enter an agreement with the Administrator to fur-
nish covered prescription medicines and pharmacists’
services to enrolled individuals.
‘‘(2) TERMS OF AGREEMENT.—An agreement
under this subsection shall include the following
terms and requirements:
‘‘(A) LICENSING.—The pharmacy and
pharmacists shall meet (and throughout the
contract period will continue to meet) all appli-
cable State and local licensing requirements.
‘‘(B) LIMITATION
ON
CHARGES.—Phar-
macies participating under this part shall not
charge an enrolled individual more than the ne-
gotiated price for an individual medicine as es-
tablished under subsection (b)(1), regardless of
whether such individual has attained the benefit
limit under section 1860B(b), and shall not
charge an enrolled individual more than the in-
dividual’s share of the negotiated price as deter-
mined under the provisions of this part.
‘‘(C) 
PERFORMANCE
STANDARDS.—The
pharmacy and the pharmacist shall comply with
performance standards relating to—
‘‘(i) measures for quality assurance,
reduction of medical errors, and participa-
tion in the drug utilization review program
described in subsection (b)(3)(A);
‘‘(ii) systems to ensure compliance
with the confidentiality standards applica-
ble under subsection (b)(5)(A); and
‘‘(iii) other requirements as the Sec-
retary may impose to ensure integrity, effi-
ciency, and the quality of the program.
‘‘(D) DISCLOSURE OF PRICE OF GENERIC
MEDICINE.—A pharmacy participating under
this part shall inform an enrollee of the dif-
ference in price between generic and non-ge-
neric equivalents.
‘‘(d) SPECIAL ATTENTION TO RURAL AND HARD-TO-
SERVE AREAS.—
‘‘(1) IN GENERAL.—The Secretary shall ensure
that all beneficiaries have access to the full range of
pharmaceuticals under this part, and shall give spe-
cial attention to access, pharmacist counseling, and
delivery in rural and hard-to-serve areas (as the Sec-
retary may define by regulation).
‘‘(2) SPECIAL ATTENTION DEFINED.—For pur-
poses of paragraph (1), the term ‘special attention’
may include bonus payments to retail pharmacists in
rural areas and any other actions the Secretary de-
termines are necessary to ensure full access to rural
and hard-to-serve beneficiaries.
‘‘(3) GAO REPORT.—Not later than 2 years
after the implementation of this part the Comp-
troller General of the United States shall submit to
Congress a report on the access of medicare bene-
ficiaries to pharmaceuticals and pharmacists’ serv-
ices in rural and hard-to-serve areas under this part
together with any recommendations of the Comp-
troller General regarding any additional steps the
Secretary may need to take to ensure the access of
medicare beneficiaries to pharmaceuticals and phar-
macists’ services in such areas under this part.
‘‘(e) INCENTIVES FOR COST AND UTILIZATION MAN-
AGEMENT AND QUALITY IMPROVEMENT.—The Secretary
is authorized to include in a contract awarded under sub-
section (b) with a carrier such incentives for cost and utili-
zation management and quality improvement as the Sec-
retary may deem appropriate, including—
‘‘(1) bonus and penalty incentives to encourage
administrative efficiency;
‘‘(2) incentives under which carriers share in
any benefit savings achieved;
‘‘(3) risk-sharing arrangements related to ini-
tiatives to encourage savings in benefit payments;
‘‘(4) financial incentives under which savings
derived from the substitution of generic medicines in
lieu of non-generic medicines are made available to
carriers, pharmacies, and the Prescription Medicine
Insurance Account; and
‘‘(5) any other incentive that the Secretary
deems appropriate and likely to be effective in man-
aging costs or utilization.
‘‘EMPLOYER INCENTIVE PROGRAM FOR EMPLOYMENT-
BASED RETIREE MEDICINE COVERAGE
‘‘SEC. 1860H. (a) PROGRAM AUTHORITY.—The Sec-
retary shall develop and implement a program under this
section called the ‘Employer Incentive Program’ that en-
courages employers and other sponsors of employment-
based health care coverage to provide adequate prescrip-
tion medicine benefits to retired individuals and to main-
tain such existing benefit programs, by subsidizing, in
part, the sponsor’s cost of providing coverage under quali-
fying plans.
‘‘(b) SPONSOR REQUIREMENTS.—In order to be eligi-
ble to receive an incentive payment under this section with
respect to coverage of an individual under a qualified re-
tiree prescription medicine plan (as defined in subsection
(f)(3)), a sponsor shall meet the following requirements:
‘‘(1) ASSURANCES.—The sponsor shall—
‘‘(A) annually attest, and provide such as-
surances as the Secretary may require, that the
coverage offered by the sponsor is a qualified
retiree prescription medicine plan, and will re-
main such a plan for the duration of the spon-
sor’s participation in the program under this
section; and
‘‘(B) guarantee that it will give notice to
the Secretary and covered retirees—
‘‘(i) at least 120 days before termi-
nating its plan; and
‘‘(ii) immediately upon determining
that the actuarial value of the prescription
medicine benefit under the plan falls below
the actuarial value of the insurance benefit
under this part.
