 26, 2004)]
[Rules and Regulations]
[Pages 68815-68818]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-25969]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 447

[CMS-2175-F]
RIN 0938-AM20


Medicaid Program; Time Limitation on Recordkeeping Requirements 
Under the Drug Rebate Program

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule.

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SUMMARY: This final rule finalizes 10-year recordkeeping requirements 
for drug manufacturers under the Medicaid drug rebate program. 
Manufacturers must retain records for 10 years from the date the 
manufacturer reports data to us for a rebate period.
    This final rule also finalizes the requirement that manufacturers 
must retain records beyond the 10-year period if the records are known 
by the manufacturer to be the subject of an audit or a government 
investigation.
    Furthermore, this final rule responds to public comments on the 
January 6, 2004 interim final rule with comment period and the proposed 
rule pertaining to the 10-year recordkeeping requirements, 
respectively.

DATES: This rule is effective January 1, 2005.

FOR FURTHER INFORMATION CONTACT: Kim Howell, (410) 786-6762.

SUPPLEMENTARY INFORMATION:

I. Background

    In order for a pharmaceutical manufacturer's products to be 
eligible for Medicaid reimbursement under section 1903(a) of the Social 
Security Act (the Act), the manufacturer must sign an agreement with us 
on behalf of the Secretary of Health and Human Services to participate 
in the Medicaid drug rebate program. Among the terms to which the 
manufacturer must agree is the requirement to retain pricing data to 
support the calculation of average manufacturer price and best price as 
defined in section 1927 of the Act. Absent a regulatory or statutory 
requirement, it has been our position that manufacturers must retain 
these records indefinitely.
    On September 19, 1995, we published a proposed rule (60 FR 48442) 
in the Federal Register that proposed numerous provisions related to 
the Medicaid drug rebate program. As relevant to this rule, we proposed 
a new 3-year recordkeeping requirement for drug manufacturers under the 
Medicaid drug rebate program and proposed a 3-year time limitation 
during which manufacturers must recalculate and report data to us on 
the average manufacturer price and best price. On August 29, 2003, we 
published a final rule with comment period (68 FR 51912) in the Federal 
Register that finalized both provisions. On September 26, 2003, we 
issued a correction notice (68 FR 55527) in the Federal Register to 
change the effective date of the August 29, 2003 rule from October 1, 
2003 to January 1, 2004.

II. Provisions of the Proposed Regulations and Interim Final Rule

    On January 6, 2004, we published an interim final rule with comment 
period that removed the 3-year recordkeeping requirement issued in the 
August 29, 2003 final rule with comment period, and replaced it with 
10-year recordkeeping requirements on a temporary basis for 
manufacturers participating in the Medicaid drug rebate program, and 
solicited comments on the 10-year requirement.
    Under the 10-year recordkeeping requirement, we required that 
manufacturers retain records for 10 years from the date the 
manufacturer reports data to us for a rebate period. We also required 
that manufacturers retain records beyond the 10-year period if the 
records are the subject of an audit or a government investigation of 
which the manufacturer is aware and if the audit findings or 
investigation related to the average manufacturer price and best price 
have not been resolved. The provisions of the January 6, 2004 interim 
final rule related to record retention are scheduled to sunset on 
December 31, 2004.
    In addition, the January 6, 2004 interim final rule with comment 
period responded to public comments on the August 29, 2003 final rule 
with comment period that pertain to the 3-year recordkeeping 
requirement at Sec.  447.534(h). The 3-year recordkeeping requirement 
for drug manufacturers participating in the Medicaid drug rebate 
program has caused a significant amount of concern from commenters with 
regard to the False Claims Act (FCA) and other possible fraud and abuse 
violations.
    Also, on January 6, 2004, we published a proposed rule (69 FR 565) 
that would remove the 3-year recordkeeping requirement and replace it 
with 10-year recordkeeping requirement on a permanent basis. We also 
proposed that manufacturers must retain records beyond the 10-year 
period if the manufacturers are aware that the records are the subject 
of an audit or a government investigation and if the audit findings or 
investigation related to the manufacturer's average manufacturer price 
and best price have not been resolved. This final rule finalizes both 
the interim final rule and the proposed rule that we published on 
January 6, 2004.

