340B Program Orphan Drug Exclusion

On Tuesday, July 28, 2013, the Health Resources and Services Administration (HRSA) of the Department of Health and Human Services (HHS) issued final regulations implementing the 340B Program orphan drug exclusion established by the Affordable Care Act (ACA). The ACA created several new types of 340B covered entities, but stipulated that drugs categorized as “orphan drugs” under Section 526 of the Federal Food, Drug and Cosmetic Act (FFDCA) would not be considered 340B “covered drugs” eligible for the 340B discount when used by these new covered entities to treat the rare disease or condition for which they are classified as orphan drugs. The exclusion attempts to balance the drug manufacturers’ need to protect their investment in orphan drugs against the 340B covered entities’ statutorily-granted ability to obtain drugs at a discount price. 

The orphan drug exclusion applies only to the following types of 340B covered entities:

• Free-Standing Cancer Hospitals;
• Critical Access Hospitals;
• Rural Referral Centers; and
• Sole Community Hospitals.

Other types of 340B covered entities, such a Disproportionate Share Hospital (DSH) or FQHC, are not subject to the orphan drug exclusion. When a covered entity is eligible to participate in the 340B Program under more than one category (i.e., as a DSH or as a Sole Community Hospital), the covered entity must select one category, and then adhere to all applicable rules. An entity may change its designation with HRSA on a quarterly basis.

The covered entities listed above may not purchase orphan drugs under the 340B Program for use for the rare disease or condition for which it is listed under Section 526 of the FFDCA. These entities may, however, purchase an orphan drug under the 340B Program for uses other than the rare disease or condition for which it is designated under Section 526 of the FFDCA. HRSA will publish the FDA’s list of Section 526 orphan drugs on its own website, updated quarterly and applicable to the next quarter’s purchases.

A 340B covered entity which is a free-standing cancer hospital is also subject to the 340B Program's prohibition against purchasing 340B covered drugs through a group purchasing organization (GPO). Under this restriction, a free-standing cancer hospital may not use a GPO to purchase an orphan drug being used to treat a non-rare condition or disease because these drugs are considered 340B covered drugs. However, a free-standing cancer hospital may use a GPO to purchase orphan drugs when used to treat a rare condition, provided the hospital maintains auditable records that demonstrate compliance with these orphan drug regulations. A free-standing cancer hospital may change its GPO election with HRSA on a quarterly basis.

In order to be eligible to purchase orphan drugs under the 340B Program for non-rare disease purposes, all of the covered entities listed above must maintain “auditable records” documenting compliance with the exclusion, ready for access by HRSA and drug manufacturers. A covered entity may develop what the regulations call an “alternative system” to document compliance with the exclusion. All such alternative systems must be approved by HHS prior to implementation. Failure to maintain compliance with the exclusion is considered impermissible drug diversion and may result in exclusion from the 340B Program and require repayment of any improperly received discount.

HRSA’s/HHS’s publication of the orphan drug exclusion regulations marks the very first time HRSA/HHS has issued formal regulations regarding the 340B Program. Previously HRSA had only issued “guidance” materials. Clearly, these formal regulations are yet another signal of HHS’s effort to step up compliance enforcement under the 340B Program. If you would like more information on the orphan drug exclusion or 340B Program compliance in general, please contact Dykema Senior Attorney Kathleen A. Reed, R.N, at 231-348-8134 or kreed@dykema.com.

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