‘‘(2) OTHER
REQUIREMENTS.—The sponsor
shall provide such information, and comply with
such requirements, including information require-
ments to ensure the integrity of the program, as the
Secretary may find necessary to administer the pro-
gram under this section.
‘‘(c) INCENTIVE PAYMENT.—
‘‘(1) IN GENERAL.—A sponsor that meets the
requirements of subsection (b) with respect to a
quarter in a calendar year shall have payment made
by the Secretary on a quarterly basis (to the sponsor
or, at the sponsor’s direction, to the appropriate em-
ployment-based health plan) of an incentive pay-
ment, in the amount determined as described in
paragraph (2), for each retired individual (or
spouse) who—
‘‘(A) was covered under the sponsor’s
qualified retiree prescription medicine plan dur-
ing such quarter; and
‘‘(B) was eligible for but was not enrolled
in the insurance program under this part.
‘‘(2) AMOUNT
OF
INCENTIVE.—The payment
under this section with respect to each individual de-
scribed in paragraph (1) for a month shall be equal
to 2⁄3 of the monthly premium amount payable from
the Prescription Medicine Insurance Account for an
enrolled individual, as set for the calendar year pur-
suant to section 1860D(a)(2).
‘‘(3) PAYMENT
DATE.—The incentive under
this section with respect to a calendar quarter shall
be payable as of the end of the next succeeding cal-
endar quarter.
‘‘(d) CIVIL MONEY PENALTIES.—A sponsor, health
plan, or other entity that the Secretary determines has,
directly or through its agent, provided information in con-
nection with a request for an incentive payment under this
section that the entity knew or should have known to be
false shall be subject to a civil monetary penalty in an
amount equal to $2,000 for each false representation plus
an amount not to exceed 3 times the total incentive
amounts under subsection (c) that were paid (or would
have been payable) on the basis of such information.
‘‘(e) PART D ENROLLMENT FOR CERTAIN INDIVID-
UALS
COVERED
BY
EMPLOYMENT-BASED
RETIREE
HEALTH COVERAGE PLANS.—
‘‘(1) ELIGIBLE
INDIVIDUALS.—An individual
shall be given the opportunity to enroll in the pro-
gram under this part during the period specified in
paragraph (2) if—
‘‘(A) the individual declined enrollment in
the program under this part at the time the in-
dividual first satisfied section 1860C(a);
‘‘(B) at that time, the individual was cov-
ered under a qualified retiree prescription medi-
cine plan for which an incentive payment was
paid under this section; and
‘‘(C)(i) the sponsor subsequently ceased to
offer such plan; or
‘‘(ii) the value of prescription medicine cov-
erage under such plan is reduced below the
value of the coverage provided at the time the
individual first became eligible to participate in
the program under this part.
‘‘(2) SPECIAL ENROLLMENT PERIOD.—An indi-
vidual described in paragraph (1) shall be eligible to
enroll in the program under this part during the 6-
month period beginning on the first day of the
month in which—
‘‘(A) the individual receives a notice that
coverage under such plan has terminated (in
the 
circumstance 
described 
in 
paragraph
(1)(C)(i)) or notice that a claim has been de-
nied because of such a termination; or
‘‘(B) the individual received notice of the
change in benefits (in the circumstance de-
scribed in paragraph (1)(C)(ii)).
‘‘(f) DEFINITIONS.—In this section:
‘‘(1) EMPLOYMENT-BASED
RETIREE
HEALTH
COVERAGE.—The term ‘employment-based retiree
health coverage’ means health insurance or other
coverage of health care costs for retired individuals
(or for such individuals and their spouses and de-
pendents) based on their status as former employees
or labor union members.
‘‘(2) EMPLOYER.—The term ‘employer’ has the
meaning given to such term by section 3(5) of the
Employee Retirement Income Security Act of 1974
(except that such term shall include only employers
of 2 or more employees).
‘‘(3) QUALIFIED RETIREE PRESCRIPTION MEDI-
CINE PLAN.—The term ‘qualified retiree prescription
medicine plan’ means health insurance coverage in-
cluded in employment-based retiree health coverage
that—
‘‘(A) provides coverage of the cost of pre-
scription medicines whose actuarial value to
each retired beneficiary equals or exceeds the
actuarial value of the benefits provided to an in-
dividual enrolled in the program under this
part; and
‘‘(B) does not deny, limit, or condition the
coverage or provision of prescription medicine
benefits for retired individuals based on age or
any health status-related factor described in
section 2702(a)(1) of the Public Health Service
Act.
‘‘(4) SPONSOR.—The term ‘sponsor’ has the
meaning given the term ‘plan sponsor’ by section
3(16)(B) of the Employee Retirement Income Secu-
rity Act of 1974.
‘‘PROMOTION
OF
PHARMACEUTICAL
RESEARCH
ON
BREAK-THROUGH
MEDICINES
WHILE
PROVIDING
PROGRAM COST CONTAINMENT
‘‘SEC. 1860I. (a) MONITORING EXPENDITURES.—
The Secretary shall monitor expenditures under this part.
On October 1, 2003, Secretary shall estimate total expend-
itures under this part for 2003.
