"Sec. 1   RCW 74.09.200 and 1979 ex.s. c 152 s 1 are each amended to read as follows:
     (1) The legislature finds and declares it to be in the public interest and for the protection of the health and welfare of the residents of the state of Washington that a proper regulatory and inspection program be instituted in connection with the providing of medical, dental, and other health services to recipients of public assistance and medically indigent persons. In order to effectively accomplish such purpose and to assure that the recipient of such services receives such services as are paid for by the state of Washington, the acceptance by the recipient of such services, and by practitioners of reimbursement for performing such services, shall authorize the secretary of the department of social and health services or his designee, to inspect and audit all records in connection with the providing of such services.
     (2) It is the intent of the legislature that the regulatory and inspection program authorized in this section shall include a systematic method to gather data for program improvement.

NEW SECTION.  Sec. 2   A new section is added to chapter 74.09 RCW to read as follows:
     (1) Audits under this chapter of the records of pharmacies licensed under chapter 18.64 RCW are subject to the following:
     (a) An initial audit may not commence earlier than thirty days prior to the date on which written notice of the audit is given to the pharmacy. The notice must be provided to the physical location at which the audit will be conducted and to the principal office or place of business of the pharmacy, if different, and must include the name, office address, and telephone number of any contractor conducting the audit pursuant to a contract with the department. Audit findings resulting from audit work that is commenced before the thirty-day period may not be used in any audit findings;
     (b) An audited pharmacy may use the written records of a hospital, physician, or other authorized pharmacy to validate the audited pharmacy's record; and
     (c) The pharmacy must have at least ninety days from the date on which the draft audit findings were delivered to the pharmacy to respond with additional documentation or other relevant information. Extensions of these time periods shall be granted for good cause.
     (2) This section does not apply to an audit that is based on an investigation for fraudulent or abusive practices under RCW 74.09.210.
     (3) For the purposes of this section, "allowable cost" means a medical cost that is:
     (a) Covered by the state plan and waivers;
     (b) Supported by the medical records indicating that the services were provided and consistent with the medical diagnosis, when special circumstances as required in the billing instructions require such documentation;
     (c) Properly coded; and
     (d) Paid at the rate allowed by the state plan.

NEW SECTION.  Sec. 3   The secretary of the department of social and health services may adopt rules as necessary to implement this act.

NEW SECTION.  Sec. 4   Section 2 of this act applies retroactively to audits commenced by the department of social and health services under chapter 74.09 RCW on or after April 1, 2011.

NEW SECTION.  Sec. 5   If any part of this act is found to be in conflict with federal requirements that are a prescribed condition to the allocation of federal funds to the state, the conflicting part of this act is inoperative solely to the extent of the conflict and with respect to the agencies directly affected, and this finding does not affect the operation of the remainder of this act in its application to the agencies concerned. Rules adopted under this act must meet federal requirements that are a necessary condition to the receipt of federal funds by the state."