III. Analysis of and Response to Public Comments on the January 6, 2004 
Interim Final With Comment Period and Proposed Rule

    We received 3 timely comments in response to the January 6, 2004 
interim final rule with comment period and proposed rule. We received 
comments from an attorney who represents the pharmaceutical industry, a 
coalition comprised of national advocacy groups, and a non-profit 
organization. These comments and our responses are summarized below.
    Comment: One commenter urged us to promulgate the 10-year 
requirement as a final rule, effective before the expiration of the 
current 10-year requirement on December 31, 2004.
    Response: We agree; therefore, we are issuing this final rule to 
permanently establish the 10-year recordkeeping requirements for 
manufacturers.
    Comment: One commenter expressed the opinion that the January 6, 
2004 interim final rule and proposed rule should be modified to change 
the record retention requirements back to 3 years. A manufacturer would 
still have the discretion to retain records for as long as it wanted, 
but would not be subject to a mandatory requirement in excess of the 3-
year period. The government would not be restricted by these rules from 
pursuing claims under the False Claims Act (FCA) or applicable health 
care laws against a manufacturer for fraud, abuse, or knowingly 
submitting false data to the government. Changing the record retention 
requirement back to 3 years would reconcile the current conflict 
between the 10-year record retention requirement and the 3-year price 
recalculation reporting requirement. The commenter further stated that 
the interim final rule and the proposed rule should be finalized to 
clearly state that the 3-year time

[[Page 68816]]

limitation is a statute of limitations and that a manufacturer will not 
be liable or obligated to pay the government or be entitled to be the 
beneficiary of any errors in calculations for periods outside of the 3-
year time limitation.
    Response: We believe that it is necessary to replace the 3-year 
provision with a 10-year provision to address concerns regarding 
Federal and State investigations for fraud under the FCA and related 
anti-fraud provisions concerning the Medicaid drug rebate program. 
Since the manufacturer is often unaware of the qui tam investigations, 
we must ensure that manufacturers participating in the Medicaid drug 
rebate program do not erroneously conclude that they could discard 
records concerning drug price calculations, as well as data supporting 
those calculations that are subject to the FCA and other fraud laws. 
The qui tam whistleblower provisions allow persons with evidence of 
fraud against Federal programs or contracts to bring suit on behalf of 
the government. Qui tam actions are filed under seal and preliminary 
investigations often take place without notice to manufacturers.
    As noted in the January 6, 2004 interim final rule, we received 
comments suggesting that the 3-year recordkeeping requirements were too 
short, but none to convince us to expand the time limit on pricing 
recalculations. Therefore, since manufacturers are in full possession 
of the documents that they need to make pricing recalculations, we 
continue to believe that 3 years is an adequate timeframe to permit 
manufacturers to recalculate their pricing data. Furthermore, the 3-
year limitation rule was designed to establish time limits for 
reporting recalculations and to decrease associated administrative 
burdens on manufacturers and States. After further consideration, we 
firmly believe that the 10-year provision will be more appropriate and 
sufficient to ensure a Federal standard with regard to the Medicaid 
drug rebate program that will not hinder the activities of Federal and 
State law enforcement activities regarding the issues of potential 
fraud and abuse violations and litigation.
    Comment: One commenter expressed the opinion that the 10-year 
recordkeeping requirement is a significant improvement over the 
original rule, and will provide a more effective safeguard against 
improper or fraudulent drug price inflation and abuse of both the 
Medicaid rebate program and the program under section 340B of the 
Public Health Service Act. However, the commenter believes that an even 
longer period of record retention should be required of drug 
manufacturers.
    Response: We recognize that there is some cross-over between the 
data required for the Medicaid drug rebate program and the 340B 
program. However, our regulation is solely designed to address the 
Medicaid drug rebate program. We believe that a 10-year recordkeeping 
requirement is consistent with the FCA and offers immediate protection 
to address potential fraud and abuse violations and litigation.

IV. Provisions of the Final Rule

    We are adopting the provisions of the regulation text in the 
January 6, 2004 proposed rule. We are making editorial changes to Sec.  
447.534(h)(1)(i) and we are removing paragraph (h)(2), which was 
included in the interim final rule with comment. This final rule 
establishes a permanent 10-year recordkeeping requirement for 
prescription drug manufacturers that participate in the Medicaid drug 
rebate program. This provision would be set forth in 42 CFR part 447 
subpart I. Under the 10-year recordkeeping requirement, we require that 
a drug manufacturer retain records for 10 years from the date the 
manufacturer reports that rebate period's data to us. In addition, we 
require a manufacturer retain data beyond the 10-year period if the 
manufacturer is aware that the records are the subject of an audit or a 
government investigation and if the audit findings or investigation 
related to the manufacturer's average manufacturer price and best price 
have not been resolved.
    In addition, in Sec.  447.534, we are removing the paragraph (ii) 
[Reserved] at the end of the section, which is a misprint. The 
paragraph that precedes it is the lower case letter ``i.'' It was 
misconstrued for the roman numeral one (i). Thus, paragraph (ii) is 
erroneous and should be removed.

