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HRSA Clarifies 340B Orphan Drug Exclusion

By August 2, 2013No Comments

On July 23, 2013, the Health Resources and Services Administration  promulgated a final rule – and the 340B program’s first regulations – to implement a statutory provision that restricts Critical Access Hospitals, Sole Community Hospitals, Rural Referral Centers, freestanding cancer hospitals, and their contract pharmacies, from purchasing “orphan drugs” at 340B‐discounted prices (Final Rule).1

In addition, HRSA defined a group purchasing organization, which impacts disproportionate share hospitals, children’s hospitals, and cancer hospitals.  The regulations are effective on October 1, 2013. The final rule is available here.  The Office of Pharmacy Affairs also published Frequently Asked Questions about the orphan drug exclusion, which are available on its website.


The 340B program requires drug manufacturers to sell “covered outpatient drugs” at discounted prices to eligible “covered entities.”2   CAHs, SCHs, RRCs, and cancer hospitals are all “covered entities” eligible to participate in the 340B program if they meet certain requirements.3   These four hospital categories became eligible to participate in the 340B program through changes adopted in the Affordable Care Act (ACA).4   The ACA, however, also provided that these hospitals may not use 340B pricing for “drug[s] designated … for a rare disease or condition.”5   These drugs are commonly known as “orphan drugs,” and, therefore, the 340B program restriction applicable to these hospitals is referred to as the “orphan drug exclusion.”

The Food and Drug Administration (FDA) designates a drug as an orphan drug if a manufacturer or sponsor requests such a designation and the FDA determines that the drug will treat a “rare disease or condition.”6   A rare disease or condition is one that affects fewer than 200,000 people in the United States, or one that affects more than 200,000 individuals but for which there is no reasonable belief that the costs incurred to develop and market the drug would ever be recouped from domestic sales of the drug.7   A list of orphan drugs is maintained online by the FDA.  Currently, there are 2,850 orphan drug designations.  Often, providers prescribe an orphan drug to treat a condition or disease other than one for which the drug has an orphan drug designation.8

The 340B statute also prohibits all other categories of 340B eligible hospitals, plus cancer hospitals, from purchasing covered outpatient drugs through a GPO “or other group purchasing arrangement” as an alternative to purchasing at 340B prices.9   The term “group purchasing organization” is not defined in the 340B statute.

Final Rule

In its proposed rule, HRSA considered whether to apply the orphan drug exclusion whether only when the drug was prescribed to treat a disease or condition for which it received an orphan drug designation or whenever the drug was prescribed, regardless of the reason for the prescription.10  The Final Rule provides that each hospital subject to the Orphan Drug exclusion has the option to exclude a drug from its 340B purchases either:  (1) when the drug is “transferred, prescribed, sold, or otherwise used for the rare condition or disease for which that orphan drug was designated,” and “match[es] the listing and sponsor of the orphan designation;” or (2) any time an orphan drug is prescribed, regardless of the condition for which it is used.11  Hospitals must inform OPA of their election, and may change it quarterly.12

HRSA will publish a list of orphan drug designations for which the exclusion will apply on the first day of each calendar quarter to be effective throughout that quarter.13  HRSA clarified that the orphan drug exclusion only applies to the drug when it is marketed by its orphan drug sponsor.14  It does not apply to generic drugs or other manufacturers of the same drug for non‐ orphan conditions.15

If a hospital chooses Option 1, it must maintain auditable records that demonstrate that the orphan drug was not prescribed for the use for which it received its orphan drug designation or propose an alternative method by which it will maintain and demonstrate compliance, subject to approval by HRSA.16  If the hospital cannot track its use of orphan drugs, it must notify HRSA that it will purchase all drugs with an orphan drug designation outside of the 340B program.17  In the preamble to the regulations, HRSA stated that it will permit covered entities to identify individual outpatient facilities—often called “child sites” of the primary covered entity—that will purchase all outpatient drugs with an orphan designation outside of the 340B program, even if the hospital choose Option 1.18  There is no mention of this exception, however, in the regulations.

