Notice Regarding Section 602 of the Veterans Health Care Act of 1992; Manufacturer Audit Guidelines and Informal Dispute Resolution

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Public Health Service

Notice Regarding Section 602 of the Veterans Health Care Act of

1992; Manufacturer Audit Guidelines and Informal Dispute Resolution

AGENCY: Public Health Service, HHS.

ACTION: Notice.

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SUMMARY: Section 602 of Public Law 102-585, the ``Veterans Health Care

Act of 1992'' (the ``Act''), enacted section 340B of the Public Health

Service Act (``PHS Act''), ``Limitation on Prices of Drugs Purchased by

Covered Entities.'' Section 340B provides that a manufacturer who sells

covered outpatient drugs to eligible entities must sign a

pharmaceutical pricing agreement (the ``Agreement'') with the Secretary

of Health and Human Services (the ``Secretary'') in which the

manufacturer agrees to charge a price for covered outpatient drugs that

will not exceed an 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 that has signed the Agreement, 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,

as stated in section 340B(a)(5)(C).

Further, the Office of Drug Pricing 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 Office of Drug Pricing has

developed a proposed informal dispute resolution process.

The purpose of this notice is to invite public comment on the

proposed manufacturer audit guidelines and the proposed informal

dispute resolution process.

DATES: The public is invited to submit comments on the proposed audit

guidelines and dispute resolution process by July 11, 1994. After

consideration of the comments submitted, PHS will issue the final audit

guidelines and the dispute resolution process.

ADDRESSES: Submit comments to Ms. Alvarez at the address noted below.

FOR FURTHER INFORMATION CONTACT: Marsha Alvarez, R. Ph., Director,

Office of Drug Pricing, Bureau of Primary Health Care, 4350 East West

Highway, West Towers, 10th Floor, Bethesda, MD 20814, Tel: (301) 594-

4354.

SUPPLEMENTARY INFORMATION:

Manufacturer Audit Guidelines

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)(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

must permit the manufacturer of a covered outpatient drug who has

signed the Agreement with the Secretary 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 must be conducted in accordance with guidelines

developed by the Secretary as required by section 340B(a)(5)(C). This

notice does not include the audit guidelines to be used by Government

auditors where the Government performs the audit of the records of the

covered entity's compliance with the requirements of section 340B(a)(5)

(A) and (B).

The following is the proposed ``Compliance Audit Guide'' concerning

manufacturer audit guidelines as developed by the Secretary pursuant to

section 340B(a)(5)(C):

I. General Guidelines

A manufacturer shall conduct an audit only when the Office of Drug

Pricing determines that there is reasonable cause to believe a

violation of section 340B(a)(5) (A) or (B) has occurred. The

manufacturer must submit a request for an audit of a covered entity to

the Office of Drug Pricing. [See section II for audit steps]. Auditors

have an ethical and legal responsibility to perform quality audits

conducted in accordance with Government Auditing Standards, Current

revision, developed by the Comptroller General of the United States.

Patient confidentiality requirements must also be observed. Audit

reports must be prepared at the completion of the audit. Copies of the

audit report shall be prepared in accordance with the reporting

standards for performance audits in Government Auditing Standards,

Current Revision. The cost of a manufacturer audit will be borne by the

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

(a) Number of Audits

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 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 failure to comply with section

340B(a)(5) (A) and (B), the Office of Drug Pricing will determine

whether an audit should be performed by the (1) Government or (2) the

manufacturer.

(b) Scope of Audits

The manufacturer must submit an audit workplan describing the audit

to the Office of Drug Pricing for review. The workplan will be reviewed

for reasonable purpose and scope. Further, a determination will be made

that only those records of the covered entity that directly pertain to

the potential violation(s) will be accessed including those systems and

processes (e.g., purchasing, distribution, dispensing, and billing)

that would assist in identifying a violation.

(c) Duration of Audits

Audits shall be performed in the minimum time necessary with the

minimum intrusion on the covered entity's operations.

II. Audit Steps

(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 informal

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 a request for a covered

entity audit with the Office of Drug Pricing. [See section ``For

Further Information'' for address.] The request must set forth a clear

description of the 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 request. In addition, the manufacturer

shall provide copies of any documents supporting its claims.

(c) The Office of Drug Pricing will conduct a preliminary review of

the documentation submitted to determine if reasonable cause exists. If

the Office of Drug Pricing finds that there is reasonable cause to

believe that a violation of section 340B(a)(5) (A) or (B) has occurred,

the audit will be permitted, and the manufacturer will be notified

accordingly. In cases where the Office of Drug Pricing determines that

the audit shall be performed by the Government, the Office of Drug

Pricing will so advise the manufacturer and the covered entity.

(d) The filing of a request for an audit does not affect any

statutory obligations of the parties as defined in section 340B of the

PHS Act. During the audit process, a manufacturer must continue to sell

covered outpatient drugs at or below the section 340B ceiling price to

the covered entity being audited.

(e) Upon approval of the request for a covered entity audit, the

manufacturer shall then submit an audit workplan to the Office of Drug

Pricing for approval. The Office of Drug Pricing, after consultation

with the PHS Office of Cost and Audit Management, will evaluate the

manufacturer's workplan, and approval will be based on criteria set

forth in the Audit Program section, Field Work Standards for

Performance Audits, Government Audit Standards, Current Revision. 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.

(f) When the audit workplan has been approved, the Office of Drug

Pricing shall notify the: (1) Manufacturer of the approval of the

audit, and (2) covered entity of a pending manufacturer audit. The

covered entity will have at least 15 days from the date of receipt of

the notice to prepare for the audit.

