Federal Register Vol. 82, No.3,

On January 25, 2016, Cranfield Aerospace Limited (CAL) applied for a supplemental type certificate to install winglets on the Cessna Aircraft Company (Cessna) model 525. The Cessna model 525 twin turbofan engine airplane is certified in the normal category for eight seats, including a pilot, a maximum gross weight of 10,700 pounds, and a maximum altitude of 41,000 feet mean sea level.

Special conditions have been applied on past 14 CFR part 25 airplane programs in order to consider the effects of systems on structures. The regulatory authorities and industry developed standardized criteria in the Aviation Rulemaking Advisory Committee (ARAC) forum based on the criteria defined in Advisory Circular 25.672-1, dated November 15, 1983. The ARAC recommendations have been incorporated in the European Aviation Safety Agency Certification Specifications (CS) 25.302 and CS 25, appendix K. The special conditions used for part 25 airplane programs, can be applied to part 23 airplane programs in order to require consideration of the effects of systems on structures. However, some modifications to the part 25 special conditions are necessary to address differences between parts 23 and 25 as well as differences between parts 91 and 121 operating environments.

Winglets increase aerodynamic efficiency. However, winglets also increase wing design static loads, increase the severity of the wing fatigue spectra, and alter the wing fatigue stress ratio, which under limit gust and maneuvering loads factors, may exceed the certificated wing design limits. The addition of the Tamarack Active Technology Load Alleviation System (ATLAS) mitigates the winglet's adverse structural effects by reducing the aerodynamic effectiveness of the winglet when ATLAS senses gust and maneuver loads above a predetermined threshold.

The ATLAS functions as a load-relief system. This is accomplished by measuring airplane loading via an accelerometer and moving an aileron-like device called a Tamarack Active Control Surface (TACS) that reduces lift at the tip of the wing. The TACS are located outboard and adjacent to the left and right aileron control surfaces. The TACS movement reduces lift at the tip of the wing, resulting in the wing spanwise center of pressure moving inboard, thus reducing bending stresses along the wing span. Because the ATLAS compensates for the increased wing root bending at elevated load factors, the overall effect of this modification is that the required reinforcement of the existing Cessna wing structure due to the winglet installation is reduced. The applicable airworthiness regulations do not contain adequate or appropriate safety standards for this design feature.

The ATLAS is not a primary flight control system, a trim device, or a wing flap. However, several regulations under Part 23, Subpart D—Design and Construction—Control Systems, have applicability to ATLAS, which might otherwise be considered “Not Applicable” under a strict interpretation of the regulations. These Control System regulations include §§ 23.672, 23.675, 23.677, 23.681, 23.683, 23.685, 23.693, 23.697, and 23.701.

An airplane designed with a load-relief system must provide an equivalent level of safety to an airplane with similar characteristics designed without a load-relief system. In the following special conditions, an equivalent level of safety is provided by relating the required structural safety factor to the probability of load-relief system failure and the probability of exceeding the frequency of design limit and ultimate loads.

These special conditions address several issues with the operation and failure of the load-relief system. These issues include the structural requirements for the system in the fully operational state; evaluation of the effects of system failure, both at the moment of failure and continued safe flight and landing with the failure annunciated to the pilot; and the potential for failure of the failure monitoring/pilot annunciation function.

The structural requirements for the load-relief system in the fully operational state are stated in special condition 2(e) of these special conditions. In this case, the structure must meet the full requirements of part 23, subparts C and D with full credit given for the effects of the load-relief system.

In the event of a load-relief system failure in-flight, the effects on the structure at the moment of failure must be considered as described in special condition 2(f)(l) of these special conditions. These effects include, but are not limited to the structural loads induced by a hard-over failure of the load-relief control surface and oscillatory system failures that may excite the structural dynamic modes. In evaluating these effects, pilot corrective actions may be considered and the airplane may be assumed to be in 1g (gravitation force) flight prior to the load-relief system failure. These special conditions allows credit, in the form of reduced structural factors of safety, based on the probability of failure of the load-relief system. Effects of an in-flight failure on flutter and fatigue and damage tolerance must also be evaluated.

Following the initial in-flight failure, the airplane must be capable of continued safe flight and landing. Special condition 2(f)(2) in these special conditions assumes that a properly functioning, monitoring, and annunciating system has alerted the pilot to the load-relief failure. Since the pilot has been made aware of the load-relief failure, appropriate flight limitations, including speed restrictions, may be considered when evaluating structural loads, flutter, and fatigue and damage tolerance. These special conditions allows credit, in the form of reduced structural factors of safety, based on the probability of failure of the load-relief system and the flight time remaining on the failure flight.

Special condition 2(g) of these special conditions addresses the failure of the load-relief system to annunciate a failure to the pilot. These special conditions address this concern with maintenance actions and requirements for monitoring and annunciation systems.

These special conditions have been modified from previous, similar part 25 special conditions because of the differences between parts 23 and 25 as well as to address the part 91 operating and maintenance environment. Paragraph (c)(3) of the part 25 special condition 1 is removed from these special conditions. Special condition 2(h) of these special conditions is modified to require a ferry permit for additional flights after an annunciated failure or obvious system failure.

Under the provisions of § 21.101, Cranfield Aerospace Limited must show that the Cessna model 525, as changed, continues to meet the applicable provisions of the regulations incorporated by reference in Type Certificate No. A1WI, revision 24, or the applicable regulations in effect on the date of application for the change. The regulations incorporated by reference in the type certificate are commonly referred to as the “original type certification basis.” The regulations incorporated by reference in Type Certificate No. A1WI, revision 24 are 14 CFR part 23 effective February 1, 1965, amendments 23-1 through 23-38 and 23-40.

If the Administrator finds the applicable airworthiness regulations (i.e., 14 CFR part 23) do not contain adequate or appropriate safety standards for the Cessna model 525 because of a novel or unusual design feature, special conditions are prescribed under the provisions of § 21.16.

In addition to the applicable airworthiness regulations and special conditions, the Cessna 525 must comply with the fuel vent and exhaust emission requirements of 14 CFR part 34 and the noise certification requirements of 14 CFR part 36.

The FAA issues special conditions, as defined in 14 CFR 11.19, in accordance with § 11.38, and they become part of the type-certification basis under § 21.101.

Special conditions are initially applicable to the model for which they are issued. Should the applicant apply for a supplemental type certificate to modify any other model included on the same type certificate to incorporate the same or similar novel or unusual design feature, the FAA would apply these special conditions to the other model under § 21.101.

The Cessna model 525 will incorporate the following novel or unusual design features: Cranfield winglets with a Tamarack Active Technology Load Alleviation System.

For airplanes equipped with systems that affect structural performance, either directly or as a result of a failure or malfunction, the applicant must take into account the influence of these systems and their failure conditions when showing compliance with the requirements of part 23, subparts C and D.

The applicant must use the following criteria for showing compliance with these special conditions for airplanes equipped with flight control systems, autopilots, stability augmentation systems, load alleviation systems, flutter control systems, fuel management systems, and other systems that either directly or as a result of failure or malfunction affect structural performance. If these special conditions are used for other systems, it may be necessary to adapt the criteria to the specific system.

Notice of proposed special conditions No. 23-16-03-SC for the Cessna model 525 airplane was published in the Federal Register on November 22, 2016 (81 FR 83737). No comments were received, and the special conditions are adopted as proposed.

As discussed above, these special conditions are applicable to the Cessna model 525. Should Cranfield Aerospace Limited apply at a later date for a supplemental type certificate to modify any other model included on A1WI, revision 24 to incorporate the same novel or unusual design feature, the FAA would apply these special conditions to that model as well.

Under standard practice, the effective date of final special conditions would be 30 days after the date of publication in the Federal Register; however, as the supplemental type certification date for the Cessna model 525 is imminent, the FAA finds that good cause exists to make these special conditions effective upon issuance.

This action affects only certain novel or unusual design features on one model of airplanes. It is not a rule of general applicability and it affects only the applicant who applied to the FAA for approval of these features on the airplane.

Accordingly, pursuant to the authority delegated to me by the Administrator, the following special conditions are issued as part of the type certification basis for Cessna Aircraft Company 525 airplanes modified by Cranfield Aerospace Limited.

The load alleviation system must comply with the following:

(a) A warning, which is clearly distinguishable to the pilot under expected flight conditions without requiring the pilot's attention, must be provided for any failure in the load alleviation system or in any other automatic system that could result in an unsafe condition if the pilot was not aware of the failure. Warning systems must not activate the control system.

(b) The design of the load alleviation system or of any other automatic system must permit initial counteraction of failures without requiring exceptional pilot skill or strength, by either the deactivation of the system or a failed portion thereof, or by overriding the failure by movement of the flight controls in the normal sense.

(1) If deactivation of the system is used to counteract failures, the control for this initial counteraction must be readily accessible to each pilot while operating the control wheel and thrust control levers.

(2) If overriding the failure by movement of the flight controls is used, the override capability must be operationally demonstrated.

(c) It must be shown that, after any single failure of the load alleviation system, the airplane must be safely controllable when the failure or malfunction occurs at any speed or altitude within the approved operating limitations that is critical for the type of failure being considered;

(d) It must be shown that, while the system is active or after any single failure of the load alleviation system—

(1) The controllability and maneuverability requirements of part 23, subpart D, are met within a practical operational flight envelope (e.g., speed, altitude, normal acceleration, and airplane configuration) that is described in the Airplane Flight Manual (AFM); and

(2) The trim, stability, and stall characteristics are not impaired below a level needed to permit continued safe flight and landing.

(a) Proper precautions must be taken to prevent inadvertent or improper operation of the load alleviation system. It must be demonstrated that with the load alleviation system operating throughout its operational range, a pilot of average strength and skill level is able to continue safe flight with no objectionable increased workload.

(b) The load alleviation system must be designed so that, when any one connecting or transmitting element in the primary flight control system fails, adequate control for safe flight and landing is available.

(c) The load alleviation system must be irreversible unless the control surface is properly balanced and has no unsafe flutter characteristics. The system must have adequate rigidity and reliability in the portion of the system from the control surface to the attachment of the irreversible unit to the airplane structure.

(d) It must be demonstrated the airplane is safely controllable and a pilot can perform all maneuvers and operations necessary to affect a safe landing following any load alleviation system runaway not shown to be extremely improbable, allowing for appropriate time delay after pilot recognition of the system runaway. The demonstration must be conducted at critical airplane weights and center of gravity positions.

(a) It must be shown by operation tests that, when the flight control system and the load alleviation systems are operated and loaded as prescribed in paragraph (c) of this section, the flight control system and load alleviation systems are free from—

(1) Jamming;

(2) Excessive friction; and

(3) Excessive deflection.

(b) The operation tests in paragraph (a) of this section must also show the load alleviation system and associated surfaces do not restrict or prevent aileron control surface movements, or cause any adverse response of the ailerons, under the loading prescribed in paragraph (c) of this section that would prevent continued safe flight and landing.

(c) The prescribed test loads are for the entire load alleviation and flight control systems, loads corresponding to the limit air loads on the appropriate surfaces.

(a) Each detail of the load alleviation system and related moveable surfaces must be designed and installed to prevent jamming, chafing, and interference from cargo, passengers, loose objects, or the freezing of moisture.

(b) There must be means in the cockpit to prevent the entry of foreign objects into places where they would jam any one connecting or transmitting element of the load alleviation system.

(c) Each element of the load alleviation system must have design features, or must be distinctively and permanently marked, to minimize the possibility of incorrect assembly that could result in malfunctioning of the control system.

(a) The load alleviation control surface must be designed so that during normal operation, when the surface has been placed in any position, it will not move from that position unless the control is adjusted or is moved by the operation of a load alleviation system.

(b) The rate of movement of the control surface in response to the load alleviation system controls must give satisfactory flight and performance characteristics under steady or changing conditions of airspeed, engine power, attitude, flap configuration, speedbrake position, and during landing gear extension and retraction.

(a) The load alleviation system and related movable surfaces as a system must—

(1) Be synchronized by a mechanical interconnection between the movable surfaces or by an approved equivalent means; or

(2) Be designed so the occurrence of any failure of the system that would result in an unsafe flight characteristic of the airplane is extremely improbable; or

(b) The airplane must be shown to have safe flight characteristics with any combination of extreme positions of individual movable surfaces.

(c) If an interconnection is used in multiengine airplanes, it must be designed to account for unsymmetrical loads resulting from flight with the engines on one side of the plane of symmetry inoperative and the remaining engines at takeoff power. For single-engine airplanes, and multiengine airplanes with no slipstream effects on the load alleviation system, it may be assumed that 100 percent of the critical air load acts on one side and 70 percent on the other.

The load alleviation system must comply with §§ 23.675, 23.681, and 23.693 as written and no unique special condition will be required for these regulations.

If applicable, other control systems used on the Cessna 525 may require a showing of compliance to §§ 23.672, 23.675, 23.677, 23.681, 23.683, 23.685, 23.693, 23.697 and 23.701 as written for this STC project.

(a) The criteria defined herein only address the direct structural consequences of the system responses and performances and cannot be considered in isolation but should be included in the overall safety evaluation of the airplane. These criteria may in some instances duplicate standards already established for this evaluation. These criteria are only applicable to structure whose failure could prevent continued safe flight and landing. Specific criteria that define acceptable limits on handling characteristics or stability requirements when operating in the system degraded or inoperative mode are not provided in this special condition.

(b) Depending upon the specific characteristics of the airplane, additional studies may be required that go beyond the criteria provided in this special condition in order to demonstrate the capability of the airplane to meet other realistic conditions such as alternative gust or maneuver descriptions for an airplane equipped with a load alleviation system.

(c) The following definitions are applicable to this special condition.

(1) Structural performance: Capability of the airplane to meet the structural requirements of 14 CFR part 23.

(2) Flight limitations: Limitations that can be applied to the airplane flight conditions following an in-flight occurrence and that are included in the flight manual (e.g., speed limitations, avoidance of severe weather conditions, etc.).

(3) [Reserved]

(4) Probabilistic terms: The probabilistic terms (probable, improbable, extremely improbable) used in this special condition are the same as those used in § 23.1309. For the purposes of this special condition, extremely improbable for normal, utility, and acrobatic category airplanes is defined as 10− 8 per hour. For commuter category airplanes, extremely improbable is defined as 10− 9 per hour.

(5) Failure condition: The term failure condition is the same as that used in § 23.1309, however this special condition applies only to system failure conditions that affect the structural performance of the airplane (e.g., system failure conditions that induce loads, change the response of the airplane to inputs such as gusts or pilot actions, or lower flutter margins).

(d) General. The following criteria (paragraphs (e) through (i)) will be used in determining the influence of a system and its failure conditions on the airplane structure.

(e) System fully operative. With the system fully operative, the following apply:

(1) Limit loads must be derived in all normal operating configurations of the system from all the limit conditions specified in subpart C (or defined by special condition or equivalent level of safety in lieu of those specified in subpart C), taking into account any special behavior of such a system or associated functions or any effect on the structural performance of the airplane that may occur up to the limit loads. In particular, any significant nonlinearity (rate of displacement of control surface, thresholds or any other system nonlinearities) must be accounted for in a realistic or conservative way when deriving limit loads from limit conditions.

(2) The airplane must meet the strength requirements of part 23 (static strength and residual strength for failsafe or damage tolerant structure), using the specified factors to derive ultimate loads from the limit loads defined above. The effect of nonlinearities must be investigated beyond limit conditions to ensure the behavior of the system presents no anomaly compared to the behavior below limit conditions. However, conditions beyond limit conditions need not be considered when it can be shown that the airplane has design features that will not allow it to exceed those limit conditions.

(3) The airplane must meet the aeroelastic stability requirements of § 23.629.

(f) System in the failure condition. For any system failure condition not shown to be extremely improbable, the following apply:

(1) At the time of occurrence. Starting from 1-g level flight conditions, a realistic scenario, including pilot corrective actions, must be established to determine the loads occurring at the time of failure and immediately after failure.

(i) For static strength substantiation, these loads, multiplied by an appropriate factor of safety that is related to the probability of occurrence of the failure, are ultimate loads to be considered for design. The factor of safety is defined in figure 1.

(ii) For residual strength substantiation, the airplane must be able to withstand two thirds of the ultimate loads defined in subparagraph (f)(1)(i).

(iii) For pressurized cabins, these loads must be combined with the normal operating differential pressure.

(iv) Freedom from aeroelastic instability must be shown up to the speeds defined in § 23.629(f). For failure conditions that result in speeds beyond VD/MD, freedom from aeroelastic instability must be shown to increased speeds, so that the margins intended by § 23.629(f) are maintained.

(v) Failures of the system that result in forced structural vibrations (oscillatory failures) must not produce loads that could result in detrimental deformation of primary structure.

(2) For the continuation of the flight. For the airplane, in the system failed state and considering any appropriate reconfiguration and flight limitations, the following apply:

(i) The loads derived from the following conditions (or defined by special condition or equivalent level of safety in lieu of the following conditions) at speeds up to VC/MC, or the speed limitation prescribed for the remainder of the flight, must be determined:

(A) The limit symmetrical maneuvering conditions specified in §§ 23.321, 23.331, 23.333, 23.345, 23.421, 23.423, and 23.445.

(B) The limit gust and turbulence conditions specified in §§ 23.341, 23.345, 23.425, 23.443, and 23.445.

(C) The limit rolling conditions specified in § 23.349 and the limit unsymmetrical conditions specified in §§ 23.347, 23.427, and 23.445.

(D) The limit yaw maneuvering conditions specified in §§ 23.351, 23.441, and 23.445.

(E) The limit ground loading conditions specified in §§ 23.473 and 23.493.

(ii) For static strength substantiation, each part of the structure must be able to withstand the loads in paragraph (f)(2)(i) of this special condition multiplied by a factor of safety depending on the probability of being in this failure state. The factor of safety is defined in figure 2.

(iii) For residual strength substantiation, the airplane must be able to withstand two thirds of the ultimate loads defined in paragraph (f)(2)(ii) of this special condition. For pressurized cabins, these loads must be combined with the normal operating pressure differential.

(iv) If the loads induced by the failure condition have a significant effect on fatigue or damage tolerance then their effects must be taken into account.

(v) Freedom from aeroelastic instability must be shown up to a speed determined from figure 3. Flutter clearance speeds V′ and V″ may be based on the speed limitation specified for the remainder of the flight using the margins defined by § 23.629.

(vi) Freedom from aeroelastic instability must also be shown up to V′ in figure 3 above, for any probable system failure condition combined with any damage required or selected for investigation by §§ 23.571 through 23.574.

(3) Consideration of certain failure conditions may be required by other sections of 14 CFR part 23 regardless of calculated system reliability. Where analysis shows the probability of these failure conditions to be less than 10− 8 for normal, utility, or acrobatic category airplanes or less than 10− 9 for commuter category airplanes, criteria other than those specified in this paragraph may be used for structural substantiation to show continued safe flight and landing.

(g) Failure indications. For system failure detection and indication, the following apply:

(1) The system must be checked for failure conditions, not extremely improbable, that degrade the structural capability below the level required by part 23 or significantly reduce the reliability of the remaining system. As far as reasonably practicable, the flightcrew must be made aware of these failures before flight. Certain elements of the control system, such as mechanical and hydraulic components, may use special periodic inspections, and electronic components may use daily checks, in lieu of detection and indication systems to achieve the objective of this requirement. These certification maintenance requirements must be limited to components that are not readily detectable by normal detection and indication systems and where service history shows that inspections will provide an adequate level of safety.

(2) The existence of any failure condition, not extremely improbable, during flight that could significantly affect the structural capability of the airplane and for which the associated reduction in airworthiness can be minimized by suitable flight limitations, must be signaled to the flightcrew. The probability of not annunciating these failure conditions must be extremely improbable (unannunciated failure). For example, failure conditions that result in a factor of safety between the airplane strength and the loads of subpart C below 1.25, or flutter margins below V″, must be signaled to the flightcrew during flight.

(h) Further flights with known load-relief system failure. Additional flights after an annunciated failure of the load-relief system or obvious failure of the load-relief system are permitted with a ferry permit only. In these cases, ferry permits may be issued to allow moving the airplane to an appropriate maintenance facility. Additional flights are defined as, further flights after landing on a flight where an annunciated or obvious failure of the load-relief system has occurred or after an annunciated or obvious failure of the load-relief system occurs during preflight preparation.

(i) Fatigue and damage tolerance. If any system failure would have a significant effect on the fatigue or damage evaluations required in §§ 23.571 through 23.574, then these effects must be taken into account.

Discussion

We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 to supersede AD 2014-26-08, Amendment 39-18059 (80 FR 3866, January 26, 2015) (“AD 2014-26-08”). AD 2014-26-08 applied to all Airbus Model A330-200, -200F, and -300 series airplanes. The NPRM published in the Federal Register on September 12, 2016 (81 FR 62676) (“the NPRM”). The NPRM was prompted by a determination that more restrictive maintenance instructions and airworthiness limitations are necessary. The NPRM proposed to require revising the maintenance or inspection program to incorporate new maintenance requirements and airworthiness limitations. The NPRM also proposed to remove certain airplanes from the applicability. We are issuing this AD to prevent safety-significant latent failures that would, in combination with one or more other specific failures or events, result in a hazardous or catastrophic failure condition.

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA Airworthiness Directive 2016-0066, dated April 6, 2016 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for all Model A330-200, -200F, and -300 series airplanes. The MCAI states:

You may examine the MCAI in the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-9057.

We gave the public the opportunity to participate in developing this AD. We received no comments on the NPRM or on the determination of the cost to the public.

We reviewed the available data and determined that air safety and the public interest require adopting this AD as proposed, except for minor editorial changes. We have determined that these minor changes:

• Are consistent with the intent that was proposed in the NPRM for correcting the unsafe condition; and

• Do not add any additional burden upon the public than was already proposed in the NPRM.

We reviewed Airbus A330 Airworthiness Limitations Section ALS Part 3—Certification Maintenance Requirements, Revision 04, dated August 17, 2013; and Revision 05, dated October 19, 2015. The service information describes updated inspections and intervals to be incorporated into the maintenance or inspection program. These documents are distinct because each revision contains unique changes to be incorporated into the maintenance or inspection program.

This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

We estimate that this AD affects 104 airplanes of U.S. registry.

The actions required by AD 2014-26-08, and retained in this AD take about 1 work-hour per product, at an average labor rate of $85 per work-hour. Based on these figures, the estimated cost of the actions that are required by AD 2014-26-08 is $85 per product.

We also estimate that it takes about 2 work-hours per product to comply with the basic requirements of this AD. The average labor rate is $85 per work-hour. Based on these figures, we estimate the cost of this AD on U.S. operators to be $17,680, or $170 per product.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

We determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify that this AD:

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);

3. Will not affect intrastate aviation in Alaska; and

4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:

We issued a supplemental notice of proposed rulemaking (SNPRM) to amend 14 CFR part 39 by adding an AD that would apply to all PILATUS AIRCRAFT LTD. Models PC-12, PC-12/45, PC-12/47, and PC-12/47E airplanes. That SNPRM was published in the Federal Register on August 31, 2016 (81 FR 59919), and proposed to supersede AD 2014-22-01, Amendment 39-18005 (79 FR 67343, November 13, 2014).

The SNPRM proposed to correct an unsafe condition for the specified products and was based on mandatory continuing airworthiness information (MCAI) originated by an aviation authority of another country. The MCAI states:

The MCAI can be found in the AD docket on the Internet at https://www.regulations.gov/document?D=FAA-2016-7003-0002.

We gave the public the opportunity to participate in developing this AD. The following presents the comments received on the proposal and the FAA's response to each comment.

Fernando Campos of KACALP Flight Operations requested that the requirements of the new revisions to the Limitations section of the FAA-approved maintenance program (e.g., maintenance manual) be written into the AD instead of requiring operators to insert these new revisions into the Limitations section of the FAA-approved maintenance program (e.g., maintenance manual).

The commenter stated that most operators do not own a maintenance library subscription (hardcopy of the maintenance manual) from PILATUS AIRCRAFT LTD. (Pilatus). Therefore, it would be impossible to comply with paragraph (f)(1) of the proposed AD.

The commenter also stated that Pilatus PC-12 airplane operators are not subject to 14 CFR 91.409(e) and/or 14 CFR 91.409(f)(3) “Inspection Program” and operators can maintain their airplane in accordance with the operating rules of 14 CFR 91.409(a) and 14 CFR 91.409(b) only.

We do not agree with the commenter. Although some operators may or may not own a current hardcopy subscription of the Pilatus PC-12 maintenance library (e.g., maintenance manual), 14 CFR 21.50 requires that a complete set of instructions for continued airworthiness (ICA) be delivered with the airplane. Therefore, it is possible for an operator to comply with paragraph (f)(1) of this AD using the set of ICA delivered with the airplane. Pilatus PC-12 airplanes are bound by 14 CFR 91.409(a) and 14 CFR 91.409(b) if operated for hire. An option for 14 CFR 135 operators, if they desire to use an “Approved Aircraft Inspection Program” is 14 CFR 91.409(c). An option for using a “Progressive Inspection” is 14 CFR 91.409(d), and the Pilatus PC-12 ICA has such a program already in it. Operators of a Pilatus PC-12 airplane are not normally subject to 14 CFR 91.409(e) or 14 CFR 91.409(f)(3); however, if an exemption to 14 CFR 91.409(e) is granted to an operator, then 14 CFR 409(f)(3) is an option as well. Incorporating the limitation requirements into the AD could potentially cause confusion and/or unintended new unsafe conditions if there were any inadvertent changes when rewriting the limitations into this AD. In addition, this deviates from the method utilized by the foreign airworthiness authority in the MCAI and could cause confusion with future rulemaking.

We have not changed the AD based on this comment.

