Final Notice Regarding Section 602 of the Veterans Health Care Act of 1992 Entity Guidelines

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Public Health Service

Final Notice Regarding Section 602 of the Veterans Health Care

Act of 1992 Entity Guidelines

AGENCY: Public Health Service, 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, ``Limitation on Prices of Drugs Purchased by Covered Entities.''

Section 340B provides that a manufacturer who sells covered outpatient

drugs to eligible entities must agree to charge a price that will not

exceed the amount determined under a statutory formula. The purpose of

this notice is to inform interested parties of final program guidelines

regarding eligible covered entities.

FOR FURTHER INFORMATION CONTACT:

Marsha Alvarez, R.Ph., Director, Drug Pricing Program, Bureau of

Primary Health Care, Health Resources and Services Administration, East

West Towers rm 10-3A1, Bethesda, Maryland 20814, Phone: (301) 594-4353.

EFFECTIVE DATE: June 13, 1994.

SUPPLEMENTARY INFORMATION:

(A) Background

Proposed entity guidelines were announced in the Federal Register

at 58 FR 68922 on December 29, 1993. A comment period of 30 days was

established to allow interested parties to submit comments. The Office

of Drug Pricing received 7 letters with comments concerning

confidential drug pricing information, retroactive discounts,drug

diversion, audit requirements, entity participation, group purchasing,

purchasing agents, manufacturer contracts, and 4 general comments.

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

Confidential Drug Pricing Information

Comment: Establish specific sanctions for entities which knowingly

make unauthorized disclosures.

Response: No change. The quoted price or the actual price given by

the manufacturer to the covered entity is not confidential. Covered

entities do not have access to confidential drug pricing information

(i.e., average manufacturer price and best price).

Eligibility for Retroactive Discounts

Comment: Do not impose a deadline on requesting retroactive

discounts.

Response: No change. It is a reasonable administrative decision to

establish a time limit for requesting refunds. Manufacturers were given

sufficient time in which to implement the discount program, and

entities were given an adequate opportunity to elect whether to

participate in the program. An entity may preserve its right to

retroactive discounts, after the deadline, by sending each manufacturer

a letter requesting such refunds and providing adequate documentation

of drug purchases.

Comment: Exclude from eligibility for retroactive discounts any

disproportionate share hospital (DSH) which purchased its outpatient

drugs through a group purchasing organization (GPO).

Response: No change. The Office of Drug Pricing considers the

outpatient drug purchases of DSHs bought through a GPO or any group

purchasing arrangement ineligible for retroactive discounts.

Comment: Allow covered entities to request an extension of the

deadline for retroactive discounts for good cause (e.g., offsite DSH

clinics whose eligibility has not yet been determined).

Response: We have amended part 3 of the notice to permit a DSH

outpatient clinic which was not participating in a GPO or any group

purchasing arrangement during the period for which it is requesting

retroactive discounts to preserve its right by sending manufacturers a

letter requesting such refunds and providing adequate documentation of

purchases.

Comment: Extend the deadline for those manufacturers which have

refused to give PHS pricing to the date on which the manufacturer

begins discounting its covered outpatient drugs in accordance with the

law.

Response: No change. At every opportunity, the Office of Drug

Pricing has communicated its willingness to assist entities with

problems of accessing PHS pricing. It has responded to all entity

complaints dealing with manufacturer noncompliance. We believe that one

year is a reasonable time in which to have resolved any difficulty with

pricing access.

Comment: Require manufacturers to respond within 30 days to

requests for retroactive discounts, even if the response is just a

request for additional information, or face possible termination from

the Medicaid program.

Response: No change. Because this issue deals with manufacturer

guidelines, it is beyond the scope of this notice. However, should a

covered entity have difficulty obtaining retroactive discounts, we

encourage the entity to contact the Office of Drug Pricing for

assistance.

Comment: Establish that a DSH, which did not submit its Medicaid

provider number for the period for which it is requesting retroactive

discounts, would be ineligible for the refund.

Response: No change. A DSH which did not submit its Medicaid

provider number may still be eligible for retroactive discounts if it

(1) did not bill Medicaid for the drugs, (2) billed for covered

outpatient drugs using an all-inclusive rate, or (3) has adequate

documentation proving that drugs for which retroactive discounts are

being requested did not generate Medicaid rebates.

Drug Diversion

Comment: Develop and publish a mechanism whereby manufacturers can

report to the Office of Drug Pricing when they suspect an entity of

diversion.

