Agency’s Narrow Interpretation of Statutory Prohibition Puts Compliance Responsibility in the Hands of Covered Entities

On July 23, 2013, the Health Resources and Services Administration (HRSA) issued a final rule clarifying the orphan drug exclusion for certain covered entities created by the Affordable Care Act (ACA) (“Final Rule”). The Final Rule is available here, has an effective date of October 1, 2013, and applies prospectively from that date. The text of the new 340B regulations created by the Final Rule, 42 C.F.R. Part 10, appears at the end of this Client Alert.

In short, the Final Rule permits the new categories of covered entities access to 340B pricing for orphan drugs based on the covered entity’s intended use. In one sense, the Agency rule is surprising given statutory language that would appear to limit these covered entities’ access to the 340B program’s deeply discounted pricing for orphan drugs without regard to the condition the drug will be used to treat. Treatment-specific considerations have never been part of access to 340B discounts: HRSA’s new interpretation of the 340B statute is a watershed moment in the history of the 340B Program. Further, HRSA has crafted a rule that puts determination of eligibility to purchase orphan drugs at 340B prices squarely in the hands of the affected covered entities. Drug manufacturers are not afforded any opportunity at the point-of-purchase to gauge the validity of the claim for discounts, and are given little authority after the fact to check the covered entity records that are the sole mechanism of ensuring compliance with the orphan drug exclusion rule, short of audit or referral to HRSA for investigation.


ACA Section 7101 created a statutory exception to the definition of “covered outpatient drug” for free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals participating in the 340B drug discount program. 42 U.S.C. § 256b(e) (also known as Section 340B(e)). The law held that the term, “covered outpatient drug,” for those purchasers (the “orphan drug exclusion entities”), does not include “drug[s] designated by the Secretary [of HHS] under section 526 of the Federal Food, Drug, and Cosmetic Act for a rare disease or condition.” The Final Rule issued last week is HRSA’s interpretation of ACA Section 7101 and guidelines for implementation.

In May, 2011, HRSA published its Proposed Rule interpreting the orphan drug exclusion (see 76 Fed. Reg. 29,183 (May 20, 2011)). HRSA received over 50 comment letters from Members of Congress, manufacturers, 340B covered entities, providers, and other 340B Program stakeholders. The conclusions of the Final Rule are largely unchanged from those proposed over two years ago.
While HRSA has issued program guidance materials in the past, the Final Rule, codified at 42 C.F.R. Part 10, is the first 340B Program regulation issued by HRSA. HRSA indicated in the Final Rule that additional 340B Program regulations would published and be incorporated into this Part in the near future. HRSA personnel indicated at a recent conference that “omnibus” 340B program regulations are being drafted; presumably they would be made part of the new 42 C.F.R. Part 10.

The Final Rule Interpretation of the Orphan Drug Exclusion

The Final Rule holds that under Section 340B(e), the orphan drug exclusion entities are not entitled to purchase orphan-designated drugs at the 340B ceiling price when such drugs are used for an orphan indication.1 The Rule requires manufacturers, however, to extend the 340B ceiling price to these entities when an orphan drug is to be used for an indication other than the orphan indication. Specifically, the Final Rule held that Section 340B(e) apples only to “drugs transferred, prescribed, sold, or otherwise used for the rare condition or disease for which the orphan drug was designated under section 526 of FDCA.” HRSA will publish a list every quarter of NDCs subject to this analysis, drawn from FDA records.2

Many manufacturers had argued that the plain text of Section 340B(e) does not permit an indication-specific interpretation, that the exception to “covered outpatient drug” was drug- and not indication-specific. If a drug were designated by FDA for any orphan purpose, the commenters urged, the manufacturer of that drug should not be obliged to sell it to the orphan drug exclusion entities at the 340B discount for any use. HRSA disagreed, concluding that to give meaning to the expansion of the 340B program to these entities, orphan-indicated products must be made available at 340B prices when used for other than an orphan indication (to find otherwise would “nullify the benefits of the expansion” of the Program). HRSA concludes that Congress intended to balance the interests of orphan drug research and the expansion of the 340B program to new entities by limiting the orphan drug exclusion to certain indicated uses (despite the lack of statutory language evidencing this position). The Final Rule goes to great lengths to defend this proposition.

The Final Rule specifies that it is the responsibility of the orphan drug exclusion entities to ensure that orphan drugs purchased through the 340B Program “are not transferred, prescribed, sold, or otherwise used for” an orphan-indicated use. To this end, covered entities are required to maintain auditable records and provide them to HRSA upon request, and in connection with government-approved manufacturer audit requests that directly pertain to the covered entities’ compliance with Section 340B(e). These auditable records are the only indicators of covered entity compliance required by the Final Rule. Moreover, all contract pharmacies are required under the Final Rule to follow the same approach used by the related covered entity to ensure compliance with the orphan drug exclusion, including implementing the necessary systems and recordkeeping requirements.

