(B) by striking the period at the end and
inserting ‘‘, but only if used for a medically ac-
cepted indication (as described in paragraph
(4)).’’; and
(3) by striking paragraph (2) and inserting the
following:
‘‘(2) Subject to paragraph (3), the term ‘covered out-
patient drug’ means—
‘‘(A) a drug which may be dispensed only upon
prescription and—
‘‘(i) which is approved for safety and effec-
tiveness as a prescription drug under section
505 or 507 of the Federal Food, Drug, and
Cosmetic Act or which is approved under sec-
tion 505(j) of such Act;
‘‘(ii)(I) which was commercially used or
sold in the United States before the date of the
enactment of the Drug Amendments of 1962 or
which is identical, similar, or related (within the
meaning of section 310.6(b)(1) of title 21 of the
Code of Federal Regulations) to such a drug,
and (II) which has not been the subject of a
final determination by the Secretary that it is
a ‘new drug’ (within the meaning of section
201(p) of the Federal Food, Drug, and Cos-
metic Act) or an action brought by the Sec-
retary under section 301, 302(a), or 304(a) of
such Act to enforce section 502(f) or 505(a) of
such Act; or
‘‘(iii)(I) which is described in section
107(c)(3) of the Drug Amendments of 1962
and for which the Secretary has determined
there is a compelling justification for its medi-
cal need, or is identical, similar, or related
(within the meaning of section 310.6(b)(1) of
title 21 of the Code of Federal Regulations) to
such a drug, and (II) for which the Secretary
has not issued a notice of an opportunity for a
hearing under section 505(e) of the Federal
Food, Drug, and Cosmetic Act on a proposed
order of the Secretary to withdraw approval of
an application for such drug under such section
because the Secretary has determined that the
drug is less than effective for all conditions of
use prescribed, recommended, or suggested in
its labeling;
‘‘(B) a biological product which—
‘‘(i) may only be dispensed upon prescrip-
tion,
‘‘(ii) is licensed under section 351 of the
Public Health Service Act, and
‘‘(iii) is produced at an establishment li-
censed under such section to produce such
product; and
‘‘(C) insulin certified under section 506 of the
Federal Food, Drug, and Cosmetic Act.
‘‘(3)(A) The term ‘covered outpatient drug’ does not
include any drug, biological product, or insulin provided
as, as part of, or as incident to, any of the following (and
for which payment may be included under this title):
‘‘(i) Inpatient hospital services (described in
subsection (b)(2)).
‘‘(ii) Extended care services (described in sub-
section (h)(5)).
‘‘(iii) Physicians’ services under subparagraph
(A) or (B) of subsection (s)(2).
‘‘(iv) 
Dialysis 
supplies 
under 
subsection
(s)(2)(F).
‘‘(v) Antigens under subsection (s)(2)(G).
‘‘(vi) Blood clotting factors for hemophiliacs
under subsection (s)(2)(I).
‘‘(vii) Services of a physician assistant, nurse
practitioner, or clinical nurse specialist under sub-
section (s)(2)(K).
‘‘(viii) Pneumococcal, hepatitis B, or influenza
vaccines under subsection (s)(10).
‘‘(ix) Rural health clinic services (under sub-
section (aa)(1)).
‘‘(x) Comprehensive outpatient rehabilitation fa-
cility services (under subsection (cc)(1)).
‘‘(xi) Hospice care (as defined in subsection
(dd)(1)).
‘‘(xii) Certified nurse-midwife services (as de-
fined in subsection (gg)(1)).
‘‘(xiii) Inpatient or outpatient rural primary
care hospital services (as defined in subsection
(mm)).
‘‘(xiv) A covered surgical procedure in an ambu-
latory 
surgical 
center 
(under 
section
1832(a)(2)(F)(i)).
‘‘(B) The term ‘covered outpatient drug’ does not in-
clude any drug that is intravenously administered in a
home setting.
‘‘(4) For purposes of paragraph (2), the term ‘medi-
cally accepted indication’, with respect to the use of an
outpatient drug, includes—
‘‘(A) any use which has been approved by the
Food and Drug Administration for the drug, and
‘‘(B) any other use of the drug, unless the Sec-
retary determines that such use is not medically ap-
propriate.’’.
(b) DEDUCTIBLE
AND PAYMENT AMOUNTS.—(1)
Section 1833(a)(1) of such Act (42 U.S.C. 1395l(a)(1)),
as amended by section 2(c)(1), is amended—
(A) by striking ‘‘and (Q)’’ and inserting ‘‘(Q)’’;
and
(B) by striking the semicolon at the end and in-
serting the following ‘‘, and (R) with respect to ex-
penses incurred for covered outpatient drugs, the
amounts paid shall be the amounts determined
under section 1834(d)(2);’’.
(2) Section 1833(a)(2) of such Act (42 U.S.C.
1395l(a)(2)) is amended by inserting ‘‘(other than covered
outpatient drugs)’’ after ‘‘(2) in the case of services’’.