Response: No change. The Office of Drug Pricing has currently

developed a proposed dispute resolution process which will be published

in the Federal Register with a public comment period.

Comment: Require PHS preclearance of all safeguard systems

developed by entities to deter diversion and require this information

to be supplied to the manufacturers upon request.

Response: No change. Guidelines concerning separate purchasing

accounts and dispensing records are quite specific, and procedures in

these areas need no prior approval. If a manufacturer believes that a

covered entity is involved in drug diversion, it has the statutory

authority to audit the entity records that directly relate to drugs of

that manufacturer purchased at PHS pricing. Proposed audit guidelines

have been developed and will be published in the Federal Register with

a public comment period.

Comment: Issue criteria for measuring the adequacy of the

safeguards.

Response: No change. If a manufacturer believes that a covered

entity has established inadequate safeguards and is involved in drug

diversion, then the manufacturer can either audit the entity or file a

complaint with the Office of Drug Pricing.

Comment: Develop a broad definition of ``patient'' to include all

necessary services provided to individuals served by the covered

entities.

Response: No change. The notice does not address the definition of

patient. The Office of Drug Pricing is in the process of developing a

definition of patient, which will be published in the Federal Register.

Public comment will be invited, and this comment will be considered at

that time.

Comment: Do not require separate inventories, as this would place a

hardship on most hospitals.

Response: No change. There is no requirement for separate

inventories.

Comment: Do not permit entities to develop alternate tracking

systems or develop criteria for these systems by March 1, 1994.

Response: No change. It is essential that the Office of Drug

pricing maintain some flexibility during this period of implementation.

Because these alternate tracking systems require prior approval from

the Office of Drug pricing before they can be implemented, sufficient

control is maintained. The Office will develop criteria at a later date

and welcomes all suggestions.

Audit Requirements

Comment: Specify the statutory basis for the Secretary to authorize

manufacturer audit guidelines.

Response: We have amended part 5 of the notice to include a

reference to section 340B(a)(5)(C) of the PHS Act, which gives the

Secretary the authority to establish procedures relating to the number,

duration, and scope of manufacturer audits.

Comment: Move quickly to develop procedures to allow manufacturers

to audit records of entities' purchases of covered outpatient drugs and

of Medicaid claims for reimbursement for such drugs.

Response: No change. The Office of Drug Pricing is developing

proposed audit guidelines which will be published in the Federal

Register with public comment invited. All comments regarding suggested

audit procedures, currently received, will be considered at that time.

Entity Participation

Comment: An entity should be viewed as not participating in the

program (and therefore as ineligible to receive its discounts) if it

has not given its Medicaid provider number of the Office of Drug

Pricing.

Comment: We have amended part 2 of the notice to require entities

to provide one of the following: (1) A pharmacy Medicaid number (the

number which the entity uses to bill Medicaid for medications), or (2)

their all-inclusive Medicaid number (e.q., ``FQ'' number), or (3)

notification that it does not bill Medicaid for all outpatient drugs.

These numbers will be posted on the electronic bulletin board

(Electronic Data Retrieval System or EDRS), maintained by the Office of

Drug Pricing, to indicate which covered entities have elected to

participate in the program. For access to the EDRS call (301) 549-4992.

Comment: All covered entities should be required to notify

manufacturers 30 days before they wish to access PHS pricing.

Response: We have amended part 6 of the notice to provide that

entities will be added to or deleted from the eligibility list on a

quarterly basis only. The Office of Drug Pricing will update the list 2

weeks before each calendar quarter, giving lead time for pricing

changes and appropriate communications with wholesalers, GPOs, and

purchasing agents.

Group Purchasing Arrangements

Comment: Allow eligible DSHs to continue GPO participation for

manufacturers who are not offering PHS pricing and prohibit GPO

participation with respect to all complying manufacturers.

Response: No change. Generally, we have found that entities are

receiving PHS pricing. The Office of Drug Pricing has, at every

opportunity, communicated its willingness to assist entities when there

are problems with accessing PHS pricing. The Office has investigated

all complaints of manufacturer noncompliance immediately and was and is

willing to take appropriate enforcement action if necessary. This is

the proper course for dealing with any manufacturer non-compliance,

rather than attempting to compensate for continued non-compliance by

disregarding the statutory GPO provisions.

Purchasing Agents

Comment: Distinguish clearly between a purchasing agent and a GPO

for purposes of the DSH/GPO prohibition, only.