Fernando Campos of KACALP Flight Operations requested that the AD be revised to allow all A&P mechanics to do the SSID program.

The commenter stated that paragraph (f)(3) of the proposed AD states that “only authorized Pilatus Service Centers can do the SSID.” The commenter stated that this is illegal and contrary to U.S. antitrust laws. Properly certificated repair stations and A&P mechanics cannot be prevented from engaging in aircraft commerce, especially if they have the appropriate ratings from the FAA under 14 CFR parts 65 and 145.

The FAA does not agree with the commenter that the requirements in this AD are illegal and contrary to U.S. antitrust laws. There is little margin for error on the safety risk presented in the SSID. Although the FAA believes that the requirement to use only Pilatus services centers appropriately addresses this risk, we will also consider an alternative method of compliance (AMOC), as stated in the AD. The FAA can issue an AMOC that allows properly certified mechanics to do the actions in the SSID, providing we believe the additional risk presented in the SSID is appropriately addressed. For such an AMOC, you should contact the FAA at the contact specified in paragraph (g)(1) of this AD.

We have not changed this AD based on this comment at this time, although we will consider AMOCs as indicated above.

Fernando Campos of KACALP Flight Operations requested compliance be allowed for operators who subscribe to the Pilatus maintenance library electronically (instead of hardcopy).

We agree with the commenter. Although we have to account for the actual paper document due to the fact that we have to incorporate by reference the documents referenced in this AD and make it part of the regulation, we understand the concerns. We added language to this AD stating that compliance with the electronic version of the Limitations sections to the FAA-approved maintenance program (e.g., maintenance manual) is acceptable provided the specifically referenced section is followed even though there may be differences with the pagination.

We have changed this AD based on this comment.

We reviewed the relevant data, considered the comments received, and determined that air safety and the public interest require adopting the AD with the change described previously and minor editorial changes. We have determined that these minor changes:

• Are consistent with the intent that was proposed in the SNPRM for correcting the unsafe condition; and

• Do not add any additional burden upon the public than was already proposed in the SNPRM.

PILATUS AIRCRAFT LTD. has issued Structural, Component and Miscellaneous—Airworthiness Limitations, document 12-A-04-00-00-00A-000A-A, dated July 12, 2016, and Structural and Component Limitations—Airworthiness Limitations, document 12-B-04-00-00-00A-000A-A, dated July 19, 2016. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section of the AD.

We estimate that this AD will affect 770 products of U.S. registry. We also estimate that it will take about 1.5 work-hours per product to comply with the basic requirements of this AD. The average labor rate is $85 per work-hour. Based on these figures, we estimate the cost of this AD on U.S. operators to be $98,175, or $127.50 per product. This breaks down as follows:

• Incorporating new revisions into the Limitations section, Chapter 4, of the FAA-approved maintenance program (e.g., maintenance manual): .5 work-hour for a fleet cost of $32,725, or $42.50 per product.

• New inspections of the MLG attachment bolts: 1 work-hour with no parts cost for fleet cost of $65,450 or $85 per product.

In addition, we estimate that any necessary corrective actions (on-condition costs) that must be taken based on the inspections will take about 1 work-hour and require parts costing approximately $100 for a cost of $185 per product. We have no way of determining the number of products that may need these necessary corrective actions.

The only costs that will be imposed by this AD over that already required by AD 2014-22-01 is the costs associated with the insertion of the revised Limitation section and the MLG attachment bolts inspection and replacement as necessary.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

We determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify this AD:

(1) Is not a “significant regulatory action” under Executive Order 12866,

(2) Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),

(3) Will not affect intrastate aviation in Alaska, and

(4) Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

You may examine the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-7003; or in person at the Docket Management Facility between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains the NPRM, the regulatory evaluation, any comments received, and other information. The street address for the Docket Office (telephone (800) 647-5527) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt.

Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:

Discussion

We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 by adding an AD that would apply to all Airbus Model A330-200, -200 Freighter, and -300 series airplanes; and Model A340-200, -300, -500, and -600 series airplanes. The NPRM published in the Federal Register on July 7, 2016 (81 FR 44235) (“the NPRM”).

The European Aviation Safety Agency (EASA), which is the Technical Agent for the Member States of the European Union, has issued EASA AD 2015-0124R2, dated August 31, 2016 (referred to after this as the Mandatory Continuing Airworthiness Information, or “the MCAI”), to correct an unsafe condition for all Airbus Model A330-200, -200 Freighter, and -300 series airplanes; and Model A340-200, -300, -500, and -600 series airplanes. The MCAI states:

You may examine the MCAI in the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-7424.

We gave the public the opportunity to participate in developing this AD. The following presents the comments received on the NPRM and the FAA's response to each comment.

The Air Line Pilots Association, International stated that it had no objection to the NPRM.

Airbus requested that Airbus Service Bulletin A340-27-5064, dated June 1, 2016, (“SB A340-27-5064, Revision 0”), which is applicable to Airbus Model A340-500 and -600 series airplanes, be included in the NPRM. Airbus noted that SB A340-27-5064, Revision 0, was issued after the NPRM was published and that EASA planned to issue a revision to EASA AD 2015-0124R1, dated February 2, 2016, to include SB A340-27-5064, Revision 0.

We agree with the commenter's request to include SB A340-27-5064, Revision 0, in this final rule. Paragraph (g) of the proposed AD instructed operators of Model A340-500 and -600 series airplanes to upgrade the three FCPCs in accordance with a method approved by the Manager, International Branch, ANM-116, Transport Airplane Directorate, FAA; or EASA; or Airbus's EASA Design Organization Approval (DOA). Now that SB A340-27-5064, Revision 0, is available, we have revised paragraph (g) of this AD to require the upgrade to be done in accordance with the Accomplishment Instructions of the applicable service information specified in paragraphs (h)(1), (h)(2), (h)(3), (h)(4), and (h)(5) of this AD. We have added a new paragraph (h)(5) to this AD, which identifies the service information for Model A340-541 and A340-642 series airplanes with hardware standard FCPC 2K2 as Airbus Service Bulletin A340-27-5064, dated June 1, 2016.

In addition, the commenter is correct that EASA has revised AD 2015-0124 R1, dated February 2, 2016, to include SB A340-27-5064, Revision 0. We have revised the Discussion section of this final rule and paragraph (p)(1), Related Information, of this AD to refer to the revised EASA AD 2015-0124R2, dated August 31, 2016.

Airbus stated that the NPRM addressed Model A330-200, -200 Freighter, and -300 series airplanes; and Model A340-200 and -300 airplanes; but not Model A340-500 and -600 series airplanes. Airbus commented that there were inconsistencies in the NPRM because if Model A340-500 and -600 series airplanes are not included in the applicability then paragraph (l) of the NPRM was incorrect because it referred to AD 2013-19-14, which includes all Model A340-541 and -642 airplanes in its applicability.

We infer that Airbus is requesting that Model A340-541 and -642 airplanes be included in the applicability of the NPRM, or requesting that this AD be revised to remove all text that is associated with Model A340-541 and -642 airplanes.

We agree to clarify. Model A340-541 and -642 airplanes were included in the applicability of the proposed AD and continue to be included in the applicability of this AD. The SUMMARY section of the NPRM included Model A340-500 and -600 series airplanes, and paragraphs (c)(6) and (c)(7) of the proposed AD included Model A340-541 and -642 airplanes, respectively. In addition, paragraph (g) of the proposed AD specified that operators of Model A340-500 and -600 airplanes must upgrade the FCPCs in accordance with a method approved by the Manager, International Branch, ANM-116 Transport Airplane Directorate, FAA; or the EASA; or Airbus's EASA DOA. For clarification we have revised the header of paragraph (g) of this AD to include Model A340-500 and -600 series airplanes.

We reviewed the relevant data, considered the comments received, and determined that air safety and the public interest require adopting this AD with the changes described previously and minor editorial changes. We have determined that these minor changes:

• Are consistent with the intent that was proposed in the NPRM for correcting the unsafe condition; and

• Do not add any additional burden upon the public than was already proposed in the NPRM.

We also determined that these changes will not increase the economic burden on any operator or increase the scope of this AD.

We reviewed the following service information:

• Airbus Service Bulletin A330-27-3205, Revision 02, dated March 23, 2016.

• Airbus Service Bulletin A330-27-3207, dated June 30, 2015.

• Airbus Service Bulletin A340-27-4195, dated November 24, 2015.

• Airbus Service Bulletin A340-27-4196, dated November 24, 2015.

• Airbus Service Bulletin A340-27-5064, dated June 1, 2016.

The service information describes procedures for upgrading (replacing or modifying) the software standards for the FCPCs. These documents are distinct since they apply to different airplane models. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

We estimate that this AD affects 92 airplanes of U.S. registry.

We estimate the following costs to comply with this AD:

According to the manufacturer, some of the costs of this AD may be covered under warranty, thereby reducing the cost impact on affected individuals. We do not control warranty coverage for affected individuals. As a result, we have included all costs in our cost estimate.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

We determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify that this AD:

1. Is not a “significant regulatory action” under Executive Order 12866;

2. Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979);

3. Will not affect intrastate aviation in Alaska; and

4. Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:

Discussion

We issued a notice of proposed rulemaking (NPRM) to amend 14 CFR part 39 by adding an AD that would apply to B-N Group Ltd. Models BN-2, BN-2A, BN-2A-2, BN-2A-3, BN-2A-6, BN-2A-8, BN-2A-9, BN-2A-20, BN-2A-21, BN-2A-26, BN-2A-27, BN-2B-20, BN-2B-21, BN-2B-26, BN-2B-27, BN-2T-4R, BN-2T, BN2A MK. III, BN2A MK. III-2, and BN2A MK. III-3 (all models on Type Certificate Data Sheets A17EU and A29EU) airplanes. That NPRM was published in the Federal Register on September 23, 2016 (81 FR 65581), and proposed to supersede AD 2016-06-01, Amendment 39-18432 (81 FR 13717; March 15, 2016).

Since we issued AD 2016-06-01, errors were discovered in the model applicability after issuance. This AD adds Models BN-2T and BN-2T-4R, removes nonexistent Model BN2B, and removes duplicate listings of BN2A and BN2A MK.III.

The NPRM proposed to correct an unsafe condition for the specified products and was based on mandatory continuing airworthiness information (MCAI) originated by an aviation authority of another country. The MCAI states that:

The MCAI can be found in the AD docket on the Internet at: https://www.regulations.gov/document?D=FAA-2016-9160-0002.

We gave the public the opportunity to participate in developing this AD. We received no comments on the NPRM or on the determination of the cost to the public.

We reviewed the relevant data and determined that air safety and the public interest require adopting the AD as proposed except for minor editorial changes. We have determined that these minor changes:

• Are consistent with the intent that was proposed in the NPRM for correcting the unsafe condition; and

• Do not add any additional burden upon the public than was already proposed in the NPRM.

We reviewed B-N Group Ltd. Britten-Norman Service Bulletin Number SB 310, Issue 4, dated September 25, 2015. The service information describes procedures for inspections, and if necessary, replacement of the pitot/static pressure head. This service information is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section of the AD.

We estimate that this AD will affect 93 products of U.S. registry. We also estimate that it would take about 1 work-hour per product to comply with the basic requirements of this AD. The average labor rate is $85 per work-hour.

Based on these figures, we estimate the cost of this AD on U.S. operators to be $7,905, or $85 per product.

In addition, we estimate that any necessary follow-on actions would take about 2 work-hours and require parts costing $10,000, for a cost of $10,170 per product. We have no way of determining the number of products that may need these actions.

The cost impact of this AD is the same as that presented in AD 2016-06-01.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. “Subtitle VII: Aviation Programs,” describes in more detail the scope of the Agency's authority.

We are issuing this rulemaking under the authority described in “Subtitle VII, Part A, Subpart III, Section 44701: General requirements.” Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

We determined that this AD will not have federalism implications under Executive Order 13132. This AD will not have a substantial direct effect on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

For the reasons discussed above, I certify this AD:

(1) Is not a “significant regulatory action” under Executive Order 12866,

(2) Is not a “significant rule” under the DOT Regulatory Policies and Procedures (44 FR 11034, February 26, 1979),

(3) Will not affect intrastate aviation in Alaska, and

(4) Will not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

You may examine the AD docket on the Internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2016-9160; or in person at the Docket Management Facility between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. The AD docket contains the NPRM, the regulatory evaluation, any comments received, and other information. The street address for the Docket Office (telephone (800) 647-5527) is in the ADDRESSES section. Comments will be available in the AD docket shortly after receipt.

Accordingly, under the authority delegated to me by the Administrator, the FAA amends 14 CFR part 39 as follows:

Authority for This Rulemaking

The FAA's authority to issue rules regarding aviation safety is found in Title 49 of the United States Code. Subtitle I, Section 106 describes the authority of the FAA Administrator. Subtitle VII, Aviation Programs, describes in more detail the scope of the agency's authority. This rulemaking is promulgated under the authority described in Subtitle VII, Part A, Subpart I, Section 40103. Under that section, the FAA is charged with prescribing regulations to assign the use of the airspace necessary to ensure the safety of aircraft and the efficient use of airspace. This regulation is within the scope of that authority as it modifies the air traffic service route structure in the north central United States to maintain the efficient flow of air traffic.

On June 5, 2015, the FAA published in the Federal Register a notice of proposed rulemaking (NPRM) (80 FR 32074), Docket No. FAA-2015-1345, to establish 13 RNAV Q-routes and one T-route originating in Los Angeles Air Route Traffic Control Center's (ARTCC) airspace. Interested parties were invited to participate in this rulemaking effort by submitting written comments on the proposal. No comments were received.

A final rule was published in the Federal Register February 4, 2016 (81 FR 5898), Docket No. FAA-2015-1345, addressing the 13 RNAV Q-routes. The T-Route was not addressed in that final rule because it required more coordination due to it being part of the Southern California Metroplex Environmental Assessment.

The development of new RNAV Standard Instrument Departure (SID) and Standard Terminal Arrival (STAR) routes requires incorporation of this T-Route into the National Airspace System route structure in order to maximize the benefits of increased safety in high volume enroute sectors.

The Los Angeles Air Route Traffic Control Center (ARTCC) currently does not have routes that join the Performance Based Navigation (PBN) arrival and departure procedures. The existing conventional jet route structure does not serve the new SID/STAR designs. Routes made up of ground based navigational aids are not capable of delivering aircraft onto the RNAV based arrival and departure procedures in an efficient manner. Developing these predictable and repeatable flight paths through a complex area confined by restricted areas will improve throughput and safety for Los Angeles ARTCC.

This first phase of a two-phase project will align a network of Q-Routes with the new SIDs and STARs. The Q-Route structure is projected to optimize descent/climb profiles to/from several airports in southern California and create segregated arrival/departure paths to reduce airspace complexity. The T-Route in this final rule de-conflicts current airway traffic from southern California to de-conflict with the newly established Q-Routes and provides a route east bound along mountainous terrain and Mexico's border.

Low altitude United States RNAV routes are published in paragraph 6011 of FAA Order 7400.11A dated August 3, 2016, and effective September 15, 2016, which is incorporated by reference in 14 CFR 71.1. The low altitude United States RNAV T-route listed in this document will be subsequently published in the Order.

This document amends FAA Order 7400.11A, Airspace Designations and Reporting Points, dated August 3, 2016, and effective September 15, 2016. FAA Order 7400.11A is publicly available as listed in the ADDRESSES section of this document. FAA Order 7400.11A lists Class A, B, C, D, and E airspace areas, air traffic service routes, and reporting points.

A previous rule published in the Federal Register of February 4, 2016 (81 FR 5898), Docket No. 2015-1345, had several changes from the NPRM which were addressed in the February 4, 2016, final rule. This rule establishes RNAV T-route T-326, which was proposed in the NPRM but was not finalized in the rule. The route required additional coordination within the Southern California Metroplex Environmental Assessment with no changes made to the proposed route. The environmental study has been finalized with no comments addressing the establishment of T-326.

The FAA is amending Title 14, Code of Federal Regulations (14 CFR) part 71 by establishing U.S. RNAV T-route T-326 beginning at the Mission Bay, CA, VORTAC (MZB) to the Imperial, CA, VORTAC (IPL) to transition from the San Diego area to the east. The route will be used to de-conflict airway traffic from arrivals and departures at San Diego International Airport. The route enhances safety through de-confliction of airway traffic and provides routing in limited airspace between mountainous terrain and Mexico's border

The FAA has determined that this regulation only involves an established body of technical regulations for which frequent and routine amendments are necessary to keep them operationally current. It, therefore: (1) Is not a “significant regulatory action” under Executive Order 12866; (2) is not a “significant rule” under Department of Transportation (DOT) Regulatory Policies and Procedures (44 FR 11034; February 26, 1979); and (3) does not warrant preparation of a regulatory evaluation as the anticipated impact is so minimal. Since this is a routine matter that only affects air traffic procedures and air navigation, it is certified that this rule, when promulgated, does not have a significant economic impact on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

The FAA has determined that this action establishing one low altitude RNAV T-route in the western U.S. to function as a transition from the San Diego area to points east, qualifies for categorical exclusion from full environmental impact review under the National Environmental Policy Act in accordance with FAA Order 1050.1F, Environmental Impacts: Policies and Procedures, Paragraph 5-6.5a for Rulemaking actions that designate or modify classes of airspace areas, airways, routes, and reporting points (see 14 CFR part 71, Designation of Class A, B, C, D, and E Airspace Areas; Air Traffic Service Routes; and Reporting Points). This action is not expected to cause any potentially significant environmental impacts. In accordance with FAAO 1050.1F, paragraph 5-2 regarding Extraordinary Circumstances, this action has been reviewed for factors and circumstances in which a normally categorically excluded action may have a significant environmental impact requiring further analysis, and it is determined that no extraordinary circumstances exist that warrant preparation of an environmental assessment.

In consideration of the foregoing, the Federal Aviation Administration amends 14 CFR part 71 as follows:

On November 17, 2016, the Commission issued a final rule in the above-captioned proceeding. This document corrects Footnote 6 in FR Doc 2016-28322, published in the Federal Register of December 21, 2016 (81 FR 93732), by adding the following citation on page 93733, in the first column: FERC Stats. & Regs. ¶ 32,715.

Background

The SIMA system has operated under its current authority since March 21, 2005. Prior to that date, authority for steel import licensing and monitoring was derived from Proclamation 7529 of March 5, 2002 (67 FR 10553). Pursuant to sections 201 and 203 of the 1974 Trade Act, 19 U.S.C. 2251, 2253, Proclamation 7529 implemented safeguard measures with respect to certain imported steel products, placing temporary tariffs on these steel imports and providing the steel industry time to restructure. The monitoring system outlined in Proclamation 7529 required all importers of steel products to obtain a license from the Department prior to completing their customs entry summary documentation. This provided a monitoring tool to ensure that the effectiveness of the steel safeguard measures was not undermined by large quantities of imports originating from countries that were excluded from the tariffs.

In Proclamation 7741 of December 4, 2003 (68 FR 68483), the President terminated the steel safeguard measures, but directed the Secretary of Commerce to continue the monitoring system until the earlier of March 21, 2005, or such time as the Secretary of Commerce established a replacement program. On December 9, 2003, the Department published a notice stating that the system would continue in effect as described in Proclamation 7741 until March 21, 2005 (68 FR 68594). On August 25, 2004, the Department published an advance notice of proposed rulemaking soliciting comments from the public on whether to continue the monitoring system beyond March 21, 2005 (69 FR 52211). The Department changed the program's name from the Steel Import Licensing and Surge Monitoring program to the Steel Import Monitoring and Analysis (SIMA) system. The name change was notified in the publication of the August 2004 advance notice (69 FR 52211). On March 11, 2005, the Department published an interim final rule responding to the comments received from the public and implementing a slightly expanded version of SIMA until March 21, 2009. That interim final rule was followed by the publication of the final rule on December 5, 2005 (70 FR 72373).

On December 12, 2008, a proposed rule was published in the Federal Register (73 FR 75624) seeking an extension of the SIMA system through March 21, 2013 and asking for comments from the public. The Department received twelve submissions, all of which expressed support for the extension. On March 18, 2009, the Department issued the final rule (74 FR 11474) to extend the application of the SIMA system until March 21, 2013. On November 13, 2012 (77 FR 67593), the Department published a proposed rule seeking comments on an extension of the SIMA system through March 21, 2017. The Department received three submissions, all of which expressed support for the extension. The Department issued the final rule to extend the application of the SIMA system until March 21, 2017 (78 FR 11090). On October 13, 2016, the Department published a proposed rule seeking comments on an extension of the SIMA system through March 21, 2022 (81 FR 70650). The Department received two submissions, both of which expressed support for the extension. The Department is issuing this final rule to extend the application of the SIMA system until March 21, 2022. The sole change included in this final rule was extending the program's lifespan to five years (the program's previous lifespan was four years—at which time an extension of the program must be proposed).

The purpose of the SIMA system is to provide steel producers, steel consumers, importers, and the general public with accurate and timely information on anticipated imports of certain steel products. Import licenses, obtained through the Internet-based SIMA licensing system, are required for U.S. imports of basic steel mill products. Aggregate import data obtained from the licenses are updated weekly and posted on the SIMA Web site monitor. Details of the current system can be found at http://enforcement.trade.gov/steel/license/.

Submissions received during the public comment period established in the proposed rule have been considered in preparing this final rule. Two submissions were received, one from a coalition of nine steel trade groups (referred to as the “industry”), and one from a large steel-producing company in the United States, AK Steel Corporation. Both of the submissions supported the five-year extension and agreed that the system is a critical tool that helps the industry closely monitor steel imports. The comments are summarized below. The two submissions received are posted on the Federal rulemaking portal at www.Regulations.gov as well as on the SIMA Web site at http://enforcement.trade.gov/steel/license/.

Comment 1: Commenters strongly support the extension of the SIMA system for an additional five years. They state that given the current global overcapacity in steel that is fueling surges in steel imports, the SIMA system gives the public access to the timeliest information possible regarding import patterns and changes, particularly increases in volumes. They also view the system as an important and transparent tool to support rational decision-making by all interested parties—steel producers, steel consumers, importers and U.S. government officials.

Response: The Department agrees that the SIMA system provides the public valuable and timely information on steel mill imports. The Department also agrees that making aggregate import volume and pricing data drawn from the licenses publicly available provides all interested stakeholders with a more informed understanding of changing market conditions in a transparent manner.

Comment 2: Commenters state that there is no significant burden on the steel importing community to comply with the licensing requirements of the SIMA system, and that this has been confirmed over the last 12 years in its current format, which remains unchanged by the proposed rule.

Response: The Department agrees that there is no significant burden on steel importers arising out of SIMA system licensing requirements. The web-based licensing system is automatic and free of charge. The Department estimates that it continues to take no longer than ten minutes to complete the automated license form, and for most applicants, the time spent is much less.

Comment 3: Commenters suggest that the Department make the SIMA system permanent rather than extend it for another five years. They state that the system has proven its effectiveness as an important analytical tool for both steel producers and consumers.

Response: Broad authority to collect information on imports is granted to the Secretary of Commerce and delegated to the Director of the Bureau of the Census. When the original safeguard authority for the SIMA system granted by the President expired in March 2005, the system was continued pursuant to this Department of Commerce information collection authority (13 U.S.C. 301(a) and 302). For purposes of administering the SIMA system, this authority was temporarily transferred from the Director of the Census Bureau to the Under Secretary for International Trade for four years. One of the conditions of the temporary transfer of authority to the Under Secretary for International Trade was that any future periodic extension of the SIMA system be notified to the Secretary and subject to review. Therefore, establishment of a permanent system is not possible under current authority.

For the reasons discussed above, the proposed rule (19 CFR part 360) is made final without changes.

This rule has been determined to be not significant for purposes of Executive Order 12866.

This rule does not contain policies with federalism implications as that term is defined in Executive Order 13132.

The Chief Counsel for Regulation of the Department of Commerce certified to the Chief Counsel for Advocacy of the Small Business Administration at the proposed rule stage, that this rule, if adopted, would not have a significant economic impact on a substantial number of small entities as that term is defined in the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. The factual basis for the certification is found in the proposed rule and is not repeated here. No comments were received on the certification or the economic impacts of this action. As a result, no final regulatory flexibility analysis is required and none was prepared.

This final rule contains collection-of-information requirements subject to review and approval by the Office of Management and Budget (OMB) under the Paperwork Reduction Act (PRA). These requirements have been approved by OMB (OMB No. 0625-0245; Expiration Date: 1/31/2018). Public reporting for this collection of information is estimated to be less than ten minutes per response, including the time for reviewing instructions and completing and reviewing the collection of information. All responses to this collection of information are voluntary, and will be provided confidentially to the extent allowed by law.

Notwithstanding any other provision of law, no person is required to respond to, nor shall any person be subject to a penalty for failure to comply with, a collection of information subject to the Paperwork Reduction Act unless that collection displays a currently valid OMB Control Number.

For reasons discussed in the preamble, 19 CFR part 360 is amended as follows:

I. Background

Under the Peace Corps Act (22 U.S.C. 2501 et seq.), the Peace Corps is authorized to enroll qualified U.S. citizens and nationals as Volunteers to serve abroad, under conditions of hardship if necessary, (i) to help the people of interested countries meet their need for trained manpower, particularly in meeting the basic needs of those living in the poorest areas of such countries, (ii) to help promote a better understanding of the American people on the part of the people served, and (iii) to help promote a better understanding of other peoples on the part of the American people. The Peace Corps is authorized to establish the terms and conditions of enrollment of Volunteers, as well as the terms and conditions of service. The Peace Corps published a proposed rule on July 31, 2015 (80 FR 45620) to revise and update the 30 year-old regulation concerning eligibility and selection standards for Peace Corps Volunteer service. The comment period for the proposed rule ended on August 31, 2015, and the Peace Corps received three comments.

