Notice Regarding Section 602 of the Veterans Health Care Act of 1992 Outpatient Hospital Facilities

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Public Health Service

Notice Regarding Section 602 of the Veterans Health Care Act of

1992 Outpatient Hospital Facilities

AGENCY: Public Health Service, HHS.

ACTION: Final notice.

-----------------------------------------------------------------------

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, Department of Health and Human Services, in which the

manufacturer agrees to charge a price for covered outpatient drugs 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 concerning the inclusion of outpatient

disproportionate share hospital (DSH) facilities in the PHS drug

discount program.

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

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

Highway, West Tower, 10th Floor, Bethesda, MD 20814, tel: (301) 594-

4353.

EFFECTIVE DATE: October 19, 1994.

SUPPLEMENTARY INFORMATION:

(A) Background

Proposed guidelines were announced in the Federal Register at 59 FR

29300 on June 6, 1994. A period of 30 days was established to allow

interested parties to submit comments. The Office of Drug Pricing

received 8 letters with comments concerning legal authority for

developing the proposed guidelines, responsibility for determining

eligibility, the inclusion of non-traditional outpatient facilities,

the need for a definition of eligible hospital facility, ambiguity in

the policies of the Health Care Financing Administration (HCFA)

regarding the Medicare cost report, possible exceptions for unique

circumstances, a retroactive effective date, and general comments

concerning the definition of ``patient'' and a contracted pharmacy

service mechanism.

The following section presents a summary of all major comments,

grouped by subject, and a response to each comment. All comments were

considered, and the guideline is adopted as proposed, with minor

changes to increase clarity.

(B) Comments and Responses

Comment: Manufacturers should not be required to provide discounts

to outpatient facilities that are included on the Medicare cost reports

of eligible DSHs until the PHS Office of Drug Pricing includes the

names of the eligible outpatient facilities on the master list of

eligible covered entities.

Response: When an eligible DSH submits the list of all outpatient

facilities (on-site and off-site) included on its Medicare cost report

and Medicaid billing status information to the Office of Drug Pricing

and the Office adds these facilities to the master list of eligible and

participating entities during regular quarterly updates, the facilities

will then be able to access PHS discount pricing. This information will

be posted on the Electronic Data Retrieval System (EDRS), maintained by

the Office of Drug Pricing. To access this information call (301) 594-

4992.

Comment: The proposed guidelines have created a new definition of

``DSH'' which appears to be within the realm of legislating as opposed

to rulemaking.

Response: Section 340B(a)(4) of the PHS Act lists the various

groups of entities eligible to receive PHS discount pricing. Section

340B(a)(4)(L) describes a subset of ``hospitals'' as defined in section

1886(d)(1)(B) of the Social Security Act as eligible to participate in

the program. Because section 1886 addresses Medicare payment for

hospital inpatient services only, the scope of the term ``hospital''

has been limited to the hospital inpatient services. However, section

340B deals exclusively with outpatient drugs. Although Congress clearly

intends this narrow definition be used to identify the Medicare

disproportionate share hospitals which are eligible for section 340B

drug discounts, we do not believe it is reasonable to use this same

definition to limit where the section 340B outpatient drugs can be

used. Some disproportionate share hospitals offer outpatient services

in off-site or satellite outpatient facilities. Further, the movement

of nonprofit hospitals in recent years has been to reorganize and offer

a variety of services, other than traditional inpatient hospital

services, through separate divisions, lines of business, or entities.

Therefore, for purposes of section 340B drug discounts, a further

interpretation of ``hospital'' is needed.

Comment: In some instances, the Medicare cost report does not

include all of the clinics and services which should be eligible for

the PHS discount pricing. For example, hospitals refer patients for

specific types of treatments to other hospitals, such as large teaching

hospitals which have specialized equipment and medical personnel.

Further, hospitals are establishing separate primary care services in

different areas of the community. These facilities are often free-

standing and not included on the DSH Medicare cost report, but

generally are customers of the hospitals and have limited financial

resources.

