AN ACT Relating to pharmacy services; and adding new sections to chapter 74.09 RCW.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

NEW SECTION. Sec. 1. (1) Reimbursement shall be made to pharmacy providers for covered pharmacy services on the basis of product acquisition cost plus a profession fee.

(2) The professional fee assigned to pharmacy providers shall be based upon each individual pharmacy's historical operating costs as determined by analysis of data submitted on an annual cost report. Professional fee determination shall be limited to the lesser of:

(a) The eighty-fifth percentile of allocated costs per prescription for all pharmacies filing a cost report, plus a reasonable profit;

(b) Usual and customary fee charges of each individual pharmacy as determined by a prescription survey addendum to the pharmacy cost report; or

(c) The lowest professional fee multiplied by a factor of 1.075, accepted by each individual pharmacy provider through participation in any pharmacy services program in which partial or total reimbursement is made by a party other than the consumer and in which total reimbursement from participation in any such program comprises five percent or more of the total prescription sales, not including sales for medical equipment and supplies, for the pharmacy during their most recently completed fiscal year.

(3) The agency may elect to further limit the professional fee assignment of individual pharmacy providers through utilization of a multiple regression analysis based on cost study data from all pharmacy cost reports. Individual pharmacy providers with data which exceeds regression analysis norms by a factor greater than 1.0 standard deviations shall be selected for evaluation.

(4) Completed cost reports shall be due on August 1 of each even-numbered year. The effective date for change of professional fees shall be July 1 of each year.

(5) Out-of-state pharmacy providers, new Washington pharmacies, and Washington pharmacies that were in business for less than six months in the cost reporting period shall not be required to file a cost report and shall be assigned a professional fee determined from mean and average cost data for all pharmacies that file a cost report. Once the annual volume of payments to an out-of-state pharmacy provider reaches a substantial level, the filing of a cost report shall be required.

(6) New pharmacy providers resulting from a complete change of ownership shall be assigned an initial professional fee based on cost data from the previous owner's cost report and weighted mean labor costs per prescription for all pharmacy providers that file a cost report. New pharmacies created by an ownership change and pharmacy providers involved in an ownership change shall apply to the agency to participate as a provider of pharmacy services only if the transaction involves a complete change in ownership.

(7) In areas where pharmacy services are not available, an authorized prescriber dispensing prescriptions to program recipients shall be eligible to receive reimbursement for provision of those services after a pharmacy provider number has been issued by the department of social and health services.

(a) The prescriber assigned a pharmacy provider number shall be reimbursed on the basis of product acquisition cost plus a professional fee of one dollar.

(b) Payment shall not apply to injectable drugs not intended for self administration by the patient except as included in the charge for the professional services of the physician.

(8) Reimbursement shall be made to the pharmacy provider only when the covered service has been prescribed by the recipient's attending practitioner.

NEW SECTION. Sec. 2. (1) The cost reports filed by pharmacy providers for professional fee determination shall reflect data which coincides with the immediate fiscal year used for federal income taxes which ends prior to the cost report filing due date, except in those cases where the provider shall file a cost report from the official financial reporting records of the business.

(2) A detailed cost report shall be filed in each even-numbered year and an interim cost report filed in each odd-numbered year. Professional fees determined each year shall include an adjustment for inflation. The initial cost report filed by all pharmacies shall be the detailed report regardless of the year in which it is filed. Pharmacies shall have been in operation for a minimum of six months in the cost reporting period to file a cost report. Failure or refusal by a Washington pharmacy or an out-of-state pharmacy, when required, to file cost reports shall result in assignment to that pharmacy of a professional fee not greater than the lowest professional fee determined for any Washington pharmacy. Pharmacies that elect not to file the pharmacy cost study report shall be required, prior to assignment of a fee to such pharmacies, to submit a prescription survey, in a format designed by the department of social and health services, reflecting their average gross profit per prescription.

(3) Cost study report forms, instructions, and notice of the requirement to file shall be prepared by the department of social and health services and distributed to all pharmacy providers as required.