The revised rule will make the following changes:

(1) Introduction. The introductory section (22 CFR 305.1) provides new definitions for the three stages (Applicant, Trainee, and Volunteer) that an individual who is interested in service as a Volunteer passes through. It also provides a definition of the term “enrollment”, which is used in connection with an individual's service as a Volunteer. The section includes a general statement explaining the process the Peace Corps follows in the selection of Volunteers and provides notice to applicants regarding the importance of submitting complete and accurate information in the application process. The section eliminates the recitation of the various anti-discrimination statutes that the Peace Corps is obligated to follow and replaces it with a clear statement that the Peace Corps does not discriminate on various grounds in the selection of Volunteers. Note that with regard to prohibiting discrimination on the basis of disability in the programs and activities of the Peace Corps, the agency is in the process of developing its section 504 implementing regulation and plans to coordinate the regulation's development with the Department of Justice pursuant to the requirements of Executive Order 12250. The section advises that applicants may be disqualified, and Volunteers and Trainees may be separated, if the Peace Corps determines they provided materially false, misleading, inaccurate, or incomplete information during the Peace Corps application process.

(2) Eligibility. The eligibility section (22 CFR 305.2) is simplified to address only the existing citizenship and age criteria for Volunteer applicants. Other eligibility factors in the current § 305.2 are moved to succeeding sections, where they are updated and expanded.

(3) Selection Standards. A revised § 305.3 incorporates the selection factors that previously appeared in § 305.4. The revision restates the attributes that an applicant must meet for Volunteer service. It revises the description of the various personal attributes that are taken into account when evaluating applicants. The revised § 305.3 explains that the Peace Corps assesses each applicant's personal, professional, educational, and legal qualifications in order to select those applicants most likely to be successful in a Peace Corps assignment, serving under conditions of hardship if necessary, to achieve the goals of the Peace Corps. Meeting the several qualifications does not in and of itself entitle any individual to serve in the Peace Corps, because the revision states that the Peace Corps endeavors to select the best qualified individuals from among all eligible applicants.

(4) Medical Status. The revised part 305 creates a new § 305.4 that replaces the provision on the medical qualifications of applicants that previously appeared in § 305.2. The revised section implements, in relation to applications for Volunteer service, Section 504 of the Rehabilitation Act. It states that an applicant must have the physical and mental capacity required to meet the essential eligibility requirements for a Volunteer and sets out those essential eligibility requirements, which include the capability to:

A revised § 305.4(a)(1)(i)-(iii) addresses medical stat.

It also requires that, in order for an applicant to be medically qualified for Volunteer service, the Peace Corps must have the capability to provide necessary or appropriate health care for the applicant. It includes a requirement that the Peace Corps consider reasonable accommodations in determining whether an applicant has the physical and mental capacity required to meet the essential eligibility requirements for a Volunteer and whether the Peace Corps has the capability to provide necessary or appropriate health care for the applicant.

A new provision provides that an applicant must not pose a direct threat, which is defined as a significant risk to the health and safety of others that cannot be eliminated by reasonable accommodation, removal of architectural, communication, or transportation barriers, or the provision of auxiliary aids or services.

The revisions include a requirement that an applicant's medical eligibility be based on an individualized assessment of the factors applicable to reasonable accommodations. An applicant determined not to be medically qualified for Volunteer service has a right to obtain a further review of the determination by a physician and, ultimately, by a review panel. In any case involving review of issues of mental health, at least one professional staff person from the Counseling and Outreach Unit also participates as a voting member of the review panel. The decision of the review panel, which is reviewed by the General Counsel for legal sufficiency, constitutes a final agency action and is not subject to further appeal.

(5) Legal Status. A new § 305.5 changes the eligibility qualifications for an applicant who is on parole or probation, previously covered in § 305.2(d), and reframes the eligibility standard in terms of the existence of an arrest or conviction record. The revision provides the Peace Corps with greater flexibility to consider the nature of the offense, how long ago the offense occurred, whether the applicant was acquitted of the offense, the terms of any applicable parole or probation, and other relevant facts or indications of rehabilitation. Specific standards will be established for drug and alcohol related offenses. An applicant rejected because of an arrest or conviction will have a right to have a review of the rejection by a more senior Peace Corps official outside of the office that made the original eligibility determination. The new provision will also eliminate the requirement that an applicant not have any court established financial or other obligation that cannot be satisfied or postponed during a Peace Corps service period.

(6) Intelligence Background. The Peace Corps has a longstanding policy to exclude from Volunteer service individuals who have engaged in intelligence activity or related work or who have been employed by or connected with an intelligence agency, either for a specific period of time or permanently (depending on the agency). This policy is founded on the premise that it is crucial to the Peace Corps in carrying out its mission that there be a complete and total separation of the Peace Corps from the intelligence activities of the United States Government or any foreign government, both in reality and appearance.

The previous regulation contained a one-sentence statement in § 305.2(e) regarding the eligibility of applicants having a background with an intelligence agency or intelligence activities. It referred applicants to provisions of the Peace Corps Manual for more details. The new § 305.6 provides greater transparency for applicants regarding this policy.

The policy covers both employment (defined broadly) by an intelligence agency and engagement in intelligence activities. It applies to an employee of an intelligence agency even if the employee was not engaged in intelligence activities for the intelligence agency. An applicant who was employed by an intelligence agency (other than the CIA) or engaged in intelligence activities is barred from Peace Corps service for a minimum of 10 years. An applicant who was employed by the CIA is barred from Peace Corps service permanently.

The policy also applies to an applicant whose background discloses a relationship to an intelligence agency or intelligence activity, but who was not employed by an intelligence agency or engaged in intelligence activities. Such a relationship might be one based on familial, personal or financial connections to an intelligence agency or intelligence activities. In these cases, the period of ineligibility will be determined by the General Counsel based on a number of stated factors.

Serious doubts about an applicant's connection with intelligence agencies or activities are to be resolved in favor of exclusion. An applicant rejected based on an intelligence background criteria has a right to appeal the rejection to the Peace Corps Director.

(7) Special Circumstances. A new § 305.7 addresses special circumstances involving some applicants, which were previously covered in § 305.2(f), (g) and (h).

The former § 305.2(f) placed restrictions on Peace Corps Volunteer service for applicants who are married and who wish to serve without their spouse. These restrictions have been removed as they are no longer relevant to eligibility for Volunteer service. In addition, a new § 305.7(a) expressly provides that two applicants who are married or are in a same sex or opposite sex domestic partnership or committed relationship may apply to serve together. This codifies in regulation the Peace Corps policy on placement of couples, including its recent policy to accept same-sex and opposite-sex couple applicants on an equal basis whether married, or unmarried and in a committed relationship/domestic partnership.

The former § 305.2(g) places restrictions on the ability of an applicant who has dependent children under the age of 18 to serve as a Peace Corps Volunteer. These restrictions have been removed because they are not relevant to the ability of an individual to serve as a Volunteer. However, a new provision has been added that generally prohibits dependents and other family members from accompanying a Volunteer during service. This provision permits the Peace Corps to make exceptions from time to time either on a case-by-case basis or for particular categories of Volunteers to the extent permitted by Federal law.

The previous policy on military service obligations of applicants that was contained in § 305.2(h) is continued in § 305.7(c), but the written statement from a commanding officer is no longer required.

(8) Background Investigation. Section 22 of the Peace Corps Act requires that applicants be investigated to ensure that their assignment “is consistent with the national interest.” The Peace Corps previously satisfied this statutory requirement under § 305.3, which required a National Agency Check (NAC) and background investigation for all applicants. A NAC is a clearance conducted by the Federal Investigations Services of the U.S. Office of Personnel Management (OPM) and is the minimum clearance required for all civilian Federal employees. Peace Corps has required that Volunteer applicants be cleared through a NAC investigation for many years, in large part because it was initially the only feasible way to comply with Section 22 of the Peace Corps Act. However, there are now other commercial, non-governmental investigative entities approved by the General Services Administration that can provide equivalent clearance services for Volunteer applicants.

The revision of part 305 includes a new § 305.8, replacing the former § 305.3. It retains the requirement that all an appropriate background investigation be completed for all Applicants who are invited to serve in the Peace Corps. However, it does not specify that the background investigation be OPM's Federal Investigations Services background investigation for Federal employment positions. This change gives Peace Corps flexibility to use other contractors to conduct background investigations, as well OPM's Federal Investigative Services.

The Peace Corps has made the following non-substantive changes to the final rule.

(1) It has eliminated the provision for the enrollment of persons who are non-citizens but who have made satisfactory arrangements to be naturalized. This provision of the proposed rule aligns with the Peace Corps Act, which stipulates that enrollment as a Volunteer is limited to U.S. citizens and nationals. Furthermore, this provision has not in practice been necessary or appropriate, as all applicants are required to have U.S. passports prior to travel overseas for pre-service training.

(2) It has amended the age requirement to make clear that Applicants must reach the age of 18 prior to becoming a Trainee (as opposed to at the time of enrollment). This correction is needed for the eligibility requirement so that only adults can become Trainees. The age of 18 is the standard for adulthood under the laws of most states.

(3) The specific number of medical personnel required to staff the Pre-Service Review Board has been deleted as unnecessarily detailed and overly constraining on the Peace Corps' decisions on how to staff the Board.

(4) The requirement for an affidavit in connection with applying for service as a member of an unmarried couple has been replaced with a requirement for a sworn statement, to allow for greater ease in electronic submission of this information.

The Peace Corps received three comments on the proposed rule.

Comment 1: One commenter had a number of thoughtful suggestions about the order of the presentation of various topics in the Peace Corps application for Volunteer service, presumably on the assumption that the order of the topics in the proposed rule would be the same order in the application.

Response: The application is a separate document and is periodically revised and does not necessarily follow the order of presentation of topics in the proposed rule. The commenter's suggestions will be useful for a future revision of the application.

Comment 2: Another commenter objected to the provision in the proposed rule that would give the Peace Corps the flexibility to have the statutorily required background investigation performed by outside contractors, rather than the Federal Investigations Services of the U.S. Office of Personnel Management. The commenter cited concerns about the reliability of investigations performed by outside contractors.

Response: The Peace Corps recognizes the commenter's concerns and will address them by limiting the use of outside contractors to those approved to conduct background investigations by the General Services Administration.

Comment 3: A third commenter recommended that any Volunteer who ends service, before completion of the full 27 months of service, except for medical reasons, should have to pay back to the Peace Corps some proportionate amount related to the actual amount spent by the Peace Corps to train and transport the Volunteer to the country of service.

Response: The Peace Corps appreciates the commenter's position, but does not view the proposal as workable. Peace Corps service is entirely voluntary and there are many valid reasons, in additional to medical, for a Volunteer to terminate his or her service before the normal 27 month service period. Furthermore, the threat of the imposition of an exit fee would likely reduce interest in Peace Corps service.

The Office of Management and Budget (OMB) has reviewed the proposed regulatory action under Executive Order 12866 and has determined that it is not a significant regulatory action within the meaning of the Executive Order. Consistent with the Executive Order, the Peace Corps is providing an explanation of the need for the regulatory action and an assessment of the potential costs and benefits of the regulatory action.

(1) Need for Regulatory Action. Under Section 5(a) of the Peace Corps Act (22 U.S.C. 2504(a)), the Peace Corps is entitled to enroll qualified citizens and nationals into Peace Corps service and is delegated authority to establish the terms and conditions of enrollment. The Peace Corps last published its terms and conditions of enrollment in 1984 and those rules are outdated and need to reflect current laws and policies that have been implemented over the past 30 years. In addition, the structure of the current regulation needs to be revised to simplify the description of the information required in order to apply to the Peace Corps, as well as the explanation of the Peace Corps selection process as described in the Supplementary Information section.

(2) Potential Costs and Benefits. It is difficult to precisely quantify the costs and benefits of the new regulation that is designed to reflect current law and regulations and to make it easier for American citizens to apply for service as a Peace Corps Volunteer. However, the Peace Corps has concluded that the current regulatory structure, and the accompanying application form, is seen as a daunting, confusing and time-consuming process, which has discouraged many Americans who might otherwise be interested in and well-qualified for Volunteer service. The new regulation will improve the possibility of the most suitable candidates being selected as a Volunteer, decrease the barriers to service and broaden the rights of applicants. This will be a substantial benefit to all Americans who want to serve as Volunteers, as well as being a benefit to the Peace Corps which is interested in creating a large, diverse pool of qualified, suitable candidates to serve abroad as Volunteers. The Peace Corps estimates that agency staff will spend less time reviewing each individual application, because the application itself will be shorter. For 2016, the Peace Corps anticipates that use of the new application will result in a savings of $95.00 per application, compared to the former application. With 22,000 expected applications for the year, the new application is expected to provide a savings of $1,384,000 resulting from the reduction in staff time spent reviewing applications. However, the agency expects that the total number of completed applications will increase, and that the agency will not realize immediate cost savings from these changes.

The former regulation listed nine factors as relevant to the determination of eligibility. These factors include citizenship, age, medical status, legal status, intelligence background, marital status, dependents, military service, and failure to disclose requested information. This listing combined factors that are basic, clear-cut requirements for Peace Corps service, such as the citizenship requirement (under the Peace Corps Act only citizens and nationals can be Volunteers), with factors that are more relevant to whether an applicant is suitable for Volunteer service, where an applicant could effectively serve, or whether the applicant has the requisite qualifications to serve as a Volunteer, which involve more judgmental and situational issues. As a result, the Peace Corps has found that many potential applicants, after reviewing the nine requirements, make self-judgments that they are not eligible to apply for Volunteer service. In addition, the application form that had been in use until June 30, 2014 was over 61 Web pages long and took approximately eight hours to complete. This was an added deterrence to many potential applicants. Approximately 75 percent of the annual 40,000 individuals who started the application never finished it due to its length and density. The Peace Corps has recently introduced a new application, which is 9 Web pages rather than the former 61 pages. It is estimated that each applicant will save approximately 7 hours with the shorter application form. The shorter application will clearly benefit applicants, because it will result in a reduced paperwork burden on applicants. The Peace Corps estimates that the shorter application form will result in a savings to the public of approximately $5,840,000. This is based on (i) an assumed hourly wage equivalent of $37.94 derived from the median wage earnings, including overhead and benefits, for persons age 25 or over who have attained a bachelor's degree, (ii) the reduction of 7 hours spent on the application, and (iii) 22,000 applications in 2015.

The shorter application should also increase the pool of individuals who complete an application from the current 10,000 per year to over 20,000 per year. Although the Peace Corps is able to simplify the application form without regard to a regulatory change, the new regulation is needed to accurately reflect the current laws and policies that relate to the Volunteer selection process.

The new regulatory action addresses deficiencies in the current regulation that have deterred potential applicants and reduced the applicant pool. The new regulation specifies only two baseline eligibility requirements for applying to the Peace Corps. An applicant must be a citizen or national of the United States and at least 18 years of age. The regulation clearly enumerates the suitability and qualification standards that are used by the Peace Corps in determining who should be invited to enroll as a Volunteer. It explains that an applicant must demonstrate suitability for Peace Corps service generally and for the particular assignment for which the applicant is being considered. It describes the medical qualifications that are applied, taking into account Section 504 of the Rehabilitation Act of 1973.

The new regulation gives the Peace Corps greater flexibility in accepting applicants with arrest or conviction records. It provides a more complete description of how the Peace Corps considers applicants who have worked for intelligence agencies or engaged in intelligence activities. The former regulation merely stated that an applicant with an intelligence background may be disqualified, without an explanation of the criteria for disqualification in the regulation. As a result, applicants could have initiated and completed the lengthy application process only to be informed that they are not eligible for Volunteer service because of having worked for intelligence agencies or having engaged in intelligence activities. Other applicants may have been deterred from applying because they concluded that any connection to an intelligence background disqualifies an applicant. By explaining the intelligence background criteria front-end, applicants will be more informed about whether they meet Peace Corps selection standards and whether it is worth their time to initiate the application process.

The new regulation also reflects the new policy of the Peace Corps to accept same sex and opposite sex couple applicants on an equal basis whether married or unmarried in a committed relationship. It removes some of the restrictions on applicants who have dependent children under the age of 18. Finally, the new regulation incorporates appeal rights when an applicant has been rejected on grounds relating to medical status, an arrest or conviction record, or for having a background in intelligence activities. Any applicant in an expanded list of protected categories who thinks that he or she had been discriminated against is given the option for review and consideration by the Office of Civil Rights and Diversity at the Peace Corps. These changes to the Volunteer application process will provide an easier, clearer, faster and more equitable and consistent process for potential applicants, and result in a greater number of well-qualified applicants available for Peace Corps Volunteer service.

The Director of the Peace Corps certifies that this regulatory action will not have a significant adverse impact on a substantial number of small entities. The regulation only applies to individuals who are interested in service as a Volunteer and has no application to small entities.

This regulatory action does not contain a Federal mandate that will result in the expenditure by State, local, and tribal governments, in aggregate, or by the private sector of $100 or more in any one year.

This regulatory action does not contain any paperwork or recordkeeping requirements and does not require clearance under the Paperwork Reduction Act. The Peace Corps Volunteer application form for Volunteer service referenced in the regulation has been approved by the Office of Management and Budget (Control Number 0420-0005).

This regulatory action does not have Federalism implications, as set forth in Executive Order 13132. It will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.

This document is not a major rule as described in Executive Order 12291.

DoD internal guidance concerning personnel security will continue to be published in DoD Manual 5200.02. Once the revision of DoD Manual 5200.02 is signed, a copy will be made available at http://www.dtic.mil/whs/directives/corres/pub1.html.

It has been determined that publication of this CFR part removal for public comment is impracticable, unnecessary, and contrary to public interest since it is based on removing DoD internal policies and procedures that are publically available on the Department's issuance Web site.

The removal of this rule will be reported in future status updates of DoD's retrospective review plan in accordance with the requirements in Executive Order 13563. DoD's full plan can be accessed at: http://www.regulations.gov/#!docketDetail;D=DOD-2011-OS-0036.

This rule revises 32 CFR part 286 to implement section 552 of title 5, United States Code (U.S.C.) and incorporate the provisions of the OPEN Government Act of 2007 and the FOIA Improvement Act of 2016. This part promotes uniformity in the DoD FOIA Program across the entire Department.

The FOIA, 5 U.S.C. 552, requires agencies to “promulgate regulations, pursuant to notice and receipt of public comment, specifying the schedule of fees applicable to the processing of requests [the FOIA] and establishing procedures and guidelines for determining when such fees should be waived or reduced.” Additionally, according to the FOIA, an agency may, in its regulation, designate those components that can receive FOIA requests, provide for the aggregation of certain requests, and provide for multitrack processing of requests. Finally, the FOIA requires agencies to “promulgate regulations . . . providing for expedited processing of requests for records.”

This rule implements changes to conform to the requirements of the following amendments to the FOIA: The OPEN Government Act of 2007, Public Law 110-175 and the FOIA Improvement Act of 2016, Public Law 114-185. These changes include the roles of the FOIA Public Liaison in § 286.4, § 286.5, § 286.8, § 286.9, and § 286.12; the roles of the FOIA Requesters Service Centers in § 286.3, § 286.4, § 286.5, § 286.8, § 286.9, § 286.11, and § 286.12; the processing of FOIA requests, § 286.7; the timing of responses to FOIA requests, § 286.8; and the fees schedules, Subpart E.

This regulatory action imposes monetary costs to the DoD and the public. The average cost to the DoD to implement the FOIA for the past five years is over $82,000,000. The benefit of this regulatory action to the public is that it promotes uniformity in the DoD FOIA Program across the entire Department and provides notice of DoD's FOIA policies and procedures to the public.

The revisions to this rule will be reported in future status updates as part of DoD's retrospective plan under Executive Order 13563 completed in August 2011. DoD's full plan can be accessed at: http://www.regulations.gov/#!docketDetail;D=DOD-2011-OS-0036.

The DoD is issuing this rule as an interim final rule with a request for comments to comply with a statutory deadline in the FOIA Improvement Act of 2016. Section 3 of the Act requires agencies to review and issue regulations in accordance with the amendments in the Act no later than 180 days after the enactment of the Act. The FOIA Improvement Act of 2016 was signed by the President on June 30, 2016; therefore, agencies need to issue regulations no later than the end of December 2016.

Additionally, this rule implements amendments made in the OPEN Government Act of 2007. The DoD's issuance of its revised FOIA regulation was previously delayed due to reorganization, process changes, and re-coordination requirements based on the inclusion of the new legislative amendments and Presidential guidance.

The DoD published a proposed FOIA rule for comment on September 3, 2014 (79 FR 52500-52524) that was not promulgated as a final rule. Just after that time, the Office of Information Policy, Department of Justice (DOJ) published its Guidance for Agency FOIA Regulations along with a recommended template to be used by agencies in the development of their regulations. Accordingly, the DoD made the decision to revise its regulation at 32 CFR part 286 so that, to the practical extent possible, it aligned with the template recommended by DOJ. The sections of the previous proposed rule that are not included in this interim rule will be in a separate internal manual, DoD Manual 5400.07. This manual contains DoD FOIA processing guidance that is internal to the department and is not legally required to be in this rule.

During the previous public comment period on the proposed rule, the DoD received a number of comments that are related to this interim rule and our incorporation of the OPEN Government Act of 2007 amendments. Those comments, and the Department's adjudication of those comments, follow.

Comment: The previous proposed rule contained the following definition of consultation: The “process whereby a federal agency transfers a FOIA responsive document to another federal agency or non-government entity, in certain situations, to obtain recommendations on the releasability of the document.” One commenter states that this definition fails to set parameters for determining when consultation is appropriate.

This commenter “believes that a `consultation' should occur only when another agency, agency component, or non-government entity has a `substantial interest' in any of the responsive records or portions thereof. While FOIA is silent as to the meaning of the term `substantial interest,' the Office of Information Policy (`OIP') suggests a `substantial interest' exists when records either `originate[] with another agency' or the records contain `information that is of interest to another agency or component.' For its part, the Department of Justice's FOIA regulations provide that `consultation' (or `referral') is appropriate when another agency originated the record or, more generally, is `better able to determine whether the record is exempt from disclosure.' ”

This commenter further “proposes that DoD redefine `consultation' accordingly: Consultation. The process whereby a federal agency transfers a FOIA responsive record to another federal agency, agency component, or non-government entity, when such party has a substantial interest in the responsive record, in order to obtain recommendations on the releasability of the record. After review, the record is returned to the original agency for response to the FOIA requester or further review.”

This commenter also asks the DoD to introduce a definition of “substantial interest” as follows: “Substantial interest. Another agency, agency component, or nongovernment entity possesses a `substantial interest' in a FOIA responsive record, such that consultation may be appropriate, whenever (1) the responsive record originates with that same agency, agency component, or non-government entity, or (2) when the agency, agency component, or non-government entity is better positioned to judge the proper application of the FOIA exemptions, given the circumstances of the request or its familiarity with the facts necessary to judge the proper withholding of exempt material.”

Response: Our interim rule adopts the definition of “consultation” from the DOJ FOIA rule template, and we believe this is the appropriate definition. It does not contain the phrase “substantial interest.” Furthermore, we are not adding a definition of “substantial interest.” The proposed definition is too narrow and unnecessarily restricts the discretionary decision-making authority of DoD officials when determining what other agencies or DoD Components should review a requested document prior to release under the FOIA.

Comment: One commenter appreciates our definition because it tracks the new statutory definition codified by the OPEN Government Act of 2007 and explicitly abandons the outdated “organized and operated” standard proposed in guidance by the Office of Management and Budget in 1987. They go on to say that the proposed definition could be improved by explaining the manner in which “alternative media shall be considered to be news-media entities.” Accordingly, they requested we amend the definition of “representative of the news media” by incorporating the entirety of the statutory standard or by adding some short indication of the application of the fee category to non-traditional news media forms and requesters. They believe that the proposed definition itself should refer to the important role of technology vis-a-vis the news media requester fee category, potentially utilizing as a starting point the examples provided in the statute.

Response: We appreciate the comment concerning the definition of “representative of the news media”. With our new interim rule, we are now adopting the definition as published in the DOJ FOIA regulation template. We believe that this definition accurately reflects the Act.

Comment: Another commenter claims our proposed definition is deeply flawed because it states that news is information that is about current events or that would be of current interest to the public.

They go on to say that “news can and frequently does concern historic past events. For example, there are any number of news stories that unveil the truth about important events of the past, perhaps because they were classified or restricted or secret in some manner. There are reporters who focus on important news stories about previously unknown aspects of World War II or Korea or Vietnam or the Persian Gulf Conflicts. There is important reporting on atomic veterans, Agent Orange exposure, chemical weapons testing, and so on. Why would important reporting on those past events not be considered news?”

“Limiting the definition to current events means that the government agency would be taking on the role of editor to decide what is important, and suggests that any news coverage about past events is not newsworthy. This definition is particularly disturbing because many of the important news stories involving DoD records concern past events and are precisely the type of news reporting that should be recognized as news for purposes of the Freedom of Information Act.”

“I understand that the definition could be interpreted to stretch to cover past events. But unless it is stated explicitly, there are components which may misinterpret the definition, and adhere to a narrower definition of news.”

“Therefore, I propose that the definition be amended to include the sentence: `This may include historic past events.' ”

Response: Because we believe the phrase “would be of current interest to the public” adequately addresses the commenter's concern, we did not accept this recommendation. Furthermore, this section of the definition of “representative of the news media” mirrors the Act and the DOJ FOIA regulation template word for word.

