On May 20, 2011, the Health Resources and Services Administration (HRSA) of the Department of Health and Human Services (HHS) published a proposed rule to implement the statutory provision excluding orphan drugs from the 340B drug discount program for certain entities that became eligible for the program as a result of healthcare reform.  76 Fed. Reg. 29183 (May 20, 2011).

Under the 340B program, manufacturers are required to provide outpatient drugs at a discount to certain providers, called “covered entities.”  The orphan drug exclusion applies only to entities that participate in the program as free-standing cancer hospitals, critical access hospitals, rural referral centers, and sole community hospitals.  Proposed 42 C.F.R. § 10.21(b).  Under HRSA’s proposed regulations, “a covered outpatient drug 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 [the Federal Food, Drug, and Cosmetic Act (FFDCA)].”  Proposed 42 C.F.R. § 10.21(a).  However, for these same covered entities, a covered outpatient drug includes designated orphan drugs that are transferred, prescribed, sold, or otherwise used for any indication other than that treating the rare disease or condition for which the drug was designated under section 526 of the FFDCA.  76 Fed. Reg. at 29186.In other words, the entities to which the orphan drug exclusion applies can purchase these drugs at 340B prices when using them for common conditions for which they are approved or any other lawful use except when using them for the rare condition or disease for which they were given an orphan drug designation.  Id.

The proposed regulations also require covered entities “to ensure that orphan drugs that are purchased through the 340B Program are not transferred, prescribed, sold, or otherwise used for the rare condition or disease for which orphan drugs are designated under [the FFDCA].”  Proposed 42 C.F.R. § 10.21(c).  Covered entities must maintain auditable records to demonstrate their compliance.  Id.  The proposed rule does not state what sanctions will apply in the case of nonperformance.

The orphan drug exclusion does not apply to children’s hospitals.  Children’s hospitals became eligible to participate in the 340B Program under the Deficit Reduction Act of 2005, but were not part of the definition of “covered entities” until the passage of the Patient Protection and Affordable Care Act (PPACA) as part of healthcare reform.  At that time there was controversy surrounding the application of the drug exclusion to children’s hospitals.  On December 15, 2010, the Medicare and Medicaid Extenders Act amended the orphan drug exclusion’s statutory language to clearly indicate that the orphan drug exclusion did not apply to children’s hospitals.

HRSA cited three rationales for its proposed rule.  First, HRSA recognized confusion regarding to which covered entities and to which uses of orphan drugs the exclusion applied, as well as record-keeping and compliance requirements.  The new regulations provide clearer guidance.  Second, HRSA wanted to maintain the savings provided by the 340B program.  Since many of the entities to which the exclusion applies are significant orphan drug purchasers, HRSA interpreted the Affordable Care Act to prohibit the purchase of orphan drugs through the 340B program only for uses for which the drug was designated under the FFDCA, thus continuing to provide covered entities with significant savings.  Third, HRSA wanted to protect manufacturers’ financial incentives to produce orphan drugs for rare conditions and diseases.  The exclusion is consistent with those incentives.

The Secretary of HHS signs agreements with pharmaceutical companies creating binding maximum prices for drugs sold to covered entities.  More than 15,000 entities currently purchase more than $3.4 billion in drugs at a 30 to 50 percent discount under the program.  HRSA estimated that the proposed rule would save an additional $20 to $30 million in drug acquisition costs.

Comments on the proposed rule are due July 19, 2011.  The full text of the proposed rule is available here.