The approach outlined in the Final Rule essentially requires drug manufacturers to trust that orphan drug exclusion entities (and their contract pharmacies) will know, at the time a drug is purchased from the wholesaler, to what use that particular unit will one day be put. This information is critical in determining at what price the sale can be made, off of what contract, under what purchaser identification number. Short of maintaining fully segregated inventories or tracking discounted drug through the purchasing and dispensing process, HRSA proposes no specific strategy for covered entity compliance with 340B(e). Alternative tracking systems must be considered and approved by HRSA on a case-by-case basis.

Under new 340B regulation §10.21(s), if a covered entity is unwilling or unable to maintain auditable records establishing compliance with 340B(e), it must purchase all orphan drugs outside of the 340B Program, regardless of the indication for which the drug is to be used. A hospital enrolled in the 340B Program may change its decision whether or not to purchase all orphan drugs outside of the 340B Program on a quarterly basis by notifying HRSA. This documentation will be public and verified during the annual recertification process.

Covered Entities with Dual Qualifications

If a covered entity qualifies as both an entity that is subject to the orphan drug exclusion and an entity that is not (e.g., a disproportionate share hospital and a sole community hospital), the hospital must select which enrollment type it chooses to qualify under and comply with the applicable regulatory and other 340B Program requirements. As part of the registration and annual recertification processes, a covered entity is required to certify that it meets the requirements for its particular enrollment type, including the orphan drug exclusion.

GPO Prohibition and the Orphan Exclusion

Section 10.21(d) clarifies that free-standing cancer hospitals (to which the GPO prohibition applies) are still prohibited from using a GPO for covered outpatient drugs. As orphan drugs when used for an orphan indication are not covered outpatient drugs, however, free-standing cancer hospitals may utilize a GPO to purchase these drugs. As the other orphan drug exclusion entities are not subject to the GPO prohibition, they may purchase orphan drugs through GPO arrangements no matter their intended use.

“Must Offer”

Manufacturers submitted comments challenging HRSA’s position in the Proposed Rule that manufacturers must extend the 340B ceiling price on an orphan drug if an orphan drug exclusion entity requests it, based on the assumption that the covered entity would only use the product for a non-orphan indication. Specifically, manufacturers argued that the “must offer” provision of the amended PHS Act (42 U.S.C. § 256b(a)(1)) could not be implemented until HRSA revises its Pharmaceutical Pricing Agreement and manufacturers execute that revised agreement. In the Final Rule, citing a Federal Register notice from 1994 and the Supreme Court’s opinion in the Santa Clara case, HRSA held that the implementation of the Final Rule is not dependent on any separate implementation of the “must offer” provision via a revision to the Pharmaceutical Pricing Agreement. HRSA further argued that even if the implementation of the Final Rule were dependent on a separate implementation of the “must offer” provision, the Final Rule itself effectively implements that provision, even in the absence of an amendment to the Pharmaceutical Pricing Agreement. Notably, the Final Rule does not contain any “must offer” language.

Additional Implications for Manufacturers of Orphan Designated Drugs

In addition to the concerns raised above regarding operationalizing a price differential based on anticipated use of the product, and about lack of visibility into compliance short of an audit or investigation, manufacturers of orphan drugs should take into consideration three additional risks/concerns.

First, HRSA refused to address manufacturer comments regarding the intersection of this policy choice and the prohibition against off-label promotion. Imagine an orphan product has only one indication for that orphan use. Orphan drug exclusion entities that attempt to purchase the product at the 340B ceiling price are effectively stating that they intend to use the product for a non-indicated use. At what point does the manufacturer’s accommodation of that sale become “promotion” that implicates the prohibition against off-label promotion? Does publishing a 340B ceiling price for such a drug amount to improper promotion? Manufacturers should carefully review the way these kinds of sales are made and build in protections against accusations of off label promotion. Highly risk-averse manufacturers may also consider seeking guidance or an Advisory Opinion from HHS OIG for clarity.

Second, orphan drug manufacturers now have an additional incentive to engage with covered entities short of an audit to ensure compliance. Several drug and biologic manufacturers have undertaken covered entity outreach programs in the last several years. These programs are intended to create relationships between the manufacturing and 340B communities, demonstrate to covered entities that manufacturers care about 340B compliance, and provide channels of communication through which noncompliance can be identified and addressed. Manufacturers of orphan drugs should consider informal outreach to the orphan drug exclusion entities in particular to build mutual trust and share compliance best practices.

Third, compliance with the recordkeeping requirements of this rule will be difficult for the orphan drug exclusion covered entities, in that they require specific tracking of each drug dispensed to a patient and for what purpose. If the covered entity cannot adequately track utilization by indication, however, the Final Rule calls for the covered entity to purchase all orphan drugs at non-340B pricing, that is, at WAC or at some non-340B discount. Compliance and tracking by indication will be particularly difficult for covered entities utilizing contract pharmacy arrangements, given that contract pharmacies will not have access to patient records indicating the prescribing physician’s intended use. Manufacturers of orphan drugs should pay careful attention to the purchasing and dispensing patterns of orphan drug exclusion covered entities with contract pharmacies where there is greater concern for noncompliance and diversion.