On July 23, 2013, the U.S. Department of Health and Human Services Health Resources and Services Administration (HRSA) issued a long-anticipated Final Rule regarding the 340B Drug Pricing Program (340B Program) orphan drug exclusion.  Hospitals subject to the 340B Program orphan drug exclusion may purchase drugs designated as orphan drugs by the U.S. Food and Drug Administration at 340B prices, as long as the drugs will be used for an indication other than the indication for which the orphan designation was granted.  Such hospitals should begin implementing auditable processes to comply with the Final Rule, which is effective October 1, 2013.

The 340B Drug Pricing Program (340B Program) allows certain hospitals and federal grantees to purchase outpatient drugs at discounted prices (the 340B price).  On July 23, 2013, the U.S. Department of Health and Human Services Health Resources and Services Administration (HRSA) issued a Final Rule regarding the 340B Program orphan drug exclusion.  The Affordable Care Act and the Medicare and Medicaid Extenders Act of 2010 expand the eligibility for hospitals to participate in the 340B Program.  Historically, a hospital could participate in the 340B Program only if it had a Disproportionate Share Hospital (DSH) payment adjustment of 11.75 percent.  Under the ACA change, hospitals with Sole Community Hospital (SCH) or Rural Referral Center (RRC) status could qualify with a DSH payment adjustment of only 8 percent; hospitals with Critical Access Hospital (CAH) status could participate by virtue of having CAH status.

However, the legislation also placed a restriction on the purchase of orphan drugs at 340B prices by SCHs, RRCs, CAHs and freestanding cancer hospitals participating in the 340B Program.  Orphan drugs are drugs designated by the U.S. Food and Drug Administration (FDA) for treatment of “a rare disease or condition.”  Immediately upon enactment, questions arose as to which drugs would be considered “orphan” and exempt from the program.  The statutory language was vague and left considerable room for interpretation. 

HRSA proposed a regulation to define the orphan exclusion in May 2011.  The Final Rule posted on July 23, 2013, represents the agency’s final decision regarding the definition of “orphan drugs” and which uses will be exempt from the 340B Program.

The Final Rule provides that these hospitals may purchase orphan drugs at 340B prices, as long as the drug is used for an indicationother than that for which the drug was granted orphan drug status (a non-rare use).  In other words, affected entities would be able to purchase drugs with orphan status at 340B prices when using them for common conditions for which they are approved or any other lawful use, but not when using them for the rare condition or disease for which the FDA gave them an orphan drug designation. 

The Final Rule also permits freestanding cancer hospitals, which also are subject to a prohibition on purchase of outpatient drugs through Group Purchasing Organizations (GPOs), to purchase orphan drugs used for the indication for which orphan drug status was granted through a GPO.  Freestanding cancer hospitals may not purchase orphan drugs for non-rare use through a GPO.  If an SCH or RRC has a DSH payment adjustment over 11.75 percent, it has the option of participating in the 340B Program as either an SCH/RRC or a DSH.  Those SCHs and RRCs participating in the 340B Program as DSH hospitals are not subject to the orphan drug exclusion, but are subject to the GPO exclusion.  However, unlike freestanding cancer hospitals, SCHs and RRCs participating in the 340B Program as DSH hospitals are not permitted to purchase orphan drugs through a GPO.

If a hospital subject to the orphan drug exclusion purchases orphan drugs at 340B prices for non-rare use, the hospital must develop an auditable process for demonstrating compliance with the orphan drug exclusion.  If the hospital is unable or unwilling to develop such a process, the hospital must refrain from purchase of all orphan drugs at 340B prices, including for non-rare use.  The Final Rule indicates that hospitals subject to the orphan drug exclusion will be expected to notify HRSA of their election to purchase non-rare-use orphan drugs at 340B prices and may change such election on a quarterly basis.

The Final Rule marks the first time that HRSA has issued formal regulations related to the 340B Program.  Past 340B Program guidance was issued through a notice and comment process, but was not codified in the Code of Federal Regulations.  HRSA has publicly announced that it intends to release additional 340B Program regulations in the future, including a comprehensive regulatory package covering many aspects of the 340B Program.  The move towards the establishment of more formal program requirements is indicative of a larger shift in the federal administration of the 340B Program from outreach and education to compliance and oversight.  Entities participating or contemplating participating in the 340B Program should take appropriate steps to develop auditable records of 340B Program compliance and ensure that they are prepared to participate in 340B Program audits by HRSA and participating drug manufacturers.

The provisions of the Final Rule are effective October 1, 2013.