V. Collection of Information Requirements

    Under the Paperwork Reduction Act (PRA) of 1995, we are required to 
provide 30-day notice in the Federal Register and solicit public 
comment when a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the PRA requires that we 
solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    However, the collection requirements referenced below are currently 
approved by OMB, under OMB control number 0938-0578, entitled 
``Medicaid Drug Rebate Program, Manufacturers''.

Section 447.534 Manufacturer Reporting Requirements

    Paragraph (h) of this section states a manufacturer must retain 
records (written or electronic) for 10 years from the date the 
manufacturer reports data to CMS for a rebate period. The records must 
include these data and any other materials from which the calculations 
of the average manufacturer price and best price are derived, including 
a record of any assumptions made in the calculations. The 10-year 
timeframe applies to a manufacturer's quarterly submission of pricing 
data and any revised pricing data subsequently submitted to CMS.

VI. Regulatory Impact Analysis

A. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 16, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132.
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely assigns responsibility of duties) directs agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year). 
We do not believe this rule will have an economically significant 
effect. We believe the rule will not result in costs to the Medicaid 
program and that additional costs to drug manufacturers will be 
minimal. We do not consider this rule to be a major rule.

[[Page 68817]]

    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and government agencies. 
Most hospitals and most other providers and suppliers are small 
entities, either by nonprofit status or by having revenues of $6 
million to $29 million in any 1 year. For purposes of the RFA, 
pharmaceutical manufacturers with 750 or fewer employees are considered 
small businesses according to the Small Business Administration's size 
standards matched to the North American Industry Classification System, 
effective October 1, 2002, (http://www.sba.gov/size/sizetable2002.html). Use of the Small Business Administration's size 
standards matched to North American Industry Classification System is 
in compliance with the Small Business Administration's regulation that 
set forth size standards for health care industries at 65 FR 69432. 
Individuals and States are not included in the definition of a small 
entity. Because pharmaceutical manufacturers are not required to report 
their numbers of employees to the Small Business Administration, we 
find there is no practical way to determine how many are considered 
small entities out of a total of 3,295 firms and establishment as 
reported by the United States Census Bureau (see http://www.census.gov/csd/susb/usaalliol.xls). Therefore, we believe this rule will not have 
a significant impact on small businesses because, although some 
pharmaceutical manufacturers may be small businesses, we estimate that 
the cost to manufacturers will be minimal, as described in section 
VII.B below.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. This rule will not have a 
significant impact on small rural hospitals, because the provisions 
contained herein do not pertain to hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in expenditure in any 1 year by State, 
local, or tribal governments, in the aggregate, or by the private 
sector, of $110 million. We anticipate this rule will not impact State 
governments or the private sector.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. We do not anticipate this rule will impose any direct 
requirement costs on State governments.

B. Anticipated Effects

1. Effects on Drug Manufacturers
    We do not collect information on the costs associated with 
manufacturer recordkeeping under the Medicaid drug rebate program. 
Therefore, in the absence of such information, we derived an estimate 
based on our annual costs of storing electronic pricing data that we 
receive from approximately 500 drug manufacturers. We store drug 
product data, including pricing information, for approximately 55,000 
drug products. Over the course of the 12 years the Medicaid drug rebate 
program has been in existence, we have gathered nearly 250 megabytes of 
information. This information fits on one compact disc. The cost of one 
blank compact disc is less than $1. We did not have a reasonable proxy 
available to estimate the staffing costs associated with maintaining 
the data, so our estimate does not include these costs.
    On the whole, we believe this approach is reasonable because it is 
our understanding that these records are maintained by most 
manufacturers in an electronic format, while smaller companies may 
maintain their pricing records in written format. In order to more 
accurately evaluate the fiscal impact of this provision in the final 
rule, we requested that manufacturers provide us with information on 
the costs they would expect to incur pursuant to retaining records for 
a 10-year period. To the extent possible, we asked that manufacturers 
make an effort to distinguish between the costs of meeting the 10-year 
recordkeeping requirement versus other recordkeeping requirements that 
may apply to the same records. However, we did not receive any 
information or data in response to our request regarding the expected 
cost that would be incurred pursuant to retaining records for a 10-year 
period necessary to determine whether our original assumptions were 
unsubstantiated. Accordingly, we continue to believe that our estimates 
are reasonable.
    We do not anticipate that this rule will adversely affect a drug 
manufacturer's participation in the Medicaid drug rebate program or 
impact the current level of access and availability of prescription 
drugs for Medicaidbeneficiaries. There is no impact on contractors or 
providers.
2. Effects on the Medicaid Program
    We are unable to quantitatively address the burden to States with 
respect to recordkeeping. This rule will not adversely affect a State's 
ability to obtain manufacturers' rebates or impact the current level of 
access and availability of prescription drugs for Medicaid 
beneficiaries. There is no impact on Medicaid providers or contractors.