Response: We have amended part 8 of the notice to distinguish a

purchasing agent from a group purchasing arrangement for purposes of

the DSH/GPO prohibition. A purchasing agent would not be considered

operating as a group purchasing arrangement if the following conditions

are met: (1) the purchasing agent is not associated with a group

purchasing organization; (2) no collective bargaining by a group of

hospitals occurs; (3) the negotiations of PHS pricing are separate

activities for each individual DSH; (4) a separate agreement with each

DSH is executed; (5) as part of the agreement, there will be no sharing

or pricing information; and (6) all final decisions concerning product

and price acceptance will be made by each individual DSH.

Comment: Do not require manufacturers to sell directly to a

purchasing agent, a GPO, or a contract pharmacy, but solely to covered

entities and their wholesalers.

Response: No change. It is a customary business practice for

manufacturers to sell to intermediaries as well as directly to the

entity. Entities often use purchasing agents or contract pharmacies, or

participate in GPOs. By placing such limitations on sales transactions,

manufacturers could be discouraging entities from participating in the

program.

Manufacturers may not single out covered entities from their other

customers for restrictive conditions that would undermine the statutory

objective.

Manufacturer Contracts Which Require Entity Compliance

Comment: Permit a manufacturer to require the covered entities to

sign a contract containing only the manufacturer's normal business

policies (e.g., routine information necessary to set up and maintain an

account) if this is a usual business practice of the manufacturers.

Response: We have amended part 11 of the notice to state that this

prohibition against a contract between a manufacturer and a covered

entity regarding entity compliance with section 340B provisions or the

Office of Drug Pricing program guidelines does not encompass entity/

manufacturer contracts that contain provisions relating to normal

business activities, requests for standard information, or other

appropriate contract provisions.

Comment: Declare null and void provisions in manufacturer contracts

signed by entities pursuant to section 340B which deal with assurances

of entity compliance with section 340B.

Response: No change. While the Office of Drug Pricing has no legal

authority to declare null and void provisions of contracts between

covered entities and manufacturers, it is our position that

manufacturers may not enforce such provisions.

General

Comment: Post Medicaid provider numbers of all eligible DSH

outpatient clinics on the electronic bulletin board.

Response: No change. The Office of Drug Pricing has developed

proposed criteria to determine the eligibility of DSH outpatient

clinics. These criteria will be published in the Federal Register, and

the public will be invited to comment.

Comment: Might certain activity generate a new Medicaid Best Price?

Response: No change. Because the Health Care Financing

Administration (HCFA) Medicaid Rebate Program deals with Best Price

calculations, the Office of the Drug Pricing will refer all Best Price

questions to the agency. For further information in this regard, please

call Al Beachley, Branch Chief, Medicaid Drug Rebate Operations Branch,

HCFA, at (410) 966-3225.

Comment: Establish a procedure whereby manufacturers will be able

to determine which purchasing groups are eligible to purchase on behalf

of covered entities and receive the PHS pricing.

Response: We have amended part 7 of the notice to require any group

which purchases covered outpatient drugs at OHS pricing on behalf of an

eligible covered entity to have written authority from the entity to

purchase its covered outpatient drugs. The purchasing group must

provide documentation of this purchase authority to the manufacturer

upon request. This rule does not supersede the statutory limitations

regarding DSH participation in GPOs or group purchasing arrangements.

Comment: Establish a prime vendor program designating certain

wholesalers to service PHS covered entities similar to programs

established with the Department of Veterans Affairs (VA), Department of

Defense (DOD), and the Bureau of Prisons (BOP).

Response: No change. The Office of Drug Pricing is in the early

stages of developing a pilot prime venter program and has considered,

among others, the various programs of VA, DOD, and BOP.

(C) Revised Entity Guidelines

Set forth below are the final entity guidelines, revised based on

the analysis of the comments described above.

(1) Confidential Drug Pricing Information

``Confidential drug pricing information'' includes both ``best

price'' and ``average manufacturer price.'' The quoted price and the

actual price given by the manufacturer to the covered entity are not

confidential.

(2) Duplicate Discount/Rebate Potential

First, a covered entity billing on a cost basis for drug purchases

must provide the Office of Drug Pricing with a pharmacy Medicaid number

(the number which the entity uses to bill Medicaid for medications).

Second, a covered entity using an all-inclusive rate (either per

encounter or visit) must submit its all-inclusive Medicaid number

(e.g., ``FQ'' number). Third, if a covered entity does not bill

Medicaid for outpatient drugs, then the entity must notify the Office

of this decision. Fourth, a large facility which houses many different

clinics, only several of which are eligible, must obtain a separate

Medicaid provider number for the eligible clinics. For those States

which cannot generate additional Medicaid provider numbers for

entities, covered entities must discuss an alternative arrangement with

the States to accomplish this objective.

