I 
108TH CONGRESS 
1ST SESSION H. R. 1045
To amend title XVIII of the Social Security Act to provide for coverage 
of outpatient prescription drugs under part B of the Medicare Program, 
and for other purposes. 
IN THE HOUSE OF REPRESENTATIVES 
MARCH 3, 2003
Mr. ENGEL introduced the following bill; which was referred to the Committee 
on Energy and Commerce, and in addition to the Committee on Ways 
and Means, for a period to be subsequently determined by the Speaker, 
in each case for consideration of such provisions as fall within the juris-
diction of the committee concerned 
A BILL 
To amend title XVIII of the Social Security Act to provide 
for coverage of outpatient prescription drugs under part 
B of the Medicare Program, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Medicare Outpatient 
Prescription Drug Coverage Act of 2003’’.
SEC. 2. MEDICARE COVERAGE OF OUTPATIENT PRESCRIP-
TION DRUGS. 
(a) 
DESCRIPTION
OF
COVERED
OUTPATIENT 
DRUGS.—
(1) COVERAGE.—Section 1861(s)(2)(J) of the 
Social Security Act (42 U.S.C. 1395x(s)(2)(J)) is 
amended to read as follows: 
‘‘(J) covered outpatient drugs (as defined in 
subsection (t)(2));’’. 
(2) DRUGS DEFINED.—Section 1861(t) of such 
Act (42 U.S.C. 1395x(t)) is amended—
(A) in the heading, by adding at the end 
the following: ‘‘; Covered Outpatient Drugs’’; 
(B) in paragraph (1)—
(i) by striking ‘‘paragraph (2)’’ and 
inserting ‘‘the succeeding paragraphs of 
this subsection’’, and 
(ii) by striking the period at the end 
and inserting ‘‘, but only if used for a 
medically accepted indication (as described 
in paragraph (4)).’’; and 
(C) by striking paragraph (2) and insert-
ing 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 med-
ical 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 Sec-
retary 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 pre-
scribed, recommended, or suggested in its label-
ing; 
‘‘(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.
(i) in each of subparagraphs (A) and (B), 
by striking ‘‘(including drugs’’ and all that fol-
lows through ‘‘patient)’’; and
(ii) by striking subparagraphs (G), (I), 
(O), (Q), and (T). 
(B) Effective January 1, 2005, section 1861 of 
such Act (42 U.S.C. 1395x) is amended by striking 
the subsection (kk). 
(C) Effective January 1, 2005, section 1881(b) 
of such Act (42 U.S.C. 1395rr(b)) is amended—
(i) in the first sentence of paragraph (1)—
(I) by striking ‘‘, (B)’’ and inserting 
‘‘and (B)’’; and 
(II) by striking ‘‘, and (C)’’ and all 
that follows and inserting a period; and 
(ii) in paragraph (11)—
(I) by striking ‘‘(11)(A)’’ and insert-
ing ‘‘(11)’’; and 
(II) by striking subparagraphs (B) 
and (C). 
(b) DEDUCTIBLE
AND PAYMENT AMOUNTS.—(1) 
Section 1833(a)(1) of such Act (42 U.S.C. 1395l(a)(1)) 
is amended—
(A) by striking ‘‘and (U)’’ and inserting ‘‘(U)’’; 
and
(B) by striking the semicolon at the end and in-
serting the following ‘‘, and (V) with respect to ex-
penses incurred for covered outpatient drugs, the 
amounts paid shall be the amounts determined 
under section 1834(e)(2);’’. 
(2) Section 1833(a)(2) of such Act (42 U.S.C. 
1395l(a)(2)) is amended—
(A) by inserting ‘‘(other than covered out-
patient drugs)’’ after ‘‘(2) in the case of services’’; 
and 
(B) by striking ‘‘(other than a covered 
osteoporosis drug) (as defined in section 1861(kk))’’. 
(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 striking ‘‘ (other than a 
covered osteoporosis drug (as defined in section 
1861(kk)))’’. 
(4) Section 1834 of such Act (42 U.S.C. 1395m) is 
amended by inserting after subsection (d) the following 
new subsection: 
‘‘(e) 
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(u)(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 indi-
vidual (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) 2005 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 
a 
Medicare+Choice organization under part C, an 
organization under a reasonable cost reimburse-
ment contract under section 1876, and in the 
case of an organization receiving payment 
under section 1833(a)(1)(A) and providing cov-
erage of covered outpatient drugs, the Secretary 
shall provide for an appropriate adjustment in 
the payment amounts otherwise made to reflect 
the aggregate increase in payments that would 
otherwise 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
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, 2005), 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 2005, 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. 
‘‘(v) ADJUSTMENT FOR GEOGRAPHIC 
VARIATIONS
IN
COSTS.—The Secretary 
shall adjust the payment limits under this 
paragraph to take account of limitations 
on the availability of drug products and 
variations among regions in the average
wholesale prices for a drug product, using 
an appropriate index as determined by the 
Secretary.
‘‘(4) ADMINISTRATIVE ALLOWANCE FOR PUR-
POSES OF PAYMENT LIMITS.—
‘‘(A) IN GENERAL.—Except as provided in 
subparagraph (B), for drugs dispensed in—
‘‘(i) 2005, the administrative allow-
ance under this paragraph is—
‘‘(I) $5 for drugs dispensed by a 
participating pharmacy, or 
‘‘(II) $3 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 TOWARD 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), 
a 
Medicare+Choice plan under part C, or under 
section 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 
toward 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 a Medicare+Choice 
organization under part C, 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 toward 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 a Medicare+Choice organization
under part C, or 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 a Medicare+Choice organization under part 
C, 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 2005), 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 1999) with the semiannual average increase 
in such prices and charges during the 5 years 
beginning with 1993.
