The 340B program permits eligible hospitals and other “safety-net” providers (Covered Entities) to purchase covered outpatient drugs from pharmaceutical manufacturers at significant discounts. The Affordable Care Act and the Medicare and Medicaid Extenders Act of 2010 expanded the categories of Covered Entities to include critical access hospitals, free-standing cancer hospitals, sole community hospitals and rural referral centers. For these categories of Covered Entities only, drugs designated by the Food and Drug Administration as drugs “for a rare disease or condition” (Orphan Drugs) are excluded from covered outpatient drugs subject to mandatory 340B pricing requirements (the Orphan Drug Exclusion). Other Covered Entities, such as disproportionate share hospitals, are not subject to the Orphan Drug Exclusion.

On July 23, 2013, the Health Services and Safety Administration (HRSA) issued a final rule on Exclusion of Orphan Drugs for Certain Covered Entities Under 340B Program [PDF]. The Final Rule is effective on October 1st, 2013, and clarifies that Covered Entities subject to the Orphan Drug Exclusion may purchase Orphan Drugs at 340B prices when they are “transferred, prescribed, sold, or otherwise used for any medically-accepted indication other than treating the rare disease or condition” for which the drug was designated orphan status.

The Final Rule also provides that free-standing cancer hospitals must still comply with the prohibition against using a group purchasing organization (GPO) for purchasing covered outpatient drugs. The Final Rule clarifies, however, that when an Orphan Drug is used for the rare condition or disease for which it was designated its orphan status, it is not considered a covered outpatient drug, and thus, free-standing cancer hospitals can use a GPO for such Orphan Drugs used for such purpose.

The Final Rule requires Covered Entities subject to the Orphan Drug Exclusion to maintain auditable records to demonstrate compliance with the Final Rule and provide such records upon HRSA’s request or upon a manufacturer audit request. Notably, in the preamble discussion to the Final Rule, HRSA states that Covered Entities’ contract pharmacies must also maintain auditable records demonstrating compliance with the Final Rule. The Final Rule provides that a Covered Entity that cannot or does not wish to maintain auditable records sufficient to demonstrate compliance with the rule, must notify HRSA and purchase all Orphan Drugs outside of the 340B Program regardless of the indication for which the drug is used.

Ober|Kaler’s Comments

Since drug manufacturers have generally taken the position that all orphan drugs (no matter how used) are excluded from 340B pricing requirements, the Final Rule is expected to result in additional savings for those Covered Entities subject to the Orphan Drug Exclusion. Covered Entities and Contract Pharmacies may need to update their 340B tracking and recordkeeping systems to verify the purpose for which an orphan drug was prescribed and to comply with the Final Rule’s requirement to maintain auditable records.