This information will be posted on the Electronic Data Retrieval

System (EDRS), maintained by the Office of Drug Pricing, to indicate

which covered entities have elected to participate in the program. For

access to the EDRS call (301) 594-4992.

If a drug is purchased by or on behalf of a Medicaid beneficiary,

the amount billed may not exceed the entity's actual acquisition cost

for the drug, as charged by the manufacturer at a price consistent with

the Veterans Health Care Act of 1992, plus a reasonable dispensing fee

established by the State Medicaid agency.

(3) Eligibility for Retroactive Discounts

Until 30 days after publication of this notice, eligible covered

entities included on the initial eligibility list may request

retroactive discounts (discounts, rebates, or account credit) for

covered outpatient drugs purchased retroactive to December 1, 1992.

Entities added to the eligibility list at a later date may only request

discounts retroactive to the date of their inclusion on the list. Of

the entities listed on the eligibility list, only the following may

request these discounts: The covered entity that--(1) has billed for

covered outpatient drugs using an all-inclusive rate (either per visit

or per encounter), or (2) has not billed Medicaid for covered

outpatient drugs since December 1, 1992, (or since its inclusion on the

eligibility list), or (3) has submitted its Medicaid provider number

and is requesting refunds for subsequent periods, or (4) has adequate

documentation proving that drugs for which a retroactive discount is

being requested have not generated Medicaid rebates.

A DSH is not eligible for retroactive discounts for covered

outpatient drugs purchased through a group purchasing organization

(GPO) or any group purchasing arrangement. Any DSH outpatient clinic

which is or will be eligible for retroactive discounts may preserve its

rights by sending manufacturers a letter requesting such refunds and

providing adequate documentation of purchases.

(4) Entity Guidelines Regarding Drug Diversion

Covered entities are required not to resell or otherwise transfer

outpatient drugs purchased at the statutory discount to an individual

who is not a patient of the entity. There are several common situations

in which this might occur. First, if individuals other than patients of

the covered entity obtain covered outpatient drugs from its

pharmaceutical dispensing facility, the entity must develop and

institute adequate safeguards to prevent the transfer of discounted

outpatient drugs to individuals who are not eligible for the discount

(e.g., separate purchasing accounts and dispensing records). Second, a

larger institution which contains an eligible entity within its

structure is required to establish separate purchasing accounts and

maintain separate dispensing records for the eligible entity. Third,

the covered entity itself may not use the covered outpatient drug in

excluded services (e.g., inpatient services). If an entity offers

services excluded from the drug discount program, the entity must

develop a separate method for purchasing and dispensing drugs for

excluded services.

The covered entity may, at its option, develop an alternative

system, short of tracking each discounted drug through the purchasing

and dispensing process, by which it can prove compliance. If an

alternate system of tracking is proposed to be used, this system must

be approved by the Drug Pricing Program. The Office will develop

criteria for alternative systems at a later date and welcomes all

suggestions.

(5) Audit Requirement

All entities receiving statutory prices are required to maintain

records of purchases of covered outpatient drugs and of any claims for

reimbursement submitted for such drugs under title XIX of the Social

Security Act. The entity must permit HHS and the manufacturer to audit

any record of a covered drug purchase that was subject to the discount,

as provided by section 340B(a)(5)(C) of the PHS Act. Manufacturer

audits will be conducted in accordance with procedures developed by the

Secretary of HHS. The Office of Drug Pricing is developing proposed

audit guidelines which will be published in the Federal Register with

public comment invited. The notice will address only audits related to

purchases as a covered entity; it does not address other audit

requirements related to participation in State Medicaid programs or

receipt of Federal funding.

(6) Entity Participation

Covered entity participation in the section 340B drug discount

program is voluntary. Once an entity has elected to participate in the

program, it must wait to enter or withdraw from the program until the

next official updating of the eligible entity list. The Office of Drug

Pricing will update this list two weeks before each calendar quarter.

The entity must comply with all program guidelines until the date it is

removed from the eligibility list.

(7) Group Purchasing

A DSH may participate in a group purchasing arrangement for

inpatient drug use without affecting its eligibility to purchase

section 340B discounted drugs. If a DSH participates in a GPO or other

group purchasing arrangement for covered outpatient drugs, the DSH will

no longer be an eligible covered entity and cannot purchase covered

outpatient drugs at the section 340B discount prices.