Comment: One commenter mentions that the list of tasks for the FOIA Public Liaison omits two important tasks for the FOIA Public Liaison. “First, there is explaining the status of an overdue request. Second, the Public Liaison can help to coordinate opportunities for a requester to clarify or narrow the scope of a request. This clarification or narrowing may require some two way discussion for the requester to understand how they may best clarify or narrow the request, including a discussion of specific impediments to the processing of the request.”

Response: We rejected this recommendation because it is our intention here to list only the statutory duties of the FOIA Public Liaison. We agree this list is not all-inclusive, and accordingly there could be a number other duties that FOIA Public Liaisons will perform. However, these other duties, to include those that the commenter mentions, are included within the scope of the statutory duties of the FOIA Public Liaison.

Comment: One commenter recommends a change to the section concerning Confidential Commercial Information. Specifically, the DoD mirrors the language of Executive Order 12600, which says that when providing the submitter of commercial information the opportunity to provide comment on the agency's release of its information under the FOIA, DoD Components should provide the submitter with a reasonable amount of time to comment. The commenter recommends, instead, that the submitter be given ten business days to respond to the notice with reasons for withholding disclosure. If the submitter fails to respond within the allotted ten days, the Agency must conclude that the submitter has no objection to disclosure of the requested information.

Response: We appreciate this comment, and agree that ten business days is a very reasonable time frame. However, because of the wide diversity of acquisition environments within the Department of Defense, it may be the case a longer period of time would be more reasonable. The DoD Components have very different acquisition environments; we have contracts concerning, for example, uniforms, office supplies, landscaping, complex information technology systems, satellites, healthcare, construction, and food. Accordingly, we believe that the individual components are best situated to determine the reasonable time for submitter response for their unique situations.

Comment: Once commenter recommends that upon submission of confidential information by the submitter to the DoD, the DoD should require the submitter to designate with good-faith effort any portions of the submission the submitter considers to be exempt under Exemption 4. A good-faith effort designation can be useful because it allows the DoD to work with information submitted beforehand that would help in its determination on whether to disclose information submitted by the submitter. They further suggest that the submitter's designation expire ten years after the date of submission unless the submitter requests, and provides justification for, a longer designation period. They state that the proposed section should be added as follows: “Designation of confidential business information. In the event a FOIA request is made for confidential business information previously submitted to the Government by a commercial entity or on behalf of it (referred to as a `submitter'), the regulations in this section apply. When submitting confidential business information, the submitter must use a good-faith effort to designate, by use of appropriate markings, at the time of submission or at a reasonable time thereafter (generally, within 30 days), any portions of the submitter's submission the submitter considers to be exempt from disclosure under FOIA Exemption 4, 5 U.S.C. 552(b)(4). The submitter's designation will expire ten years after the date of submission unless the submitter requests, and provides justification for, a longer designation period.”

Response: Some DoD Components have adopted a similar practice, and we believe that given the wide variety of DoD contracts (as described in the previous response), this procedure is best left with the components to determine whether it's appropriate for them. Additionally, this is actually an acquisition and not a FOIA policy recommendation; therefore, this rule is not the appropriate place for the policy. Furthermore, this policy (of proactively determining the confidential business information without a FOIA request) suffers from a defect. When a FOIA request is received for this type of information, the FOIA provides the “push” to the Agency to release the information, and Executive Order 12600 provides the submitter the opportunity to protect it. With the FOIA, the Agency has the legal authority to release information over the objections of the submitter, and with the Executive Order the submitter can prevent such a release under the Administrative Procedures Act. However, in the process recommended by this commenter, if the submitter asks the Agency to protect information that the Agency clearly believes is not protectable under Exemption 4, it has no recourse to persuade or convince the submitter to made a more reasonable determination. The inevitable, yet unintended, consequence would be less contract information being released to the public; in effect, less transparency.

Comment: A commenter discussed our proposed rule's reference to the FOIA exclusions, 5 U.S.C. 552(c)(1)-(3). They believe that this allows the DoD to make a misrepresentation regarding the actual existence of records to the requester. Specifically, they objected to the following wording: Because of the possibility of the existence of excluded records, DoD law enforcement components will respond to all FOIA requests when no records are located or when located records fall within an exclusion by stating that no records responsive to the FOIA were found.

This commenter believes “the justification the proposed regulation provides for misrepresentation—`the possibility of the existence of excluded records'—is insufficient. The FOIA contemplates a need for nondisclosure in cases of records the release of which could threaten the efficacy of law enforcement, but in no way does it countenance lying to requesters. Law enforcement may reasonably demand flexibility in the principles of open government that the FOIA seeks to advance, but it cannot require complete abdication of those principles. It is also unclear from the proposed regulations whether the DoD would believe itself authorized to make misrepresentations to Legislatures as to the existence of (b)(7) records.”

This commenter recommends instead that the agency follow the approach set out in the Department of Justice's guidelines regarding exclusions. The agency should have internal accountability mechanisms to ensure that exclusions are not overused. It should also include language in all FOIA responses informing the requester of the existence of exclusions and should also post information about exclusions on its public Web site.

Response: The procedures that we had in the proposed rule were appropriate and in accordance with the Act and DOJ procedural guidance. However, we have deleted much of the procedural guidance for exclusions and now our section on this topic mirrors the DOJ FOIA regulation template.

Comment: One commenter appreciated the requirement that a FOIA Requester Service Center must provide a requester with an estimated date of completion for their FOIA request when the requester enquires about the status of a request. However, the commenter also indicated that there is not a good accountability measure listed to ensure that dates given are given in good faith.

Response: We are not sure what the commenter means by “accountability measure,” or how it would apply to this rule. Therefore, we did not adopt their recommendation.

Comment: One commenter recommend that in the section concerning expedited processing, we should provide examples of compelling need, imminent loss of due process rights, and humanitarian need.

Response: We appreciate this comment; however, for the sake of brevity, we are not including examples. Furthermore, in this case the use of examples risks the possibility of adding confusion to the understanding of the issue.

Comment: One commenter is concerned that we were separating the definition of compelling need from the main body of the regulation.

Response: We appreciate this comment. Our previous proposed rule had a definitions section separate from the body of the rule. Now that we are publishing our rule according to the DOJ FOIA regulation template, the definition is located within the body of the rule.

Comment: In the fees section of our proposed rule, and in our current rule, we have a “business as usual approach” concerning the costs associated with the processing of electronic records. Specifically, the proposed rule said that a “business as usual approach exists when the DoD Component has the capability to process a FOIA request for electronic records without a significant expenditure of monetary or personnel resources. DoD Components are not required to conduct a search that does not meet this business as usual criterion.” A commenter mentions that this has no foundation in law, and obfuscates the true reasonableness standard for electronic searches set out in 5 U.S.C. 552(a)(3)(C). They propose that it should be eliminated.

Response: We agree with the commenter and have removed the “business as usual” criterion.

Comment: One commenter is concerned about the absence of “substantial interest” in the discussion of consultations with and referrals to other agencies, agency components, or non-government entities. They mention the proposed rule contains varying references to “substantial interest,” “equity interest,” and “interest or equity.” This commenter recommends that DoD standardize its language by using “substantial interest” to avoid confusion. It also should provide a clear statement that consultation ought never to occur with an entity that does not possess a substantial interest in responsive records.

Response: Because we have adopted the DOJ FOIA regulation template, we have standardized the use of the word “interest,” it is not further modified by “substantial” or “equity”.

Comment: One commenter recommends that DoD revise the practice of not advising FOIA requesters that a consultative process has been undertaken “unless information is withheld by the consulted agency.” This commenter believes that “transparency and an open government—hallmarks of FOIA—mandate that agencies provide requesters with this information.”

Response: Because we have adopted the DOJ FOIA regulation template, which does not include this practice, the interim final rule also does not include guidance to not inform FOIA requesters of consultations.

Comment: Concerning the procedure of advising FOIA requesters of their appeal rights, one commenter states that the time limits on submission of administrative appeals should recognize the Justice Department's statements on the possibility of lengthy delays on mail reaching government agencies due to security screening. They suggest that the postmark of the letter can be used to satisfy the appeal deadline for an administrative appeal, as is permitted in most legal situations.

Response: With our adoption of the DOJ FOIA regulation template, we have now adopted this procedure.

Comment: One commenter mentions the language in our proposed rule which concerns commercial requesters. It indicates that a “representative of the news media could make a FOIA request that is for commercial use (e.g., a magazine publisher asking for duty addresses of DoD personnel to solicit them to buy subscriptions to the magazine).” The commenter notes that while it is theoretically possible that if a FOIA request could be submitted to DoD by a member of the news media for such a purpose, such a scenario is unlikely and, at the very least, uncommon. This commenter further contents that a FOIA request is submitted by a member of the news media, there should be a strong presumption that the requestor is entitled to classification as a “representative of the news media” for fee purposes.

Response: We agree, and with our adoption of the DOJ FOIA regulation template, this subsection was deleted.

Comment: One commenter mentions that our proposed subsection on fees discusses examples of news media entities such as publishers of periodicals who make their products available for purchase or subscription by the general public. This commenter believes that this requirement fails to include the large variety and number of online news organizations, many of which provide their products free of charge to internet readers. Therefore, they propose that the subsection should be adjusted to recognize this reality. They ask that we “remove the requirement that a publisher of periodicals must make their products available for purchase or subscription, as that requirement unnecessarily impedes the qualification of many legitimate news media entities at the present time.”

Response: Because we are adopting the DOJ FOIA regulation template, this phrase is no longer in our regulation.

Comment: Another commenter had a similar issue with this section. “[The] FOIA states that examples of news-media entities include `publishers of periodicals . . . who make their products available for purchase by or subscription by or free distribution to the general public.' The Proposed Rule, on the other hand, inexplicably truncates the definition to exclude publishers that make their publications available for `free distribution to the general public.' There are countless media entities that provide their services to the public for free or through an advertisement-based model, including the overwhelming majority of broadcast and online news outlets. ABC News, National Public Radio, CBS News, Slate, NBC News, Politico, Pro Publica, and PBS are just a handful of examples of organizations that provide news to the public for free. It would be absurd for the DoD not to recognize these and other news organizations that provide free or advertising-supported journalism as representatives of the news media.”

“Furthermore, the authority under which the DoD is empowered to promulgate regulations regarding its implementation of FOIA, 5 U.S.C. 552(a)(4)(A)(i), states that [s]uch agency regulations shall provide that . . . [e]xamples of news-media entities are . . . publishers of periodicals (but only if such entities qualify as disseminators of `news') who make their products available for purchase by or subscription by or free distribution to the general public.”

“While the statute says such examples are `not all-inclusive,' the DoD cannot promulgate regulations that are less inclusive than what Congress has indicated. As the Supreme Court has held with regard to an agency's construction of a statute which it administers, `[i]f the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.' Therefore, [we urge] the DoD to expand its definition of news-media entities to include publishers who make their products available for free to the public, in accordance with the express direction of Congress in the 2007 OPEN Government Act.”

Response: Our adoption of the DOJ FOIA regulation template revises this subsection to satisfactorily adopt this commenter's recommendation.

Comment: One commenter requests that DoD elaborate on the meaning of “alternative media.” Specifically, they state: “While DoD has followed FOIA's instruction to consider evolving `methods of news delivery' and `alternative media' formats when defining a news media entity, the proposed section would benefit from some examples that could provide guidance to FOIA officers when considering fee category requests. Specifically, [we are] concerned that nascent news media organizations, which have yet to demonstrate a large readership or a history of reporting and dissemination, could be excluded.”

“Ensuring an expanded definition of `alternative media' is entirely consistent with judicial precedent. For example, the U.S. Court of Appeals for the District of Columbia Circuit has noted that FOIA's legislative history demonstrates `it is critical that the phrase `representative of the news media' be broadly interpreted if the act is to work as expected. . . . In fact, any person or organization which regularly publishes or disseminates information to the public . . . should qualify . . . as a `representative of the news media.' The U.S. District Court for the District of Columbia has similarly construed DoD's current fee category regulation, 32 CFR 286.28(e)(7)(i), to include, for example, regular publishers of periodicals, even when those periodicals are simply disseminated by email or posted on a frequently visited Web site.”

“The legislative history of FOIA also suggests the need for improvement in the treatment of `alternative media.' Senator Patrick Leahy, co-sponsor of the OPEN Government Act, stated that the changes to the definition of `representative of the news media' would ensur[e] that anyone who gathers information to inform the public, including . . . bloggers, may seek a fee waiver[.]' He also stated that the new definition covered `Internet blogs and other Web-based forms of media . . . free newspapers and individuals performing a media function who do not necessarily have a prior history of publication.' Co-sponsor Senator John Cornyn affirmed Senator Leahy's view that the new definition `grants the same privileged FOIA fee status currently enjoyed by traditional media outlets to bloggers and others who publish reports on the Internet.' ”

“Accordingly, [we request] that DoD expand the proposed definition of `representative of the news media' by incorporating the entirety of the statutory standard and by adding some short indication of the application of fee category to non-traditional news media forms and requesters.”

Response: We understand and appreciate this recommendation; however, we are not revising this subsection as requested. We do not believe that an expanded definition of “alternative media” is necessary. Any such elaboration or definition risks excluding some types of alternative media. Additionally, the DOJ FOIA regulation template, which we have adopted, does not contain any such expanded definition.

Comment: This same commenter requests “that DoD provide further explanation of how it will determine whether potential news media requesters possess the editorial skill to use responsive records to create a `distinct work' and the sufficient intent to `distribute[] that work to an audience.' News media requesters often prove this skill and intent with varying levels of specificity. DoD should clarify the standard of proof it will apply to these requests. Moreover, it should clarify the extent to which information about the requester that is not contained in the request will be used to determinate the veracity of a requester's claims. For example, DoD should explain whether it is appropriate to examine the history of an organization, its past practices with regard to FOIA records, and the detail of its planned use of responsive records, subject to editorial considerations and the content of the production. [We recommend] that DoD permit after-the-fact factual considerations, but that it remind FOIA offices that news media requester status is not static, so as to accommodate nascent news media persons or entities and others transitioning into news reporting.”

Response: We appreciate this recommendation; however, we do not believe that this rule is the appropriate place for a further explanation of how we should determine whether a potential news media requester meets the statutory standard or not. DOJ has not provided guidance in this area, and if they do we will pass it to the DoD Components.

Comment: This commenter also points out that the proposed rule states, in part, that “[f]reelance journalists may be regarded as working for a news organization. . . .” This commenter contends that “this language appears to largely mirror the language in the 2007 OPEN Government Act, which was codified at 5 U.S.C. 552(a)(4)(A)(iii). However, the language of the Proposed Rule changes the imperative `shall' of FOIA to a permissive `may.' As stated above, the authority under which the DoD is empowered to promulgate regulations regarding its implementation of FOIA, 5 U.S.C. 552(a)(4)(A)(i), states that `[s]uch agency regulations shall provide that . . . [a] freelance journalist shall be regarded as working for a news-media entity. . . .' The DOD has no power to modify a clear and essential term contained in a statute through the regulatory process. The Proposed Rule must be changed such that it properly reflects the will of Congress.”

Response: The DOJ FOIA regulation template, which we adopted, uses the term “will” which we believe has the same imperative force as “shall”.

Comment: This commenter also is concerned that a subsection of the proposed rule may be interpreted too narrowly by FOIA officers. The proposed rule states that “[a] person or entity that merely disseminates documents received pursuant to the FOIA to an audience would not qualify as a representative of the news media because, in this case, the person or entity is not using editorial skills to turn raw materials into a distinct work.” The commenter contends “While it is true that FOIA defines `a representative of the news media' as a person or entity that gathers information and uses its editorial skills to turn such information into a distinct work for distribution, the Proposed Rule would benefit from clarifying language instructing FOIA officers that it should be interpreted liberally in favor of the requestor. A person or entity that meets the definition of `a representative of the news media' may, in certain circumstances, disseminate documents received pursuant to a FOIA request in full, oftentimes publishing such documents online alongside or as a supplement to a news article or other commentary. This practice is beneficial, and should not lead to the denial of media fee status.”

Response: We believe that this paragraph does not contradict the FOIA; it is very clear that the Act requires a representative of the news media to use “editorial skills.” However, since this sentence is not in the DOJ FOIA regulation template, we do not have it in our interim rule.

Executive Orders 13563 and 12866 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distribute impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This interim final rule has been designated a “significant regulatory action,” although not economically significant, under section 3(f) of Executive Order 12866. Accordingly, the rule has been reviewed by the Office of Management and Budget (OMB) under the requirements of these Executive Orders.

This interim final rule is not subject to the Unfunded Mandates Reform Act because it does not contain a federal mandate that may result in the expenditure by state, local, and tribal governments, in the aggregate, or by the private sector, of $100M or more in any one year.

It has been certified that this interim final rule is not subject to the Regulatory Flexibility Act because it does not have a significant economic impact on a substantial number of small entities. The rule implements the procedures for processing FOIA requests within the Department of Defense, which do not create such an impact.

This interim final rule does not impose reporting or recordkeeping requirements under the Paperwork Reduction Act of 1995.

Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a rule that imposes substantial direct requirement costs on state and local governments, preempts state law, or otherwise has federalism implications. This interim final rule will not have a substantial effect on state and local governments, or otherwise have federalism implications.

On October 12, 2016, the Postal Service filed a notice of mailing services price adjustments with the Postal Regulatory Commission (PRC) for products and services covered by Mailing Standards of the United States Postal Service, International Mail Manual (IMM®), to be effective on January 22, 2017. In addition, on October 17, 2016, the USPSTM published a notice of proposed price changes in the Federal Register entitled “International Mailing Services: Proposed Price Changes” (81 FR 71427). The notice included price changes that we would adopt for products and services covered by Mailing Standards of the United States Postal Service, International Mail Manual (IMM®) and publish in Notice 123, Price List, on Postal Explorer® at pe.usps.com. We received no comments.

As set forth in the PRC's Order No. 3610 issued on November 15, 2016, as well as in the PRC's Order No. 3670 issued on December 15, 2016, the PRC determined that the international prices in the Postal Service's Notice may go into effect on January 22, 2017. The new prices will accordingly be posted in Notice 123, on Postal Explorer at pe.usps.com.

You may be potentially affected by this action if you are an agricultural producer, food manufacturer, or pesticide manufacturer. The following list of North American Industrial Classification System (NAICS) codes is not intended to be exhaustive, but rather provides a guide to help readers determine whether this document applies to them. Potentially affected entities may include:

• Crop production (NAICS code 111).

• Animal production (NAICS code 112).

• Food manufacturing (NAICS code 311).

• Pesticide manufacturing (NAICS code 32532).

B. How can I get electronic access to other related information?

You may access a frequently updated electronic version of 40 CFR part 180 through the Government Printing Office's e-CFR site at http://www.ecfr.gov/cgi-bin/text-idx?&c=ecfr&tpl=/ecfrbrowse/Title40/40tab_02.tpl.

C. How can I file an objection or hearing request?

Under FFDCA section 408(g), 21 U.S.C. 346a, any person may file an objection to any aspect of this regulation and may also request a hearing on those objections. You must file your objection or request a hearing on this regulation in accordance with the instructions provided in 40 CFR part 178. To ensure proper receipt by EPA, you must identify docket ID number EPA-HQ-OPP-2016-0682 in the subject line on the first page of your submission. All requests must be in writing, and must be received by the Hearing Clerk on or before March 6, 2017. Addresses for mail and hand delivery of objections and hearing requests are provided in 40 CFR 178.25(b).

In addition to filing an objection or hearing request with the Hearing Clerk as described in 40 CFR part 178, please submit a copy of the filing (excluding any Confidential Business Information (CBI)) for inclusion in the public docket. Information not marked confidential pursuant to 40 CFR part 2 may be disclosed publicly by EPA without prior notice. Submit the non-CBI copy of your objection or hearing request, identified by docket ID number EPA-HQ-OPP-2016-0682, by one of the following methods:

• Federal eRulemaking Portal: http://www.regulations.gov. Follow the online instructions for submitting comments. Do not submit electronically any information you consider to be CBI or other information whose disclosure is restricted by statute.

• Mail: OPP Docket, Environmental Protection Agency Docket Center (EPA/DC), (28221T), 1200 Pennsylvania Ave. NW., Washington, DC 20460-0001.

• Hand Delivery: To make special arrangements for hand delivery or delivery of boxed information, please follow the instructions at http://www.epa.gov/dockets/contacts.html.

Additional instructions on commenting or visiting the docket, along with more information about dockets generally, is available at http://www.epa.gov/dockets.

EPA originally issued a final rule, published in the Federal Register of May 11, 2011 (76 FR 27261) (FRL-8873-2), which announced that on its own initiative under FFDCA section 408, 21 U.S.C. 346a, it established a time-limited tolerance for the combined residues of propiconazole and its metabolites in or on avocado at 10 ppm, with an expiration date of December 31, 2013. Subsequently, EPA published a final rule in the Federal Register of December 27, 2013 (78 FR 78746) (FRL-9904-15) to extend (revise) the expiration date for this tolerance to December 31, 2016. EPA established the tolerance because FFDCA section 408(l)(6) requires EPA to establish a time-limited tolerance or exemption from the requirement for a tolerance for pesticide chemical residues in food that will result from the use of a pesticide under an emergency exemption granted by EPA under FIFRA section 18. Such tolerances can be established without providing notice or period for public comment.

In 2014, EPA received a request to extend the use of propiconazole on avocado for an additional 3 years (under a quarantine exemption) due to the disease situation remaining an emergency condition, warranting authorization of use of propiconazole under a quarantine exemption. After having reviewed the submission, EPA concurred that emergency conditions exist. EPA authorized under FIFRA section 18 the use of propiconazole on avocado trees for control of laurel wilt disease in Florida.

EPA assessed the potential risks presented by residues of propiconazole in or on avocado. In doing so, EPA considered the safety standard in FFDCA section 408(b)(2), and decided that the necessary tolerance under FFDCA section 408(l)(6) would be consistent with the safety standard and with FIFRA section 18. The data and other relevant material have been evaluated and discussed in the final rule published in the Federal Register of May 11, 2011. Based on that data and information considered, the Agency reaffirms that extension of the time-limited tolerance will continue to meet the requirements of FFDCA section 408(l)(6). Therefore, the time-limited tolerance is extended for an additional 3-year period. EPA will publish a document in the Federal Register to remove the revoked tolerance from the Code of Federal Regulations (CFR). Although this tolerance will expire and is revoked on December 31, 2019, under FFDCA section 408(l)(5), residues of the pesticide not in excess of the amounts specified in the tolerance remaining in or on avocado after that date will not be unlawful, provided the pesticide is applied in a manner that was lawful under FIFRA and the application occurred prior to the revocation of the tolerance. EPA will take action to revoke this tolerance earlier if any experience with, scientific data on, or other relevant information on this pesticide indicate that the residues are not safe.

In making its tolerance decisions, EPA seeks to harmonize U.S. tolerances with international standards whenever possible, consistent with U.S. food safety standards and agricultural practices. EPA considers the international maximum residue limits (MRLs) established by the Codex Alimentarius Commission (Codex), as required by FFDCA section 408(b)(4). The Codex is a joint United Nations Food and Agriculture Organization/World Health Organization food standards program, and it is recognized as an international food safety standards-setting organization in trade agreements to which the United States is a party. EPA may establish a tolerance that is different from a Codex MRL; however, FFDCA section 408(b)(4) requires that EPA explain the reasons for departing from the Codex level.

The Codex has not established a MRL for propiconazole on avocado.

This action establishes a tolerance under FFDCA section 408(d) in response to a petition submitted to the Agency. The Office of Management and Budget (OMB) has exempted these types of actions from review under Executive Order 12866, entitled “Regulatory Planning and Review” (58 FR 51735, October 4, 1993). Because this action has been exempted from review under Executive Order 12866, this action is not subject to Executive Order 13211, entitled “Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, or Use” (66 FR 28355, May 22, 2001) or Executive Order 13045, entitled “Protection of Children from Environmental Health Risks and Safety Risks” (62 FR 19885, April 23, 1997). This action does not contain any information collections subject to OMB approval under the Paperwork Reduction Act (PRA) (44 U.S.C. 3501 et seq.), nor does it require any special considerations under Executive Order 12898, entitled “Federal Actions To Address Environmental Justice in Minority Populations and Low-Income Populations” (59 FR 7629, February 16, 1994).

Since tolerances and exemptions that are established on the basis of a petition under FFDCA section 408(d), such as the tolerance in this final rule, do not require the issuance of a proposed rule, the requirements of the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), do not apply.

This action directly regulates growers, food processors, food handlers, and food retailers, not States or tribes, nor does this action alter the relationships or distribution of power and responsibilities established by Congress in the preemption provisions of FFDCA section 408(n)(4). As such, the Agency has determined that this action will not have a substantial direct effect on States or tribal governments, on the relationship between the national government and the States or tribal governments, or on the distribution of power and responsibilities among the various levels of government or between the Federal Government and Indian tribes. Thus, the Agency has determined that Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999) and Executive Order 13175, entitled “Consultation and Coordination with Indian Tribal Governments” (65 FR 67249, November 9, 2000) do not apply to this action. In addition, this action does not impose any enforceable duty or contain any unfunded mandate as described under Title II of the Unfunded Mandates Reform Act (UMRA) (2 U.S.C. 1501 et seq.).

This action does not involve any technical standards that would require Agency consideration of voluntary consensus standards pursuant to section 12(d) of the National Technology Transfer and Advancement Act (NTTAA) (15 U.S.C. 272 note).

Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), EPA will submit a report containing this rule and other required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register. This action is not a “major rule” as defined by 5 U.S.C. 804(2).