‘‘(b) ESTABLISHMENT
OF SUSTAINABLE GROWTH
RATE.—
‘‘(1) IN GENERAL.—The Secretary shall estab-
lish a sustainable growth rate prescription medicine
target system for expenditures under this part for
each year after 2003.
‘‘(2) INITIAL COMPUTATION.—Such target shall
equal the amount of total expenditures estimated for
2003 adjusted by the Secretary’s estimate of a sus-
tainable growth rate (in this section referred to as
an ‘SGR’) percentage between 2003 and 2004. Such
SGR shall be estimated based on the following:
‘‘(A) Reasonable changes in the cost of
production or price of covered pharmaceuticals,
but in no event more than the rate of increase
in the consumer price index for all urban con-
sumers for the period involved.
‘‘(B) Population enrolled in this part, both
in numbers and in average age and severity of
chronic and acute illnesses.
‘‘(C) Appropriate changes in utilization of
pharmaceuticals, as determined by the Drug
Review Board (established under subsection
(c)(3)) and based on best estimates of utiliza-
tion change if there were no direct-to-consumer
advertising or promotions to providers.
‘‘(D) Productivity index of manufacturers
and distributors.
‘‘(E) Percentage of products with patent
and market exclusivity protection versus prod-
ucts without patent protection and changes in
the availability of generic substitutes.
‘‘(F) Such other factors as the Secretary
may determine are appropriate.
In no event may the sustainable growth rate exceed
120 percent of the estimated per capita growth in
total spending under this title.
‘‘(3) 
COMPUTATION
FOR
SUBSEQUENT
YEARS.—In October of 2004 and each year there-
after, for purposes of setting the SGRs for the suc-
ceeding year, the Secretary shall adjust each current
year’s estimated expenditures by the estimated SGR
for the succeeding year, further adjusted for correc-
tions in earlier estimates and the receipt of addi-
tional data on previous years spending as follows:
‘‘(A) ERROR ESTIMATES.—An adjustment
(up or down) for errors in the estimate of total
expenditures under this part for the previous
year.
‘‘(B) COSTS.—An adjustment (up or
down) for corrections in the cost of production
of prescriptions covered under this part between
the current calendar year and the previous year.
‘‘(C) TARGET.—An adjustment for any
amount (over or under) that expenditures in the
current year under this part are estimated to
differ from the target amount set for the year.
If expenditures in the current year are esti-
mated to be—
‘‘(i) less than the target amount, fu-
ture target amounts will be adjusted down-
ward; or
‘‘(ii) more than the target amount,
the Secretary shall notify all pharma-
ceutical manufacturers with sales of phar-
maceutical prescription medicine products
to medicare beneficiaries under this part,
of a rebate requirement (except as pro-
vided in this subparagraph) to be deposited
in the Federal Medicare Prescription Medi-
cine Trust Fund.
‘‘(D) 
REBATE
DETERMINATION.—The
amount of the rebate described in subparagraph
(C)(ii) may vary among manufacturers and
shall be based on the manufacturer’s estimated
contribution to the expenditure above the target
amount, taking into consideration such factors
as—
‘‘(i) above average increases in the
cost of the manufacturer’s product;
‘‘(ii) increases in utilization due to
promotion activities of the manufacturer,
wholesaler, or retailer;
‘‘(iii) launch prices of new drugs at
the same or higher prices as similar drugs
already in the marketplace (so-called ‘me
too’ or ‘copy-cat’ drugs);
‘‘(iv) the role of the manufacturer in
delaying the entry of generic products into
the market; and
‘‘(v) such other actions by the manu-
facturer that the Secretary may determine
has contributed to the failure to meet the
SGR target.
The rebates shall be established under such
subparagraph so that the total amount of the
rebates is estimated to ensure that the amount
the target for the current year is estimated to
be exceeded is recovered in lower spending in
the subsequent year; except that, no rebate
shall be made in any manufacturer’s product
which the Food and Drug Administration has
determined is a breakthrough medicine (as de-
termined under subsection (c)) or an orphan
medicine.
‘‘(c) BREAKTHROUGH MEDICINES.—
‘‘(1) DETERMINATION.—For purposes of this
section, a medicine is a ‘breakthrough medicine’ if
the Drug Review Board (established under para-
graph (3)) determines—
‘‘(A) it is a new product that will make a
significant and major improvement by reducing
physical or mental illness, reducing mortality,
or reducing disability; and
‘‘(B) that no other product is available to
beneficiaries that achieves similar results for
the same condition at a lower cost.
‘‘(2) CONDITION.—An exemption from rebates
under subsection (b)(3) for a breakthrough medicine
shall continue as long as the medicine is certified as
a breakthrough medicine but shall be limited to 7
calendar years from 2003 or 7 calendar years from
the date of the initial determination under para-
graph (1), whichever is later.
‘‘(3) DRUG REVIEW BOARD.—The Drug Review
Board under this paragraph shall consist of the
Commissioner of Food and Drugs, the Directors of
the National Institutes of Health, the Director of
the National Science Foundation, and 10 experts in
pharmaceuticals, medical research, and clinical care,
selected by the Commissioner of Food and Drugs
from the faculty of academic medical centers, except
that no person who has (or who has an immediate
family member that has) any conflict of interest with
any pharmaceutical manufacturer shall serve on the
Board.
