On July 23, 2013, the Health Resources and Services Administration (HRSA) issued its final rule regarding the exclusion of orphan drugs for certain covered entities from the 340B Program.1 This is the first regulation that HRSA has issued in connection with the 340B Program. It establishes a new Part 10 of Chapter 42 of the Code of Federal Regulations, which will address implementation of certain requirements of the 340B law, as modified by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (together, PPACA). According to HRSA, additional 340B Program regulations may be published in the future and would be incorporated into the new 42 C.F.R. part 10. The final rule is effective October 1, 2013.

As discussed below, the final rule generally mirrors HRSA’s proposed rule on this issue,2 and narrowly interprets the 340B orphan drug exemption to apply only where a drug is used for a rare disease or condition for which the drug received its orphan designation. The final rule makes covered entities responsible for ensuring that orphan drugs purchased under the 340B Program are not transferred, prescribed, sold, or otherwise used for the drug’s orphan indication, but gives covered entities great latitude to determine how to fulfill this responsibility. Covered entities that cannot or do not wish to maintain auditable records sufficient to demonstrate compliance with this requirement must notify HRSA and purchase all orphan drugs outside of the 340B Program, regardless of the indication for which the drug is used. The final rule also allows covered entities to use a group purchasing organization (GPO) to purchase orphan drugs used for orphan indications, but, unlike the proposed rule, it prohibits free-standing cancer hospitals that elect to purchase all orphan drugs outside of the 340B Program from using a GPO to purchase those drugs.

I. The Final Rule Construes the Orphan Drug Exemption to Apply to Orphan Indications Only

PPACA added several new categories of entities to the 340B Program: certain cancer hospitals, critical access hospitals, rural referral centers, and sole community hospitals.3 In response to concerns that this expansion in covered entities could reduce incentives for manufacturers to develop and market orphan drugs, undercutting the Orphan Drug Act,4 Congress added an orphan drug exemption to the 340B law. This provision exempts orphan drugs sold to the newly eligible entities from 340B discounting obligations. The exemption provides:

EXCLUSION OF ORPHAN DRUGS FOR CERTAIN COVERED ENTITIES—For covered entities described in subparagraph (M) (other than a children’s hospital described in subparagraph (M)), (N), or (O) of subsection (a)(4) [of 42 U.S.C. § 256b(a)(4)], the term “covered outpatient drug” shall not include a drug designated by the Secretary under section 526 of the Federal Food, Drug, and Cosmetic Act for a rare disease or condition.5

In the final rule, HRSA construes the above statutory language very narrowly, making a number of determinations that generally limit the applicability of the orphan drug exemption. These determinations include:

  • „„Most importantly, the final rule prohibits newly eligible covered entities from purchasing an orphan drug through the 340B Program only where the drug is “transferred, prescribed, sold, or otherwise used for the rare condition or disease for which that orphan drug was designated under section 526 of the [Federal Food Drug and Cosmetic Act (FFDCA)].”6 The orphan exemption will not attach to the drug itself.
  • „„Manufacturers and covered entities seeking to determine whether a drug is designated under section 526 of the FFDCA and the indication(s) for which it is designated must consult the FDA listing of orphan drugs under section 526, which HRSA will publish on its website on the first day of the month prior to the end of each calendar quarter “to govern the following quarter’s purchases.”7 (Thus, it appears that in some cases, newly eligible entities could receive an advance notice allowing a one-month period of unrestricted 340B purchasing before the orphan exemption applies to the drug). While not completely clear, language in the preamble suggests that HRSA also interprets the orphan drug exemption to apply to any designated orphan indication (once appearing in the HRSA list), even if not approved by the FDA, as long as the drug itself was approved by the FDA.8
  • „HRSA states that the orphan drug exemption does not apply to entities that could potentially qualify as a type of covered entity to which the exemption would apply (i.e., a cancer hospital, critical access hospital, rural referral center, or sole community hospital), but that are enrolled under a different category of covered entity. For example, as HRSA explained, “if a hospital potentially qualifies under more than one section, such as a 340B(a) (4)(L) disproportionate share hospital and 340B(a)(4)(O) sole community hospital, the hospital must select which enrollment type it chooses to qualify under and comply with the related regulatory and program requirements.”9
  • „„The preamble states that the 340B orphan drug exemption applies only to a drug manufactured by the sponsor of the orphan designation—not generic drugs or other manufacturers of the same drug for nonorphan conditions. According to HRSA, “the exclusion only applies to those drugs that match the section 526 listing by the FDA, which includes the name of the drug’s sponsor.”10 This interpretation seemingly could strip an orphan drug of its exempt status if it were sold to another manufacturer that was not the “sponsor” listed by FDA.