(3) Section 1833(b) of such Act (42 U.S.C. 1395l(b))
is amended—
(A) in clause (1), by inserting ‘‘or for covered
outpatient drugs’’ after ‘‘1861(s)(10)(A)’’, and
(B) in clause (2), by inserting ‘‘or with respect
to covered outpatient drugs’’ after ‘‘1861(kk)))’’.
(4) Section 1834 of such Act (42 U.S.C. 1395m) is
amended by inserting after subsection (c) the following
new subsection:
‘‘(d) 
PAYMENT
FOR
COVERED
OUTPATIENT
DRUGS.—
‘‘(1) DEDUCTIBLE.—
‘‘(A) APPLICATION.—
‘‘(i) IN
GENERAL.—Except as pro-
vided in clauses (ii) and (iii), payment
shall be made under paragraph (2) only
with respect to expenses incurred by an in-
dividual for covered outpatient drugs dur-
ing a calendar year on or after such date
in the year as the Secretary determines
that the individual has incurred expenses
in the year for covered outpatient drugs
(during a period in which the individual is
entitled to benefits under this part) equal
to the amount of the prescription drug de-
ductible specified in subparagraph (C) for
that year.
‘‘(ii) DEDUCTIBLE NOT APPLIED TO
1ST
YEAR
IMMUNOSUPPRESSIVES.—The
prescription drug deductible established
under this paragraph shall not apply to
drugs described in section 1861(t)(2)(A)
used in immunosuppressive therapy and
furnished, to an individual who receives an
organ transplant for which payment is
made under this title, within 1 year after
the date of the transplant.
‘‘(B) RESPONSE TO APPLICATION.—If the
system described in section 1842(o)(4) has not
been established and an individual applies to
the Secretary to establish that the individual
has met the requirement of subparagraph (A),
the Secretary shall promptly notify the individ-
ual (and, if the application was submitted by or
through a participating pharmacy, the phar-
macy) as to the date (if any) as of which the
individual has met such requirement.
‘‘(C) PRESCRIPTION
DRUG
DEDUCTIBLE
AMOUNT.—The prescription drug deductible
specified in this subparagraph for—
‘‘(i) 1997 is $250, and
‘‘(ii) any succeeding year, is the pre-
scription drug deductible for the preceding
year, increased by the percentage by which
the monthly premium under section 1839
for months during the year exceeds the
monthly premium under such section for
months during the preceding year.
‘‘(2) PAYMENT AMOUNT.—
‘‘(A) IN
GENERAL.—Subject to the pre-
scription drug deductible established under
paragraph (1)(A) and except as provided in
subparagraph (B), the amounts payable under
this part with respect to a covered outpatient
drug is equal to 80 percent of the lesser of—
‘‘(i) the actual charge for the drug, or
‘‘(ii) the applicable payment limit es-
tablished under paragraph (3).
‘‘(B) TREATMENT
OF
CERTAIN
COST-
BASED PREPAID ORGANIZATIONS.—In applying
subparagraph (A) in the case of an organization
under a reasonable cost reimbursement contract
under section 1876 and in the case of an orga-
nization 
receiving 
payment 
under 
section
1833(a)(1)(A) and providing coverage of cov-
ered outpatient drugs, the Secretary shall pro-
vide for an appropriate adjustment in the pay-
ment amounts otherwise made to reflect the ag-
gregate increase in payments that would other-
wise be made with respect to enrollees in such
an organization if payments were made other
than under such clause or such a contract on
an individual-by-individual basis.
‘‘(3) PAYMENT LIMITS.—
‘‘(A) PAYMENT LIMIT FOR NON-MULTIPLE
SOURCE DRUGS AND MULTIPLE-SOURCE DRUGS
WITH
RESTRICTIVE
PRESCRIPTIONS.—In the
case of a drug that either is not a multiple
source drug (as defined in paragraph (9)(A)) or
is a multiple source drug and has a restrictive
prescription (as defined in paragraph (9)(B)),
the payment limit for the drug under this para-
graph for a payment calculation period is equal
to the lesser of—
‘‘(i) the 90th percentile of the actual
charges (computed on a statewide basis,
carrier-wide basis, or other appropriate ge-
ographic area basis, as specified by the
Secretary) for the drug for the second pre-
vious payment calculation period, adjusted
(as the Secretary determines to be appro-
priate) to reflect the number of tablets (or
other dosage units) dispensed; or
‘‘(ii) the amount of the administrative
allowance (established under paragraph
(4)) plus the product of—
‘‘(I) the number of tablets (or
other dosage units) dispensed, and
‘‘(II) the per tablet or unit aver-
age wholesale price for such drug (as
determined under subparagraph (C)
for the period for purposes of this
subparagraph).
‘‘(B) PAYMENT
LIMIT
FOR
MULTIPLE
SOURCE
DRUGS
WITHOUT
RESTRICTIVE
PRE-
SCRIPTIONS.—In the case of a drug that is a
multiple source drug but does not have a re-
strictive prescription, the payment limit for the
drug under this paragraph for a payment cal-
culation period is equal to the amount of the
administrative allowance (established under
paragraph (4)) plus the product of—
‘‘(i) the number of tablets (or other
dosage units) dispensed, and
‘‘(ii) the unweighted median of the
per tablet or unit average wholesale prices
(determined under subparagraph (C) for
purposes of this subparagraph) for such
drug for the period.
