HRSA released its final rule on the orphan drug exclusion today. The final rule is published in the Federal Register and available at

The Affordable Care Act (ACA) added four new categories of covered entities to the 340B Drug Discount Program: certain cancer hospitals, rural referral centers, critical access hospitals, and sole community hospitals (ACA covered entities). These new covered entity types were added to the program on a more limited basis than the other categories of covered entities. Specifically, the ACA provided that the new covered entity types were ineligible for 340B pricing for drugs subject to an orphan designation. Under the 340B statute, only "covered outpatient drugs" (CODs) are subject to the ceiling price requirement, and the ACA amended the statutory definition of that term to exclude orphan drugs for purposes of the new ACA covered entity types.

HRSA issued a proposed rule on the orphan drug exception in May 2011. Over two years later, the final rule adopts HRSA’s initial proposal with minimal changes, largely ignoring manufacturer concerns regarding the presumed ability of covered entities to implement the proposed indication-based approach in a compliant manner. We summarize key aspects of the final rule below.

Orphan drug definition – proposed rule position retained: The ACA provides that the exception to the COD definition and therefore the ceiling price requirement applies to "a drug designated by the Secretary under section 526 of the Federal Food, Drug, and Cosmetic Act for a rare disease or condition." The proposed rule had defined this exception narrowly, to refer to the orphan indication alone, rather than the drug as a whole, such that the ACA covered entities would be able to access the 340B ceiling price on orphan drugs so long as the entity used the drug for a non-orphan indication. The final rule retains that narrow interpretation, which means that the ACA covered entities are entitled to the 340B ceiling price on an orphan drug when the orphan drug is used for a non-orphan indication. To that end, if a covered entity requests the ceiling price for an orphan drug, manufacturers are to assume the covered entity will use that unit of product for a non-orphan indication. HRSA policy is that manufacturers may not condition availability of the 340B price on a covered entity’s assurance of compliance with 340B provisions, including the compliance requirements of the final rule.  

Effective date: The effective date of the final rule is October 1, 2013 and HRSA expressly states that the final rule applies prospectively only.

Must offer:  HRSA proposed to implement the indication-based approach with the direction that manufacturers "must offer" the 340B ceiling price on an orphan drug if one of the ACA covered entities requests it, on the assumption that the covered entity would only use that product for a non-orphan indication. Manufacturers challenged that direction on the basis that the ACA's "must offer" standard has not yet been implemented, and cannot be implemented until HRSA actually revises the Pharmaceutical Pricing Agreement (PPA) and participating manufacturers execute that revised agreement and thereby agree to the must offer requirement. In response, HRSA states that the final rule’s implementation is not dependent on any separate implementation of “must offer” through a revision to the PPA, but that even if it were, the regulation would be a permissible implementation of that provision even without an amendment to the PPA. The final rule cites to the so-called “non-discrimination” Federal Register Final Notice from 1994 for this position, as well as to the AstraZeneca Supreme Court decision, which HRSA claims supports the position that the PPA is not a transactional, bargained-for contract and therefore, at least in HRSA’s view, does not need to be amended for “must offer” to be in effect. Despite HRSA’s stated position, the actual text of the regulation does not appear to include any “must offer” language.

Compliance concerns – covered entity opt-out: Manufacturers had expressed concerns regarding the indication-based approach because it assumed that covered entities have the information and resources necessary to identify the indication for which a particular unit of drug is used. Manufacturers argued that it would be arbitrary and capricious for HRSA to adopt an indication-based approach absent fact-finding to support the conclusion that the new covered entity types indeed had such track and trace capabilities. The final rule recognizes that such barriers to compliance may exist, but instead of evaluating whether it is actually possible to track and trace the indication for which a particular unit of drug is used, the final rule simply directs that a covered entity should purchase all orphan drugs, regardless of indication, outside of the 340B program if the covered entity cannot (or does not wish to) maintain auditable records which document the covered entity’s compliance. Where that is the case, the ACA covered entity must notify HRSA of this decision to “opt-out,” which the ACA covered entity can change on a quarterly basis. HRSA will include the “opt-out” status for each ACA covered entity in its covered entity database. As for the opt-out option, the final rule also indicates:

  • Contract pharmacies: All contract pharmacies must follow the same approach as that used by the sponsoring covered entity. That is, if a covered entity develops the necessary systems and records to document compliance, its contract pharmacies must do so as well. The contract pharmacy cannot opt-out of the 340B program for orphan drugs where the sponsoring covered entity has not also done so.
  • Outpatient facilities: An outpatient facility of an ACA covered entity, by contrast, can opt-out of the 340B program for purposes of the orphan drug requirements even where its parent entity has not done so.

Manufacturer audit rights and recent HRSA audit results: The final rule specifies that a covered entity’s compliance with the orphan drug exception is a component of its compliance with 340B(a)(5) of the statute and therefore is subject to audit by manufacturers. Audits therefore remain a manufacturer’s sole remedy for suspected non-compliance. To that end, we include below a link to HRSA’s most recent covered entity audit results, which include multiple findings of diversion (to inpatients and to ineligible individuals at a contract pharmacy) and duplicate discounts at several of the entities. The corrective action plans and sanctions are still to be determined for those covered entities. A copy of the audit results is available on the OPA website at: We urge you to review the results to identify any covered entity customers relevant to your business.