States, or other groups, which purchase drugs for covered entities

(other than disproportionate share hospitals) are not included on the

list of covered entities; however, they are eligible to purchase at the

section 340B discount if the following requirements are met: (1) the

group purchasing arrangement must be comprised of only covered

entities, (2) if group purchasing arrangements contain entities which

are not eligible for the discount, separate purchasing accounts and

dispensing/distribution must be maintained, and (3) the purchasing

group has written authority from the covered entity to purchase covered

outpatient drugs on its behalf.

(8) Purchasing Agents

A covered entity is permitted to use a purchasing agent without

forfeiting its right to the section 340B drug discounts. If a

purchasing agent is used, the arrangement must be in writing and the

terms of the agent's relationship with the entity must be clearly

defined. The entity and the agent should decide whether the agent

simply negotiates the drug purchasing contracts on behalf of the entity

or actually receives drug shipments for distribution to the entity. If

the latter, the transfer of purchased pharmaceuticals from an agent to

the entity would not be viewed as drug diversion.

For purposes of the DSH/GPO prohibition only, a purchasing agent

may be distinguished from and would not be considered operating as a

GPO or other group purchasing arrangement if the following conditions

are met: (1) the purchasing agent is not associated with a GPO or other

purchasing arrangement; (2) no collective bargaining by a group of

hospitals occurs; (3) the negotiations for PHS pricing are separate

activities for each individual DSH; (4) a separate agreement with each

DSH is executed; (5) as part of the agreement, there will be no sharing

of pricing information; and (6) all final decisions concerning product

and price acceptance will be made by each individual DSH.

(9) Definition of Covered Outpatient Drug

Section 1927(k)(2) of the Social Security Act defines ``covered

outpatient drug'' to include most drugs and biologicals which may be

dispensed only by prescription and which require approval by the Food

and Drug Administration or a license under section 351 of the PHS Act.

Section 1927(k)(3) limits the definition of ``covered outpatient drug''

to exclude certain settings (e.g., such services as emergency room,

hospice, dental, physician, nursing facilities, x-ray, lab, and renal

dialysis) in some instances. In these settings, if a covered drug is

included in the per diem rate (i.e., bundled with other payments in an

all-inclusive, per visit, or an encounter rate), it will not be

included in the section 340B discount program. However, if a covered

drug is billed and paid for instead as a separate line item as an

outpatient drug in a cost basis billing system, this drug will be

included in the program.

(10) Dealing Direct or Through a Wholesaler

If a manufacturer has customarily dealt directly with a particular

covered entity, then requiring the manufacturer to continue this form

of purchasing with the covered entity is reasonable. When dealing

directly with a covered entity, manufacturers must offer covered

outpatient drugs at or below the section 340B discount prices. If a

manufacturer customarily uses a wholesaler as a means of distribution,

then requiring the manufacturer to continue this form of purchasing

with covered entities is also reasonable. If the manufacturer's drugs

are available to covered entities through wholesalers, the discount

must be made available through that avenue. Manufacturers may not

single out covered entities from their other customers for restrictive

conditions that would undermine the statutory objective. Manufacturers

must not place limitations on the transactions (e.g., minimum purchase

amounts) which would have the effect of discouraging entities from

participating in the discount program.

(11) Manufacturer's Contracts Requiring Entity Compliance

A manufacturer may not condition the offer of statutory discounts

upon an entity's assurance of compliance with section 340B provisions.

Covered entity assurances regarding the following activities may not be

required: (1) eligibility to participate in the program; (2)

utilization of covered outpatient drugs only in authorized services;

(3) maintaining the confidentiality of the drug pricing information;

(4) permitting the manufacturers to audit purchase, inventory, and

related records prior to the publication of approved PHS guidelines;

and (5) submitting information related to drug acquisition, purchase,

and inventory systems. Entities are not required to sign agreements

assuring manufacturers of their compliance with section 340B

provisions. (If a manufacturer asks a covered entity whether the entity

is in fact participating in the section 340B discount program, the

entity must supply the manufacturer with this information). This

prohibition does not include provisions that address customary business

practice, request standard information, or include other appropriate

contract provisions.

Dated: May 9, 1994.

John H. Kelso,

Acting Administrator, Health Resources and Services Administration.

[FR Doc. 94-11643 Filed 5-12-94; 8:45 am]

BILLING CODE 4160-15-P-M