‘‘(C) DETERMINATION OF UNIT PRICE.—
‘‘(i) IN
GENERAL.—For purposes of
this paragraph, the Secretary shall deter-
mine, with respect to the dispensing of a
covered outpatient drug in a payment cal-
culation period (beginning on or after Jan-
uary 1, 1997), the per tablet or unit aver-
age wholesale price for the drug.
‘‘(ii) BASIS FOR DETERMINATIONS.—
‘‘(I) DETERMINATION FOR NON-
MULTIPLE-SOURCE DRUGS.—For pur-
poses of subparagraph (A), such de-
termination shall be based on a bian-
nual survey conducted by the Sec-
retary of a representative sample of
direct sellers, wholesalers, or phar-
macies (as appropriate) of wholesale
(or comparable direct) prices (exclud-
ing discounts to pharmacies); except
that if, because of low volume of sales
for the drug or other appropriate rea-
sons or in the case of covered out-
patient drugs during 1997, the Sec-
retary determines that such a survey
is not appropriate with respect to a
specific drug, such determination shall
be based on published average whole-
sale (or comparable direct) prices for
the drug.
‘‘(II) DETERMINATION FOR MUL-
TIPLE-SOURCE DRUGS.—For purposes
of subparagraph (B), the Secretary
may base the determination under
this subparagraph on the published
average wholesale (or comparable di-
rect) prices for the drug or on a bian-
nual survey conducted by the Sec-
retary of a representative sample of
direct sellers, wholesalers, or phar-
macists (as appropriate) of wholesale
(or comparable direct) prices (exclud-
ing discounts to pharmacies).
‘‘(III) COMPLIANCE
WITH
SUR-
VEY
REQUIRED.—If a wholesaler or
direct seller of a covered outpatient
drug refuses, after being requested by
the Secretary, to provide the informa-
tion required in a survey under this
clause, or deliberately provides infor-
mation that is false, the Secretary
may impose a civil money penalty of
not to exceed $10,000 for each such
refusal or provision of false informa-
tion. The provisions of section 1128A
(other than subsections (a) and (b))
shall apply to civil money penalties
under the previous sentence in the
same manner as such provisions apply
to a penalty or proceeding under sec-
tion 1128A(a). Information gathered
pursuant to the survey shall not be
disclosed except as the Secretary de-
termines to be necessary to carry out
the purposes of this part.
‘‘(iii) QUANTITY AND TIMING.—Such
determination shall be based on the price
or prices for purchases in reasonable quan-
tities and shall be made for a payment cal-
culation period based on prices for the first
day of the first month of the previous pay-
ment calculation period.
‘‘(iv) GEOGRAPHIC BASIS.—The Sec-
retary shall make such determination, and
calculate the payment limits under this
paragraph, on a national basis; except that
the Secretary may make such determina-
tion, and calculate such payment limits, on
a regional basis to take account of limita-
tions on the availability of drug products
and variations among regions in the aver-
age wholesale prices for a drug product.
‘‘(4) ADMINISTRATIVE
ALLOWANCE
FOR
PUR-
POSES OF PAYMENT LIMITS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), for drugs dispensed in—
‘‘(i) 1997, the administrative allow-
ance under this paragraph is—
‘‘(I) $5.00 for drugs dispensed by
a participating pharmacy, or
‘‘(II) $3.00 for drugs dispensed
by another pharmacy; or
‘‘(ii) a subsequent year, the adminis-
trative allowance under this paragraph is
the administrative allowance under this
paragraph for the preceding year increased
by the percentage increase (if any) in the
implicit price deflator for gross national
product (as published by the Department
of Commerce in its ‘Survey of Current
Business’) over the 12-month period end-
ing with August of such preceding year.
Any allowance determined under the clause (ii)
which is not a multiple of 1 cent shall be round-
ed to the nearest multiple of 1 cent.
‘‘(B) ADJUSTMENT
IN
ALLOWANCE
FOR
MAIL
SERVICE
PHARMACIES.—The Secretary
may, by regulation and after consultation with
pharmacists, elderly groups, and private insur-
ers, reduce the administrative allowances estab-
lished under subparagraph (A) for any drug
dispensed by a mail service pharmacy (as de-
fined by the Secretary) based on differences be-
tween such pharmacies and other pharmacies
with respect to operating costs and other econo-
mies.
‘‘(5) ASSURING
APPROPRIATE
PRESCRIBING
AND DISPENSING PRACTICES.—
‘‘(A) IN
GENERAL.—The Secretary shall
establish a program to identify (and to educate
physicians and pharmacists concerning)—
‘‘(i) instances or patterns of unneces-
sary or inappropriate prescribing or dis-
pensing practices for covered outpatient
drugs;
‘‘(ii) instances or patterns of sub-
standard care with respect to such drugs;
and
‘‘(iii) potential adverse reactions.