NEW SECTION. Sec. 3. (1) The principles of cost-related reimbursement require that providers maintain sufficient financial and prescription records to facilitate appropriate cost reporting and professional fee determination. Standardized definition, accounting statistics, record keeping, and reporting practices which are widely accepted in pharmacy practice and related fields shall be adhered to. Significant modifications in these practices and systems shall not be required in order to determine costs pertinent to the principle of cost-related reimbursement.

(2) The pharmacy provider shall keep and make available for review, upon request of the department of social and health services, the supporting records and documents as are necessary to ascertain that the cost-related professional fee determination and program payments are appropriate. These records shall include matters regarding pharmacy ownership and organizational structure, fiscal and prescription agreements, state and federal income tax returns with all supporting documents; drug product, devices and supply purchase invoices, asset acquisition, lease or sale; franchise or management arrangements; pharmacy services charge schedules; income receipts by source and purpose; and records pertaining to all other reported costs of operation on the cost study report. Other records shall be made available as necessary. Pertinent records shall be maintained by the pharmacy provider for five years from the date of filing the corresponding cost report with the agency. Records in support of costs, charges, and payments for services and products are subject to inspection and audit by the department of social and health services. If a pharmacy provider does not maintain adequate records to support cost-related professional fee determination, the assigned professional fee to that provider shall be suspended or reduced to the lowest fee for all participating pharmacy providers that filed a cost report for the period of inadequate records. Program payments to such providers shall be suspended or reduced until the agency is assured that adequate records are maintained.

(3) Cost reports filed by pharmacy providers shall reflect cost data provided in accordance with generally accepted accounting principles, and in adequate detail to permit recasting of the costs derived from the accounts ordinarily kept by the provider to ascertain the costs pertinent to various facets of the total pharmacy operation. The data, including source documentation, shall be accurate for the appropriate reporting period and sufficient to support cost-related professional fee determination.

NEW SECTION. Sec. 4. (1) Allowable costs for cost-related reimbursement and professional fee determination shall be limited to those that arise from arm's-length transactions between unrelated parties. Related parties shall exist when one party of a transaction has the ability to significantly influence another party to the extent that their own separate interests may not be fully pursued.

(a) Costs not related to the provision of pharmacy services shall be disallowed in the computation of the professional fee. Related costs shall be allowed in total, fractionally allocated, or limited in the professional fee computation process per cost finding and allocation techniques employed in the analysis of pharmacy cost reports.

(b) The following costs shall be disallowed, fractionally allocated, or limited in the analysis of cost reports:

(i) Transactions between related parties are disallowed as costs (i.e., nonarm's-length transactions) except that compensation received by owners shall be limited to a reasonable amount and accepted as an allowable cost if the owner actually performs functions directly related to the provision of pharmacy services. The reasonable limitation of an owner's compensation shall take into consideration the costs that would have been incurred to pay a nonowner employee for performance of the duties related to the provision of pharmacy services;

(ii) Costs deemed unreasonable by comparison with similar costs incurred by similar pharmacy providers may be limited or disallowed;

(iii) Noncompetition covenant expenses are not allowable as costs for professional fee determination; and

(iv) Corporate officer's fees shall be considered as owner's compensation and subject to the limitations applicable to owner's compensation.

(c) Nothing in this section precludes application of reasonable limitations on any other specific cost data items as considered appropriate by the department of social and health services.

(2) Audit findings and conclusions per review of pharmacy provider cost reports and subsequent professional fee determinations which reveal overpayment by the agency for pharmacy services shall be subject to refund to the agency by such pharmacy providers. Audit activities which reveal underpayment by the agency to pharmacy providers shall be subject to adjustment payment by the agency to such providers.

(3) Insufficient documentation to support payment for services provided as reflected on billings submitted to the agency by pharmacy providers shall result in suspension or denial of program payments to such provider pending verification of documentation to support their billed charges.

NEW SECTION. Sec. 5. Sections 1 through 4 of this act are each added to chapter 74.09 RCW.