HRSA recognized that some hospitals might qualify for the 340B program in two categories that are subject to different restrictions.  For example, a hospital might meet the criteria to participate both as a DSH and as an RRC.  A DSH may not purchase covered outpatient drugs through a GPO but is not subject to the orphan drug exclusion, while an RRC is not subject to the GPO prohibition but is subject to the orphan drug exclusion.  The Final Rule requires these hospitals to choose their designation and abide by the rules applicable to that category of hospital.19  The decision may only be changed on a quarterly basis.20 

According to HRSA, violation of the orphan drug exclusion will be treated as a form of diversion of 340B drugs and sanctioned in the same way.21  It analogized violation of the exclusion to providing 340B drugs to non‐patients or at ineligible sites.22  HRSA sanctions for diverting 340B drugs to ineligible patients range from requiring repayment of the 340B discount to removal from the program.  In addition, manufacturers may audit hospitals for compliance with the patient diversion requirement.23

The regulations include specific provisions for cancer hospitals, which are the only category of hospital subject to both the orphan drug exclusion and GPO prohibition.24  The Final Rule provides that cancer hospitals may purchase orphan drugs through a GPO when the drug is used to treat the condition or illness for which it received the orphan drug designation.25   However, a cancer hospital may not purchase an orphan drug through a GPO if it is used to treat another condition or illness.26

The Final Rule includes definitions for terms that relate to the orphan drug exclusion.   Specifically, HRSA defines “ceiling price,” “covered entity,” “covered outpatient drug,” “manufacturer,” “orphan drug,” and “Pharmaceutical Pricing Agreement” by incorporating or referencing the definition in the 340B statute or Medicaid rebate statute.27  The Final Rule also defines GPO, which is of importance to DSHs, children’s hospitals and cancer hospitals.   Specifically, GPO is defined as “an entity that contracts with purchasers, such as hospitals, nursing homes, and home health agencies, to aggregate purchasing volume and negotiate final prices with manufacturers, distributors, and other vendors.”28

Analysis and Impact

The Final Rule is a source of relief for CAHs, RRCs, SCHs, and cancer hospitals, and is a setback for drug manufacturers.  However, affected hospitals will have to apply tracking systems to ensure that they comply with the orphan drug exclusion.  Affected hospitals must now determine whether they are able to implement a system that can track the use of orphan drugs by the illness or condition the drug was used to treat.29

In comments to HRSA, some hospitals expressed concern regarding the burden of establishing an auditable orphan drug tracking system.30  One hospital suggested that it would use ICD‐9‐CM codes to identify diagnoses that would trigger the orphan drug exclusion.31  That commenter acknowledged that the approach would be over‐inclusive, as multiple diagnoses, diseases, or conditions can be covered by a single ICD‐9‐CM code, but stated that the approach carried a low risk of non‐compliance.32  HRSA did not state whether using ICD‐9‐CM codes was an acceptable methodology to comply with the orphan drug exclusion, but responded that it believed hospitals have the capability to track orphan drugs by indication and maintain auditable records.33  It also noted that hospitals could opt to exclude orphan drugs entirely from their 340B purchases or propose an alternative tracking system.34

Hospitals affected by the orphan drug restriction have noted that the ICD‐9‐CM solution potentially requires the hospital to cross‐reference each of the 2,850 orphan drug designations with their corresponding National Drug Codes (NDCs) and to associate each NDC with all ICD‐9‐ CM codes under which the designated rare disease or condition could be coded.  Affected hospitals must weigh the burden of creating, implementing, maintaining, and updating such a system against the savings the hospital would realize from being able to obtain the drugs at 340B prices.

One commenter noted that drugs dispensed in the retail setting are not associated with ICD‐9‐CM codes.35  Again, HRSA did not have any specific advice for addressing this issue, but suggested that the affected hospitals “determine how they will meet these requirements” and/or propose an alternative tracking system.36

The orphan drug exclusion applies to a hospital’s contract pharmacies and HRSA stated in the preamble to the regulations that “[a]ffected covered entities with contract pharmacies that cannot or do not wish to maintain auditable records sufficient to demonstrate compliance with this rule, must purchase all orphan drugs, regardless of indication, outside the 340B Program.”37   If a contract pharmacy is unwilling or unable to track the purposes for which an orphan drug was prescribed, the covered entity and contract pharmacy might consider amending their contract pharmacy agreement to state that orphan drugs are not included within its scope.  By doing so, the covered entity will purchase only non‐orphan drugs under the “bill to ship to” arrangement.  HRSA has not sanctioned this approach and hospitals should consult with legal counsel before relying on it.


The orphan drug regulations are the first step toward HRSA’s stated goal of codifying two decades of 340B program guidance into a comprehensive set of regulations.38  If you have additional questions or would like assistance in drafting comments or policies and procedures to address these regulations, please contact Barbara Straub Williams (202‐872‐6733 orBarbara.Williams@ppsv.com), or the principal at The Powers Firm with whom you normally work.