‘‘(B) STANDARDS.—In carrying out the
program under subparagraph (A), the Secretary
shall establish for each covered outpatient drug
standards for the prescribing of the drug which
are based on accepted medical practice. In es-
tablishing such standards, the Secretary shall
incorporate standards from such current au-
thoritative compendia as the Secretary may se-
lect; except that the Secretary may modify such
a standard by regulation on the basis of sci-
entific and medical information that such
standard is not consistent with the safe and ef-
fective use of the drug.
‘‘(C) 
PROHIBITION
OF
FORMULARY.—
Nothing in this title (other than section
1862(c)) shall be construed as authorizing the
Secretary to exclude from coverage or to deny
payment—
‘‘(i) for any specific covered out-
patient drug, or specific class of covered
outpatient drug; or
‘‘(ii) for any specific use of such a
drug for a specific indication unless such
exclusion is pursuant to section 1862(a)(1)
based on a finding by the Secretary that
such use is not safe or is not effective.
‘‘(6) TREATMENT OF CERTAIN PREPAID ORGA-
NIZATIONS.—
‘‘(A) GENERAL RULE COUNTING PREPAID
PLAN EXPENSES TOWARDS THE PRESCRIPTION
DRUG
DEDUCTIBLE.—Except as provided in
subparagraph (B), expenses incurred by (or on
behalf of) a medicare beneficiary for covered
outpatient drugs shall be counted (consistent
with subparagraph (C)) toward the prescription
drug deductible established under paragraph
(1) whether or not, at the time the expenses
were incurred, the beneficiary was enrolled in a
plan under section 1833(a)(1)(A) or under sec-
tion 1876.
‘‘(B) TREATMENT OF DRUG BUY-OUT PLAN
EXPENSES.—In the case of a medicare bene-
ficiary enrolled in a month in a drug buy-out
plan (as defined in subparagraph (D))—
‘‘(i) expenses incurred by the bene-
ficiary for covered outpatient drugs reim-
bursed under the plan shall not be counted
towards the prescription drug deductible,
but
‘‘(ii) if the individual disenrolls from
the plan during the year, the beneficiary is
deemed to have incurred, for each month
of such enrollment, expenses for covered
outpatient drugs in an amount equal to the
actuarial value (with respect to such
month) of the deductible for covered out-
patient drugs (as computed by the Sec-
retary for purposes of section 1876(e)(1))
applicable on the average to individuals in
the United States.
‘‘(C) TREATMENT OF EXPENSES FOR COV-
ERED
OUTPATIENT
DRUGS
INCURRED
WHILE
ENROLLED IN A PREPAID PLAN OTHER THAN A
DRUG BUY-OUT PLAN.—The Secretary may not
enter into a contract with an organization
under section 1876, or provide for payment
under section 1833(a)(1)(A) with respect to an
organization which provides reimbursement for
covered outpatient drugs, with respect to a plan
that is not a drug buy-out plan, unless the or-
ganization provides assurances, satisfactory to
the Secretary, that—
‘‘(i) the organization will maintain
and make available, for its enrollees and in
coordination with the appropriate carriers
under this part, an accounting of expenses
incurred by (or on behalf of) enrollees
under the plan for covered outpatient
drugs; and
‘‘(ii) the organization will take into
account, in any deductibles established
under the plan in a year with respect to
covered outpatient drugs under this part,
the amounts of expenses for covered out-
patient drugs incurred in the year by (or
on behalf of) the beneficiary and otherwise
counted towards the prescription drug de-
ductible in the year.
‘‘(D) DRUG BUY-OUT PLAN DEFINED.—In
this paragraph, the term ‘drug buy-out plan’
means a plan under section 1833(a)(1)(A) or
offered by an organization under section 1876
and with respect to which—
‘‘(i) the amount of any deductible
under the plan with respect to covered out-
patient drugs under this title,
is less than 50 percent of—
‘‘(ii) the prescription drug deductible
specified in paragraph (1)(C).
‘‘(E) MEDICARE BENEFICIARY DEFINED.—
In this subsection, the term ‘medicare bene-
ficiary’ means, with respect to a month, an in-
dividual covered for benefits under this part for
the month.
‘‘(F) TREATMENT OF PLAN CHARGES.—In
the case of covered outpatient drugs furnished
by an eligible organization under section
1876(b) or an organization described in section
1833(a)(1)(A) which does not impose charges
on covered outpatient drugs dispensed to its
members, for purposes of this subsection the
actual charges of the organization shall be the
organization’s standard charges to members,
and other individuals, not entitled to benefits
with respect to such drugs.