Therefore, 40 CFR chapter I is amended as follows:

Section 602 of Public Law 102-585, the “Veterans Health Care Act of 1992,” enacted section 340B of the PHSA, “Limitation on Prices of Drugs Purchased by Covered Entities,” codified at 42 U.S.C. 256b. The 340B Program permits covered entities “to stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” H.R. REP. No. 102-384(II), at 12 (1992). Eligible covered entity types are defined in section 340B(a)(4) of the PHSA. Section 340B of the PHSA instructs HHS to enter into a pharmaceutical pricing agreement (PPA) with certain drug manufacturers. When a drug manufacturer signs a PPA, it is opting into the 340B Program and it agrees to the statutory requirement that the prices charged for covered outpatient drugs to covered entities will not exceed defined 340B ceiling prices, which are based on quarterly pricing data obtained from the Centers for Medicare & Medicaid Services (CMS). Section 7102 of the Patient Protection and Affordable Care Act (Pub. L. 111-148) as amended by section 2302 of the Health Care and Education Reconciliation Act (Pub. L. 111-152) (HCERA) (hereinafter referred to as the “Affordable Care Act”), added section 340B(d)(1)(B)(vi) of the PHSA, which provides for the imposition of sanctions in the form of civil monetary penalties, which—

(I) shall be assessed according to standards established in regulations to be promulgated by the Secretary;

(II) shall not exceed $5,000 for each instance of overcharging a covered entity that may have occurred; and

(III) shall apply to any manufacturer with an agreement under Section 340B of the PHSA that knowingly and intentionally charges a covered entity a price for purchase of a drug that exceeds the maximum applicable price under subsection 340B(a)(1).

The Affordable Care Act also added section 340B(d)(1)(B)(i)(I) of the PHSA, which requires “[d]eveloping and publishing through an appropriate policy or regulatory issuance, precisely defined standards and methodology for the calculation of ceiling prices . . .” CMPs provide a critical enforcement mechanism for HHS if manufacturers do not comply with statutory pricing obligations under the 340B Program. HHS is also finalizing this rule to provide increased clarity in the marketplace for all 340B Program stakeholders as to the calculation of the 340B ceiling price.

Since 1992, HHS has administratively established the terms and certain elements of the 340B Program through guidelines published in the Federal Register, typically after publication of a notice in the Federal Register and opportunity for public comment. In September 2010, HHS published an advanced notice of proposed rulemaking (ANPRM) in the Federal Register, “340B Drug Pricing Program Manufacturer Civil Monetary Penalties” (75 FR 57230, September 20, 2010). After consideration of the comments received on the ANPRM, HHS published a notice of proposed rulemaking (NPRM) in the Federal Register (80 FR 34583, June 17, 2015) entitled, “340B Drug Pricing Program Ceiling Price and Manufacturer Civil Monetary Penalties Regulation” to implement CMPs for manufacturers who knowingly and intentionally charge a covered entity more than the 340B ceiling price for a covered outpatient drug and to provide increased clarity on the requirements of manufacturers to calculate the 340B ceiling price on a quarterly basis. The public comment period closed on August 17, 2015, and HHS received approximately 35 comments. HHS reopened the comment period (81 FR 22960, April 19, 2016) to invite additional comment on several specific areas of the NPRM: 340B ceiling price calculations that result in a ceiling price that equals zero (penny pricing), the methodology that manufacturers utilize when estimating the ceiling price for a new covered outpatient drug, and the definition of the knowingly and intentionally standard for manufacturer CMPs. The additional comment period closed on May 19, 2016, and HHS received approximately 70 comments during this additional comment period. The following section presents a summary of the comments received, grouped by subject, and a response to each grouping. All comments on the proposals included in the NPRM and the reopening Notice were considered in developing this final rule, and changes were made as described. Other changes were also made to improve clarity and readability.

The revisions to 42 CFR part 10 of the final rule are described according to the applicable section of the final rule. This final rule replaces § 10.1, § 10.2, § 10.3, and § 10.10, adds a new § 10.11, and eliminates § 10.20 and § 10.21.

Comments received during both comment periods addressed general issues. We have summarized those comments and have provided a response below.

Comment: Several commenters urge HHS to specify that the effective date of the final rule be prospective and at least two quarters after the final rule's publication in the Federal Register. In addition, the commenters urge HHS to build in a significant grace period with respect to manufacturer compliance to give manufacturers sufficient time to put the necessary system capabilities in place. Other commenters asked HHS to revise the effective date of the final rule to 180 days after March 23, 2010, which would allow HHS to impose CMPs retroactively.

Response: The final rule is effective March 6, 2017. HHS recognizes that the effective date falls in the middle of a quarter. As such, HRSA plans to begin enforcing the requirements of this final rule at the start of the next quarter, which begins April 1, 2017. Manufacturers that offer 340B ceiling prices as of the quarter beginning April 1, 2017, must comply with the requirements of this final regulation. HHS believes that this timeframe provides manufacturers sufficient time to adjust systems and update their policies and procedures. HHS disagrees that the rule should be implemented retroactively. An attempt to apply the final rule retroactively would be administratively burdensome and difficult to implement for all stakeholders.

Comment: Several commenters urge HHS to defer the final rule pending the issuance of additional substantive program guidance. The commenters state that the issuance of substantive guidance first is more consistent with fundamental fairness in a civil penalty enforcement context, inasmuch as program stakeholders should understand their substantive obligations prior to any enforcement activity. The commenters also request that HHS finalize the information collection request (ICR) and gain experience first with administering the 340B ceiling price reporting system.

Response: HHS does not believe that the issuance of additional guidance is needed in order to implement this final rule. The provisions of this final rule will be effectively implemented independent of other programmatic regulations and guidances. Current policies under the 340B Program provide stakeholders with sufficient guidance regarding programmatic compliance. Regarding the ICR, HHS submitted an ICR pertaining to the collection of information for the 340B ceiling price reporting system in compliance with section 3507(a)(1)(D) of the Paperwork Reduction Act of 1995. The Office of Management and Budget (OMB) approved the ICR on September 28, 2015, after a formal notice and comment process (80 FR 22207, April 21, 2015). This final rule contains specific information related to the calculation of the 340B ceiling price and the imposition of CMPs against manufacturers who knowingly and intentionally overcharge a covered entity; therefore, it is not necessary to implement the 340B ceiling price reporting system prior to finalizing this rule.

Comment: A commenter requests that HHS provide login credentials to state Medicaid staff to facilitate dissemination of 340B ceiling price information. Alternatively, HHS could develop a different means of providing states with quarterly updates of 340B ceiling price calculations (e.g., via designated state technical contacts).

Response: We appreciate the commenters concern, and HRSA and CMS are jointly working on alternative ways to share this information with states.

Comment: Several commenters argue that HHS does not have rulemaking authority to issue a binding ceiling price regulation, as it does not have general rulemaking authority with respect to the 340B Program. Regarding 340B ceiling prices, commenters point out that Congress directed HHS under section 340B(d)(1)(B)(i)(I) of the PHSA to establish “precisely defined standards and methodology for the calculation of ceiling prices” via “an appropriate policy or regulatory issuance.” They argue, however, that in other parts of the statute, Congress more clearly directs HHS to issue regulations. For instance, under section 340B(d)(1)(B)(vi)(I), Congress directed HHS to implement civil monetary penalties pursuant to “standards established in regulations.” Commenters argue that Congress intended to confer a different level of authority and did not give HHS authority to issue regulations in this area.

Response: HHS has the statutory authority under section 340B(d)(1)(B)(i)(I) of the PHSA to develop and publish through appropriate policy or a regulatory issuance, such as this final rule, the precisely defined standards and methodology for the calculation of 340B ceiling prices. The fact that Congress limited HHS to proceed by rulemaking with regard to other authorities in the statute does not negate the choice that Congress expressly provided to HHS in section 340B(d)(1)(B)(i)(I) to proceed through either policy or regulation.

Comment: Some commenters suggest that the rule should require manufacturers to provide background information to HHS regarding 340B sales, including information such as the identity of the 340B covered entity billed for a given drug and the shipping location of the drug.

Response: HHS appreciates these comments; however, they are beyond the scope of this final rule.

Comment: Commenters noted that the rule only addressed one of the 340B Program integrity improvements required by the Affordable Care Act—CMPs for manufacturers. They suggested that HHS should not finalize this rule and should instead issue a new, comprehensive NPRM that addresses all the improvements as required by the Affordable Care Act. For instance, the commenters opposed the implementation of CMP procedures absent HHS's creation of an Administrative Dispute Resolution (ADR) process.

Response: HHS is choosing to issue separate rulemakings for the different areas of the 340B Program integrity improvements that the Affordable Care Act mandates and for which HHS has rulemaking authority. HHS is addressing the administrative dispute resolution process and issued an NPRM August 12, 2016, in the Federal Register (81 FR 53381). HHS anticipates finalizing the administrative dispute resolution regulation after the comments have been reviewed and considered.

Comment: Commenters note that the Affordable Care Act requires manufacturers to report to HHS the 340B ceiling price each quarter as well as any prior period lagged price concessions that could affect prior quarter 340B ceiling prices by changed average manufacturer price (AMP), Best Price, and unit rebate amounts (URA). The commenter further notes that the proposed rule did not address this circumstance. They suggested that HHS establish a secure protocol to submit pricing and publish for comment its proposed process for manufacturer reporting of such submissions.

Response: Section 340B(d)(1)(B) of the PHSA requires HHS to develop a system to verify the accuracy of 340B ceiling prices calculated by manufacturers and charged to covered entities. HHS recognizes the utility of the type of policy mentioned in the comments and plans to publish guidance on the particular components of the 340B ceiling price reporting system.

Section 10.1 and § 10.2 of the rule provide general information concerning section 340B of the PHSA, “Limitation on Prices of Drugs Purchased by Covered Entities.” Section 10.1 provides the purpose of part 10 and § 10.2 provides a summary of section 340B of the PHSA, which instructs the Secretary of Health and Human Services to enter into agreements with manufacturers of covered outpatient drugs under which the amount to be paid to manufacturers by certain statutorily defined covered entities does not exceed the 340B ceiling price. Manufacturers participating in the 340B Program are required to provide these discounts on all covered outpatient drugs sold to participating 340B covered entities. HHS did not receive any comments with respect to these sections and is finalizing these sections as proposed.

In the proposed rule, HHS sought to define several terms that were used throughout the regulation. These terms included: “340B Drug,” “Average Manufacturer Price,” “Ceiling price,” “CMS,” “Covered entity,” “Covered outpatient drug,” “Manufacturer,” “National Drug Code,” “Pharmaceutical Pricing Agreement,” “Quarter,” “Secretary,” and “Wholesaler.” HHS did not receive comment on the following terms, which are finalized in this rule as proposed: “Average Manufacturer Price,” “Ceiling Price,” “CMS,” “National Drug Code,” “Pharmaceutical Pricing Agreement,” and “Secretary.” For the remaining terms, HHS received specific comments and have summarized those comments below.

Proposed § 10.3 set forth a definition of the term “340B drug” as a covered outpatient drug, as defined in section 1927(k) of the Social Security Act (SSA), purchased by a covered entity at or below the 340B ceiling price required pursuant to a PPA with the Secretary. Based on the comments received, HHS is removing this definition from the final rule, as HHS believes that the definition is unnecessary. HHS received the following comment regarding the definition of a 340B drug.

Comment: Several commenters suggest that HHS remove the proposed definition of a “340B drug” as the term is not used in the 340B statute or proposed regulations and as drafted could lead to confusion and uncertainty. The proposed definition also narrowly defines the circumstances under which a 340B covered entity can acquire the drug.

Response: After consideration of the comments received with respect to this definition and in light of the definition of covered outpatient drug as set forth in section 1927(k) of the SSA, which is also defined in this final rule, HHS does not believe the definition is necessary and is, therefore, removing the definition of a 340B drug from this final rule.

The proposed rule defined the term covered entity as an entity that is listed in section 340B(a)(4) of the PHSA, meets the requirements under section 340B(a)(5) of the PHSA, and is registered and listed in the 340B database. HHS received several comments regarding the proposed definition of covered entity and have summarized them below.

Comment: Several commenters supported the proposed definition of “covered entity” as it included both registration and database listing requirements. They explain that HHS's proposal will improve the integrity of the Program, assist manufacturers in meeting their obligations, and strengthen manufacturer Medicaid compliance. Commenters urge HHS to include in the definition of covered entity that an organization must both: (1) Be in compliance with the duplicate discount and diversion prohibitions; and (2) be registered and appear on the 340B database as a participating entity during the quarter in which the transaction is made.

Response: The term covered entity is defined, in accordance with section 340B(a)(4) of the PHSA, to mean an entity that is listed in the statute and meets all of the requirements in section 340B(a)(5) pertaining to diversion and duplicate discounts. As the definition imposed in this final rule already includes that a covered entity must comply with section 340B(a)(5), it is not necessary for the definition to specify compliance with the requirements pertaining to diversion and duplicate discounts The process for appearing on the 340B database is separate and distinct from compliance with the requirements in section 340B(a)(5), and all covered entities listed on the 340B database are expected to be in compliance with this provision of the statute.

The term covered outpatient drug was defined in the proposed rule as having the meaning set forth in section 1927(k) of the SSA. HHS received several comments on the proposed definition and has summarized them below.

Comment: A few commenters recommended that HHS limit the definition of “covered outpatient drug” to only the definition at section 1927(k)(2) of the SSA, and not include the “limiting definition” of covered outpatient drugs in section 1927(k)(3) of the SSA to prevent manufacturers from limiting 340B pricing to drugs that are reimbursed separately, as opposed to those reimbursed under bundled payment methodologies. Commenters note that CMS is increasingly moving towards the use of bundled payments and other types of value-based purchasing models with the goal of 50 percent of all Medicaid payments being made under alternative payment models by 2018. Therefore, they argue, it is highly likely that an increasing number of covered entities will no longer be eligible for 340B pricing for Medicaid patients if section 1927(k)(3) of the SSA is incorporated into this regulation. Commenters urge the development of a definition of “covered outpatient drug” that is specific to the 340B Program and does not track with the Medicaid statute, which is limited to the Medicaid Drug Rebate Program (MDRP).

Response: Section 340B(b)(1) of the PHSA states that the term “covered outpatient drug” has the meaning set forth in section 1927(k) of the SSA. Section 1927(k) includes the limiting definition and HHS does not believe that the interpretation of covered outpatient drug is contrary to the purpose of the 340B Program. We disagree that covered entities will not be eligible for the 340B Program as a result of this provision.

HHS defined the term manufacturer in the proposed rule as having the meaning set forth in section 1927(k) of the SSA. HHS received several comments on the proposed definition and has summarized them below.

Comment: For the term “manufacturer,” commenters urge HHS to incorporate its long-standing guidance that a manufacturer “must hold legal title to or possession of the national drug code (NDC) for the covered outpatient drugs.” The commenter explains that the PPA has reflected this provision. This is important because there could be distinct legal entities that own distinct NDCs and are different manufacturers for purposes of the 340B Program.

Response: Section 340B(b)(1) of the PHSA defines the term as having the meaning set forth in section 1927(k) of the SSA. Given the 340B statute's direct reference to section 1927(k) of the SSA, HHS does not believe that this term needs to be further defined in this final rule. However, for 340B Program purposes, a manufacturer would be the entity holding legal title or possessing the NDC in question.

Comment: Commenters urged HHS to clarify the distinction between “manufacturers” and “wholesalers.” They suggest HHS specify that “traditional” wholesale distribution operations and contract packaging and repackaging operations do not make an entity a “manufacturer” that can be subject to CMPs.

Response: The definition of “manufacturer” is finalized at § 10.3. To the extent that a wholesale distributor meets the definition of “manufacturer,” it would need to meet the requirements for manufacturers as defined in this rule.

The term quarter is defined in the proposed rule as a calendar quarter, unless otherwise specified. HHS received several comments on this term, which are summarized below.

Comment: Several commenters support that 340B ceiling prices are calculated based on calendar quarters. However, the commenters argue that the proposed rule does not recognize the two-quarter lag between when a sales transaction occurs and when the applicable 340B ceiling price becomes effective. They urge HHS to clarify that 340B ceiling price calculations are based on sales transactions from two prior calendar quarters. They feel this is supported because calculating the 340B ceiling price for a particular calendar quarter in the immediate preceding quarter is not possible because AMP and Best Price for the quarter are not calculated and reported to CMS until 30 days after the end of a quarter.

Response: HHS agrees with the commenters. HHS notes that the 340B ceiling price is calculated based on data received from CMS that incorporates the quarterly pricing lag. For purposes of this final rule, HHS is interpreting the 340B ceiling price calculation provision at section 340B(a)(1) to be the AMP reported from the preceding calendar quarter minus the URA. Section 10.10(a) of this final rule, pertaining to the calculation of the 340B ceiling price, has been modified to align with the 340B statute pertaining to AMP calculations made in the preceding calendar quarter. For instance, the pricing data from the first quarter in any given year is not due to be reported to CMS until 30 days into the second quarter. Therefore, the pricing data from the first quarter cannot be used to price drugs until the third quarter. The definition of quarter will be finalized as proposed.

The proposed rule defines wholesaler as the term as set forth in 42 U.S.C. 1396r-8(k)(11). HHS received several comments, which are summarized and responded to below.

Comment: Commenters suggest that HHS uniformly refer to the applicable sections of the SSA (as opposed to the reference to the United States Code) for purposes of consistency and to avoid any potential confusion. Other commenters note that the term “wholesaler” as defined in section 1927(k)(11) of the SSA is focused on the distribution to retail community pharmacies, which are entities that cannot qualify as 340B covered entities. They state further that while retail community pharmacies may serve as contract pharmacies, not all 340B covered entities maintain contract pharmacy arrangements. The commenters do not think it is appropriate to utilize a definition that focuses on drug distribution and retail community pharmacies. In addition, commenters urge HHS to ensure that specialty pharmacies, including radio pharmacies and nuclear pharmacies, are not included in the term “manufacturer” or “wholesaler” and, therefore, that the 340B ceiling price is not required to be offered by specialty pharmacies, although they may elect to do so. Unlike “specialty distribution,” which can be an entity that performs the same function as a wholesaler, specialty pharmacies are pharmacies that receive, rather than distribute drugs.

Response: After consideration of the comments received on the term wholesaler, HHS is removing this term from the final rule. The term “wholesaler” as defined at section 1927(k)(11) of the SSA is not appropriate for 340B Program purposes for the reasons cited by commenters and it is not necessary to define this term in the final rule. With respect to “specialty distribution” or “specialty pharmacy,” HHS notes that it is the manufacturer's responsibility to ensure compliance with 340B Program requirements, including the requirements set forth in this final rule.

Comment: Commenters urge HHS to clarify that (1) traditional wholesale distribution operations (e.g., purchasing or holding for resale or distribution) and (2) contract packaging and repackaging operations (i.e., where the product does not bear the repackages labeler code) will not cause an entity to be a “manufacturer” that is potentially subject to CMPs. Instead, manufacturers subject to the 340B Program's pricing obligations (and potentially CMPs) should be limited to entities whose NDC labeler code appears on a drug product, as this approach is consistent with CMS and the MDRP.

Response: Although HRSA recognizes that wholesalers often act as independent entities, a manufacturer's failure to ensure that covered entities receive the 340B ceiling price through its distribution arrangements with wholesalers may be grounds for assessment of civil monetary penalties as set forth in this final rule.

In the proposed rule, HHS recognized that the 340B ceiling price for a covered outpatient drug is equal to AMP minus the URA, and will be calculated using six decimal places. HRSA proposed to publish the 340B ceiling price rounded to two decimal places.

HHS received numerous comments on this provision in the proposed rule. In this final rule, HHS has decided to remove the terms “package size” and “case package size” and plans to address these operational elements concerning the 340B ceiling price calculation in future guidance associated with the 340B Program ceiling price reporting system. HHS has addressed specific comments with respect to this issue below.

Comment: Several commenters expressed concern that the terms “package size” and “case package size” are confusing and not in the 340B statute. Commenters argue that “case package size” is not a metric tabulated or reported under other price reporting programs or currently used by manufacturers. Commenters suggest HHS clarify the terms to assist stakeholders in understanding how 340B ceiling prices are calculated and to ensure consistency in the methodology used by manufacturers to calculate 340B ceiling prices. Commenters also urge HHS to refrain from introducing new variables without analysis and an understanding of the overall ceiling price calculation. Other commenters stated that case/package size was proposed in an effort to assist HHS in providing sales prices for an 11-digit NDC; however if the unit type and units per package are consistent with the units in the 11-digit NDC, then the sales price can be derived without using any other value.

Response: After consideration of the comments received, HHS has decided to remove “package size” and “case package size” from the final rule as the statute only speaks to the 340B ceiling price calculation as being AMP minus URA. HHS does plan to further elaborate on the manner that the terms relate to the 340B ceiling price calculation, and its use by the market, in future guidance associated with the 340B Program ceiling price reporting system.

Comment: Some commenters noted that the proposed rule would require calculation of the ceiling price to six decimal points and that the necessity of this added complexity is unclear. They suggested that the ceiling prices be reported and calculated in dollars and cents with two decimal places. Several commenters support and appreciate that HHS plans to publish the ceiling price rounded to two decimal places, which makes it easier for covered entities to determine if manufacturers are charging them appropriately.

Response: HHS has concluded that the data utilized for the 340B ceiling price calculation should be in the same format as reported to CMS. CMS has indicated in Manufacturer Release No. 82 (November 1, 2010) that when AMP is submitted to the Drug Data Reporting for Medicaid (DDR) system, it should be rounded to six decimal places. In Manufacturer Release No. 46 (April 18, 2000), CMS modified the rounding methodology for the URA and required manufacturers to round URA calculations to four digits and because the field codes require six digits, CMS “pads” positions five and six with zeros. HRSA receives both the AMP and URA data from CMS at six decimal places. For the purposes of calculating the 340B ceiling price, HHS has decided that data utilized for the calculation of the 340B ceiling price will be rounded to six decimal places in an effort to ensure an accurate 340B ceiling price. HHS will then make the 340B ceiling price available in the secure 340B ceiling price system rounded to two decimal places in an effort to ensure certainty in the market place.

Comment: Some commenters urge HHS to clarify in the final rule that the ceiling price calculation is based on the quarterly AMP as opposed to a monthly AMP.

Response: AMP is described in section 340B(a)(1) of the PHSA as the AMP for the drug under title XIX of the SSA in the preceding calendar quarter. The AMP used for the calculation of the 340B ceiling price is a quarterly AMP sent to HRSA by CMS on a quarterly basis. We agree with the commenters and have modified the final rule to clarify that the 340B ceiling price is based on quarterly AMP data.

Comment: Commenters argue that the ceiling price calculation mechanics are unclear given that HHS has not yet implemented the ceiling price verification mechanism and Web site for covered entities. Other commenters request that HHS provide a detailed, standardized 340B ceiling price methodology, including a written formula.

Response: With respect to the 340B ceiling price calculation, HHS has determined that this final rule will be limited to the elements necessary to calculate the 340B ceiling price as defined at section 340B(a)(1) of the PHSA. This final rule sets forth the 340B ceiling price calculation as AMP minus URA. The development of the 340B ceiling price reporting system is proceeding under a separate ICR process that is operational in nature and is not contingent upon the specific provisions contained in this final rule. This ICR was submitted and approved by OMB on September 28, 2015, after a formal notice and comment process (80 FR 22207, April 21, 2015, OMB No. 0915-0327).

Comment: Some commenters encourage HHS to require both manufacturers and CMS to report URA values to HHS for verification and resolution of anomalies or discrepancies.

Response: The reporting obligations of manufacturers and HRSA's receipt of pricing information from CMS are outside the scope of this rule.

Where the URA equals the AMP for a drug, the section 340B ceiling price formula would result in a ceiling price of zero. The statute, however, clearly contemplates a payment to a manufacturer and the act of purchasing covered outpatient drugs. Setting a zero dollar ceiling price would run counter to the statutory scheme and lead to unintended consequences, including operational challenges. For example, some information technology systems are not able to generate invoices for any prices less than $0.01 and manufacturers may not be able to generate an electronic data interchange price update for an item that does not have a price of at least $0.01. The NPRM therefore proposed that when the 340B ceiling price calculation resulted in an amount less than $0.01, a manufacturer charge a $0.01 per unit of measure.

In light of the comments received on this particular policy (when ceiling price calculations result in a ceiling price that equals a zero, or “penny pricing”), HHS reopened the comment period (81 FR 22960, April 19, 2016) to solicit additional comment and determine whether or not alternatives raised in the comments regarding the penny pricing policy would be more appropriate. HHS also sought to provide the public with adequate opportunity to comment on alternatives to penny pricing.

The specific alternatives raised by commenters on the NPRM included the Federal Ceiling Price (FCP), the most recent positive 340B ceiling price from previous quarters, and nominal price. Some commenters stated that the FCP, which is the basis for certain Federal government program drug purchases, would be a viable alternative. Other commenters suggested that charging a ceiling price from previous quarters in which the ceiling price was greater than $0.00 would be reasonable. Finally, several commenters suggested that nominal pricing, which is a term used in the MDRP, would be more appropriate. Other commenters suggested that manufacturers should be able to utilize any reasonable pricing methodology that they choose.

In the reopening of the comment period published in the Federal Register, HHS received numerous comments supporting and opposing the alternatives to penny pricing. Several commenters opposed to the alternatives expressed that any alternatives to penny pricing would violate the 340B ceiling price formula and would reward manufacturers for raising prices faster than inflation. In addition, commenters opposed to the alternatives explained that they would directly conflict with the intent of the 340B Program by increasing costs for covered entities. Other commenters opposing the penny pricing policy suggested that the policy would result in drug shortages, stockpiling, diversion, harm to patients and abuse. Among support for several of the alternatives, these commenters recommended that HHS allow manufacturers to select a reasonable pricing methodology in accordance with their duty of good faith under the PPA.