‘‘(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 2004 and 2005
and in May of each succeeding year, providing 
the information compiled under subparagraph 
(A). For each such report submitted after 
2006, 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 bio-
equivalence problem or, if they do 
present such a problem, are shown to 
meet an appropriate standard of bio-
equivalence.
‘‘(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 
issued 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 partici-
pating pharmacy (as defined in subsection 
(u)(1))’’; 
(B) in subsection (h)(4), by adding at the 
end the following: ‘‘In publishing directories 
under this paragraph, the Secretary shall pro-
vide for separate directories (wherever appro-
priate) for participating pharmacies.’’; and 
(C) by inserting after subsection (t) the 
following new subsection: 
‘‘(u)(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, 2005, 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(e)(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, a 
Medicare+Choice organization under part C, 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(e)(3)(C)(ii). 
Nothing in this paragraph shall be construed as requiring 
a pharmacy operated by a Medicare+Choice organization
under part C, 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, 2005, 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) in paragraph (2)(C), by inserting ‘‘or 
to be a participating pharmacy under section 
1842(u)’’ after ‘‘1842(h)(1)’’; 
(B) by striking ‘‘, or’’ at the end of para-
graph (6); 
(C) by adding ‘‘or’’ at the end of para-
graph (7); and 
(D) by inserting after paragraph (7) the 
following new paragraph: 
‘‘(8) in the case of a participating or non-
participating 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(e)(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) re-
spectively; 
(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) respec-
tively;
(4) by redesignating paragraphs (1) and (2) as 
subparagraphs (A) and (B) respectively; 
(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 (u)(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)) is amended—
(A) by striking ‘‘and’’ at the end of sub-
paragraph (I);
(B) by redesignating subparagraph (L) as 
subparagraph (J); and 
(C) 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 (u)(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(e)(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 (u)(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)) 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 fol-
lowing 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 (u)(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 subsections (e)(2), (h)(1), and 
(h)(2) of section 1153 of such Act (42 U.S.C. 
1320c–2) shall apply to such activities in the 
same manner as they apply to contracts with 
peer review organizations, instead of the re-
quirements of the second and third sentences of 
section 1842(b)(2)(A) of such Act (42 U.S.C. 
1395u(b)(2)(A)). 
(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 (u)(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 (42 U.S.C. 1395u(h)(3)) shall not 
apply to covered outpatient drugs (other than drugs 
described in section 1861(s)(2)(J) of such Act (42 
U.S.C. 1395x(s)(2)(J)) as of the date of the enact-
ment of this Act) dispensed before January 1, 2006. 
(5) BATCH PROMPT PROCESSING OF CLAIMS.—
Section 1842(c) of such Act (42 U.S.C. 1395u(c)), 
is amended—
(A) by redesignating paragraph (6) as 
paragraph (7); 
(B) in paragraphs (2)(A) and (3)(A), by 
striking ‘‘Each’’ and inserting ‘‘Except as pro-
vided in paragraph (6), each’’; and 
(C) by inserting after paragraph (5) 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(e),’’ 
after 
‘‘1833(b),’’; and 
(B) by inserting ‘‘and in the case of cov-
ered outpatient drugs, applicable coinsurance 
percent (specified in section 1834(e)(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 adding at the end the 
following new section: 
‘‘PRESCRIPTION DRUG PAYMENT REVIEW COMMISSION 
‘‘SEC. 1849. (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).
‘‘(2) The Commission shall consist of 11 individuals. 
Members of the Commission shall first be appointed by 
no later than January 1, 2004, for a term of 3 years, ex-
cept that the Director may provide initially for such short-
er terms as will ensure that (on a continuing basis) the 
terms of no more than 4 members expire in any one year. 
‘‘(3) The membership of the Commission shall in-
clude recognized experts in the fields of health care eco-
nomics, medicine, pharmacology, pharmacy, and prescrip-
tion drug reimbursement, as well as at least one individual 
who is a medicare beneficiary. 
‘‘(b)(1) The Commission shall submit to Congress an 
annual report no later than May 1 of each year, beginning 
with 2005, concerning methods of determining payment 
for covered outpatient drugs under this part. 
‘‘(2) Such report, in 2006 and thereafter, shall in-
clude, with respect to the previous year, information on—
‘‘(A) increases in manufacturers’ prices for cov-
ered outpatient drugs and in charges of pharmacists 
for covered outpatient drugs, 
‘‘(B) the level of utilization of covered out-
patient drugs by medicare beneficiaries, and 
‘‘(C) administrative costs relating to covered 
outpatient drugs.
‘‘(c) The following provisions of section 1805 shall 
apply to the Commission in the same manner as they 
apply to the Medicare Payment Advisory Commission: 
‘‘(1) Subsection (c)(4) (relating to compensa-
tion of members). 
‘‘(2) Subsection (d) (relating to staffing and ad-
ministration). 
‘‘(3) Subsection (e) (relating to powers of the 
Commission generally). 
‘‘(4) Subsection (f)(1) (relating to requests for 
appropriations). 
‘‘(d) There are authorized to be appropriated such 
sums as may be necessary to carry out the provisions of 
this section. Such sums shall be payable from the Federal 
Supplementary Medical Insurance Trust Fund.’’. 
(i) DEVELOPMENT OF STANDARD MEDICARE CLAIMS 
FORM.—
(1) The Secretary shall develop, in consultation 
with representatives of pharmacies and other inter-
ested individuals, a standard claims form (and a 
standard electronic claims format) to be used in re-
quests for payment for covered outpatient drugs 
under the medicare program and other third-party 
payors.