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

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