Dispute Resolution Process

65406

Federal Register / Vol. 61, No. 240 / Thursday, December 12, 1996 / Notices

Management Branch (address above) for
public review and comment. Interested
persons may, on or before January 13,
1997, submit to the Dockets
Management Branch (address above)
written comments. Two copies of any
comments are to be submitted, except
that individuals may submit one copy.
Comments are to be identified with the
docket number found in brackets in the
heading of this document. Received
comments may be seen in the office
above between 9 a.m. and 4 p.m.,
Monday through Friday. FDA will also
place on public display any
amendments to, or comments on, the
petitioner’s environmental assessment
without further announcement in the
Federal Register. If, based on its review,
the agency finds that an environmental
impact statement is not required and
this petition results in a regulation, the
notice of availability of the agency’s
finding of no significant impact and the
evidence supporting that finding will be
published with the regulation in the
Federal Register in accordance with 21
CFR 25.40(c).
Dated: November 25, 1996.
George H. Pauli,
Acting Director, Office of Premarket
Approval, Center for Food Safety and Applied
Nutrition.
[FR Doc. 96–31574 Filed 12–11–96; 8:45 am]
BILLING CODE 4160–01–F

Health Resources and Services
Administration
Manufacturer Audit Guidelines and
Dispute Resolution Process 0905–ZA–
19
Health Resources and Services

Administration, HHS.

ACTION: Final notice.

AGENCY:

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

INFORMATION:

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 preapproval 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

Federal Register / Vol. 61, No. 240 / Thursday, December 12, 1996 / Notices
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

65407

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

65408

Federal Register / Vol. 61, No. 240 / Thursday, December 12, 1996 / Notices

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 agreedupon 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

Federal Register / Vol. 61, No. 240 / Thursday, December 12, 1996 / Notices
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.)

65409

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

65410

Federal Register / Vol. 61, No. 240 / Thursday, December 12, 1996 / Notices

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.

Federal Register / Vol. 61, No. 240 / Thursday, December 12, 1996 / Notices
(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 nonresponse 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

65411

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

65412

Federal Register / Vol. 61, No. 240 / Thursday, December 12, 1996 / Notices

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, caseby-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

Federal Register / Vol. 61, No. 240 / Thursday, December 12, 1996 / Notices
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

National Institutes of Health
National Institute on Aging; Notice of
Closed Meeting
Pursuant to Section 10(d) of the
Federal Advisory Committee Act, as
amended (5 U.S.C. Appendix 2), notice
is hereby given of the following
meeting:
Name of Committee: National Institute on
Aging Special Emphasis Panel
(Teleconference).
Date of Meeting: December 19, 1996.
Time of Meeting: 10:30 a.m. to
adjournment.
Place of Meeting: Gateway Building, Room
2C212, 7201 Wisconsin Avenue, Bethesda,
Maryland 20892.
Purpose/Agenda: To review a grant
application.
Contact Person: Dr. James P. Harwood,
Scientific Review Administrator, Gateway
Building, Room 2C212, National Institutes of
Health, Bethesda, Maryland 20892–9205,
(301) 496–9666.

This notice is being published less
than 15 days prior to the above meeting
due to the urgent need to meet timing
limitations imposed by the review and
funding cycle.
This meeting will be closed in
accordance with the provisions set forth
in sections 552b(c)(4) and 552b(c)(6),
Title 5, U.S.C. Applications and/or
proposals and the discussions could
reveal confidential trade secrets or
commercial property such as patentable
material and personal information
concerning individuals associated with
the applications and/or proposals, the
disclosure of which would constitute a
clearly unwarranted invasion of
personal privacy.
(Catalog of Federal Domestic Assistance
Program No. 93.866, Aging Research,
National Institutes of Health)
Dated: December 6, 1996.
Paula N. Hayes,
Acting Committee Management Officer, NIH.
[FR Doc. 96–31585 Filed 12–11–96; 8:45 am]
BILLING CODE 4140–01–M

DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
[Docket No. FR–4086–N–86]

Notice of Proposed Information
Collection for Public Comment
Office of the Assistant
Secretary for Community Planning and
Development, HUD.
ACTION: Notice
AGENCY:

The proposed information
collection requirement described below
will be submitted to the Office of

SUMMARY:

65413

Management and Budget (OMB) for
review, as required by the Paperwork
Reduction Act. The Department is
soliciting public comments on the
subject proposal.
DATES: Comments due: February 10,
1997.

ADDRESSES: Interested persons are

invited to submit comments regarding

this proposal. Comments should refer to

the proposal by name and/or OMB

Control Number and should be sent to:

Reports Liaison Officer, Shelia E. Jones,

Department of Housing & Urban

Development, 451—7th Street, SW,

Room 7230, Washington, DC 20410.

FOR FURTHER INFORMATION CONTACT:
Frank Price, 202–708–2094 ext. 4572
(this is not a toll-free number) for copies
of the proposed forms and other
available documents.
SUPPLEMENTARY INFORMATION: The
Department will submit the proposed
information collection to OMB for
review, as required by the Paperwork
Reduction Act of 1995 (44 U.S.C.
Chapter 35, as amended).
The Notice is soliciting comments
from members of the public and affected
agencies concerning the proposed
collection of information to: (1) Evaluate
whether the proposed collection of
information is necessary for the proper
performance of the functions of the
agency, including whether the
information will have practical utility;
(2) Evaluate the accuracy of the agency’s
estimate of the burden of the proposed
collection of information; (3) Enhance
the quality, utility, and clarity of the
information to be collected; and (4)
Minimize the burden of the collection of
information on those who are to
respond; including through the use of
appropriate automated collection
techniques or other forms of information
technology, e.g., permitting electronic
submission of responses.
This Notice also lists the following
information:
Title of Proposal: Rental
Rehabilitation Program Renewal
Application.
OMB Control Number, if applicable:
2506–0080.
Description of the need for the
information and proposed use:
Although the Rental Rehabilitation
Program was terminated October 1,
1991, Public Law 98–181 (97 Stat.
1153), Section 17, that originally
authorized the Rental Rehabilitation
Program still imposes data collection
and reporting requirements upon HUD
and grantees. The information will be
used by HUD to account for program
grant funds and to satisfy statutory
reporting requirements.