These narrow interpretations appear difficult to square with the plain language of the statute. As noted in the preamble, “[s] everal comments from manufacturers included the assertion that the plain text of the 340B orphan drug exclusion does not permit an indication-specific interpretation.”11 In response to these comments, HRSA asserts without elaboration that “[t]his rule is consistent with the language of the orphan drug exclusion in 340B(e) of the PHSA, which states that it applies to drugs ‘for a rare disease or condition.’”12 This quote, however, omits the key portion of the orphan drug provision, which provides that the term “covered outpatient drug” shall not include “a drug designated by the Secretary under section 526 of the [FFDCA] for a rare disease or condition.”13 Read as a whole, the statutory language creates an exemption for “a drug” designated by the Secretary as a drug for a rare disease or condition (irrespective of whether the designated drug may have non-orphan indications, or may be used for a non-orphan indication by a 340B entity). By its terms, the exemption covers any drug designated for a rare disease or condition; there is no extra requirement that the drug be limited to use for the rare disease or condition that allowed its designation, or that the 340B entity use the drug for the rare disease or condition underlying its designation.

HRSA does not respond to these arguments in the final rule, but instead seeks to justify its interpretation as consistent with the intent of Congress in enacting the orphan drug exemption. According to HRSA, “the interpretation as set forth in this rule reflects the intent of Congress to expand eligible entities and restrict purchases of certain orphan drugs by both providing 340B savings for newly-eligible covered entities including commonly prescribed uses of orphan drugs and protecting the financial incentives for manufacturing orphan drugs designated for a rare disease or condition.”14 HRSA also reasons that limiting the exemption to orphan indications is consistent with the Orphan Drug Act’s incentives (such as seven years market exclusivity, a clinical trial tax credit, federal research grants for clinical testing, and exemption from the drug application user fee), because these incentives do not apply to any indication that has not itself received orphan drug designation.15

While it is true that the seven years market exclusivity, clinical trial tax credit, federal research grants for clinical testing, and the user fee exemption only apply to a drug’s orphan designation, the statutory language underlying these incentives makes clear that they apply only to orphan designated indications.16 Unlike the orphan drug exemption, the plain language of these provisions does not refer to “a drug” designated for an orphan designation. Thus, HRSA’s interpretation is hard to reconcile with the fundamental principle of statutory construction that statutes must be interpreted in accordance with their plain language.

II. The Final Rule Leaves it to Covered Entities to Determine How to Comply With the Orphan Drug Exemption

The final rule establishes that it is the responsibility of the covered entity to ensure “that any orphan drugs purchased through the 340B Program are not transferred, prescribed, sold, or otherwise used for the rare condition or disease for which the orphan drugs are designated under section 526 of the FFDCA.”17 A cancer hospital, critical access hospital, rural referral center, or sole community hospital that purchases orphan drugs under the 340B Program “is required to maintain and provide auditable records on request which document the covered entity’s compliance with this requirement [and make them] available for audit by the Federal Government or, with Federal Government approval, by the manufacturer.”18 A covered entity that “cannot or does not wish to maintain auditable records sufficient to demonstrate compliance with this rule, must notify HRSA and purchase all orphan drugs outside of the 340B Program regardless of the indication for which the drug is used.”19 A hospital may change its decision to purchase all orphan drugs outside of the 340B Program on a quarterly basis by notifying HRSA.

In the preamble to the final rule, HRSA explicitly recognizes “that compliance with this rule may be challenging for the subset of covered entities to which it applies” and notes that “[m]any commenters pointed out that diagnosis codes and other information are not readily available for prescriptions handled in the retail setting.”20 Nevertheless, the final rule lacks specificity regarding the systems and mechanisms that covered entities must use to prevent orphan drugs purchased under 340B from being used for the drug’s orphan indication(s). Unlike the proposed rule, the final rule does not even require covered entities to maintain separate purchasing accounts for orphan drugs used for designated and nondesignated indications. Instead, “the affected hospitals will need to determine how they will meet these requirements.”21 The preamble states that “HRSA guidelines (59 FR 25113 (May 13, 1994)) allow the covered entity discretion to develop an alternative system, short of tracking each discounted drug through the purchasing and dispensing process, to prove compliance.”22 To our knowledge, HRSA has not yet developed formal criteria for such alternative systems; the 1994 guidance quoted by HRSA merely states that the agency “will develop criteria for alternative systems at a later date and welcomes all suggestions.”23

The preamble states that entities violating the orphan drug exemption shall be subject to the sanctions and penalties applicable to a failure to comply with the prohibition on diversion of covered outpatient drugs in section 340B(a)(5) (B). HRSA commits that, as part of its covered entity audit program, it will review covered entities’ auditable records that demonstrate compliance with the orphan drug regulation, when applicable.24 Additionally, while HRSA has not yet issued revised audit guidelines, the preamble states that “[t]he current manufacturer audit guidelines (61 FR 65406 (December 12, 1996)) apply to violations of section 340B(a) (5)(B) of the PHSA, and therefore manufacturers have the ability to audit covered entities’ compliance with the orphan drug provision pursuant to those guidelines” (which require the manufacturer to demonstrate reasonable cause that the entity is violating the statutory prohibition on diversion).25

