The HHS Health Resources and Services Administration’s final rule on how 340B requirements apply to drugs with orphan indications says that only the specific rare disease use will be exempted from mandatory discounts.

If the drug also has other non-orphan indications, its manufacturer must provide the 340B discounts when the product is used for those other indications. Drug makers had requested that all uses of a drug that includes an orphan indication be excluded from discounting requirements.

The final rule, “Exclusion of Orphan Drugs for Certain Covered Entities under 340B Program,” scheduled for publication in the July 23 Federal Register, clarifies and implements a provision of the Affordable Care Act. The rule takes effect Oct. 1, 2013.

ACA provisions aimed to protect prices for orphan indications somewhat as the new law was making more health care providers eligible for the discounting program.

Under ACA, the discount exemption only applies when the orphan drug is provided in four types of facilities: free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals. Those facilities were first given access to 340B discounts by ACA.

The exclusion does not apply to any providers that were eligible for 340B before ACA, such as disproportionate share hospitals and children’s hospitals. Thus, these types of facilities may continue to obtain discounts when they purchase a drug and provide it for an orphan indication.

Under 340B, safety net health care providers are eligible to purchase outpatient drugs at Medicaid-level prices, although they may also receive below-Medicaid prices since prices paid by 340B entities are exempt from the “best price” calculation (providers enrolled in 340B are typically referred to as “covered entities”).

The final position on the scope of the exclusion mirrors HRSA’s proposed rule issued in May 2011 Also see "HRSA Defines "Orphan Drug" For 340B; Purchasing Prohibition Applies Only To Use In Rare Diseases" - Pink Sheet, 19 May, 2011.. In comments on the proposal, 340B entities had encouraged HHS to keep in place its proposal to limit the exclusion to FDA-designated orphan uses of a drug, while manufacturers had urged the agency to apply the exclusion to any use of a drug with an orphan designation Also see "340B Orphan Drug Rule: Stakeholders Are Parsing ACA Statute – Should Some Indications Be Cheaper Than Others?" - Pink Sheet, 6 June, 2011..

The final rule states that “a covered outpatient drug [under 340B] does not include orphan drugs that are transferred, prescribed, sold, or otherwise used for the rare condition or disease for which that orphan drug was designated under section 526 [the orphan drug law] of the [Federal Food, Drug and Cosmetic Act]. A covered outpatient drug includes drugs that are designated under section 526 of the FFDCA when they are transferred, prescribed, sold, or otherwise used for any medically accepted indication other than treating the rare disease or condition for which the drug was designated under section 526 of the FFDCA.”

HRSA responded to manufacturers’ comments seeking a broader interpretation of ACA’s exclusion for orphan drugs: “Interpreting the statutory language to exclude all uses of drugs with an orphan designation, including indications for other diseases and conditions, would nullify the benefits of the expansion of the 340B program for those entities. Therefore, we believe that interpreting the statutory language to exclude all indications for a drug that has an orphan drug designation is contrary to Congressional intent to balance the interests of orphan drug research and the expansion of the 340B Program to new entities.”

“Drugs that are marketed for a rare disease are in some cases also approved for other indications; some of these drugs are among the most widely used today,” HRSA notes. “This rule recognizes the unique issues associated with orphan drugs, when the drug with such a designation is used for a rare disease or condition, by excluding them from the 340B program for these entities.”

HRSA also explains that its interpretation is consistent with FDA, which applies incentives for orphan drug development, such as seven years of market exclusivity, only to indications for rare disorders.

HRSA’s list of orphan drug exclusions will follow FDA’s list of orphan drugs, which the agency will post on its website quarterly, on the first day of the month prior to the start of the next calendar quarter to govern the following quarter’s purchases.

Financial Impact On Manufacturers Small, HRSA Says

While manufacturers may not have gotten their way, HRSA believes the economic impact on them will be slight.

“HRSA believes … implementation of this rule will not result in jeopardizing the economic viability of orphan drug products,” the rule says. It points to the narrow field of entities covered by the exclusion rule. Currently, 340B sales to all entities are estimated at about $6 billion annually, or about 2% of the overall pharmaceutical market, the rule notes. The four types of entities covered by the rule comprised an estimated 3% of total 340B sales in fiscal 2012, it says, and the purchase of orphan drugs by those entities would constitute an even smaller subset of sales.

The rule attempts to quantify savings to the entities involved: “HHS projects that the final rule may result in a $6 [million] to $9 million reduction in the cost to acquire drugs by the affected covered entities versus what these affected entities are paying to orphan drug manufacturers without the proposed rule for the purchase of these drugs for non-rare indications.”

However, manufacturers have been concerned about the rapid expansion of 340B, which is occurring through organic growth and the expansion of contract pharmacy networks. One consultant estimates that 340B will grow to over $16 billion in sales by 2019. Also, some manufacturers are affected more by 340B pricing than others, such as Genentech with its large oncology portfolio ([A#00130722009]).

One relief to manufacturers is that the rule will apply prospectively from the effective date, rather than retrospectively to the date of ACA’s signing, since retrospective application “would be administratively burdensome and difficult to implement for all stakeholders.”

Providers Responsible For Compliance

Covered entities will be responsible for ensuring that drugs they purchase with the 340B discount are not used to treat orphan-drug indications. Under the rule, any entity that purchases drugs with an orphan indication under 340B “is required to maintain and provide auditable records on request which document the covered entity’s compliance with this requirement.” The records may be audited by HRSA or, with HRSA’s permission, by manufacturers, the rule says.

Manufacturers already are allowed, with HRSA’s permission, to audit 340B providers for compliance with statutory prohibitions on duplicate discounts and diversion of drugs to non-eligible patients; auditing for orphan drug compliance would fall under the diversion prohibition. HRSA has recently approved six manufacturer audits of 340B covered entities, of which three have been completed.

Covered entities must notify HRSA prior to purchasing orphan drugs if they are able to comply with the rule. For those that believe they are unable to maintain the necessary records, the rule instructs them to purchase all orphan drugs, regardless of indication, outside of the 340B program to ensure compliance.

The rule addresses a unique situation for free-standing cancer hospitals, the only type of entity that falls both under 340B’s orphan drug exclusion and a separate exclusion for purchasing 340B drugs from group purchasing organizations. It says free-standing cancer hospitals may purchase drugs for orphan indications through a GPO, since they are excluded from discounts, but may not purchase those drugs for non-orphan indications through a GPO. This distinction is similar to how covered entities purchase inpatient drugs, which are not covered by the discount, versus outpatient drugs, which are.

The orphan rule was only one of many manufacturers have been anticipating from HRSA. The agency is currently working on a proposed rule that will cover a number of questions about 340B, including the definition of a patient eligible to receive 340B-discounted drugs, rules for contracting with outside pharmacies to dispense 340B drugs, and additional program requirements for covered entities and manufacturers. HRSA now says it expects to release the proposed comprehensive rule by June 2014.

340B Final Rule Keeps Orphan Drug Exclusion Narrow, Counter To Manufacturers’ Request

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