‘‘(d) NO REVIEW.—The Secretary’s determination of
the rebate amounts under this section, and the Drug Re-
view Board’s determination of what is a breakthrough
drug, are not subject to administrative or judicial review.
‘‘APPROPRIATIONS TO COVER GOVERNMENT
CONTRIBUTIONS
‘‘SEC. 1860J. (a) IN GENERAL.—There are author-
ized to be appropriated from time to time, out of any mon-
eys in the Treasury not otherwise appropriated, to the
Prescription Medicine Insurance Account, a Government
contribution equal to—
‘‘(1) the aggregate premiums payable for a
month pursuant to section 1860D(a)(2) by individ-
uals enrolled in the program under this part; plus
‘‘(2) one-half the aggregate premiums payable
for a month pursuant to such section for such indi-
viduals by former employers; plus
‘‘(3) the benefits payable by reason of the appli-
cation of paragraph (2) of section 1860B(a) (relat-
ing to catastrophic benefits).
‘‘(b) APPROPRIATIONS TO COVER INCENTIVES FOR
EMPLOYMENT-BASED RETIREE MEDICINE COVERAGE.—
There are authorized to be appropriated to the Prescrip-
tion Medicine Insurance Account from time to time, out
of any moneys in the Treasury not otherwise appropriated
such sums as may be necessary for payment of incentive
payments under section 1860H(c).
‘‘PRESCRIPTION MEDICINE DEFINED
‘‘SEC. 1860K. As used in this part, the term ‘pre-
scription medicine’ means—
‘‘(1) a drug that may be dispensed only upon
a prescription, and that is described in subpara-
graph (A)(i), (A)(ii), or (B) of section 1927(k)(2);
and
‘‘(2) insulin certified under section 506 of the
Federal Food, Drug, and Cosmetic Act, and needles,
syringes, and disposable pumps for the administra-
tion of such insulin.’’.
(b) CONFORMING AMENDMENTS.—
(1) 
AMENDMENTS
TO
FEDERAL
SUPPLE-
MENTARY HEALTH INSURANCE TRUST FUND.—Sec-
tion 1841 of the Social Security Act (42 U.S.C.
1395t) is amended—
(A) in the last sentence of subsection (a)—
(i) by striking ‘‘and’’ after ‘‘section
201(i)(1)’’; and
(ii) by inserting before the period the
following: ‘‘, and such amounts as may be
deposited in, or appropriated to, the Pre-
scription Medicine Insurance Account es-
tablished by section 1860F’’;
(B) in subsection (g), by inserting after
‘‘by this part,’’ the following: ‘‘the payments
provided for under part D (in which case the
payments shall come from the Prescription
Medicine Insurance Account in the Supple-
mentary Medical Insurance Trust Fund),’’;
(C) in the first sentence of subsection (h),
by inserting before the period the following:
‘‘and section 1860D(b)(4) (in which case the
payments shall come from the Prescription
Medicine Insurance Account in the Supple-
mentary Medical Insurance Trust Fund)’’; and
(D) in the first sentence of subsection
(i)—
(i) by striking ‘‘and’’ after ‘‘section
1840(b)(1)’’; and
(ii) by inserting before the period the
following: ‘‘, section 1860D(b)(2) (in which
case the payments shall come from the
Prescription Medicine Insurance Account
in the Supplementary Medical Insurance
Trust Fund)’’.
(2) PRESCRIPTION
MEDICINE
OPTION
UNDER
MEDICARE+CHOICE PLANS.—
(A) ELIGIBILITY, ELECTION, AND ENROLL-
MENT.—Section 1851 of the Social Security Act
(42 U.S.C. 1395w–21) is amended—
(i) in subsection (a)(1)(A), by striking
‘‘parts A and B’’ inserting ‘‘parts A, B,
and D’’; and
(ii) in subsection (i)(1), by striking
‘‘parts A and B’’ and inserting ‘‘parts A,
B, and D’’.
(B) VOLUNTARY
BENEFICIARY
ENROLL-
MENT
FOR
MEDICINE
COVERAGE.—Section
1852(a)(1)(A) of such Act (42 U.S.C. 1395w–
22(a)(1)(A)) is amended by inserting ‘‘(and
under part D to individuals also enrolled under
that part)’’ after ‘‘parts A and B’’.
(C) 
ACCESS
TO
SERVICES.—Section
1852(d)(1) of such Act (42 U.S.C. 1395w–
22(d)(1)) is amended—
(i) in subparagraph (D), by striking
‘‘and’’ at the end;
(ii) in subparagraph (E), by striking
the period at the end and inserting ‘‘;
and’’; and
(iii) by adding at the end the fol-
lowing new subparagraph:
‘‘(F) the plan for prescription medicine
benefits under part D guarantees coverage of
any specifically named covered prescription
medicine for an enrollee, when prescribed by a
physician in accordance with the provisions of
such part, regardless of whether such medicine
would otherwise be covered under an applicable
formulary or discount arrangement.’’.
(D) PAYMENTS TO ORGANIZATIONS.—Sec-
tion 1853(a)(1)(A) of such Act (42 U.S.C.