Response: Although it is understandable that the DSH would desire

to obtain PHS pricing for these various facilities, the statute clearly

states that it is only the DSH that qualifies for discount pricing. We

have attempted to define DSH in a manner consistent with HCFA policy

guidelines (Provider Certification, State Operation Manual, section

2024). Only outpatient facilities which are an integral component of

the DSH will be included on the DSH Medicare cost report, and only

these facilities will be eligible for PHS discount pricing.

Comment: The proposed guidelines would permit any health care

entity, by means of its business relations with other health care

entities, to make itself eligible for PHS pricing. Any clinic,

facility, or community hospital affiliated with a DSH could consolidate

its cost reporting requirements and use the Medicare provider number of

the DSH to make itself eligible for PHS pricing. This is not consistent

with Congress's intent in precisely defining a list of entities

eligible for the PHS discount pricing.

Response: Congress referred to section 1886 of the Social Security

Act (Medicare inpatient hospital payment) for the definition of DSH;

therefore, it is reasonable to utilize existing Medicare rules to

determine eligibility for PHS discount pricing. The proposed Medicare

cost report test was developed by Medicare officials and used, in part,

to determine whether a facility is a component of a hospital. If an

outpatient facility does not share in the hospital cost report, it is

properly viewed as an independent, free-standing facility.

When a DSH attempts to certify multiple components as a single

hospital for purposes of Medicare certification, it must follow

guidelines developed by HCFA. These guidelines (Provider Certification,

State Operation Manual, section 2024) establish tests to determine

whether an additional hospital facility, geographically separated but

in the same metropolitan area, is a separate facility from or a

component of a single hospital. These tests include: (a) all components

subject to the control and direction of one common owner (i.e.,

governing body) which is responsible for the operational decisions of

the entire hospital enterprise; (b) one chief medical officer who

reports directly to the governing body and who is responsible for all

medical staff activities of all components; (c) integration of the

organized medical staff (e.g., all medical staff members having

privileges at all components); and (d) one chief executive officer

through whom all administrative authority flows and who exercises

control and surveillance over all administrative activities of all

components. This does not preclude the establishment of a deputy or

assistant executive officer position.

If the off-site clinic meets these tests, it would be included in

the DSH Medicare cost report. This test clearly determines whether a

facility is an integral part of a DSH hospital, and is an appropriate

standard to determine eligibility. It incorporates Medicare criteria

that are not ambiguous and forms an independent and objective basis on

which to determine eligibility.

Comment: The proposed guidelines should be applied uniformly to all

DSH outpatient facilities, regardless of whether they fit the common

perception of a traditional hospital outpatient clinic (e.g., include

facilities that serve prison inmates, HMOs, home infusion and home

health patients). Anything short of this would be extremely difficult

to administer since separating traditional from non-traditional

facilities would be a highly subjective and time-consuming exercise.

Further, PHS should include in the final notice a specific definition

for eligible ``outpatient facility.''

Response: Section 340B(b) of the PHS Act refers to section 1927(k)

of the Social Security Act for the definition of ``covered outpatient

drug.'' This definition does not include any limitations on outpatient

settings, and there is no requirement that the covered drug be used in

a ``traditional'' outpatient setting. Any outpatient facility included

on an eligible DSH's Medicare cost report can access PHS pricing if it

is included on the master list of eligible entities.

Comment: There are certain circumstances which might prevent an

otherwise eligible outpatient facility from billing under the DSH's

provider number (e.g., State or local laws requiring a facility or

pharmacy to bill all third party payers directly). In these instances,

the facility should be permitted to access PHS discount pricing if the

eligible DSH facility can demonstrate that the pharmacy would meet the

proposed Medicare test but for the unique circumstances.