After consideration of the comments received, HHS is finalizing the penny pricing policy as proposed. This long-standing policy reflects a balance between the equities of different stakeholders and establishes a standard pricing method in the market. Specific comments are addressed below.

Comment: Several commenters support the maintenance of the current HHS penny pricing proposal, believing it is the best approach for calculating the 340B ceiling price, that it is well-established and effective, and that it is consistent with HHS' existing policy. Many commenters were concerned that any alternatives to penny pricing would be inconsistent with the statute. Commenters encouraged HHS to consider the unintended impact that changing the penny pricing policy would have on the covered entities and the vulnerable populations they serve and supported finalizing the original penny pricing proposal. Commenters recommended that if alternate proposals were considered, HHS put forward more detailed models for thorough review and analysis of impact on covered entities.

Response: HHS agrees with the commenters supporting the current policy and is finalizing the penny pricing policy as proposed. HHS has established the penny pricing policy that allows for the next positive price ($0.01) when the calculation of the 340B ceiling price is zero. This policy is consistent with the timing of the 340B ceiling price calculation (preceding calendar quarter), and it appropriately aligns with the requisite data points (i.e., AMP and URA) for the 340B ceiling price as set forth in section 340B(a)(1) of the PHSA. HHS believes that the proposed alternatives to penny pricing would be inconsistent with the 340B ceiling price formula established in section 340B(a) of the PHSA and would raise 340B ceiling prices above the statutory formula in ways that would be inconsistent with the statutory scheme. HHS believes that the penny pricing policy best effectuates the statutory scheme.

Comment: Some commenters stated that the inflationary penalty used to calculate the URA was established to discourage manufacturers from raising the price of drugs faster than inflation (i.e., the rebate percentage increases when a manufacturer increases the price of a brand-name drug). Further, commenters believed that any alternative policy to penny pricing would reward manufacturers for raising prices faster than inflation. Commenters stated that the inflationary penalty used to calculate the URA was intentionally established by Congress to discourage manufacturers from raising the price of drugs faster than the rate of inflation and that any alternative to penny pricing would ignore this core component of the pricing formula established by Congress.

Response: Under the MDRP, CMS indexes quarterly AMPs to the rate of inflation (Consumer Price Index adjusted for inflation-urban). Section 1927(c)(2)(A) of the SSA provides that if the AMP increases at a rate faster than inflation, the manufacturer pays an additional rebate amount which is reflected in an increased URA. Historically, because of the basic rebate and the inflation factor, section 1927(c)(2)(A) of the SSA could increase the rebate amount manufacturers must pay to the States, and result in negative 340B ceiling prices. Due to the provision in section 1927(c)(2)(D) of the SSA that limits the unit rebate amount to 100 percent of the AMP, effective January 1, 2010, an increase in the basic rebate and inflation factor would not result in a negative 340B price, but could result in a zero 340B ceiling price. The methodologies proposed as alternatives to penny pricing would decrease the effect of the inflationary component of the statutory formula established by Congress (AMP increasing faster than inflation).

Comment: Commenters acknowledged HHS' authority and obligation to define the term “ceiling price,” but argued that a literal interpretation of the statutory text that would result in a calculated 340B ceiling price of zero dollars is an absurd outcome.

Response: The calculation of the 340B ceiling price is defined in section 340B(a)(1) of the PHSA as AMP minus URA. Under the MDRP, CMS indexes quarterly AMPs to the rate of inflation (Consumer Price Index adjusted for inflation-urban). Section 1927(c)(2)(A) of the SSA provides that if AMP increases at a rate faster than inflation, the manufacturer pays an additional rebate amount which is reflected in an increased URA, which could result in a 340B ceiling price of zero. Although infrequent, HHS notes that there are instances when the 340B ceiling price does calculate to a zero price. For example, in the first calendar quarter of 2016, approximately 1 percent of all drugs listed under the 340B program for that quarter resulted in a zero price.

For the reasons described in the previous responses, HHS does not believe that it is consistent with the statutory scheme to set the price at zero. In this circumstance, HHS is therefore requiring that manufacturers charge a $0.01 for the drug, which we believe best effectuates the statutory scheme by requiring a payment.

Comment: Several commenters stated that the 340B statute does not address situations where the 340B ceiling pricing calculation results in zero and therefore the PPA should govern. Commenters argued that while the PPA does not directly address what should occur when the 340B pricing formula results in zero, it provides that the agreement “shall be construed in accordance with Federal common law” which requires the parties “gap fill” by negotiating ambiguous requirements in good faith. Other commenters offered criteria under which the duty of good faith would be met by a reasonable pricing methodology to include that the policy is readily and objectively verifiable, is statutorily supported, and represents a favorable discount to covered entities.

Response: The U.S. Supreme Court has stated that PPAs are not transactional, bargained for contracts, and that “PPAs simply incorporate statutory obligations and record the manufacturers' agreement to abide by them” (Astra USA v. Santa Clara County, 563 U.S. 110, 118 (2011)). Moreover, the PPA indicates that any ambiguities shall be interpreted in a manner that best effectuates the statutory scheme, not that any ambiguities should be negotiated between the parties. 340B Program requirements are based on the manner in which the Department interprets the statute, and are not subject to a contractual negotiation process. For the reasons previously stated, the Department has determined that penny pricing is the policy that best effectuates the statutory scheme.

Comment: Commenters suggested that HHS institute a similar policy to address zero prices as the Veterans Administration (VA) uses to implement the Master Agreement for FCP prices given to certain Federal purchasers pursuant to the Veterans Health Care Act of 1992, the same legislation that created the 340B Program. They state that the VA interprets its program, which is similar to the 340B Program, to require a good faith negotiation to set a reasonable price in the event of a negative or zero FCP.

Response: Contrary to the commenters' position, the approach utilized by the VA under its separate Prime Vendor Program supports the penny pricing policy. Similar to this final rule, the VA sets the price of a negative or zero priced FCP at $0.01. The VA's assumption for these drugs is, therefore, that prices are set at $0.01. While the VA also has an additional mechanism through which manufacturers can request nominal increases in the prices of drugs (Department of Veterans Affairs, Dear Manufacturer Letter, February 24, 1993), the VA's ability to increase prices by a nominal amount above this default is based on statutory authority that does not apply to the 340B Program. Title 38 U.S.C. 8126(a)(2) states that prices may nominally exceed the statutory formula if the VA determines it “to be in the best interests of the Department or such Federal agencies.” There is no similar authority in the 340B statute to exceed the basic price calculation, and therefore HHS does not have the same ability to adjust the pricing formula set by statute.

Comment: Many commenters strongly objected to the penny pricing policy. They argued that HHS did not articulate a non-arbitrary, non-capricious reason as to why a $0.01 price is reasonable. Some commenters stated that there is no material difference between zero and $0.01, and since HHS has already stated that zero is not reasonable, $0.01 is also not reasonable. They also argued that the price of zero or one penny fails to cover the costs of goods sold, so cannot be considered the “purchase” of product. Commenters argued that the penny pricing policy would result in an illegal taking of private property by the government. They also argued the policy would result in “arbitrary” or “confiscatory” price controls.

Response: The longstanding penny pricing policy attempts to strike a balance that best effectuates the statutory scheme while ensuring that a zero ceiling price does not result. There is no requirement in the statute that the price paid must cover the costs of the drug. Reading such a requirement into the statute would require the evaluation of the costs of not only zero priced drugs, but any drug with a 340B ceiling price that is only a nominal amount. HHS does not believe that such a system is consistent with the statute. The sale of a drug for a cost less than manufacturing costs still constitutes a “purchase” and does not result in the taking of private property.

HHS disagrees with commenters that there is no material difference between setting the price at zero and $0.01. Setting the price at $0.01 requires a payment and therefore ensures that there is a purchase within the meaning of the statute and, as a practical matter, between the buyer and seller. Setting the price at zero rather than $0.01 would lead to operational challenges. We understand, for instance, that some information technology systems are not able to generate invoices for any prices less than $0.01 and manufacturers may not be able to generate an electronic data interchange price update for an item that does not have a price of at least $0.01.

Manufacturer participation in the 340B Program is also voluntary, albeit required in order to participate in the MDRP. Moreover, it is important to note that a manufacturer controls when a product reaches a zero 340B ceiling price through its own pricing decisions. If a manufacturer does not wish to offer a zero 340B ceiling price, the manufacturer may choose not to participate in the 340B Program or may alter its drug pricing practices so as not to cause a zero 340B ceiling price. For example, when AMP increases more quickly than the rate of inflation, the manufacturer must pay a greater Medicaid rebate, which can also cause a zero 340B price. A manufacturer can control AMP by adjusting the prices that it charges for drugs.

Comment: Some commenters stated the penny pricing proposal is likely to result in and/or increase the potential for drug shortages and diversion, requiring manufacturers to adopt burdensome and costly “alternate allocation procedures” to correct for the market-distorting effect of HHS' policies. Commenters further stated the continuation of penny pricing policy would further exacerbate drug shortages, particularly for generic drugs, given that in the first quarter 2017 generic drugs will be subject to an additional rebate in the URA formula if the AMP for such drugs rises faster than inflation. Given this, the penny pricing provision would result in potential of stockpiling, diversion, harm to patients, and abuse of controlled substances. Commenters were also concerned that there could be an increase in risk evaluation and mitigation strategy (REMS) drugs and drugs for which there is a grey or black market.

Response: The penny pricing policy has been in place for many years and HHS does not have evidence that the policy causes significant risks of stockpiling, diversion, harm to patients, and abuse of controlled substances. HHS has existing policy with regard to manufacturer limited distribution plans for sales of covered outpatient drugs to eligible 340B entities under the 340B Program. Manufacturers may address any resultant market distribution challenges by developing and executing a plan for limited distribution to all purchasers of the affected drug, including 340B covered entities when penny pricing occurs. Manufacturers are currently able to develop appropriate limited distribution protocols. HHS will be sensitive to plans to address drug shortages, stockpiling, and oversupplying of drugs subject to abuse or with REMS warnings.

Comment: Many commenters stated their desire for the flexibility to use any or all of the alternative methods to penny pricing proposed. Manufacturer flexibility and discretion to adopt reasonable approaches to setting the 340B ceiling price when the ceiling price calculates to zero allows manufacturers to recover their costs while providing a discounted rate commensurate with the intent of the 340B statute.

Response: HHS believes it is most appropriate to establish a standard price calculation in this circumstance, as it is not practical to allow all manufacturers to choose from a variety of methods that could result in pricing variations that could create market disruption and uncertainty. Therefore, we are finalizing the penny pricing policy as proposed.

Comment: Some commenters were in favor of utilizing nominal pricing (less than 10 percent of AMP in the same quarter for which the AMP is computed) as an alternative to penny pricing. Commenters also noted that the MDRP uses this methodology, and that nominal price is a term that appears nine times in the Medicaid statute. They stated further that Congress has demonstrated support for applying this concept by listing 340B covered entities first among the six potential recipients to whom manufacturers may extend a nominal price without impacting best price. Commenters stated that nominal price addressed HHS' concern that “prices must be based on the immediately preceding calendar quarter.”

Response: While the term nominal price appears in the Medicaid drug rebate statute, it is entirely absent from the 340B statute. Covered entities can receive a nominal price without impacting a manufacturers' best price for purposes of Medicaid calculations; however, nominal pricing is unrelated to the statutorily-mandated 340B Program pricing calculation. Although the nominal pricing alternative is based on the calendar quarter in which AMP is calculated, consistent with the timing of the 340B ceiling price calculation, it does not appropriately align with the requisite data points (i.e., AMP and URA) for the 340B ceiling price as set in section 340B(a)(1) of the PHSA. HHS will therefore finalize penny pricing as proposed.

Comment: Some commenters favored the utilization of the most recent positive AMP or the last positive, non-zero ceiling price as an alternative to penny pricing. This approach would result in a significant discount to covered entities and would be analogous to the process under MDRP where manufacturers are required to report the most recent positive AMP if AMP equals zero. Carrying forward the most-recent, positive quarterly 340B ceiling price would have the practical effect of establishing a realistic covered entity purchase price, and would reduce the risk of diversion posed by penny pricing.

Response: The MDRP and the 340B Program are authorized under different statutes. While the commenter attempts to draw a comparison between the Medicaid AMP policy and the 340B penny pricing policy, AMP is not the only component of the 340B ceiling pricing formula, as the calculation also includes the URA.

In addition, utilizing the AMP calculation from the last positive quarter would not align with the statutory requirement at section 340B(a)(1) of the PHSA that the 340B ceiling price be based on the preceding calendar quarter's data and could encourage manufacturers to manipulate pricing data. In addition, this method ignores the portion of the congressionally mandated pricing formula regarding the inflation adjustment. Therefore, HHS has determined that this alternative is not an adequate alternative and will finalize this rule as proposed.

Comment: Many commenters were in favor of utilizing the FCP as an alternative to penny pricing. Commenters also suggested the FCP offers an objectively verifiable benchmark and conveys a significant discount to covered entities without driving stockpiling and diversion.

Response: The FCP has some similarities in intent and price-setting methodology to the 340B ceiling price. However, the FCP is generally computed once each calendar year and does not align with the requirement that 340B ceiling prices be calculated on a quarterly basis. Additionally, the FCP is not computed using the required calculation points of AMP and URA. Moreover, there is no mention of the FCP in the 340B statute. Therefore, HHS has determined that FCP is not an adequate alternative and will finalize this rule as proposed.

Comment: Some commenters requested an exception to the penny pricing policy for orphan drugs. They suggest that when 340B sales volume exceeds a given threshold (e.g., 15 percent), a manufacturer should be permitted to utilize an alternative 340B price, such as its lowest commercial price.

Response: When an orphan drug meets the definition of a covered outpatient drug, it would be subject to the requirements as set forth in this final rule. Further, the statue does not contemplate an alternative pricing methodology for orphan drugs.

In general, calculation of the current quarter 340B ceiling price for each covered outpatient drug is based on pricing data from the immediately preceding calendar quarter. For new drugs, there is no sales data from which to determine the 340B ceiling price. HHS published guidelines in 1995 describing ceiling price calculations for new drugs (60 FR 51488, October 2, 1995) and the final rule will replace these guidelines.

In the NPRM, HHS proposed that manufacturers estimate the 340B ceiling price for a new covered outpatient drug as of the date the drug is first available for sale, and provide HHS an estimated 340B ceiling price for each of the first three quarters the drug is available for sale. HHS also proposed that, beginning with the fourth quarter the drug is available for sale, the manufacturer must calculate the 340B ceiling price as described in proposed 42 CFR 10.10(a). Under the proposed rule, the actual 340B ceiling price for the first three quarters would also have been calculated and manufacturers would have been required to provide a refund or credit to any covered entity that purchased the covered outpatient drug at a price greater than the calculated 340B ceiling price. HHS proposed that any refunds or credits owed to a covered entity would be provided by the end of the fourth quarter.

HHS received comments supporting and opposing the various components of its proposal on new drug price estimation. Commenters requested clarification on de minimis refunds under the proposed policy, price estimation methodologies, and whether refund policies stated in this regulation apply to all refunds, not just those corresponding to new drugs. Several commenters supported a specific methodology for calculating new drug prices, which included setting the price of the new covered outpatient drug as wholesale acquisition cost (WAC) minus the applicable rebate percentage (i.e., 23.1 percent for most single-source and innovator drugs, 17.1 percent for clotting factors and drugs approved exclusively for pediatric indications, and 13 percent for generics). Commenters argued that this price would eliminate the need to estimate the price for the first three quarters and would result in a reasonable 340B ceiling price. Given the comments received regarding setting a specific methodology, when HHS reopened the comment period, HHS sought comment on this issue. HHS specifically requested comment on setting the estimation at WAC minus the applicable rebate percentage.

After consideration of the comments received, HHS is modifying the final rule to require that manufacturers estimate, using a standardized methodology, the 340B ceiling price for a new covered outpatient drug until there is AMP data available to calculate an actual 340B ceiling price as set forth in 340B(a)(1) of the PHSA. The methodology set forth in this final rule for the estimated 340B ceiling price is WAC minus the appropriate rebate percentage. Once the AMP is known, and no later than the fourth quarter that the drug is available for sale, manufacturers would be required to calculate the actual 340B ceiling price based on AMP for the time under which the 340B ceiling price was estimated. The manufacturer is then required to offer a repayment to the covered entity the difference between the estimated 340B ceiling price and the actual 340B ceiling price within 120 days of the determination by the manufacturer that an overcharge occurred.

For example, if a manufacturer with a PPA has a new drug approved for sale in February, and that drug meets the definition of covered outpatient drug, the 340B price estimation requirements would apply for at least one full calendar quarter. During that time, the manufacturer would estimate the 340B ceiling price at WAC minus the appropriate rebate percentage until the manufacturer can calculate an AMP for the product, resulting in an actual 340B ceiling price based on that AMP. The estimation can occur for up to the first three calendar quarters of availability, at which point the manufacturer will have the necessary pricing data to calculate the 340B ceiling price based on section 340B(a)(1) of the PHSA.

Since manufacturers must offer repayments as set forth in this section, it is incumbent on them to contact affected covered entities as part of that process. During initial contact, a manufacturer and a covered entity may both determine that a given overcharge is not significant, or agree to other payment options such as netting or crediting. In these instances, both parties are free to pursue mutually agreed-upon alternative refund arrangements. HHS has summarized and provided a response to the comments below.

Comment: HHS received comments generally supporting and opposing the proposal to price new covered outpatient drugs at WAC minus the Medicaid minimum discount rebate percentages (i.e., 23.1 percent for most single-source and innovator drugs, 17.1 percent for clotting factors and drugs approved exclusively for pediatric indications, and 13 percent for generics) until an AMP derived ceiling price can be identified after the third full quarter in which the drug became available. In addition, commenters suggested that HHS should not require subsequent pricing revisions or a refund once the actual price is determined. The commenters stated that such an approach would be simpler, while resulting in reasonable proxies for the final 340B ceiling prices.

Response: The 340B ceiling price is calculated based upon AMP minus URA data supplied by CMS that is reported by manufacturers under the MDRP. Given that the AMP for a new covered outpatient drug may not be known for a period of time after the drug comes to market, HHS sought a balance between a standardized and universally applicable interim pricing requirement, while also ensuring that covered entities ultimately receive the 340B ceiling price as defined by the statute. Therefore, we have added to the final rule that new covered outpatient drugs should be estimated and sold to 340B participating covered entities using a standardized formula for the estimation at WAC minus the applicable Medicaid drug rebate percentage until an actual 340B ceiling price can be determined based on AMP. HHS believes a standardized formula for the calculation of the estimation will create stability in the market and provide transparency and consistency in the process. While the commenter's suggested approach may be feasible, HHS does not believe that it is reflective of statutory intent. In addition, HHS has maintained in the final rule that once an actual 340B ceiling price can be determined, manufacturers will be obligated to refund any difference between the estimated 340B price and the actual 340B ceiling price. If a manufacturer refuses to refund covered entities after it has been determined covered entities were overcharged during the time the 340B ceiling price was estimated, that could meet the knowingly and intentionally standard to apply a CMP. This has been clarified in § 10.11 of this final rule.

Comment: HHS received several comments from covered entity groups expressing concern that the proposed new drug price estimation method, based on WAC minus the appropriate rebate percentage, would result in prices that are significantly higher than estimates derived from other methods. Commenters stated that WAC-derived pricing is often 30 percent higher than prices available to group purchasing organizations and that 340B ceiling prices are typically much lower than this estimation.

Response: HHS believes that the final rule ensures that covered entities will be able to receive the 340B ceiling price as defined in statute by requiring manufacturers to offer a refund to covered entities after the estimation period and within 120 days of determining there was an overcharge.

Comment: Several commenters suggested that the 340B Program follow Medicaid policy towards rebates for new drugs, whereby prices are determined from the beginning by AMP (rather than WAC) minus the applicable discount percentage. The commenters argued that policy alignment with Medicaid would greatly simplify rebate program administration, and minimize the need for future reconciliation of overcharges. Commenters also suggested that HHS should reevaluate such a formula for new drug pricing to see how closely it aligns with AMP derived pricing after the initial estimation period.

Response: The CMS Medicaid Covered Outpatient Drug Rule (81 FR 5270, February 1, 2016) refers to AMP-based pricing only when a new version of an existing drug comes to market. In the case of a new drug, the Medicaid program does not utilize AMP-based pricing, as there are no prior sales data to base it on. Therefore, initial prices must be based on another price point. HHS believes that using a standardized formula, WAC minus the appropriate rebate percentage, to estimate 340B ceiling prices prior to an AMP being available is the most appropriate way to implement pricing requirements with regards to new drugs.

Comment: Regarding the timeframe for new drug price calculations, several commenters suggested that new drug pricing follow the VA policy, whereby manufacturers are required to provide an initial (provisional) FCP statutory discount percentage to the WAC for 30 days, followed by a temporary pricing period predicated on the first 30 days of commercial sales, and permanent ceiling pricing taking effect after the first quarter by applying the statutory discount to the non-Federal AMP as it becomes available. Commenters cited the VA timeframe, whereby an estimated (WAC-based) price is used for the first month that a new drug is available, followed by a switch to a temporary (AMP-based) price.

Response: HHS believes that it is appropriate to minimize any restatements of pricing that occur as a new 340B drug comes to market. The VA timeframe does not correlate to the quarterly pricing that occurs in the 340B Program. Therefore, HHS has finalized the rule to estimate drug pricing as WAC minus the appropriate rebate percentage until an actual 340B ceiling price can be computed based on AMP.

HHS also notes that a provisional FCP is not required by the VA, it is optional. In addition, if a provisional FCP is established, it is not valid for just the first 30 days. It remains valid until the first temporary FCP comes due or is established, which could be up to 75 days from launch.

Comment: Commenters suggested that new drug calculations should not be subject to the two-quarter lag typical of other price calculations. These commenters recommended establishing an “interim” (WAC minus the appropriate rebate percentage) ceiling price through the first full quarter, followed by pricing based on the AMP, which can be established with one quarter of data. Other commenters suggested establishing provisional 340B ceiling prices for new drugs based on MDRP statutory discounts applied to an available U.S. sales reference price (e.g., WAC reduced by estimates for quarterly URA values), thus eliminating the need for restatements at a later date.

Response: The 340B ceiling price is set by the statute and manufacturers are required to charge covered entities that ceiling price. Therefore, manufacturers are required to issue refunds if it is determined that a covered entity paid a price higher than the 340B ceiling price. HHS has also decided to standardize the pricing estimation during the period for which there is not an AMP available to calculate an actual 340B ceiling price. HHS believes that WAC minus the rebate percentage serves is a fair and reasonable estimated 340B ceiling price.

Comment: Commenters among the drug manufacturer community stated that it is not necessary to provide price estimates past the first full quarter, so that less time will elapse where a new drug ceiling price is estimated instead of being based on actual market data. Others stated that two quarters was sufficient to calculate prices based off the first quarter's sales data. Commenters argued that a shorter estimate period would reduce administrative burdens, and lessen the need for retroactive refunds.

Response: HHS agrees that an AMP for a new covered outpatient drug may be established after one full quarter has elapsed. Under the final rule, once the AMP is known, and no later than the fourth quarter that the drug is available for sale, manufacturers would be required to calculate the actual 340B ceiling price based on the AMP for the time under which the ceiling price was estimated. The estimation can occur for up to the first three calendar quarters of availability, at which point the manufacturer will have the necessary pricing data to calculate the 340B ceiling price based on section 340B(a)(1) of the PHSA. The manufacturer must offer to refund or credit the covered entity the difference between the estimated ceiling price and the actual 340B ceiling price within 120 days of the determination by the manufacturer that an overcharge occurred.

Comment: Commenters were concerned that the proposed timeframe for manufacturers to issue refunds or credits is too short. Commenters requested that the refund process for overestimated new drug prices follow the Medicaid approach of allowing 12 quarters for price restatements, followed by 2 quarters for the refund to occur. Other commenters wrote in support of the proposed fourth quarter standard.

Response: The NPRM proposed that refunds or credits be provided to entities by the end of the fourth quarter. HHS agrees additional time may be necessary to issue refunds. Therefore, HHS has changed the NPRM's fourth quarter standard in the final rule. In addition, the final rule states that manufacturers must offer to refund or credit the covered entity the difference between the estimated 340B ceiling price and the actual 340B ceiling price within 120 days of the determination by the manufacturer that an overcharge occurred. HHS believes that 120 days allows the manufacturer and the covered entity an opportunity to first determine whether the overcharge is significant, and if not, whether to make repayment options such as crediting or netting.

Comment: Commenters argued that the proposed refund procedure is inconsistent with the 1995 guidance (60 FR 51488, October 2, 1995) where covered entities are responsible for initiating the refund process, and must do so without a third-party intermediary and that the refund requests should be made by the end of the fourth full quarter after a new drug comes to market.

Response: Manufacturers are required by statute to provide covered entities the statutorily defined 340B ceiling price. Therefore, once a manufacturer determines there is an overcharge related to new drug price estimation as set forth in this final rule, manufacturers must notify covered entities affected and appropriately refund them accordingly. This final rule replaces the 1995 guidance in its entirety.

Comment: Commenters stated that requiring refunds following ceiling price recalculations would be inconsistent with the 340B statute because such refunds would impose an undue cost on manufacturers.

Response: In accordance with section 340B(a)(1) of the PHSA, 340B ceiling prices for covered entities must “not exceed an amount equal to the average manufacturer price for the drug under title XIX of the SSA in the preceding calendar quarter, reduced by the rebate percentage” outlined in section 340B(a)(2)(A) of the PHSA. Since the necessary predicate of an AMP cannot be known until a drug has been on the market for a preceding calendar quarter, we have determined that using a reasonable, standardized estimate in the interim, followed by refunds as the AMP is calculated, achieves the programmatic goal of assuring that covered entities receive refunds owed in both a timely and a complete manner. Regarding the cost to manufacturers, this policy involves using similar mechanisms currently in use for other refunds routinely issued by manufacturers, and does not represent a significant added cost.