1395w–23(a)(1)(A)) is amended—
(i) by inserting ‘‘determined sepa-
rately for benefits under parts A and B
and under part D (for individuals enrolled
under that part)’’ after ‘‘as calculated
under subsection (c)’’;
(ii) by striking ‘‘that area, adjusted
for such risk factors’’ and inserting ‘‘that
area. In the case of payment for benefits
under parts A and B, such payment shall
be adjusted for such risk factors as’’; and
(iii) by inserting before the last sen-
tence the following: ‘‘In the case of the
payments for benefits under part D, such
payment shall initially be adjusted for the
risk factors of each enrollee as the Sec-
retary determines to be feasible and appro-
priate. By 2006, the adjustments would be
for the same risk factors applicable for
benefits under parts A and B.’’.
(E) CALCULATION OF ANNUAL MEDICARE
+CHOICE CAPITATION RATES.—Section 1853(c)
of such Act (42 U.S.C. 1395w–23(c)) is
amended—
(i) in paragraph (1), in the matter
preceding subparagraph (A), by inserting
‘‘for benefits under parts A and B’’ after
‘‘capitation rate’’;
(ii) in paragraph (6)(A), by striking
‘‘rate of growth in expenditures under this
title’’ and inserting ‘‘rate of growth in ex-
penditures for benefits available under
parts A and B’’; and
(iii) by adding at the end the fol-
lowing new paragraph:
‘‘(8) PAYMENT
FOR
PRESCRIPTION
MEDI-
CINES.—The Secretary shall determine a capitation
rate for prescription medicines—
‘‘(A) dispensed in 2003, which is based on
the projected national per capita costs for pre-
scription medicine benefits under part D and
associated claims processing costs for bene-
ficiaries under the original medicare fee-for-
service program; and
‘‘(B) dispensed in each subsequent year,
which shall be equal to the rate for the previous
year updated by the Secretary’s estimate of the
projected per capita rate of growth in expendi-
tures under this title for an individual enrolled
under part D.’’.
(F) LIMITATION
ON
ENROLLEE
LIABIL-
ITY.—Section 1854(e) of such Act (42 U.S.C.
1395w–24(e)) is amended by adding at the end
the following new paragraph:
‘‘(5) SPECIAL RULE FOR PROVISION OF PART D
BENEFITS.—In no event may a Medicare+Choice or-
ganization include as part of a plan for prescription
medicine benefits under part D a requirement that
an enrollee pay a deductible, or a coinsurance per-
centage that exceeds 20 percent.’’.
(G) REQUIREMENT FOR ADDITIONAL BEN-
EFITS.—Section 1854(f)(1) of such Act (42
U.S.C. 1395w–24(f)(1)) is amended by adding
at the end the following new sentence: ‘‘Such
determination shall be made separately for ben-
efits under parts A and B and for prescription
medicine benefits under part D.’’.
(3) EXCLUSIONS FROM COVERAGE.—
(A) APPLICATION
TO
PART
D.—Section
1862(a) of the Social Security Act (42 U.S.C.
1395y(a)) is amended in the matter preceding
paragraph (1) by striking ‘‘part A or part B’’
and inserting ‘‘part A, B, or D’’.
(B) PRESCRIPTION
MEDICINES
NOT
EX-
CLUDED FROM COVERAGE IF APPROPRIATELY
PRESCRIBED.—Section 1862(a)(1) of such Act
(42 U.S.C. 1395y(a)(1)) is amended—
(i) in subparagraph (H), by striking
‘‘and’’ at the end;
(ii) in subparagraph (I), by striking
the semicolon at the end and inserting ‘‘,
and’’; and
(iii) by adding at the end the fol-
lowing new subparagraph:
‘‘(J) in the case of prescription medicines
covered under part D, which are not prescribed
in accordance with such part;’’.
SEC. 4. SUBSTANTIAL REDUCTIONS IN THE PRICE OF PRE-
SCRIPTION DRUGS FOR MEDICARE BENE-
FICIARIES.
(a) PARTICIPATING MANUFACTURERS.—
(1) IN GENERAL.—Each participating manufac-
turer of a covered outpatient drug shall make avail-
able for purchase by each pharmacy such covered
outpatient drug in the amount described in para-
graph (2) at the price described in paragraph (3).
(2) DESCRIPTION OF AMOUNT OF DRUGS.—The
amount of a covered outpatient drug that a partici-
pating manufacturer shall make available for pur-
chase by a pharmacy is an amount equal to the ag-
gregate amount of the covered outpatient drug sold
or distributed by the pharmacy to Medicare bene-
ficiaries.
(3) DESCRIPTION
OF
PRICE.—The price at
which a participating manufacturer shall make a
covered outpatient drug available for purchase by a
pharmacy is the price equal to the lowest of the fol-
lowing:
(A) The lowest price paid for the covered
outpatient drug by any agency or department of
the United States.
(B) The manufacturer’s best price for the
covered outpatient drug, as defined in section
1927(c)(1)(C) of the Social Security Act (42
U.S.C. 1396r–8(c)(1)(C)).