Response: The test used to determine the eligibility of hospital

outpatient facilities must incorporate criteria that form an

independent and objective basis. This will provide fair and easy

administration. To include a ``but for'' test would create a difficult

standard to administer. If an outpatient facility is not included on

the eligible DSH's Medicare cost report, it will not meet the

requirements for eligibility.

Comment: The effective date of this notice should be made

retroactive to December 1, l992. Further, the June 13 deadline for

requesting retroactive rebates or credits should be extended.

Response: In a Federal Register notice, dated May 13, l994, a

deadline was announced for requesting retroactive discounts. Eligible

and potentially eligible covered entities could request these discounts

until June 13, 1994. See 59 FR 25112. The notice permits an off-site

outpatient DSH facility to receive retroactive discounts if it meets

the following requirements: (1) is included on an eligible DSH's

Medicare cost report, (2) has not participated in a group purchasing

arrangement for covered outpatient drugs, (3) has not billed Medicaid

for the covered outpatient drugs for which retroactive discounts are

being requested, and (4) has preserved its right to such discounts by

sending manufacturers a letter requesting such refunds and providing

adequate documentation of drug purchases by June 13, l994. After this

date, the right to retroactive discounts ceased. See 59 FR 25112.

(``Any DSH outpatient clinic which is or will be eligible for

retroactive discounts may preserve its right by sending manufacturers a

letter requesting such refunds and providing adequate documentation of

purchases.'')

Comment: There is no definition of the term ``patient,'' thereby

permitting a DSH to distribute discounted drugs to virtually anyone it

can argue is a patient without running afoul of the drug resale

prohibition of section 340B(a)(5)(B) of the PHS Act.

Response: PHS will address this issue in a future Federal Register

notice which will request public comment. All comments concerning the

definition of ``patient'' will be addressed at that time.

Comment: PHS has approved a contracted pharmacy service model

without public notice and an opportunity to comment.

Response: PHS will discuss the contracted pharmacy service model in

a future Federal Register notice which will invite public comment. All

comments concerning this issue will be addressed at that time.

(C) DSH Outpatient Facility Guidelines

Set forth below are the final guidelines regarding the inclusion of

DSH outpatient facilities: The outpatient facility is considered an

integral part of the ``hospital'' and therefore eligible for section

340B drug discounts if it is a reimbursable facility included on the

hospital's Medicare cost report. For example, if a hospital with one

Medicare provider number meets the disproportionate share criteria and

this hospital has associated outpatient clinics whose costs are

included in the Medicare cost report, these clinics would also be

eligible for section 340B drug discounts. However, free-standing

clinics of the hospital that submit their own cost reports using

different Medicare numbers (not under the single hospital Medicare

provider number) would not be eligible for this benefit.

A DSH, eligible for PHS pricing, must first request that the Office

of Drug Pricing include in the PHS drug discount program the outpatient

facilities that are included in its Medicare cost report. A list of

these outpatient facilities along with Medicaid billing status

information must be included with the request. Second, an appropriate

official of the DSH must sign a statement that he/she is familiar with

HCFA guidelines concerning Medicare certification of hospital

components as one cost center, has examined the list of outpatient

facilities, and certifies that the facilities are correctly included on

the DSH's Medicare cost report. When these facilities are added to the

master list of eligible and participating covered entities, the off-

site facilities will be able to access PHS discount pricing. On-site

clinics that are not included on the Medicare cost report will not be

eligible for PHS discount pricing. This information will be posted on

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

of Drug Pricing, on a quarterly basis. To access this information, call

(301) 594-4992.

DSHs which have questions concerning this process, or manufacturers

which have questions concerning the eligibility of certain DSH

outpatient clinics, should contact Elizabeth Hickey (301-594-4353), at

the Office of Drug Pricing.

Dated: September 13, 1994.

James A. Walsh,

Acting Administrator, Health Resources and Services Administration.

[FR Doc. 94-23095 Filed 9-16-94; 8:45 am]

BILLING CODE 4160-15-P