Comment: Commenters requested clarification on what is meant by the “expected” versus the “actual” price, in addition to requests for clarification on methods for developing expected or estimated prices for new drugs.

Response: For the purposes of this rule, “expected” can be understood as the initial (estimated) 340B ceiling price that is charged to a covered entity when there is not yet an AMP to use in the 340B ceiling price calculation. HHS has added to this final rule a standardized formula to the new drug price cost estimation, which is WAC minus the appropriate rebate percentage. The “actual” 340B ceiling price is the price of a new drug once there is an AMP in place that is used to calculate the 340B ceiling price per statute.

Comment: Commenters requested clarification on the potential role of wholesalers and distributors in the refund process, specifically in identifying covered entities entitled to a refund based on new drug price estimation.

Response: The role of wholesalers and distributors is dependent on how individual manufacturers contract with these third parties to distribute 340B drugs. Whether wholesalers and distributors play a role in the refund process is determined by individual manufacturers and their business operations with these stakeholders. The requirement to refund a covered entity as outlined in the final rule rests with the manufacturers. A manufacturer may use a third party to assist in ensuring they meet those requirements.

Comment: Several commenters requested that there be an exemption for de minimis refund amounts resulting from differences between initial ceiling price estimates and the establishment of a retroactive actual ceiling price after the first three quarters that a new drug becomes available. Commenters cited administrative burden in issuing refunds for all overcharges, regardless of their significance. Commenters representing both the manufacturer and the covered entity communities were broadly supportive of a defined threshold, as well as a stated timeframe for refunds to be issued.

Response: Manufacturers are obligated to offer repayments within 120 days of the determination that an overcharge occurred. HHS does not agree that the final rule should set a materiality threshold, and believes this is best approached by marketplace arrangements and in good faith negotiation between the parties. To the extent that a manufacturer and covered entity agree that a de minimis threshold for refunds should be established, such a threshold can be established through mutual agreement between the manufacturer and covered entity.

Comment: Regarding overcharges resulting from differences between estimated and actual ceiling prices, a number of commenters requested that overcharges be netted in a manner similar to MDRP regulations. The commenters stated that the MDRP permits manufacturers to aggregate the impact of restated prices on each sale to determine the net amount due after pricing restatements and that states are not permitted to retain excess rebate amounts paid upon recalculations. Commenters suggested that because the MDRP and 340B Program are closely intertwined, they should be consistently administered and allow a similar netting approach as to minimize administrative and financial burden of refunding 340B covered entities.

Response: To the extent there is an agreement between the manufacturer and covered entity, HHS does not intend to prevent manufacturers from using the industry's practice of netting overcharges and undercharges, or to restate ceiling prices based on pricing data submitted to CMS. However, the 340B statute is specific to ensuring each covered outpatient drug is offered at or below the 340B ceiling price. Once it is determined that an overcharge occurred, a manufacturer and a covered entity, in good faith, may both determine that a given overcharge is not significant, or agree to other payment options such as netting or crediting. In these instances, both parties are free to pursue mutually agreed-upon alternative refund arrangements.

Comment: Many commenters suggested that covered entities be held liable for undercharges that occur during a new drug's estimated pricing period.

Response: Given the nature of the standardized estimated 340B ceiling price calculation described in this final rule, HHS views the likelihood of undercharges to be low. Because WAC is typically higher than the 340B ceiling price and the estimation for new drugs finalized in this rule is based on that amount, we believe that new estimation undercharges will be minimal. Section 340B(a)(10) of the PHSA states that there is no prohibition on larger discounts being offered to covered entities. In addition, the statute is specific in addressing when a manufacturer overcharges a covered entity and it does not address refunds by covered entities if the manufacturer provides a price below the 340B ceiling price. Therefore, it will not be addressed in the final rule.

Comment: Commenters requested clarification on whether the refund policy described in this rule would apply to all overcharges identified during price restatements, and not just those that occur as sales data can be applied to new drug pricing. Commenters also requested that HHS codify a formal refund procedure in regulation and that the Affordable Care Act requires the 340B Program to develop a refund mechanism.

Response: The refund requirements as set forth in this final rule apply as it relates to new drug price estimations. Specific procedures for refunds are outside the authority of this final rule and will be addressed in future guidance. HHS is finalizing this refund requirement as proposed and continues to believe that an instance of overcharging may occur at the time of initial purchase or when subsequent ceiling price recalculations resulting from pricing data submitted to CMS occur.

Comment: Commenters requested that HHS define “new drug” in this rule, suggesting the use of NDC-11 or package size as criteria. Commenters suggested a clarification that a new package size is not a new drug, suggesting that new prices can be derived off known unit prices, with any subsequent refunds occurring under the existing reconciliation process. Commenters suggested a clarification that a new package size of an existing drug should not be considered a new drug for purposes of this rule and that the 340B ceiling price should use the per unit pricing data (NDC-9) from the existing package sizes already in the market.

Response: For the purposes of this final rule, a new covered outpatient drug is any drug that does not have a previous quarter AMP calculation from which a price can be derived. HHS does not believe this distinction needs to be clarified in the final rule, and additional policy on this issue may be developed if the need arises.

Section 340B(d)(1)(B)(vi) of the PHSA provides for the imposition of civil monetary penalties on manufacturers that knowingly and intentionally charge a covered entity a price for a 340B drug that exceeds the ceiling price. At § 10.11(a) of the NPRM, HHS proposed that any manufacturer with a PPA that knowingly and intentionally charges a covered entity more than the 340B ceiling price, as defined in § 10.10, for a covered outpatient drug, may be subject to a civil monetary penalty not to exceed $5,000 for each instance of overcharging a covered entity. As indicated in the NPRM, pursuant to a delegation of authority, OIG will have authority to impose a CMP. The initial release of the NRPM did not define the term “knowing and intentional,” but based on comments received, HHS reopened the NPRM comment period (81 FR 22960, April 19, 2016) to seek comment on the definition of the knowing and intentional standard for purposes of HHS' CMP authority. HHS offered possible options on how the term should be defined. HHS understands that intent is difficult to define, therefore, input was solicited on circumstances in which the requisite intent should and should not be inferred. In particular, HHS solicited comment on the concept that manufacturers would not be considered to have the requisite intent in the following circumstances:

• The manufacturer made an inadvertent, unintentional, or unrecognized error in calculating the ceiling price;

• A manufacturer acted on a reasonable interpretation of agency guidance; or

• When a manufacturer has established alternative allocation procedures where there is an inadequate supply of product to meet market demand, as long as covered entities are able to purchase on the same terms as all other similarly situated non-340B covered entities.

HHS received numerous comments recommending the terms knowingly and intentionally be further defined in the final rule. Commenters generally supported the listed examples of circumstances where the requisite intent is not demonstrated, and a number of commenters suggested additional examples. Commenters also raised concern over ensuring the terms knowingly and intentionally are not overly prescriptive such that they limit the use of a CMP. In the final rule, HHS sought balance between a clear and enforceable definition and the need to approach each instance of an overcharge with a full view of the surrounding circumstances. Given these two goals, HHS is finalizing the rule as proposed and has provided additional examples of conduct that would not be considered to meet the threshold of “knowing and intentional” action in this supplementary information section in response to comments. In addition, as a general principle, HHS will defer to OIG to determine whether a given situation constitutes a `knowing and intentional' 340B drug overcharge based on the specific case being investigated. HHS believes this will provide the flexibility necessary to evaluate an instance of overcharging on a case-by-case basis. Below is a summary of the comments received, and HHS' responses.

Comment: Commenters provided additional examples to be considered as not meeting the knowing and intentional threshold, such as periods of estimations for new drugs.

Response: HHS agrees that the period of time for which a manufacturer is estimating a 340B ceiling price for new drugs as set forth in this final rule may not meet the knowingly and intentionally standard, as long as the manufacturer also ensures that the covered entities are refunded according to § 10.10(c). However, if a manufacturer does not offer to refund a covered entity per § 10.10(c) of the final rule, that may constitute a knowing and intentional overcharge. The final rule has been modified accordingly. Examples of circumstances where HHS would assume that a manufacturer did not “knowingly and intentionally” overcharge a covered entity are:

• The manufacturer made an isolated inadvertent, unintentional, or unrecognized error in calculating the 340B ceiling price;

• The manufacturer sells a new covered outpatient drug during the period the manufacturer is estimating a price based on this final rule, as long as the manufacturer offers refunds of any overcharges to covered entities within 120 days of determining an overcharge occurred during the estimation period;

• When a covered entity did not initially identify the purchase to the manufacturer as 340B-eligible at the time of purchase; or

• When a covered entity chooses to order non-340B priced drugs and the order is not due to a manufacturer's refusal to sell or make drugs available at the 340B price.

We note that these examples are not exhaustive, and are intended to provide an indication of some types of actions that would not be considered “knowing and intentional” overcharges. In the NPRM, the last two examples above were included in the text of the regulation defining instances of overcharging. Upon consideration of public comments, HHS believes that the last two examples above should be construed as particular circumstances under which an instance of overcharging did not occur as opposed to examples of what would constitute an instance of overcharging. As a result, HHS is not including these two examples in the final regulatory text defining an instance of overcharging, but rather providing them here as examples of instances where overcharging did not occur. As a general principle, HHS will defer to OIG to determine whether a given situation constitutes a `knowing and intentional' overcharge based on the specific case being investigated.

Comment: Some commenters suggested that HHS adopt the definition of “knowingly” from the HHS OIG CMP regulations. Under these regulations, the term “knowingly” is defined as “a person, with respect to information, has actual knowledge of information, acts in deliberate ignorance of the truth or falsity of the information, or acts in reckless disregard of the truth or falsity of the information, and that no proof of specific intent to defraud is required” (42 CFR 1003.102 (e)). A few commenters noted that under the canons of statutory construction, agencies must assume Congress intended each word or phrase to have a distinct meaning.

Response: HHS does not believe it is appropriate to incorporate additional language over and above the statutory language “knowingly and intentionally” that would limit OIG further in applying this penalty. Each factual case is different and will be evaluated separately to determine if it may warrant a penalty as set forth in this final rule. After consideration of the comments received, HHS has decided not to define these terms and to allow OIG the necessary flexibility to evaluate each instance of overcharge on a case-by-case basis.

Comment: Commenters offered specific definitions of the term “intentionally.” Several commenters requested that “intentionally” be defined as “not due to a mathematical miscalculation, clerical oversight, or similar inadvertent error.” A few commenters requested that the term “intentionally” be defined as “consciously committing an act or omission that results in an overcharge.” Commenters requested that, when defining the terms “knowingly” and “intentionally,” HHS incorporate definitions such as “actual knowledge by the manufacturer, its employees, or its agents of the instance of overcharge” or “acting consciously and with awareness of the acts leading to the instance of overcharge.” Commenters interpreted the statute to say that it must be “knowing and intentional” on the part of the manufacturer both that the amount charged exceeds the ceiling price and that the entity charged is in fact a covered entity.

Response: HHS appreciates commenters' proposed definitions of “knowingly and intentionally,” and also acknowledges commenters' concerns about HHS' proposed definitions. HHS agrees that in cases where a manufacturer established that the overcharge in question was as a result of an isolated act of simple negligence or inadvertent math error, then the penalty would not typically apply. However, the facts and circumstances of each case would need to be taken into account. For example, if a manufacturer inadvertently developed an unreliable process that resulted in negligent errors, but later there is knowledge of such systematic failures that results in errors in the 340B ceiling price calculation that causes overcharges, this could be sufficient to meet a knowingly and intentionally standard. After consideration of the comments received, HHS has decided not to define these terms and to allow OIG the necessary flexibility to evaluate each instance of overcharge on a case-by-case basis.

Comment: Several commenters believed that the statute's requirement that conduct must be both “knowing” and “intentional” to impose CMPs sets up a specific and demanding standard and some covered entities were concerned that the proposed definitions set the bar so high as to have little practical value in ensuring that they receive appropriate prices under the 340B Program. They stated that the intent standard is contrary to Congress' intent to give HHS a meaningful enforcement tool, and it will not deter manufacturers from overcharging under the 340B statute. Further, they noted that the Supreme Court wrote that through CMP provisions “Congress thus opted to strengthen and formalize HHS' enforcement authority” (Astra USA v. Santa Clara County, 563 U.S. 110, 121-22 (2011)). Other commenters were concerned that the proposed definitions would not amount to the heightened threshold for intent outlined in the statute, meaning that the proposed definitions would capture lesser forms of misconduct than Congress had intended.

Response: While HHS agrees that the use of the terms knowingly and intentionally as set forth in the statute set a high standard for imposing penalties, HHS believes it will serve as an enforcement tool to ensure manufacturers are charging covered entities at or below the 340B ceiling price. HHS appreciates commenters' proposed definitions of “knowingly and intentionally,” and also acknowledges commenters' concerns about HHS' proposed definitions. HHS has decided not to define these terms and to allow OIG the necessary flexibility to evaluate each instance of overcharge on a case-by-case basis.

Comment: HHS provided several possible definitions for knowing and intentional when it reopened the comment period: (1) Actual knowledge by the manufacturer, its employees, or its agents of the instance of overcharge; (2) willful or purposeful acts by, or on behalf of, the manufacturer that lead to the instance of overcharge; (3) acting consciously and with awareness of the acts leading to the instance of overcharge; and/or (4) acting with a conscious desire or purpose to cause an overcharge or acting in a way practically certain to result in an overcharge. HHS received a number of comments on the proposed definitions.

Response: HHS has decided not to define these terms and to allow OIG the necessary flexibility to evaluate each instance of overcharge on a case-by-case basis.

Comment: With respect to the language in the notice of reopening of comment period (81 FR 22960, April 6, 2016) that “manufacturers do not need to intend specifically to violate the 340B statute; but rather to have knowingly and intentionally overcharged the 340B covered entity,” several commenters expressed concern that this is inconsistent with the statutory text. These commenters argued that in order to be subject to CMPs, the manufacturer must specifically intend to violate the 340B statute, not solely intend to charge a price that is higher than the 340B ceiling price.

Response: HHS agrees that CMPs will be applied to a manufacturer that knowingly and intentionally overcharges a covered entity. The specific intent to violate the 340B statute is not necessarily required to be shown to warrant an application of the penalty provision.

Comment: Commenters expressed concern that any further definition of the terms “knowing” and “intentionally” will constrain HHS' ability to judge whether a CMP is appropriate in a given instance. If HHS determines that further definition is necessary, they suggested using an exclusionary approach, stating specific actions that do not rise to the level of requisite intent, rather than an approach that names only specific actions that will be considered “knowing and intentional” in this context. Commenters generally supported the listed examples of circumstances where the requisite intent is not demonstrated and requested that the examples be explicitly characterized as non-exhaustive. Several commenters suggested adding a catch-all provision to the list of examples, such as “other situations in which it is reasonable not to infer that a manufacturer acted `knowingly and intentionally,' ” or “any other situation not presenting circumstances of a deliberate effort to disobey the law with regard to the 340B program.”

Response: HHS agrees with the commenter's approach. Therefore, instead of defining these terms in an inclusive manner, HHS has chosen to provide OIG the flexibility to determine what constitutes “knowingly” and “intentionally” overcharging a covered entity in a particular instance. In addition, HHS provides examples above regarding circumstances that would not meet the threshold of knowingly and intentionally overcharging a covered entity.

Comment: With respect to the proposed example “the manufacturer made an inadvertent, unintentional, or unrecognized error in calculating the ceiling price,” one commenter suggested including an error “identifying the eligibility of an entity to receive the 340B discount.”

Response: HHS did not include the suggestion to include an error in “identifying the eligibility of an entity to receive the 340B discount” in the final rule to retain flexibility that the penalty be applied only where appropriate. However, it should be noted that 340B covered entities are listed on the 340B public database, and those listed are entitled to the 340B ceiling price.

Comment: Regarding the proposed example “a manufacturer acted on a reasonable interpretation of agency guidance,” a commenter was concerned that the example was overly broad, since manufacturers may decide what is reasonable, and this, therefore, may create a loophole for manufacturers to avoid CMPs. They recommended, at a minimum, clarifying that this is an objective reasonableness standard, as determined by HHS and/or OIG. Several other commenters suggested adding exceptions for reasonable interpretations of laws, regulations, and the pharmaceutical pricing agreement. Further, one commenter stated that in circumstances where the statute and agency guidance conflict, it is reasonable for the manufacturer to adopt practices consistent with the statute.

Response: HHS agrees that the proposed example that, “a manufacturer acted on a reasonable interpretation of agency guidance,” was overly broad. OIG would need to consider each circumstance of a 340B drug overcharge on a case by case basis to determine if that circumstance constitutes a “knowing and intentional action.

Comment: With respect to the proposed example, “when a manufacturer has established alternative allocation procedures where there is an inadequate supply of product to meet market demand, as long as covered entities are able to purchase on the same terms as all other similarly-situated providers,” commenters were concerned that this is overly broad. They recommended that HHS only provide a safe harbor for manufacturers with valid limited distribution plans, and revise § 10.11 of the final rule to address other situations where a manufacturer fails to make 340B drugs available to covered entities to the same extent as to non-340B providers. They argued that the statute states CMPs are issued when manufacturers “knowingly and intentionally charges a covered entity a price for purchase of a drug that exceeds the maximum available price under subsection (a)(1).” Section 340B(a)(1) of the PHSA requires that “the manufacturer offer each covered entity covered outpatient drugs for purchase at or below the applicable ceiling price if such a drug is made available to any other purchaser at any price.” Therefore, if a manufacturer does not comply with the nondiscrimination provision in subsection (a)(1), this constitutes an overcharge for purposes of the CMP provision. Other commenters recommended that HHS delete this example, because it would allow any manufacturer to develop alternative allocation procedures to disregard the ceiling price whenever demand exceeds supply.

Response: HHS agrees that the proposed example, “when a manufacturer has established alternative allocation procedures where there is an inadequate supply of product to meet market demand, as long as covered entities are able to purchase on the same terms as all other similarly-situated providers,” was overly broad. OIG would need to consider each circumstance of a 340B drug overcharge on a case by case basis to determine if that circumstance constitutes a “knowing and intentional” action.

Comment: Commenters suggested that the proposed example, “when a manufacturer has established alternative allocation procedures where there is an inadequate supply of product to meet market demand, as long as covered entities are able to purchase on the same terms as all other similarly-situated providers,” a manufacturer would not have the requisite intent if a covered entity chooses to purchase the manufacturer's product through a channel other than the subset of distributors through which the 340B ceiling price is available. Another commenter suggested that the example read instead, “. . . as long as the manufacturer offers covered entities the opportunity to purchase on terms consistent with those offered to other similarly-situated entities in the same class of trade.”

Response: In general, HHS agrees that the penalty provisions typically would not be appropriate in a case where a covered entity chooses to purchase a covered outpatient drug knowing that the price charged exceeds the 340B ceiling price. However, in the case where there was sufficient evidence to conclude that this result was due to actions by the manufacturer that were knowing and intentional, a penalty may be appropriate. Although it may be reasonable to believe that such a circumstance is extremely unlikely to arise, HHS does not believe it is appropriate or necessary to exclude a possibility that may occur.

Comment: A number of commenters suggested additional examples of situations that they believe do not meet the “knowing and intentional” standard. Some of the examples suggested by commenters include, but are not limited to, the following:

• Instances of intentional failure to issue refunds to covered entities, because HHS has not yet established procedures for issuing refunds;

• A case where a manufacturer was not aware it was selling to a covered entity;

• A case where a distributor failed to give a covered entity a 340B price through no fault of the manufacturer;

• Situations where there is a reasonable disagreement and no established law or agency guidance or circumstances where the manufacturer acted based on reasonable assumptions in the absence of (or in the face of conflicting) guidance, provided such assumptions are consistent with the requirements and intent of section 340B of the PHSA and any implementing regulations, and a written or electronic record outlining these assumptions is maintained; and

• When a manufacturer has established a uniformly applied limited distribution system or risk evaluation and mitigation strategy (“REMS”).

Response: HHS appreciates the efforts commenters made in enumerating conduct they believed should be exempt from examples of knowingly and intentionally selling a drug above its 340B ceiling price. OIG will review these circumstances on a case-by-case basis along with the facts for each instance. Rather than try to anticipate every circumstance that might occur, HHS believes it more appropriate to retain flexibility. To the extent that manufacturers identify situations where uncertainty results in unnecessary costs, HHS will respond as such circumstances arise and may provide additional guidance in the future.

Additionally, since manufacturers are named in statute as being responsible for setting appropriate 340B ceiling prices, they must be responsible for the conduct of business partners with whom they have contracted. Nevertheless, inadvertent clerical errors, as long as they are corrected as soon as identified, would not be considered to be a “knowing and intentional” overcharge.

Comment: Commenters recommended including as an exemption from being considered an overcharge and meeting the knowing and intentional threshold when a manufacturer acted on credible evidence that a covered entity is engaged in diversion of 340B drugs. They stated that if a manufacturer has evidence a covered entity is improperly diverting a drug, it should be able to charge the covered entity a price above the 340B ceiling price. It is argued that this option would create a check on 340B drug diversion, since manufacturers have better and timelier access to sales data than does HHS.

Response: HHS does not believe that unilaterally overcharging a covered entity based upon suspicion of diversion is warranted under the statutory language. Manufacturers cannot condition the sale of a 340B drug at the 340B ceiling price because they have concerns or specific evidence of possible non-compliance by a covered entity. Manufacturers that suspect diversion are encouraged to work in good faith with the covered entity, conduct an audit per the current audit guidelines, or contact HHS directly.

At § 10.11(b) of the proposed rule, HHS defined an instance of overcharging for the purpose of imposing a CMP as any order for a certain covered outpatient drug, by NDC, which results in a covered entity paying more than the 340B ceiling price. An instance of overcharging is considered at the NDC level and may not be offset by other discounts provided on any other NDC or discounts provided on the same NDC on other transactions, orders, or purchases. HHS also proposed that manufacturers have an obligation to ensure that the 340B ceiling price is provided through distribution arrangements made by the manufacturer. An instance of overcharging may occur at the time of initial purchase or at subsequent ceiling price recalculations. The recalculations are due to pricing data submitted to CMS that results in a covered entity paying more than the ceiling price due to failure or refusal to refund or credit a covered entity. Finally, HHS proposed that a manufacturer's failure to provide the 340B ceiling price is not considered an instance of overcharging when a covered entity did not initially identify the purchase to the manufacturer as 340B-eligible at the time of purchase. Covered entity orders of non-340B priced drugs will not subsequently be considered an instance of overcharging unless the manufacturer refuses to sell or makes drugs available at the 340B ceiling price.

HHS received comments supporting and opposing the proposed § 10.11(b). Some commenters opposed certain components of the proposed definition, including the proposal to (1) define the term based on orders; (2) require manufacturers to ensure 340B pricing regardless of distribution arrangements; (3) prohibit offsets; (4) consider as an instance of overcharging when a manufacturer fails or refuses to provide funds at the time of initial purchases or during subsequent ceiling price recalculation; and (5) clarify that a manufacturer's failure to provide the 340B ceiling price if a covered entity did not initially identify such purchases as 340B eligible or that covered entity orders of non-340B drugs will not be subsequently considered an instance of overcharging unless the manufacturers refuses or makes drugs available at the 340B ceiling price. These commenters claimed that HHS does not have the statutory authority to define the term as such or that such definition does not meet the “knowingly and intentionally” standard. At the same time, other commenters supported these components of the proposed definitions as they ensure that covered entities have access to covered outpatient drugs under the 340B Program. Specific comments are addressed below.

Comment: Commenters wrote in opposition to the definition of an instance of overcharging as any order for a covered outpatient drug, by NDC, which results in a covered entity paying more than the ceiling price. Some commenters asked HHS to define an instance of overcharging more restrictively and on a per-unit basis rather than a per-order basis. Doing so would allow OIG to impose penalty amounts commensurate with the severity of the violation.

Response: HHS has determined to finalize the definition of instance as proposed. An instance of overcharging is any order for a certain covered outpatient drug, by NDC, which results in a covered entity paying more than the 340B ceiling price, as defined in § 10.3 of this final rule, for a covered outpatient drug. Each order for an NDC will constitute a single instance, regardless of the number of units of each NDC in that order. This includes any order placed with a manufacturer or through a wholesaler, authorized distributor, or agent. A single order may contain one or more NDCs; thus a violation of this provision may constitute more than one instance depending on the number of NDCs in the order. HHS believes that changing the definition to a per-unit basis is restrictive and overly burdensome as current purchasing occurs at the 11-digit NDC versus a per-unit basis. Finalizing the rule as proposed strikes the right balance in applying the appropriate penalties.

Comment: Commenters asked HHS to clarify that the “order” is the single purchase order, rather than separate line items within a single purchase order. Commenters claimed that defining an instance of overcharging based on “orders” may be interpreted to include situations in which estimated 340B ceiling prices for new drugs were too high and the manufacturer did not issue refunds to covered entities in the time that the rule would require.

Response: Each order for an NDC will constitute a single instance, regardless of the number of units of each NDC in that order. If a covered entity orders a single bottle of a covered outpatient drug four times in a month, it would be considered four instances of overcharging. A single order may contain one or more NDCs; thus a violation of this provision may constitute more than one instance depending on the number of NDCs in the order. With regards to new drug price estimation and refunds to a covered entity, HHS addresses those requirements in § 10.10 of this final rule. If refunds in this circumstance are not offered to covered entities within 120 days of the determination by the manufacturer that an overcharge occurred, it may be considered as meeting the definition of knowingly and intentionally overcharging the covered entity and the definition of instance would apply. This is in alignment with the statute that requires manufacturers to provide covered entities the 340B ceiling price.