(C) The lowest price at which the drug is
available (as determined by the Secretary)
through importation consistent with the provi-
sions of section 804 of the Federal Food, Drug,
and Cosmetic Act.
(b) SPECIAL PROVISION WITH RESPECT TO HOSPICE
PROGRAMS.—For purposes of determining the amount of
a covered outpatient drug that a participating manufac-
turer shall make available for purchase by a pharmacy
under subsection (a), there shall be included in the cal-
culation of such amount the amount of the covered out-
patient drug sold or distributed by a pharmacy to a hos-
pice program. In calculating such amount, only amounts
of the covered outpatient drug furnished to a Medicare
beneficiary enrolled in the hospice program shall be in-
cluded.
(c) ADMINISTRATION.—The Secretary shall issue
such regulations as may be necessary to implement this
section.
(d) REPORTS TO CONGRESS REGARDING EFFECTIVE-
NESS OF SECTION.—
(1) IN GENERAL.—Not later than 2 years after
the date of the enactment of this Act, and annually
thereafter, the Secretary shall report to the Con-
gress regarding the effectiveness of this section in—
(A) protecting Medicare beneficiaries from
discriminatory pricing by drug manufacturers;
and
(B) making prescription drugs available to
Medicare beneficiaries at substantially reduced
prices.
(2) CONSULTATION.—In preparing such re-
ports, the Secretary shall consult with public health
experts, affected industries, organizations rep-
resenting consumers and older Americans, and other
interested persons.
(3) RECOMMENDATIONS.—The Secretary shall
include in such reports any recommendations they
consider appropriate for changes in this section to
further reduce the cost of covered outpatient drugs
to Medicare beneficiaries.
(f) DEFINITIONS.—For purposes of this section:
(1) 
PARTICIPATING
MANUFACTURER.—The
term ‘‘participating manufacturer’’ means any man-
ufacturer of drugs or biologicals that, on or after the
date of the enactment of this Act, enters into a con-
tract or agreement with the United States for the
sale or distribution of covered outpatient drugs to
the United States.
(2) COVERED OUTPATIENT DRUG.—The term
‘‘covered outpatient drug’’ has the meaning given
that term in section 1927(k)(2) of the Social Secu-
rity Act (42 U.S.C. 1396r–8(k)(2)).
(3) 
MEDICARE
BENEFICIARY.—The 
term
‘‘Medicare beneficiary’’ means an individual entitled
to benefits under part A of title XVIII of the Social
Security Act or enrolled under part B of such title,
or both.
(4) HOSPICE
PROGRAM.—The term ‘‘hospice
program’’ has the meaning given that term under
section 1861(dd)(2) of the Social Security Act (42
U.S.C. 1395x(dd)(2)).
(5) SECRETARY.—The term ‘‘Secretary’’ means
the Secretary of Health and Human Services.
(f) EFFECTIVE DATE.—The Secretary shall imple-
ment this section as expeditiously as practicable and in
a manner consistent with the obligations of the United
States.
SEC. 5. AMENDMENTS TO PROGRAM FOR IMPORTATION OF
CERTAIN PRESCRIPTION DRUGS BY PHAR-
MACISTS AND WHOLESALERS.
Section 804 of the Federal Food, Drug, and Cosmetic
Act (as added by section 745(c)(2) of Public Law 106–
387) is amended—
(1) by striking subsections (e) and (f) and in-
serting the following subsections:
‘‘(e) TESTING; APPROVED LABELING.—
‘‘(1) TESTING.—Regulations under subsection
(a)—
‘‘(A) shall require that testing referred to
in paragraphs (6) through (8) of subsection (d)
be conducted by the importer of the covered
product pursuant to subsection (a), or the man-
ufacturer of the product;
‘‘(B) shall require that, if such tests are
conducted by the importer, information needed
to authenticate the product being tested be sup-
plied by the manufacturer of such product to
the importer; and
‘‘(C) shall provide for the protection of any
information supplied by the manufacturer
under subparagraph (B) that is a trade secret
or commercial or financial information that is
privileged or confidential.
‘‘(2) APPROVED LABELING.—For purposes of
importing a covered product pursuant to subsection
(a), the importer involved may use the labeling ap-
proved for the product under section 505, notwith-
standing any other provision of law.
‘‘(f) DISCRETION OF SECRETARY REGARDING TEST-
ING.—The Secretary may waive or modify testing require-
ments described in subsection (d) if, with respect to spe-
cific countries or specific distribution chains, the Secretary
has entered into agreements or otherwise approved ar-
rangements that the Secretary determines ensure that the
covered products involved are not adulterated or in viola-
tion of section 505.’’;
(2) by striking subsections (h) and (i) and in-
serting the following subsections:
‘‘(h) PROHIBITED AGREEMENTS; NONDISCRIMINA-
TION.—
‘‘(1) PROHIBITED AGREEMENTS.—No manufac-
turer of a covered product may enter into a contract
or agreement that includes a provision to prevent
the sale or distribution of covered products imported
pursuant to subsection (a).