C. Alternatives Considered

    Retain the 3-Year Recordkeeping provision in the August 29, 2003 
final rule with comment period.
    We considered retaining the 3-year recordkeeping provision in the 
August 29, 2003 final rule with comment period. However, we believe it 
is necessary to replace the 3-year provision with a 10-year provision 
to address concerns regarding Federal and State investigations for 
fraud under the FCA concerning the Medicaid drug rebate program.
    Establish a different time limitation.
    Another alternative would be to establish a longer or shorter 
recordkeeping requirement. We did not choose a longer recordkeeping 
timeframe because we believe a 10-year period will offer immediate 
protection to address situations where investigations are under seal in 
qui tam actions. Further, the exception to the 10-year requirement 
adequately addresses situations where investigations known to 
manufacturers are not yet resolved. We did not choose a shorter 
recordkeeping timeframe in this rule because we are concerned that such 
a timeframe could be misconstrued to lead a manufacturer to believe 
that it could prematurely destroy vital evidence in a potential fraud 
and abuse litigation.
    Finalize the 10-year recordkeeping requirement with a sunset date 
provision.
    We considered finalizing the 10-year recordkeeping requirement with 
a sunset date provision. However, we did not choose to finalize the 
provision with a sunset date because as discussed previously, we have 
concerns about the potential premature destruction of evidence in false 
claims act litigation.

[[Page 68818]]

D. Conclusion

    For these reasons, we are not preparing analyses for either the RFA 
or section 1102(b) of the Act because we have determined, and we 
certify, that this rule will not have a significant economic impact on 
a substantial number of small entities or a significant impact on the 
operations of a substantial number of small rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 447

    Accounting, Administrative practice and procedure, Drugs, Grant 
programs--health, Health facilities, Health professions, Medicaid, 
Reporting and recordkeeping requirements, Rural areas.


0
For the reasons set forth in the preamble, the Centers for Medicare & 
Medicaid Services amends 42 CFR chapter IV as set forth below:

PART 447--PAYMENTS FOR SERVICES

0
1. The authority for citation for part 447 continues to read as 
follows:

    Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 
1302).

Subpart I--Payment for Outpatient Prescription Drugs Under Drug 
Rebate Agreements

0
2. In Sec.  447.534, the following changes are made:
0
A. Paragraph (h)(1)(i) is revised.
0
B. Paragraph (h)(1)(ii) is republished.
0
C. Paragraph (h)(2) is removed and reserved.
0
D. Paragraph (i) is republished.
0
E. The paragraph designated (ii) [Reserved] at the end of the section 
is removed.


Sec.  447.534  Manufacturer reporting requirements.

* * * * *
    (h) Recordkeeping requirements. (1)(i) A manufacturer must retain 
records (written or electronic) for 10 years from the date the 
manufacturer reports data to CMS for that rebate period. The records 
must include these data and any other materials from which the 
calculations of the average manufacturer price and best price are 
derived, including a record of any assumptions made in the 
calculations. The 10-year timeframe applies to a manufacturer's 
quarterly submission of pricing data, as well as any revised pricing 
data subsequently submitted to CMS.
    (ii) A manufacturer must retain records beyond the 10-year period 
if both of the following circumstances exist:
    (A) The records are the subject of an audit or of a government 
investigation related to pricing data that are used in average 
manufacturer price or best price of which the manufacturer is aware.
    (B) The audit findings or investigation related to the average 
manufacturer price and best price have not been resolved.
    (2) [Reserved]
    (i) Timeframe for reporting revised average manufacturer price or 
best price. A manufacturer must report to CMS revisions to average 
manufacturer price or best price for a period not to exceed 12 quarters 
from the quarter in which the data were due.

(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)

    Dated: August 18, 2004.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.

    Approved: September 8, 2004.
Tommy G. Thompson,
Secretary.
[FR Doc. 04-25969 Filed 11-24-04; 8:45 am]
BILLING CODE 4120-01-P