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FDA SHOULD EXEMPT HOSPITAL RETURNS FROM DRUG DIVERSION LAW's RESALE BAN WITHOUT TIME CONSTRAINTS, REGARDLESS OF REASON, REP. DINGELL TELLS AGENCY

Executive Summary

FDA drug diversion regulations should allow wholesalers to re-enter into distribution any pharmaceuticals returned by hospital customers regardless of when the products were first shipped and why they were returned, Rep. Dingell (D-Mich.) urged in a May 22 letter to the agency. Dingell, principal sponsor of the Prescription Drug Marketing Act, urged FDA to revise its Aug. 1 and Nov. 3 draft interpretation of the law "to permit returns by hospitals and other health care entities." Agency regs should provide that "prescription drugs may be returned to the wholesaler or manufacturer from which the hospital or health care entity purchased the prescription drugs without limitation as to time or nature of the return," the congressman said. The agency has said hospital returns are allowable if the cause is misshipment or misorder and if they occur within 10 days of delivery. The House Commerce/Oversight Subcommittee chairman's position has unofficial endorsement of the American Pharmaceutical Association, the American Society of Hospital Pharmacists, and the Pharmaceutical Manufacturers Association. The National Wholesale Druggists Association has withheld its support but hopes to meet with the other groups to work out what constitutes a legitimate return. Subcommittee staff has met with the four associations over the past several months in an effort to reach a consensus on the hospital returns issue. Dingell said FDA must change its current reading of the act "to correct an illogical, inequitable, and wholly unintended interpretation of" the prohibition against hospital resales. He suggested that NWDA is responsible for equating normal returns with legislatively sanctioned hospital resales. "NWDA has singularly interpreted the statutory language banning resales by hospitals and health care entities in a manner which redounds to their economic benefit but does a disservice to the overall interest of the pharmaceutical industry, pharmacists and to the public." Permitting normal returns, the congressman said, "will restore the competitive balance that existed prior to the self-serving interpretation of the term resale by the NWDA, as well as provide further assurance that FDA and other regulators can distinguish legitimate returns from the diversion of the goods into the secondary market." The act is intended to prohibit only for-profit resales of drugs by hospitals, the legislation's primary author contended. The committee report on the bill makes clear that the committee intended to prohibit health care entities from reselling discounted products "at a profit," Dingell said. The report explains that when hospitals receive discounts "and then resell those drugs at a profit, they are unfairly competing with wholesalers and retailers who cannot obtain such a favorable price. Such resales may defraud manufacturers, who are led to believe that the drugs are for the use of the health care entity," the letter states. On the other hand, Dingell continued, when Congress drafted the act, although it "was clearly concerned about" nonprofit institutions' resales, it "took care not to interfere with legitimate business operations of hospitals and health care entities by listing several important exceptions to the prohibition against resales." The congressman noted that "there was no specific provision made in the statute to allow hospitals to return overstocks, misorders, or other resalable merchandise to wholesalers or manufacturers because it was not thought to be necessary. Such returns are not resales for profit," Dingell said. "Similarly, there is no specific allowance for 'returns of expired pharmaceuticals' or even 'recalls' in the statute. However,' he maintained, "it is clear that the statute does not prohibit such returns by hospitals or health care entities to wholesalers or manufacturers. In sum, the argument by the NWDA that returns are the type of resale contemplated by the committee stands logic on its head." Dingell acknowledged that there may be a regulatory need "to assure that 'returns' are really 'returns.'" However, he said, recordkeeping requirements are sufficient to ensure that hospitals do not abuse their right to make normal business returns. "Clearly, FDA can require appropriate recordkeeping to assure that the resale prohibitions of the PDMA are enforceable," he said. Besides requiring that hospitals return products to the supplier that provided them, Dingell also recommended that the institutions "fill out the existing credit memo forms currently used as part of standard business practice, which specifies the hospital or health care entity, the wholesaler, the date, the quantity and a description of the product." In addition, he continued, "when products are returned to the wholesaler by the hospital, they may be returned to the wholesaler's stock, destroyed or returned to the manufacturer consistent with the policy of the wholesaler and the manufacturer. The wholesaler will notify the manufacturer if a return is a chargeback or if expired goods are received." Dingell asked for an agency response "within three weeks." Notwithstanding the position of Dingell and three key associations, FDA lawyers heretofore have maintained that the agency's options are relatively limited. The agency's Compliance Office counsel Richard Arkin pointed out at a meeting of the Food & Drug Law Institute that the act clearly bans hospital resales and that "a return of goods for credit is a sale under the law." On the other hand, Arkin added that FDA would like to allow for "legitimate" returns; the law makes no distinction among returns. In a May 26 statement, NWDA argued that its concerns are not rooted in an aversion to returns. "Handling or facilitating returns (from any customer) is an appropriate value-added service that wholesalers render for their customers and suppliers. NWDA is specifically not trying to regulate its members' way out of the returns business, and any statement to the contrary is incorrect." The association contends that all but an estimated 0.5% of hospital returns should be exempt from the act's resales prohibition. However, to meet the association's standard for a "legitimate" return, hospital and manufacturer documentation would be required. All products that are not preferentially priced should be returnable without restriction, the association said, reasoning that "Congress did not intend to restrict the return of nonpreferentially priced products." In addition, even if preferentially priced, products misordered or misshipped are legitimate returns and should be permitted if hospitals notify the distributors of the mistake "within a reasonable time," the association continued. Finally, hospital returns of overstocked or expired products, regardless of time since delivery, should be allowed if the hospital notifies and receives authorization from the manufacturer. "Based on these positions, only an estimated 0.5% of all hospital drug purchases would be restricted" under the law if returned to wholesalers, the association said. NWDA's concern appears to be that the impediments to wholesaler diversion be as formidable as possible. It argues that if distributors are responsible for documenting hospital returns of discounted products, it would be easy not to report the return, resell the products, and receive a chargeback from the manufacturer. Nonetheless, hospital pharmacists and PMA prefer Dingell's approach because it lacks the reporting and authorization requirements.
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