‘‘(2) NONDISCRIMINATION.—No manufacturer
of a covered product may take actions that discrimi-
nate against, or cause other persons to discriminate
port containing the study described in paragraph
(1).’’;
(3) in subsection (k)(2)—
(A) by redesignating subparagraphs (A)
through (E) as subparagraphs (B) through (F),
respectively; and
(B) by inserting before subparagraph (B)
(as so redesignated) the following subpara-
graph:
‘‘(A) The term ‘discrimination’ includes a
contract provision, a limitation on supply, or
other measure which has the effect of providing
United States pharmacists, wholesalers, or con-
sumers access to covered products on terms or
conditions that are less favorable than the
terms or conditions provided to any foreign pur-
chaser of such products.’’;
(4) by striking subsection (m); and
(5) by inserting after subsection (l) the fol-
lowing subsection:
‘‘(m) FUNDING.—For the purpose of carrying out
this section, there are authorized to be appropriated such
sums as may be necessary for fiscal year 2002 and each
subsequent fiscal year.’’.
SEC. 6. REASONABLE PRICE AGREEMENT FOR FEDERALLY
FUNDED RESEARCH.
(a) IN GENERAL.—If any Federal agency or any non-
profit entity undertakes federally funded health care re-
search and development and is to convey or provide a pat-
ent or other exclusive right to use such research and devel-
opment for a drug or other health care technology, such
agency or entity shall not make such conveyance or pro-
vide such patent or other right until the person who will
receive such conveyance or patent or other right first
agrees to a reasonable pricing agreement with the Sec-
retary of Health and Human Services or the Secretary
makes a determination that the public interest is served
by a waiver of the reasonable pricing agreement provided
in accordance with subsection (c).
(b) CONSIDERATION OF COMPETITIVE BIDDING.—In
cases where the Federal Government conveys or licenses
exclusive rights to federally funded research under sub-
section (a), consideration shall be given to mechanisms for
determining reasonable prices which are based upon a
competitive bidding process. When appropriate, the mech-
anisms should be considered where—
(1) qualified bidders compete on the basis of
the lowest prices that will be charged to consumers;
(2) qualified bidders compete on the basis of
the least sales revenues before prices are adjusted in
accordance with a cost based reasonable pricing for-
mula;
(3) qualified bidders compete on the basis of
the least period of time before prices are adjusted in
accordance with a cost based reasonable pricing for-
mula;
(4) qualified bidders compete on the basis of
the shortest period of exclusivity; or
(5) qualified bidders compete under other com-
petitive bidding systems.
Such competitive bidding process may incorporate require-
ments for minimum levels of expenditures on research,
marketing, maximum price, or other factors.
(c) WAIVER.—No waiver shall take effect under sub-
section (a) before the public is given notice of the proposed
waiver and provided a reasonable opportunity to comment
on the proposed waiver. A decision to grant a waiver shall
set out the Secretary’s finding that such a waiver is in
the public interest.
SEC. 7. GAO ONGOING STUDIES AND REPORTS ON PRO-
GRAM; MISCELLANEOUS REPORTS.
(a) ONGOING STUDY.—The Comptroller General of
the United States shall conduct an ongoing study and
analysis of the prescription medicine benefit program
under part D of the Medicare program under title XVIII
of the Social Security Act (as added by section 3 of this
Act), including an analysis of each of the following:
(1) The extent to which the administering enti-
ties have achieved volume-based discounts similar to
the favored price paid by other large purchasers.
(2) Whether access to the benefits under such
program are in fact available to all beneficiaries,
with special attention given to access for bene-
ficiaries living in rural and hard-to-serve areas.
(3) The success of such program in reducing
medication error and adverse medicine reactions and
improving quality of care, and whether it is probable
that the program has resulted in savings through re-
duced hospitalizations and morbidity due to medica-
tion errors and adverse medicine reactions.
(4) Whether patient medical record confiden-
tiality is being maintained and safe-guarded.
(5) Such other issues as the Comptroller Gen-
eral may consider.
(b) REPORTS.—The Comptroller General shall issue
such reports on the results of the ongoing study described
in (a) as the Comptroller General shall deem appropriate
and shall notify Congress on a timely basis of significant
problems in the operation of the part D prescription medi-
cine program and the need for legislative adjustments and
improvements.
(c) MISCELLANEOUS STUDIES AND REPORTS.—
(1) STUDY ON METHODS TO ENCOURAGE ADDI-
TIONAL
RESEARCH
ON
BREAKTHROUGH
PHARMA-
CEUTICALS.—
(A) 
IN
GENERAL.—The 
Secretary 
of
Health and Human Services shall seek the ad-
vice of the Secretary of the Treasury on pos-
sible tax and trade law changes to encourage
increased original research on new pharma-
ceutical breakthrough products designed to ad-
dress disease and illness.
(B) REPORT.—Not later than January 1,
2003, the Secretary shall submit to Congress a
report on such study. The report shall include
recommended methods to encourage the phar-
maceutical industry to devote more resources to
research and development of new covered prod-
ucts than it devotes to overhead expenses.
(2) STUDY ON PHARMACEUTICAL SALES PRAC-
TICES
AND
IMPACT
ON
COSTS
AND
QUALITY
OF
CARE.—
(A) 
IN
GENERAL.—The 
Secretary 
of
Health and Human Services shall conduct a
study on the methods used by the pharma-
ceutical industry to advertise and sell to con-
sumers and educate and sell to providers.