(g) Suggested audit procedures include the following:

(1) Review the covered entity's policies and procedures

regarding the procurement, inventory, distribution, dispensing, and

billing for covered outpatient drugs.

(2) Assess internal controls applicable to the policies and

procedures identified above (#1) when necessary to satisfy the audit

objectives.

(3) 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.

(4) Test compliance with the policies and procedures identified

above (#3) when necessary to satisfy the audit objectives.

(5) Review the covered entity's records of drug procurement and

distribution and determine whether the covered entity obtained a

discount only for those programs authorized to receive discounts by

section 340B of the PHS Act.

(6) 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 Medicaid provider number to the Office of

Drug Pricing and billed Medicaid at the actual acquisition cost.

(h) Where the manufacturer's auditors conclude that there has been

a violation of the requirements of section 340B(a)(5) (A) or (B), the

manufacturer's auditors shall identify (1) the procedures or lack of

adherence to existing procedures which caused the violation, and (2)

the dollar amounts involved.

(i) Following completion of the audit field work, the

manufacturer's auditors shall provide a verbal briefing of the audit

findings to the covered entity to ensure a full understanding of the

facts.

(j) An audit report must be prepared at the completion of the audit

in accordance with reporting standards for performance audits of the

Government Auditing Standards, Current Revision. The manufacturer shall

submit a copy of 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 60 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.

(k) Informational copies of the audit report shall also be

submitted to the Office of Drug Pricing (see section For Further

Information Contact for the address), the Office of Inspector General,

Office of Audit Services, PHS Audits Division at room 1-30, Park

Building, 12420 Parklawn Drive, Rockville, MD 20857, and the PHS Cost

and Audit Management Branch, room 17A-50, Parklawn Building, 5600

Fishers Lane, Rockville, MD 20857.

(l) If a dispute concerning the audit findings and recommendations

arises, the parties may file a request for informal dispute resolution

with the Office of Drug Pricing. All dispute resolution procedures

developed by the Office of Drug Pricing shall be followed.

Informal Dispute Resolution

The Office of Drug Pricing is proposing an informal process for the

resolution of certain disputes between manufacturers, covered entities,

and PHS concerning compliance with the provisions of section 340B of

the PHS Act. PHS expects parties to utilize this informal process

before resorting to other remedies which may be available.

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

provided in section 340B(a)(5)(B) of the PHS Act, or the prohibition

against duplicate discounts or rebates provided in 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 manufacturer has refused to sell a covered outpatient drug to

a covered entity 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 auditors of the manufacturer have not abided by the approved

workplan or audit guidelines.

II. Review Process

Prior to the filing of a request for review with the Office of Drug

Pricing, the parties must attempt, in good faith, to resolve the

dispute. All parties involved in the dispute must maintain written

documentation as evidence of a 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 Office of Drug Pricing. [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.

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

Office of Drug Pricing 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 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 30 calendar days of

the receipt of the letter. 7 days from the date of the postmark of the

letter will be allowed for mailing and processing through the

organization.

Upon receipt of the response or rebuttal, the review committee

chairperson 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) adequate

documentation supporting the issues, and (4) the reasonableness of the

allegations. If the documentation is adequate, the review committee

will be convened to 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. This proposed

finding of the committee will be submitted to the Director of the

Office of Drug Pricing for consideration and approval. A written

decision of dismissal will be sent to each party and will contain the

Director's findings and conclusions in detail and reasons why the

request for a review did not raise a genuine and substantial issue of

fact.

With all other proposed findings, 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 chairperson

will submit the proposed findings to the Director of the Office of Drug

Pricing for consideration and approval. The Director's written decision

will be sent with a transmittal letter to both parties.

If the covered entity or the manufacturer does not agree with the

Office of Drug Pricing'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.

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 PHS could be

terminated or other actions taken as deemed appropriate. If the final

determination is that an entity has violated section 340B prohibitions

against resale or transfer of covered outpatient drugs, the prohibition

against duplicate discounts and rebates (or billing Medicaid more than

the actual acquisition cost of the drug), or other statutory

prohibitions, 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.

The entity may also be excluded from the drug discount program, if the

conduct warrants such a sanction.

After the dispute is resolved, any disputed amounts plus the rate

of interest must be paid or credited to an account balance no later

than 30 days following a final determination. Interest will begin to

accrue from the time the manufacturer is deemed to have been out of

compliance with section 340B (or provisions of the PHS Pharmaceutical

Pricing Agreement) or the entity is deemed to have violated

prohibitions of section 340B. The interest rate will be based upon an

annual rate established by the Secretary of the Treasury after

considering private consumer rates of interest prevailing at the time

of the violation. This rate, utilized by the Department of Health and

Human Services (HHS) in the collection of debts owed to the United

States, may be revised quarterly by the Secretary of the Treasury and

is published by the HHS Assistant Secretary for Management and Budget

in the Federal Register. See 45 CFR 30.13 Parties will apply the

interest rate for the quarter in which the violation occurred, and this

rate will remain fixed for the duration of the time in which interest

accrues.

(The reporting requirements of this document are subject to Office

of Management and Budget (OMB) clearance under the Paperwork

Reduction Act of 1980, 44 U.S.C. 3501-3520, and will not be

implemented until such clearance has been obtained)

Dated: June 6, 1994.

Ciro V. Sumaya,

Administrator, Health Resources and Services Administration.

[FR Doc. 94-14089 Filed 6-9-94; 8:45 am]

BILLING CODE 4160-15-P