‘‘(7) PHYSICIAN GUIDE.—
‘‘(A) IN
GENERAL.—The Secretary shall
develop, and update annually, an information
guide for physicians concerning the comparative
average wholesale prices of at least 500 of the
most commonly prescribed covered outpatient
drugs. Such guide shall, to the extent prac-
ticable, group covered outpatient drugs (includ-
ing multiple source drugs) in a manner useful
to physicians by therapeutic category or with
respect to the conditions for which they are pre-
scribed. Such guide shall specify the average
wholesale prices on the basis of the amount of
the drug required for a typical daily therapeutic
regimen.
‘‘(B) MAILING
GUIDE.—The Secretary
shall provide for mailing, in January of each
year (beginning with 1997), a copy of the guide
developed and updated under subparagraph
(A)—
‘‘(i) to each hospital with an agree-
ment in effect under section 1866;
‘‘(ii) to each physician (as defined in
section 1861(r)(1)) who routinely provides
services under this part; and
‘‘(iii) to Social Security offices, senior
citizen centers, and other appropriate
places.
‘‘(8) REPORTS ON UTILIZATION AND EFFECTS
ON PRICES.—
‘‘(A) COMPILATION
OF
INFORMATION.—
The Secretary shall compile information on—
‘‘(i) manufacturers’ prices for covered
outpatient drugs, and on charges of phar-
macists for covered outpatient drugs, and
‘‘(ii) the use of covered outpatient
drugs by individuals entitled to benefits
under this part.
The information compiled under clause (i) shall
include a comparison of the increases in prices
and charges for covered outpatient drugs dur-
ing each 6 month period (beginning with Janu-
ary 1995) with the semiannual average increase
in such prices and charges during the 5 years
beginning with 1989.
‘‘(B) REPORTS.—The Secretary shall sub-
mit to the Committees on Ways and Means and
Commerce of the House of Representatives and
the Committee on Finance of the Senate a re-
port, in May and November of 1996 and 1997
and in May of each succeeding year, providing
the information compiled under subparagraph
(A). For each such report submitted after
1998, the report shall include an explanation of
the extent to which the increases in outlays for
covered outpatient drugs under this part are
due to the factors described in subparagraphs
(A)(i) and (A)(ii).
‘‘(9) DEFINITIONS.—In this subsection:
‘‘(A) MULTIPLE SOURCE DRUG.—
‘‘(i) IN
GENERAL.—The term ‘mul-
tiple source drug’ means, with respect to a
payment calculation period, a covered out-
patient drug for which there are 2 or more
drug products which—
‘‘(I) are rated as therapeutically
equivalent (under the Food and Drug
Administration’s most recent publica-
tion of ‘Approved Drug Products with
Therapeutic 
Equivalence 
Evalua-
tions’);
‘‘(II) except as provided in clause
(ii), are pharmaceutically equivalent
and bioequivalent, as defined in clause
(iii) and as determined by the Food
and Drug Administration; and
‘‘(III) are sold or marketed dur-
ing the period.
‘‘(ii) EXCEPTION.—Subclause (II) of
clause (i) shall not apply if the Food and
Drug Administration changes by regulation
(after an opportunity for public comment
of 90 days) the requirement that, for pur-
poses of the publication described in clause
(i)(I), in order for drug products to be
rated as therapeutically equivalent, they
must be pharmaceutically equivalent and
bioequivalent, as defined in clause (iii).
‘‘(iii) DEFINITIONS.—For purposes of
this subparagraph:
‘‘(I) PHARMACEUTICALLY EQUIV-
ALENT.—Drug products are pharma-
ceutically equivalent if the products
contain identical amounts of the same
active drug ingredient in the same
dosage form and meet compendial or
other applicable standards of strength,
quality, purity, and identity.
‘‘(II) 
BIOEQUIVALENT.—Drugs
are bioequivalent if they do not
present 
a 
known 
or 
potential
bioequivalence problem or, if they do
present such a problem, are shown to
meet an appropriate standard of
bioequivalence.
‘‘(III) SOLD OR MARKETED.—A
drug is considered to be sold or mar-
keted during a period if it is listed in
the publications referred to in clause
(i)(I), unless the Secretary determines
that such sale or marketing is not ac-
tually taking place.
‘‘(B) 
RESTRICTIVE
PRESCRIPTION.—A
drug has a ‘restrictive prescription’ only if—
‘‘(i) in the case of a written prescrip-
tion, the prescription for the drug indi-
cates, in the handwriting of the physician
or other person prescribing the drug and
with an appropriate phrase (such as ‘brand
medically necessary’) recognized by the
Secretary, that the particular drug must be
dispensed; or
‘‘(ii) in the case of a prescription is-
sued by telephone—
‘‘(I) the physician or other per-
son prescribing the drug (through use
of such an appropriate phrase) states
that the particular drug must be dis-
pensed, and
‘‘(II) the physician or other per-
son submits to the pharmacy involved,
within 30 days after the date of the
telephone prescription, a written con-
firmation which is in the handwriting
of the physician or other person pre-
scribing the drug and which indicates
with such appropriate phrase that the
particular drug was required to have
been dispensed.
‘‘(C) PAYMENT
CALCULATION
PERIOD.—
The term ‘payment calculation period’ means
the 6-month period beginning with January of
each year and the 6-month period beginning
with July of each year.’’.