(B) REPORT.—Not later than January 1,
2003, the Secretary shall submit to Congress a
report on such study. The report shall include
the estimated direct and indirect costs of the
sales methods used, the quality of the informa-
tion conveyed, and whether such sales efforts
leads (or could lead) to inappropriate pre-
scribing. Such report may include legislative
and regulatory recommendations to encourage
more appropriate education and prescribing
practices.
(3) STUDY ON COST OF PHARMACEUTICAL RE-
SEARCH.—
(A) 
IN
GENERAL.—The 
Secretary 
of
Health and Human Services shall conduct a
study on the costs of, and needs for, the phar-
maceutical research and the role that the tax-
payer provides in encouraging such research.
(B) REPORT.—Not later than January 1,
2003, the Secretary shall submit to Congress a
report on such study. The report shall include
a description of the full-range of taxpayer-as-
sisted programs impacting pharmaceutical re-
search, including tax, trade, government re-
search, and regulatory assistance. The report
may also include legislative and regulatory rec-
ommendations that are designed to ensure that
the taxpayer’s investment in pharmaceutical re-
search results in the availability of pharma-
ceuticals at reasonable prices.
(4) REPORT ON PHARMACEUTICAL PRICES IN
MAJOR FOREIGN NATIONS.—Not later than January
1, 2003, the Secretary of Health and Human Serv-
ices shall submit to Congress a report on the retail
price of major pharmaceutical products in various
developed nations, compared to prices for the same
or similar products in the United States. The report
shall include a description of the principal reasons
for any price differences that may exist.
SEC. 8. MEDIGAP TRANSITION PROVISIONS.
(a) IN GENERAL.—Notwithstanding any other provi-
sion of law, no new medicare supplemental policy that pro-
vides coverage of expenses for prescription drugs may be
issued under section 1882 of the Social Security Act on
or after January 1, 2003, to an individual unless it re-
places a medicare supplemental policy that was issued to
that individual and that provided some coverage of ex-
penses for prescription drugs.
(b) ISSUANCE OF SUBSTITUTE POLICIES IF OBTAIN
PRESCRIPTION DRUG COVERAGE THROUGH MEDICARE.—
(1) IN
GENERAL.—The issuer of a medicare
supplemental policy—
(A) may not deny or condition the issuance
or effectiveness of a medicare supplemental pol-
icy that has a benefit package classified as ‘‘A’’,
‘‘B’’, ‘‘C’’, ‘‘D’’, ‘‘E’’, ‘‘F’’, or ‘‘G’’ (under the
standards established under subsection (p)(2) of
section 1882 of the Social Security Act, 42
U.S.C. 1395ss) and that is offered and is avail-
able for issuance to new enrollees by such
issuer;
(B) may not discriminate in the pricing of
such policy, because of health status, claims ex-
perience, receipt of health care, or medical con-
dition; and
(C) may not impose an exclusion of bene-
fits based on a pre-existing condition under
such policy,
in the case of an individual described in paragraph
(2) who seeks to enroll under the policy not later
than 63 days after the date of the termination of en-
rollment described in such paragraph and who sub-
mits evidence of the date of termination or
disenrollment along with the application for such
medicare supplemental policy.
(2) INDIVIDUAL COVERED.—An individual de-
scribed in this paragraph is an individual who—
(A) enrolls in a prescription drug plan
under part D of title XVIII of the Social Secu-
rity Act; and
(B) at the time of such enrollment was en-
rolled and terminates enrollment in a medicare
supplemental policy which has a benefit pack-
age classified as ‘‘H’’, ‘‘I’’, or ‘‘J’’ under the
standards referred to in paragraph (1)(A) or
terminates enrollment in a policy to which such
standards do not apply but which provides ben-
efits for prescription drugs.
(3) ENFORCEMENT.—The provisions of para-
graph (1) shall be enforced as though they were in-
cluded in section 1882(s) of the Social Security Act
(42 U.S.C. 1395ss(s)).
(4) DEFINITIONS.—For purposes of this sub-
section, the term ‘‘medicare supplemental policy’’
has the meaning given such term in section 1882(g)
of the Social Security Act (42 U.S.C. 1395ss(g)).
SEC. 9. OFFSET FOR CATASTROPHIC PRESCRIPTION MEDI-
CINE BENEFIT.
If the mid-summer 2000 budget estimate prepared by
the Director of the Congressional Budget Office results
in a higher level of projected on-budget surplus over the
ten-fiscal-year period beginning with fiscal year 2001 than
projected on-budget surplus in the estimate prepared by
the Director in March, 2000, there shall be transferred
out of any moneys in the Treasury not otherwise appro-
priated in a fiscal year (beginning with fiscal year 2003)
to the Prescription Medicine Insurance Account (created
in the Federal Supplemental Medical Insurance Trust
Fund established by section 1841 of the Social Security
Act (42 U.S.C. 1395t)) such sums as are necessary to off-
set the costs attributable to the operation of section
1860B(a)(1)(B) of the Social Security Act (as added by
section 3) (relating to catastrophic benefit payment
amounts) in that fiscal year.
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