III. The Final Rule Directs Manufacturers To Make Reasonable Assumptions Regarding Potential Best Price Implications

Although the final rule preamble notes that “[s]everal manufacturers commented that HRSA cannot require manufacturers to sell orphan drugs to the newly-eligible entities at 340B prices until CMS issues guidance confirming explicitly that sales of orphan drugs to newly-eligible entities at (or below) 340B prices are exempt from Medicaid Best Price,”26 the rule does not squarely address these concerns. HRSA merely states that it “does not believe that compliance with the 340B Program is contingent upon implementing regulations expressly addressing the effect on Medicaid Best Price for orphan drugs.”27 Thus, the final rule would not resolve the potential best price questions that could result when a manufacturer sells an orphan drug to a covered entity at the 340B ceiling price, and the covered entity ultimately dispenses the drug for a non-orphan indication. Instead, it reminds manufacturers that in the absence of specific guidance from CMS, they “may make reasonable assumptions in their calculations, consistent with the general requirements and intent of section 1927 of the Social Security Act, Federal Regulations, the Medicaid drug rebate agreement, and their customary business practices.”28

IV. HRSA Asserts that the Statutory “Must Offer” Provision Need Not Be Incorporated into the Pharmaceutical Pricing Agreement (PPA)

The final rule preamble notes one commenter’s assertion that the proposed rule “impermissibl[y] attempt[s] to implement the ‘must offer’ provision of the Affordable Care Act,” which “can only be implemented if it is written into the PPA,” and that “[s]everal other manufacturers commented on the must offer provision and expressed concerns about how that language would be implemented.”29 The rule does not squarely address the argument that the “must offer” provision does not apply to orphan drugs because it applies only to “covered outpatient drugs,”30 and that the statute excludes from the covered outpatient drug definition “a drug” designated for a rare disease and sold to a newly-eligible covered entity.

Instead, HRSA states that the “regulation is not dependent upon implementation of the ‘must offer’ provision,” reasoning that HRSA has imposed a longstanding requirement “that manufacturers offer drugs at the 340B discount to 340B covered entities on the same basis as its other customers,” which HRSA claims was in place before the inclusion of the “must offer” provision in the 340B statute by PPACA.31 The rule contends that a “refusal to offer orphan drugs to a 340B covered entity on the basis of 340B Program participation would violate the 340B statutory requirements.”32

HRSA also argues that the “must offer” provision does “not need to be specifically written into the PPA prior to taking effect,” because the Supreme Court’s decision in Astra USA, Inc. v. Santa Clara County, 131 S. Ct. 1342 (2011), confirmed that “PPAs are not transactional, bargained-for contracts, but simply serve as the means by which drug manufacturers opt into the statutory framework of the 340B Program.”33 HRSA does not, however, directly address the plain language of the statutory framework to which manufacturers have opted-in, which provides that “[e]ach such agreement [i.e., each PPA] … shall require that the manufacturer 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.”34

V. The Final Rule Provides that Covered Entities May Purchase Drugs Subject to the Orphan Drug Exemption Through a GPO

The final rule also addresses the interaction between the orphan drug exemption and the “GPO prohibition,” which prohibits certain categories of covered entities from purchasing any covered outpatient drug through a GPO.35 Of the newly eligible covered entities to which the orphan drug exclusion applies, only free-standing cancer hospitals are subject to the GPO prohibition.36 The final rule reiterates the requirement for such entities to comply with the GPO prohibition, but provides that “a free-standing cancer hospital could use a GPO when an orphan drug is used for a rare disease or condition if it is able to track by indication, as these drugs are not considered covered outpatient drugs and the GPO prohibition only applies to covered outpatient drugs.”37

In a change from the proposed rule, however, the final rule provides that to the extent that a free-standing cancer hospital elects to purchase all orphan drugs outside of the 340B Program, the covered entity “is not permitted to use a GPO to purchase those drugs.”38 According to HRSA, “[a] llowing a free-standing cancer hospital to purchase all of its orphan drugs through GPOs would, in effect, allow hospitals to purchase orphan drugs that are included in the definition of ‘covered outpatient drugs,’ which is prohibited.”39

VI. Conclusion

Over two years after the publication of the proposed rule (on which 50 comments were submitted from industry stakeholders), the final rule still leaves many questions regarding the implementation of the orphan drug exemption unanswered. HRSA’s interpretation limiting the orphan drug exemption to drugs ultimately used for their orphan indication raises administrative challenges for both manufacturers and covered entities. Whether an orphan drug is a 340B drug (and hence the correct price) will be unknown at the time of sale, as neither the manufacturer nor the covered entity can know what indication the drug would be used for at the time of sale. Therefore, as recommended by HRSA, manufacturers may wish to develop reasonable assumptions regarding the pricing treatment of orphan drugs, in preparation for the October 1, 2013 effective date of the final rule.