(c) PARTICIPATING
PHARMACIES; CIVIL
MONEY
PENALTIES.—
(1) 
PARTICIPATING
PHARMACIES.—Section
1842 of such Act (42 U.S.C. 1395t) is amended—
(A) in subsection (h)(1), by inserting be-
fore the period at the end of the second sen-
tence the following: ‘‘, except that, with respect
to a supplier of covered outpatient drugs, the
term ‘participating supplier’ means a participat-
ing 
pharmacy 
(as 
defined 
in 
subsection
(o)(1))’’;
(B) in subsection (h)(4), is amended by
adding at the end the following: ‘‘In publishing
directories under this paragraph, the Secretary
shall provide for separate directories (wherever
appropriate) for participating pharmacies.’’;
and
(C) by inserting after subsection (n) the
following new subsection:
‘‘(o)(1) For purposes of this section, the term ‘par-
ticipating pharmacy’ means, with respect to covered out-
patient drugs dispensed on or after January 1, 1997, an
entity which is authorized under a State law to dispense
covered outpatient drugs and which has entered into an
agreement with the Secretary, providing at least the fol-
lowing:
‘‘(A) The entity agrees to accept payment under
this part on an assignment-related basis for all cov-
ered outpatient drugs dispensed to an individual en-
titled to benefits under this part (in this subsection
referred to as a ‘medicare beneficiary’) during a year
after—
‘‘(i) the Secretary has notified the entity,
through the electronic system described in para-
graph (4); or
‘‘(ii) in the absence of such a system, the
entity is otherwise notified that the Secretary
has determined,
that the individual has met the prescription drug de-
ductible with respect to such drugs under section
1834(d)(1) for the year.
‘‘(B) The entity agrees—
‘‘(i) not to refuse to dispense covered out-
patient drugs stocked by the entity to any medi-
care beneficiary; and
‘‘(ii) not to charge medicare beneficiaries
(regardless of whether or not the beneficiaries
are enrolled under a prepaid health plan or with
eligible organization under section 1876) more
for such drugs than the amount it charges to
the general public (as determined by the Sec-
retary in regulations).
‘‘(C) The entity agrees to keep patient records
(including records on expenses) for all covered out-
patient drugs dispensed to all medicare beneficiaries.
‘‘(D) The entity agrees to submit information
(in a manner specified by the Secretary to be nec-
essary to administer this title) on all purchases of
covered outpatient drugs dispensed to medicare
beneficiaries.
‘‘(E) The entity agrees—
‘‘(i) to offer to counsel, or to offer to pro-
vide information (consistent with State law re-
specting the provision of such information) to,
each medicare beneficiary on the appropriate
use of a drug to be dispensed and whether there
are potential interactions between the drug and
other drugs dispensed to the beneficiary; and
‘‘(ii) to advise the beneficiary on the avail-
ability (consistent with State laws respecting
substitution of drugs) of therapeutically equiva-
lent covered outpatient drugs.
‘‘(F) The entity agrees to provide the informa-
tion requested by the Secretary in surveys under sec-
tion 1834(d)(3)(C)(ii).
Nothing in this paragraph shall be construed as requiring
a pharmacy operated by an eligible organization (described
in section 1876(b)) or an organization described in section
1833(a)(1)(A) for the exclusive benefit of its members to
dispense covered outpatient drugs to individuals who are
not members of the organization.
‘‘(2) The Secretary shall provide to each participating
pharmacy—
‘‘(A) a distinctive emblem (suitable for display
to the public) indicating that the pharmacy is a par-
ticipating pharmacy; and
‘‘(B) upon request, such electronic equipment
and technical assistance (other than the costs of ob-
taining, maintaining, or expanding telephone service)
as the Secretary determines may be necessary for
the pharmacy to submit claims using the electronic
system established under paragraph (4).
‘‘(3) The Secretary shall provide for periodic audits
of participating pharmacies to assure—
‘‘(A) compliance with the requirements for par-
ticipation under this title; and
‘‘(B) the accuracy of information submitted by
the pharmacies under this title.
‘‘(4) The Secretary shall establish, by not later than
January 1, 1997, a point-of-sale electronic system for use
by carriers and participating pharmacies in the submission
of information respecting covered outpatient drugs dis-
pensed to medicare beneficiaries under this part.
‘‘(5) Notwithstanding subsection (b)(3)(B), payment
for covered outpatient drugs may be made on the basis
of an assignment described in clause (ii) of that subsection
only to a participating pharmacy.’’.