Comment: Some commenters suggested that an instance of overcharging be defined as each product ceiling price reported by a manufacturer to HRSA that contains a price that the manufacturer knows and intends to be in excess of the price as calculated. Other comments recommended further defining the term to add details related to the instance. For example, some recommended inclusion of the following language: all mispriced purchases within a quarter on a particular drug to a particular customer, intentionally incorrect ceiling prices reported to HRSA that actually result in overcharges to one or more registered covered entities, and incorrect treatment by a manufacturer of a registered covered entity as an organization ineligible for the 340B ceiling price. Other commenters asked HHS to include in the definition of instance of overcharging, a manufacturer's failure to offer a covered outpatient drug to a covered entity to the same extent that the drug is offered to other purchasers.

Response: HHS declines to include additional language as raised by the commenters. While the examples provided may result in a covered entity being charged above the 340B ceiling price, they relate more to defining the knowing and intentional standard, which will be determined by OIG on a case-by-case basis. HHS believes it is important to provide the necessary flexibility for OIG to determine the facts surrounding a specific case. HHS also notes that it is the actual sale of the covered outpatient drug above the 340B ceiling price by the manufacturers to the covered entity that is the subject of the overcharge per the statute.

Comment: Commenters opposed the proposed extension of the manufacturer's responsibility to ensure that covered entities have access to 340B pricing for covered outpatient drugs sold by wholesalers and distributors. They contend that manufacturers should not be responsible for the conduct of their agents, since an agent's actions are not knowing and intentional on the part of the manufacturer and since these actions are not within the manufacturers' control. A number of commenters pointed out that manufacturers may provide wholesalers and distributers the 340B pricing but covered entities may not purchase drugs at 340B pricing because wholesalers and distributers may add fees that may raise the price of drugs above the 340B ceiling price. Clarification was requested related to when actions by a wholesaler would be attributed to manufacturers when assessing CMPs, and whether a distribution fee charged by a wholesaler could cause an overcharge.

Response: Manufacturers are ultimately responsible for ensuring a covered entity receives a drug at or below the 340B ceiling price as stated in the statute and per this final rule. Manufacturers also have control over the distribution of covered outpatient drugs, including those distributed by wholesalers, distributers, and agents wherein the terms and conditions of the sales set through these distribution arrangements are set by the manufacturer via a contract agreed to and between the manufacturer and the distributors. This final rule applies solely to manufacturers, even though other third parties have a role in ensuring the covered entity receives a drug at or below the 340B ceiling price. Manufacturers must consider the wholesaler role in this process and work out issues in good faith and in normal business arrangements regarding the assurance that the covered entity is receiving the appropriate prices. Failure to ensure the covered entities are receiving the 340B ceiling prices through a third party may be grounds for the assessment of CMPs under this final rule. HHS does clarify, however, that fees charged directly by a wholesaler or other distributor are not considered part of the 340B ceiling price and would not be considered as part of assessing an instance of an overcharge.

Comment: Commenters asked for a clarification that specialty pharmacies are not considered “specialty distribution or wholesalers” and thus are not required to provide 340B pricing. Other commenters claimed that the requirements set forth under this section are not consistent with the non-discrimination policy, which allows manufacturers to establish alternate allocation procedures. Commenters requested clarification that CMPs would not apply in a situation where a covered entity purchased product in the marketplace when the manufacturer was employing a distribution system compliant with HRSA's non-discrimination guidance (340B Program Notice Release No. 2011-1.1 (May 23, 2012)). Some commenters asked HHS to clarify that a refusal by the covered entity to purchase drugs through a limited distribution arrangement should not be interpreted as the manufacturer's refusal to sell or make drugs available at the 340B price for purposes of CMPs.

Response: All requirements as set forth in this final rule for offering the 340B ceiling price to covered entities apply regardless of the distribution system. If a manufacturer is using a specialty pharmacy to distribute covered outpatient drugs, it must ensure the covered entity is not overcharged if drugs are accessed through that pharmacy. As to comments suggesting that the rule is inconsistent with the current non-discrimination policy, HHS does not believe that is the case. Consistent with section 340B(a)(1) of the PHSA, manufacturers are expected to provide the same opportunity for 340B covered entities and non-340B purchasers to purchase covered outpatient drugs when such drugs are sold through limited distributors or specialty pharmacies. Manufacturers may continue to develop limited distribution procedures provided that those arrangements follow HHS established policy. HHS will take into consideration whether a manufacturer has submitted an alternate allocation plan to HHS when a manufacturer is being investigated for a possible overcharge, whether this plan is compliant with the 340B non-discrimination policy, and whether the manufacturer is following its plan.

Comment: Commenters argued that HHS is attempting to interpret and apply the “shall offer” provision through this rule. Some commenters claimed that CMPs do not apply to a shall offer provision until a manufacturer signs a PPA that includes that provision.

Response: Section 340B(a)(1) of the PHSA provides that a manufacturer shall offer each covered entity covered outpatient drugs for purchase at or below the applicable ceiling price if such drug is made available to any other purchaser at any price. This particular provision of section 340B(a)(1) is separate and distinct from the provision pertaining to the calculation of 340B ceiling prices. Because this final rule is applicable to the provision of section 340B(a)(1) pertaining to the calculation of the 340B ceiling price, the language in the statute regarding “shall offer” will not be addressed in this final rule.

Comment: Commenters asked HHS not to finalize the proposed rule provision that an instance of overcharging would be considered at the NDC level and may not be offset by other discounts provided on any other NDC or discounts provided on the same NDC on other transactions, orders, or purchases. They argue that offsetting is an industry practice and should not meet the knowing and intentional standard. Still other commenters pointed out that HHS has not developed a process for refunds and without such a standardized refund process, the use of offsets should be allowed. For these reasons, the commenters asked that HHS finalize the regulation to allow for offsets. Commenters also claimed that if finalized, HHS would make the offering of sub-ceiling prices mandatory rather than voluntary. Calculating refunds based only on restatements that lower the ceiling price, without accounting for restatements that raise the ceiling price, would transform the voluntary nature of offering sub-ceiling prices into a requirement. Other commenters favored allowing offsetting but providing covered entities a mechanism to contest the offsets.

Response: As proposed, and finalized in this rule, an instance of overcharging is considered at the 11-digit NDC level and may not be offset by other discounts provided on any other NDC or discounts provided on the same NDC on other transactions, orders, or purchases. The 340B statute is specific to ensuring each covered outpatient drug is offered at or below the 340B ceiling price. However, HHS does not intend to prevent manufacturers from using the industry's practice of netting overcharges and undercharges, or from restating ceiling prices based on pricing data submitted to CMS, to the extent that there is agreement between the manufacturer and covered entity.

In regards to comments based on the refund process, HHS has finalized that an instance of an overcharge may occur at the time of initial purchase or when subsequent ceiling price recalculations occur and the manufacturer refuses to refund or issue a credit to a covered entity. HHS has clarified in the final rule that this would include refusal to refund covered entities according to § 10.10(c) of the final rule with regards to new drug price estimation and would include refusal to refund a covered entity after restatements to CMS. If a covered entity is not refunded when there is an overcharge, the covered entity, in essence paid above the 340B ceiling price. While HHS has finalized in this rule the requirement to refund if there is an overcharge, the specific refund procedures will be addressed under separate guidance. Until there is final guidance in place regarding refund procedures, manufacturers and covered entities should work in good faith and refund in a reasonable manner that is documented by the parties involved.

Regarding the statement that not allowing offsets would force manufacturers to sell below 340B ceiling prices, the statute is specific in addressing when a manufacturer overcharges a covered entity and it does not address refunds by covered entities if the manufacturer provides a price below the 340B ceiling price. Therefore, it will not be addressed in the final rule.

Comment: Some commenters asked HHS not to finalize the rule as proposed related to penalizing a manufacturer for failure or refusal to refund or credit a covered entity. They pointed out that HHS has not developed a mechanism to provide such subsequent price recalculations and has not established or operationalized a mechanism to retroactively revise 340B pricing based on revised Medicaid metrics. Other commenters stated that finalizing the rule is premature since HHS has not developed a process for credits and refunds.

Response: HHS has finalized that an instance of an overcharge may occur at the time of initial purchase or when subsequent ceiling price recalculations occur and the manufacturer refuses to refund or issue a credit to a covered entity. This would include refusal to refund covered entities according to § 10.10(c) of the final rule with regards to new drug price estimation and would include refusal to refund a covered entity after restatements to CMS. If a covered entity is not refunded when there is an overcharge, the covered entity, in essence paid above the 340B ceiling price. The final rule requires a refund if there is an overcharge and specific refund procedures will be addressed under separate guidance. HHS does not believe that the requirements of this rule are dependent on the separate issue of how to operationalize a refund process. Until there is final guidance in place regarding the refund procedures, manufacturers and covered entities should work in good faith and refund in a reasonable manner that is documented by the parties involved.

Comment: Some commenters supported the rule as proposed but asked HHS to allow covered entities time to request a reclassification of prior purchases as 340B eligible. They asked that HHS finalize the rule to require manufacturers to honor a covered entity's request to reclassify a purchase from non-340B to 340B and to issue a corresponding refund if a covered entity requests such a reclassification within 365 days of purchase.

Response: HHS continues to maintain the decision that a manufacturer's failure to provide the 340B ceiling is not considered an overcharge if the covered entity did not initially identify the purchase to the manufacturer as 340B eligible at the time of purchase. HHS does not authorize covered entities to reclassify a purchase as 340B eligible after the fact. Therefore, HHS has removed this example from the final regulation and instead includes it as an example of what would not be considered an instance of overcharging in the preamble to this rule. Covered entities participating in the 340B Program are responsible for requesting 340B pricing at the time of the original purchase. If a covered entity wishes to reclassify a previous purchase as 340B, covered entities should first notify manufacturers and ensure all processes are fully transparent with a clear audit trail that reflects the actual timing and facts underlying a transaction. The covered entity retains responsibility for ensuring full compliance and integrity of its use of the 340B Program.

Comment: Commenters supported the proposal that it could be considered an instance of overcharging when a manufacturer's documented refusal to sell or make drugs available at the 340B price results in the covered entity purchasing at the non-340B price. However, some commenters asked HHS to clarify the term “documented refusal” mentioned in the preamble. They suggested that the following examples not constitute a documented refusal:

• Communications between a manufacturer (or a wholesaler) and a covered entity relating to verifying eligibility for 340B prices prior to a sale, or

• A manufacturer's failure to provide the 340B ceiling price to a covered entity that has violated the prohibition against diversion or duplicate discounting.

Response: Covered entity orders of non-340B priced drugs will not subsequently be considered an instance of overcharging unless the manufacturer's documented refusal to sell or make drugs available at the 340B price resulted in the covered entity purchasing at the non-340B price. When a manufacturer's documented refusal to sell or make drugs available at the 340B ceiling price results in the covered entity purchasing at the non-340B price, a manufacturer's sale at the non-340B price could be considered an instance of overcharging. An example of “documented refusal” would include any type of manufacturers' written communication related to reasons a manufacturer is not providing 340B ceiling prices to either a single covered entity or group of covered entities. HHS does not agree that a manufacturer could consider not selling a 340B drug at the 340B ceiling price to a covered entity based on possible non-compliance with program requirements. Regarding verifying the eligibility of a covered entity, the 340B public database lists all covered entities eligible to purchase 340B drugs in any given quarter. The 340B public database should be used by all stakeholders to determine and verify covered entity eligibility. In addition to the example provided above as “documented refusal,” OIG would also review information related to such a circumstance on a case-by-case basis to determine if a manufacturer has overcharged a covered entity and whether the threshold is met to apply CMPs. HHS notes that we are removing this specific example from the final regulation and include it as an example of what would not be considered an instance of overcharging in the preamble to this rule.

Comment: Some commenters requested that HHS not require that an act be “intentional” when imposing CMPs and that the penalty be higher than $5,000.

Response: Section 340B(d)(1)(B)(vi) of the PHSA provides for the imposition of civil monetary penalties on manufacturers that knowingly and intentionally charge a covered entity a price for purchase of a drug that exceeds the 340B ceiling price. Additionally, section 340B(d)(1)(B)(vi)(II) of the PHSA states that CMPs “shall not exceed $5,000 for each instance of overcharging.” Therefore, HHS has no authority to modify the standard of intent, and any CMPs assessed will be done in accordance with the amount specified in the 340B statute, as adjusted annually for inflation pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (section 701 of Pub. L. 114-74).

Comment: A few commenters stated that when imposing CMPs, certain documentation should be required to establish that there was a “knowing and intentional” overcharge. They suggested that evidence should include documentation that the manufacturer received a request for the ceiling price by the covered entity, and either refused in writing to provide the ceiling price, or failed to execute a ceiling price transaction within a specified period of time.

Response: The OIG will determine, upon review of the case, the appropriate documentation and other information that may be required to determine if a CMP should be applied.

Comment: Commenters requested that the rule specify that HHS should not attempt to recover any penalties until at least 60 days after the end of any appeal or judicial review. It was also requested that, should a party seek data in relation to a CMP proceeding from a third party, such as a wholesaler or software vendor, the party seeking data may compensate the third party for their assistance, and that the third party may require that compensation. Commenters also recommended that the rule provide for confidentiality requirements in CMP proceedings, in order to ensure the confidentiality of 340B pricing.

Response: HHS understands the importance of maintaining the confidentiality of 340B ceiling price data and will handle such data accordingly. More broadly, the pertinent procedures outlined in 42 CFR parts 1003 and 1005 will be followed in matters involving the imposition of CMPs and any appeals therefrom.

Comment: Several commenters suggested that the funds collected from CMPs should be directed to OIG to support the enforcement of CMPs, to the HRSA Office of Pharmacy Affairs, and for HHS to create a 340B ceiling price database.

Response: While HHS appreciates these comments, they are beyond the statutory authority of the 340B Program and this final rule.

Comment: Several commenters supported HHS delegating the authority to levy CMPs to OIG, and recommended that the delegation of authority to OIG be explicitly stated in the regulation, rather than mentioned in the preamble. Additionally, several commenters were also concerned that at proposed § 10.11(a), in the sentence “This penalty will be imposed pursuant to the procedures at 42 CFR part 1003 and 1005” the term “procedures” may be read to not encompass definitions and standards for CMPs. Therefore, they suggested modifying the sentence to state, “Pursuant to a delegation of authority, the HHS Office of Inspector General (OIG) will have the authority to bring CMP actions utilizing the definitions, standards, and procedures applied to civil monetary penalties under 42 CFR parts 1003 and 1005.” It was also suggested to add a definition of “knowingly and intentionally” to section 1003.101 of the OIG regulations.

Response: HHS does not believe it necessary to add the delegation of authority to OIG in the regulatory text. HHS believes that pursuant to a separate delegation of authority, OIG has the authority to handle CMP actions utilizing the definitions, standards, and procedures applied to civil monetary penalties under 42 CFR parts 1003 and 1005, as applicable. Consistent with the proposed rule, we have finalized the regulatory text indicating that CMPs will be imposed pursuant to the procedures contained at 42 CFR part 1003. No further rulemaking is required to apply the procedures at 42 CFR part 1003 to the imposition of CMPs. HHS will monitor activities relating to the evaluation and pursuit of CMPs and, if necessary, will consider issuing additional guidance about procedures applicable to such actions.

Comment: A few commenters were concerned about the decision to delegate CMP actions to OIG. They stated that HHS has not identified a specific delegation, and that 42 CFR parts 1003 and 1005 only provide for the imposition of CMPs under specific statutory authorities, which do not include the 340B statute's CMP provisions. They argued that unless OIG amends their regulations to apply them to a 340B proceeding, HHS will need to develop, take comments on, and ultimately finalize a new proposal setting out procedures for seeking and imposing CMPs against manufacturers. A few commenters noted that some portions of 42 CFR parts 1003 and 1005 are inapplicable in a 340B context.

Response: As noted above, a delegation of authority to OIG for a CMP from the Secretary of HHS is sufficient. HHS does not perceive there to be any conflict between the procedural aspects of 42 CFR part 1003 and the imposition of CMPs. HHS notes that 42 CFR part 1005 applies to appeals of exclusions and civil monetary penalties and assessments and would not be directly relevant to the initial imposition of a CMP. Accordingly, HHS finalized the regulatory text indicating that CMPs will be imposed pursuant to the applicable procedures contained at 42 CFR part 1003. No further rulemaking is required to apply the procedures at 42 CFR part 1003 to the imposition of CMPs. HHS will monitor activities relating to the evaluation and pursuit of CMPs and, if necessary, will consider issuing additional guidance about procedures applicable to such actions.

HHS has examined the effects of this rule as required by Executive Order 12866 on Regulatory Planning and Review (September 30, 1993), Executive Order 13563 on Improving Regulation and Regulatory Review (January 8, 2011), the Regulatory Flexibility Act (September 19, 1980, Pub. L. 96-354), the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), and Executive Order 13132 on Federalism (August 4, 1999).

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 is supplemental to and reaffirms the principles, structures, and definitions governing regulatory review as established in Executive Order 12866, emphasizing the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. Section 3(f) of Executive Order 12866 defines a “significant regulatory action” as an action that is likely to result in a rule: (1) Having an annual effect on the economy of $100 million or more in any 1 year, or adversely and materially affecting a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local, or tribal governments or communities (also referred to as “economically significant”); (2) creating a serious inconsistency or otherwise interfering with an action taken or planned by another agency; (3) materially altering the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raising novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in the Executive Order. A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year), and a “significant” regulatory action is subject to review by the Office of Management and Budget (OMB).

This final rule will not have economic impacts of $100 million or more in any 1 year, and, therefore, has not been designated an “economically significant” rule under section 3(f)(1) of Executive Order 12866. The 340B Program as a whole creates significant savings for entities purchasing drugs through the program, with total savings estimated to be $6 billion in CY 2015.1 However, this final rule would not significantly impact the Program. This final rule codifies current policies, some of which have been modified, regarding calculation of the 340B ceiling price and manufacturer civil monetary penalties. HHS does not anticipate that the imposition of civil monetary penalties would result in significant economic impact.

The 340B Program uses information that already must be reported under Medicaid to calculate the statutorily defined 340B ceiling price as required by this final rule. Because the components of the 340B ceiling price are already calculated by the manufacturers under the MDRP and reported to CMS, HHS does not believe this portion of the final rule would have an impact on manufacturers. The impact on manufacturers would also be limited with respect to calculation of the 340B ceiling price as defined in this final rule due to the fact that manufacturers regularly calculate the 340B ceiling price and have been doing so since the program's inception.

Separate from calculation of the 340B ceiling price, manufacturers are required to ensure they do not overcharge covered entities, and a civil monetary penalty could result from overcharging if it met the standards in this final rule. HHS envisions using these penalties in rare situations. Since the Program's inception, issues related to overcharges have been resolved between a manufacturer and a covered entity and any issues have generally been due to technical errors in the calculation. For the penalties to be used as defined in the statute and in this rule, the manufacturer overcharge would have to be the result of a knowing and intentional act. Based on anecdotal information received from covered entities, HHS anticipates that this would occur very rarely if at all.

This rulemaking also proposes that a manufacturer charge a $0.01 per unit of measure for a drug with a 340B ceiling price below $0.01. A small number of manufacturers have informed HRSA over the last several years that they charge more than $0.01 for a drug with a ceiling price below $0.01. However, this is a long-standing HRSA policy, and HRSA believes the majority of manufacturers currently follow the practice of charging a $0.01. Therefore, this portion of the regulation would not result in a significant impact. This final regulation would allow HRSA to enforce the policy in a manner that would require the manufacturer to charge a $0.01, and it is likely that manufacturers would charge $0.01 in order to avoid the imposition of a civil monetary penalty for overcharging a covered entity. HRSA believes manufacturers that currently do not comply will come into compliance, which will result in the covered entity paying less for these drugs. There will be a cost transfer from the covered entity to the manufacturer.

HHS recognizes that certain administrative costs would be incurred for compliance with this final rule. HHS does not collect data related to such administrative costs, and compliance costs are expected to vary significantly. HHS believes it is reasonable to assume that manufacturers would use one-half to one full-time compliance officer to ensure compliance with the requirements in this final rule. According to the Bureau of Labor Statistics, the mean annual wage for a pharmaceutical compliance officer (NAICS 325400, occupation code 13-1041) is $80,170 in 2015. Inclusion of benefits and overhead (resulting in a total labor cost of 1.5 times mean annual wage) yields a total annual cost of $120,255 for one compliance officer. Thus, the estimated annual cost for labor across all 600 manufacturers is between $36,067,500 and $72,153,000.

We received the following comments on the anticipated impacts on drug manufacturers:

Comment: Regarding the proposed rule's regulatory impact analysis, some commenters disagree that the proposed rule is “not likely to have an economic impact of $100 million or more in any 1 year” and objects to its failure to designate the proposed rule as economically significant. They argue that resources that would be required to comply with the obligations of this proposed rule would extend beyond a compliance officer and would include the re-writing and implementation of new policies and procedures, and the training of staff.

Response: The proposed rule and the policies finalized herein codify several current policies, some of which have been modified, regarding the calculation of the 340B ceiling price and introduce manufacturer civil monetary penalties. HHS reviewed the comments submitted in response to the NPRM, and has attempted to minimize burden for both manufacturers and covered entities in its formulation of the final rule, specifically regarding the policy of estimating new drug prices (see § 10.10(c)). With the modification made in this final rule, we believe that stakeholders' administrative burdens' with respect to this policy will be minimal. Through the comments that HHS received during both comment periods on the estimation of new drug prices, commenters expressed support for this approach and maintained that it created an even playing field across all stakeholders as the calculation of the 340B ceiling price is easily verifiable by covered entities and reduces administrative burden. HHS also understands that based on the comments received, the methodology for calculating new drugs as set forth in this final rule is already taking place in the marketplace and will thus not create any additional burden.

Manufacturers have always been required to ensure that they do not overcharge covered entities per the section 340B(d)(1). This final rule incorporates a penalty for knowingly and intentionally overcharging covered entities, as discussed in subsequent sections of this final rule (see § 10.11(a)). Under current practice, HHS encourages manufacturers and covered entities to work in good faith to resolve any pricing discrepancies. HHS anticipates this practice to continue and anticipates that the imposition of penalties to occur only on a rare basis. The remaining policies in the proposed rule and finalized in this rule reflect current 340B Program policy and should not result in significant economic impacts.

Comment: Commenters note that manufacturers would have to build into their systems the capacity to identify all sales transactions with covered entities at the originally charged price, as well as any recalculated price, for up to three full years after the original transaction. They explain that these prices along with issuing the actual refunds to the covered entities could easily exceed $100 million per year.

Response: We note that the 340B Program uses data that manufacturers already report to CMS under the MDRP (AMP, URA) to calculate the statutorily defined 340B ceiling price. As these components of the 340B ceiling price are already calculated by manufacturers under the MDRP, HHS does not believe that this will cause additional burden on manufacturers.

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) and the Small Business Regulatory Enforcement and Fairness Act of 1996, which amended the RFA, require HHS to analyze options for regulatory relief of small businesses. If a rule has a significant economic effect on a substantial number of small entities, the Secretary must specifically consider the economic effect of the rule on small entities and analyze regulatory options that could lessen the impact of the rule. HHS will use an RFA threshold of at least a three percent impact on at least five percent of small entities.

The final rule would affect drug manufacturers (North American Industry Classification System code 325412: Pharmaceutical Preparation Manufacturing). The small business size standard for drug manufacturers is 750 employees. Approximately 600 drug manufacturers participate in the 340B Program. While it is possible to estimate the impact of this final rule on the industry as a whole, the data necessary to project changes for specific manufacturers or groups of manufacturers is not available, as HRSA does not collect the information necessary to assess the size of an individual manufacturer that participates in the 340B Program.

This final rule clarifies statutory requirements for manufacturers, including small manufacturers, and codifies current ceiling price calculation policies in regulation. HHS is unaware of small manufacturers who do not follow the ceiling price policies finalized by this regulatory action. The specific elements required as part of the calculation of the ceiling price are elements that manufacturers are already required to utilize as part of their participation in the 340B Program. HHS expects that these elements would continue to be available. Therefore, calculation of the ceiling price would not result in an economic impact or create additional administrative burden on these businesses.

HHS has determined, and the Secretary certifies that this final rule will not have a significant impact on the operations of a substantial number of small manufacturers; therefore, we are not preparing an analysis of impact for the purposes of the RFA. HHS, estimates that the economic impact on small manufacturers will be minimal and less than three percent.

Section 202(a) of the Unfunded Mandates Reform Act of 1995 requires that agencies prepare a written statement, which includes an assessment of anticipated costs and benefits, before issuing “any rule that includes any Federal mandate that may result in the expenditure by State, local, and Tribal governments, in the aggregate, or by the private sector, of $100 million or more (adjusted annually for inflation) in any one year.” In 2015, that threshold level is approximately $144 million. HHS does not expect this final rule to exceed the threshold.

HHS has reviewed this final rule in accordance with Executive Order 13132 regarding federalism, and has determined that it does not have “federalism implications.” This final rule would not “have substantial direct effects on the States, or on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.” The provisions in this final rule would not adversely affect the following family elements: Family safety, family stability, marital commitment; parental rights in the education, nurture, and supervision of their children; family functioning, disposable income or poverty; or the behavior and personal responsibility of youth, as determined under Section 654(c) of the Treasury and General Government Appropriations Act of 1999.

The Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) requires that OMB approve all collections of information by a Federal agency from the public before they can be implemented. This final rule is projected to have no impact on current reporting and recordkeeping burden for manufacturers under the 340B Program. Changes finalized in this rulemaking would result in no new reporting burdens.