Alternative methods: The final rule specifies that a covered entity may develop an alternative system by which it can prove compliance, but that such alternative system must be approved by the Secretary prior to implementation. The final rule cites to a 1994 Federal Register Final Notice on this point (59 Fed. Reg. 25,113 (May 13, 1994)), but does not provide any specificity as to what is required by the orphan drug final rule in the first instance such that one can determine what an “alternative” approach to that requirement might be. The only specificity is a preamble discussion, in which HRSA concludes that use of a retrospective review as a proxy for a current drug-by-drug analysis “would not meet auditable records compliance requirements.”

Off-label concerns: The indication-based approach contained in the proposed rule raised particular concerns for manufacturers whose orphan drugs are approved only for use in treating the orphan indication, because a covered entity's request for the ceiling price on such drugs necessarily would indicate the covered entity’s intent to use the product for an off-label indication. Manufacturers requested the ability to decline requests for the ceiling price in such cases. The final rule simply does not address this concern in any way, and as noted above, reaffirms HRSA’s position that “must offer” now is in effect. The final rule states that an orphan drug is subject to the 340B ceiling price when used “for any medically-accepted indication other than” the orphan indication.

Best price exclusion: ACA covered entities have argued since enactment that while they may not be entitled to the ceiling price on orphan drugs, there is nothing in the statute that prevents manufacturers from providing the ceiling price (or any other lesser discount amount) on a voluntary basis. Some manufacturers may have been unwilling to provide such voluntary discounts absent explicit guidance from the Centers for Medicare & Medicaid Services (CMS) that those discounts would still be exempt from the calculation of Best Price. The final rule ignores these concerns stating that “compliance with the 340B Program is [ not ] contingent upon implementing regulations expressly addressing the effect on Medicaid Best Price for orphan drugs.” The final rule simply directs manufacturers to make reasonable assumptions.

Single category enrollment: The proposed rule noted that certain covered entities could qualify under more than one covered entity category under the newly amended 340B statute but that such covered entities would have to select one category and comply with whatever restrictions accompanied it. For example, a hospital that could qualify as either a critical access hospital (CAH) or a disproportionate share hospital (DSH) would have to choose between the orphan drug exclusion (CAH status) or the Group Purchasing Organization (GPO) exclusion (DSH status). The final rule retains this requirement.

Cancer hospital GPO carve-out – proposed rule position revised: One of the ACA covered entity types, cancer hospitals, is subject to both the statutory GPO prohibition, which prohibits the use of GPOs to purchase any "covered outpatient drug," as well as the orphan drug exclusion. In the proposed rule, HRSA proposed that cancer hospitals could opt to purchase all orphan drugs outside of the 340B program and therefore through a GPO even when those products were not used for their orphan indications. Manufacturers opposed this exception to the GPO prohibition because HRSA's indication-based approach necessarily means that orphan drugs, when not used for their orphan indication, remain covered outpatient drugs, and therefore cannot be purchased through a GPO. Manufacturers argued that the 340B statute, even as amended by the ACA, includes no such exception to the GPO prohibition. HRSA reversed course on this position in the final rule, recognizing that the GPO prohibition does not have a carve-out for orphan drugs. As a result, 340B cancer hospitals that choose the “opt-out” option discussed above are prohibited from using a GPO to purchase orphan drugs in all circumstances, whether or not those drugs are used for their orphan indication.

"Transferred, prescribed, sold, or otherwise used": The proposed rule discussed orphan drugs using the language of whether the drug is "transferred, prescribed, sold, or otherwise used" for the orphan indication. That nomenclature had not been used by HRSA in guidance to date and therefore manufacturers requested that HRSA clarify the meaning of these terms. The final rule retains this language but does not include any clarifications regarding the scope or meaning of this phrase.

Identification of orphan drugs – HRSA quarterly list: The proposed rule directed that orphan drugs were to be identified by reference to the Food and Drug Administration (FDA) database listing of such products at The final rule retains this standard, and also provides that HRSA itself will include the list of orphan drugs on the 340B website as well, updated on a quarterly basis and posted the first day of the month prior to the end of the calendar quarter to govern the following quarter’s purchases.

First formal regulation: This final rule represents the first regulation for the 340B program, codified at 42 C.F.R. Part 10. As you may have read in the trade press, HRSA also is in the process of preparing a more comprehensive rule to address other aspects of the 340B program. HRSA has stated in the trade press that it hopes to issue a proposed regulation by year end. In this final rule, HRSA indicates that the more comprehensive regulation, once finalized, also would be included at 42 C.F.R. Part 10.

Definitions: As the first regulation for the 340B program, the final rule includes definitions for a number of key terms, most notably the following definition of a GPO: “an entity that contracts with purchasers, such as hospitals, nursing homes, and home health agencies, to aggregate purchasing volume and negotiate final prices with manufacturers, distributors, and other vendors.”

As always, it is very important that you review the final rule and most recent HRSA audit results carefully yourself to ensure you fully and completely identify all issues relevant to your organization