(2) CIVIL MONEY PENALTIES FOR VIOLATION
OF
PARTICIPATION
AGREEMENT, FOR
EXCESSIVE
CHARGES FOR NONPARTICIPATING PHARMACIES AND
FOR FAILURE TO PROVIDE SURVEY INFORMATION.—
Section 1128A(a) of such Act (42 U.S.C. 1320a–
7a(a)) is amended—
(A) by striking ‘‘or’’ at the end of para-
graph (1);
(B) in paragraph (2)(C), by inserting ‘‘or
to be a participating pharmacy under section
1842(o)’’ after ‘‘1842(h)(1)’’;
(C) by striking ‘‘, or’’ at the end of para-
graph (2) and inserting a semicolon;
(D) by adding ‘‘or’’ at the end of para-
graph (3); and
(E) by inserting after paragraph (3) the
following new paragraph:
‘‘(4) in the case of a participating or
nonparticipating pharmacy (as defined for purposes
of part B of title XVIII)—
‘‘(A) presents or causes to be presented to
any person a request for payment for covered
outpatient drugs dispensed to an individual en-
titled to benefits under part B of title XVIII
and for which the amount charged by the phar-
macy is greater than the amount the pharmacy
charges the general public (as determined by
the Secretary in regulations), or
‘‘(B) fails to provide the information re-
quested by the Secretary in a survey under sec-
tion 1834(d)(3)(C)(ii);’’.
(d) LIMITATION ON LENGTH OF PRESCRIPTION.—
Section 1862(c) of such Act (42 U.S.C. 1395y(c)) is
amended—
(1) by redesignating subparagraphs (A) through
(D) of paragraph (1) as clauses (i) through (iv);
(2) in paragraph (2)(A), by striking ‘‘paragraph
(1)’’ and inserting ‘‘subparagraph (A)’’;
(3) by redesignating subparagraphs (A) and
(B) of paragraph (2) as clauses (i) and (ii);
(4) by redesignating paragraphs (1) and (2) as
subparagraphs (A) and (B);
(5) by inserting ‘‘(1)’’ after ‘‘(c)’’; and
(6) by adding at the end the following new
paragraph:
‘‘(2) No payment may be made under part B for any
expense incurred for a covered outpatient drug if the drug
is dispensed in a quantity exceeding a supply of 30 days
or such longer period of time (not to exceed 90 days, ex-
cept in exceptional circumstances) as the Secretary may
authorize.’’.
(e) USE
OF CARRIERS, FISCAL INTERMEDIARIES,
AND OTHER ENTITIES IN ADMINISTRATION.—
(1) AUTHORIZING USE OF OTHER ENTITIES IN
ELECTRONIC CLAIMS SYSTEM.—Section 1842(f) of
such Act (42 U.S.C. 1395u(f)) is amended—
(A) by striking ‘‘and’’ at the end of para-
graph (1);
(B) by striking the period at the end of
paragraph (2) and inserting ‘‘; and’’; and
(C) by adding at the end the following new
paragraph:
‘‘(3) with respect to implementation and oper-
ation (and related functions) of the electronic system
established under subsection (o)(4), a voluntary as-
sociation, corporation, partnership, or other non-
governmental organization, which the Secretary de-
termines to be qualified to conduct such activities.’’.
(2) ADDITIONAL
FUNCTIONS
OF
CARRIERS.—
Section 1842(b)(3) of such Act (42 U.S.C.
1395u(b)(3)), 
as 
amended 
by 
section
151(b)(1)(B)(iii) of the Social Security Act Amend-
ments of 1994, is amended—
(A) by striking ‘‘and’’ at the end of sub-
paragraph (I);
(B) by adding ‘‘and’’ at the end of sub-
paragraph (L);
(C) by redesignating subparagraph (L) as
subparagraph (J); and
(D) by inserting after subparagraph (J)
(as so redesignated) the following new subpara-
graphs:
‘‘(K) if it makes determinations or payments
with respect to covered outpatient drugs, will—
‘‘(i) receive information transmitted under
the electronic system established under sub-
section (o)(4), and
‘‘(ii) respond to requests by participating
pharmacies (and individuals entitled to benefits
under this part) as to whether or not such an
individual has met the prescription drug de-
ductible 
established 
under 
section
1834(d)(1)(A) for a year; and
‘‘(L) will enter into such contracts with organi-
zations described in subsection (f)(3) as the Sec-
retary determines may be necessary to implement
and operate (and for related functions with respect
to) the electronic system established under sub-
section (o)(4) for covered outpatient drugs under
this part;’’.
(3) SPECIAL CONTRACT PROVISIONS FOR ELEC-
TRONIC CLAIMS SYSTEM.—
(A) PAYMENT
ON
OTHER
THAN
A
COST
BASIS.—Section 1842(c)(1) of such Act (42
U.S.C. 1395u(c)(1)), as amended by section
126(h)(2) of the Social Security Act Amend-
ments of 1994, is amended—
(i) by inserting ‘‘(A)’’ after ‘‘(c)(1)’’;
(ii) in the first sentence, by inserting
‘‘, except as provided in subparagraph
(B),’’ after ‘‘under this part, and’’; and
(iii) by adding at the end the follow-
ing new subparagraph:
‘‘(B) To the extent that a contract under this section
provides for implementation and operation (and related
functions) of the electronic system established under sub-
section (o)(4) for covered outpatient drugs, the Secretary
may provide for payment for such activities based on any
method of payment determined by the Secretary to be ap-
propriate.’’.