1 Exclusion of Orphan Drugs for Certain Covered Entities Under 340B Program, 78 Fed. Reg. 44,016 (July 23, 2013).   HRSA administers the 340B program.
2 Section 340B of the Public Health Service Act is codified at 42 U.S.C. § 256b.   In the 340B program “covered outpatient drugs” has the meaning ascribed to it in the Medicaid rebate statute, 42 U.S.C. § 1396r‐8(k).
3 See 42 U.S.C. § 256b(a)(4)(L‐O).  All four categories must be owned or operated by a unit of state or local government, be a public or private non‐profit corporation that is either formally granted governmental powers by a unit of state or local government, or be a private non‐profit corporation with a contract with a unit of state or local government to provide indigent care to individuals who do not qualify for Medicare or Medicaid.  Id. § 256b(a)(4)(L)(i).  In addition, CANs must have a disproportionate share adjustment percentage exceeding 11.75 percent and must refrain from purchasing covered outpatient drugs through a group purchasing organization or other group purchasing arrangement, and SCHs and RRCs must have a disproportionate share adjustment percentage equal or greater than 8 percent.  Id.  § 256b(a)(4)(M), (O).
4 Patient Protection and Affordable Care Act, Pub. L. No. 111‐148, § 7101, 124 Stat. 119, 821‐22, (2010), as amended by the Health Care and Education Reconciliation Act of 2010 (HCERA), Pub. L. No. 111‐152, § 2302, 124 Stat. 1029, 1082‐83.
5 See 42 U.S.C. § 256b(e).  Children’s hospitals were originally subject to the orphan drug exclusion, but Congress later exempted them from its scope.  See HCERA § 2302, 124 Stat. at 1083, as amended by Medicare and Medicaid Extenders Act of 2010, Pub. L. No. 111‐309, § 204, 124 Stat. 3285, 3289‐91.
6 21 U.S.C. § 360bb(a).
7 Id. § 360bb(a)(2).
8 Many orphan drugs, especially those that are effective against rare forms of cancer, have more than one orphan drug designation.  Seehttp://www.accessdata.fda.gov/scripts/opdlisting/oopd/.
9 42 U.S.C. § 256b(a)(4)(L)(iii).
10 Exclusion of Orphan Drugs for Certain Covered Entities Under 340B Program, 76 Fed. Reg. 29,183 (May 20, 2011).
11 Final Rule at 44,027‐28; 42 C.F.R. § 10.21(a), (c)(3) (Oct. 1, 2013).
12 Final Rule at 44,028; 42 C.F.R. at § 10.21(c)(3).  OPA is a division of HRSA.
13 Final Rule at 44,028; 42 C.F.R. at § 10.21(e)
14 Final Rule at 44,020.
15 Id.
16 Final Rule at 44,028; 42 C.F.R. at § 10.21(c)(1), (2).
17 Final Rule at 44,028; 42 C.F.R. at § 10.21(c)(3).
18 Final Rule at 44,025.
19 Final Rule at 44,028; 42 C.F.R. at § 10.21(b)(2).
20 Final Rule at 44,028, 42 C.F.R. at § 10.21(b)(2).
21 Final Rule at 44,028; 42 C.F.R. at § 10.21(f).
22 Final Rule at 44,022.
23 42 U.S.C. § 256b(a)(5)(C).
24 See 42 U.S.C. § 256b(a)(4)(M), (e).
25 Final Rule at 44,028; 42 C.F.R. at § 10.21(d)(3).
26 Final Rule at 44,028; 42 C.F.R. at § 10.21(d)(2).
27 Final Rule at 44,027; 42 C.F.R. at § 10.3.
28 Final Rule at 44,027; 42 C.F.R. at § 10.3.
29 Because cancer hospitals are subject to the GPO exclusion, they would have to buy drugs with an orphan designation at wholesale acquisition cost (WAC) or through the 340B program’s prime vendor, Apexus, if they cannot implement such a tracking system.
30 Final Rule at 44,020‐21.
31 Id. at 44,021.
32 Id.
33 Id.
34 Id.
35 Id.
36 Id.
37 Id. at 44,025.
38 See, e.g., 340B Drug Pricing Program Regulations, RIN: 0906‐AB04 (Notice of Proposed Rulemaking expected in June 2014), information available at http://www.reginfo.gov.

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