(B) APPLICATION
OF
DIFFERENT
PER-
FORMANCE
STANDARDS.—The Secretary of
Health and Human Services, before entering
into contracts under section 1842 of the Social
Security Act with respect to the implementation
and operation (and related functions) of the
electronic system for covered outpatient drugs,
shall establish standards with respect to per-
formance with respect to such activities. The
provisions of section 1153(e)(2) and paragraphs
(1) and (2) of section 1153(h) of such Act shall
apply to such activities in the same manner as
they apply to contracts with peer review organi-
zations, instead of the requirements of the sec-
ond 
and 
third 
sentences 
of 
section
1842(b)(2)(A) of such Act.
(C) USE OF REGIONAL CARRIERS.—Section
1842(b)(2)(A) 
of 
such 
Act 
(42 
U.S.C.
1395u(b)(2)(A)) is amended by adding at the
end the following new sentence: ‘‘With respect
to activities relating to implementation and op-
eration (and related functions) of the electronic
system established under subsection (o)(4), the
Secretary may enter into contracts with carriers
under this section to perform such activities on
a regional basis.’’.
(4) DELAY IN APPLICATION OF COORDINATED
BENEFITS WITH MEDIGAP.—The provisions of sub-
paragraph (B) of section 1842(h)(3) of the Social
Security Act shall not apply to covered outpatient
drugs (other than drugs described in section
1861(s)(2)(J) of such Act as of the date of the en-
actment of this Act) dispensed before January 1,
1998.
(5) BATCH PROMPT PROCESSING OF CLAIMS.—
Section 1842(c) of such Act (42 U.S.C. 1395u(c)),
as amended by sections 125(a) and 135(b)(2) of the
Social Security Act Amendments of 1994, is
amended—
(A) in paragraphs (2)(A) and (3)(A), by
striking ‘‘Each’’ and inserting ‘‘Except as pro-
vided in paragraph (6), each’’;
(B) by adding at the end the following new
paragraph:
‘‘(6)(A) Each contract under this section which pro-
vides for the disbursement of funds, as described in sub-
section (a)(1)(B), with respect to claims for payment for
covered outpatient drugs shall provide for a payment cycle
under which each carrier will, on a monthly basis, make
a payment with respect to all claims which were received
and approved for payment in the period since the most
recent date on which such a payment was made with re-
spect to the participating pharmacy or individual submit-
ting the claim.
‘‘(B) If payment is not issued, mailed, or otherwise
transmitted within 5 days of when such a payment is re-
quired to be made under subparagraph (A), interest shall
be paid at the rate used for purposes of section 3902(a)
of title 31, United States Code (relating to interest pen-
alties for failure to make prompt payments) for the period
beginning on the day after such 5-day period and ending
on the date on which payment is made.’’.
(f) MODIFICATION OF HMO/CMP CONTRACTS.—
(1) SEPARATE
ACTUARIAL
DETERMINATION
FOR COVERED OUTPATIENT DRUG BENEFIT.—Sec-
tion 
1876(e)(1) 
of 
such 
Act 
(42 
U.S.C.
1395mm(e)(1)) is amended by adding at the end
thereof the following new sentence: ‘‘The preceding
sentence shall be applied separately with respect to
covered outpatient drugs.’’.
(2) ADDITIONAL OPTIONAL BENEFITS.—Section
1876(g)(3)(A) 
of 
such 
Act 
(42 
U.S.C.
1395mm(g)(3)(A)) is amended by striking ‘‘rate’’
and inserting ‘‘rates’’.
(g) CONFORMING AMENDMENTS.—
(1) The first sentence of section 1866(a)(2)(A)
(42 U.S.C. 1395cc(a)(2)(A)) is amended—
(A) 
by 
inserting 
‘‘1834(d),’’ 
after
‘‘1833(b),’’; and
(B) by inserting ‘‘and in the case of cov-
ered outpatient drugs, applicable coinsurance
percent (specified in section 1834(d)(2)(C)) of
the lesser of the actual charges for the drugs or
the payment limit (established under section
1834(d)(3))’’ after ‘‘established by the Sec-
retary’’.
(2) Section 1903(i)(5) (42 U.S.C. 1396b(i)(5))
is amended by striking ‘‘section 1862(c)’’ and insert-
ing ‘‘section 1862(c)(1)’’.
(h) PRESCRIPTION DRUG PAYMENT REVIEW COM-
MISSION.—Part B is amended by inserting after section
1846 the following new section:
‘‘PRESCRIPTION DRUG PAYMENT REVIEW COMMISSION
‘‘SEC. 1847. (a)(1) The Director of the Congressional
Office of Technology Assessment (in this section referred
to as the ‘Director’ and the ‘Office’, respectively) shall
provide for the appointment of a Prescription Drug Pay-
ment Review Commission (in this section referred to as
the ‘Commission’), to be composed of individuals with ex-
pertise in the provision and financing of covered out-
patient drugs appointed by the Director (without regard
to the provisions of title 5, United States Code, governing
appointments in the competitive service).