Last week, federal health officials published a final rule for the 340B drug discount program that enables rural hospitals to continue stretching their dollars, serving more patients, and improving their services.
The July 23 regulation by the Health Resources and Services Administration (HRSA) implements statutory language that limited 340B drug discounts on orphan drugs for critical access hospitals, sole community hospitals, and rural referral centers. The limitation also applies to free-standing cancer hospitals.
These four types of hospitals became part of the 340B program in 2010. As part of the price of securing drug industry support for the legislation, the Obama administration agreed to a last-minute change making it harder for these new categories of 340B hospitals to get discounts on orphan drugs, which are used to treat rare diseases or conditions.
Orphan drugs have become hugely profitable for drug companies. The government incentivizes their production through additional patent protection and an easier path through Food and Drug Administration (FDA) review. Companies also can charge high prices for these medicines for which there are few, if any, alternatives.
The FDA gives drugs an orphan designation for one or more particular indications. These drugs can be, and often are, prescribed to treat different, often more common conditions. For example, the drug Remicade is frequently used to treat rheumatoid arthritis, a very common indication, but it also has an orphan designation to treat a few rare diseases, including Crohn’s disease. Likewise, hospitals frequently use Herceptin to treat breast cancer, but it also has orphan designations to treat diseases that affect far fewer people, including certain rare forms of stomach and pancreatic cancer.
Drug companies argued that the orphan drug limitation prevented newly eligible 340B hospitals from obtaining discounts on any orphan drugs, no matter how they are used. HRSA, however, interpreted the exclusion more narrowly, ruling that it prohibits these hospitals from buying an orphan drug at a 340B-discounted price only when the drug is used to treat the rare disease or condition for which the drug received its orphan designation.
HRSA’s regulation also makes clear that hospitals must have tracking systems in place to demonstrate that orphan drugs purchased at 340B prices are not used to treat the rare diseases and conditions for which those drugs received their designations. Hospitals must also maintain auditable records demonstrating compliance with the regulation. If a hospital cannot or chooses not to implement such a tracking system, it should not purchase orphan drugs at 340B prices and should notify HRSA of its decision.
The final regulation will be effective on Oct. 1, 2013.
HRSA should be commended for its sensible interpretation. Nevertheless, Safety Net Hospitals for Pharmaceutical Access (SNHPA) and its member hospitals believe this orphan drug restriction should never have been enacted and ultimately should be repealed.
The 340B program is intended to help hospitals that serve large numbers of uninsured and underserved patients to stretch scarce resources and serve more vulnerable patients. When Congress expanded 340B to rural and cancer hospitals, it intended for these hospitals to use program savings to stretch their resources, just as disproportionate share (DSH) and children’s hospitals do. This orphan drug restriction significantly diminishes the value of the 340B program for rural and cancer hospitals and undermines the program’s purpose. One estimate has shown that the restriction reduces the potential financial benefit from 340B for rural hospitals by 16 percent, while manufacturers stand to save only 0.6 percent of their total orphan drug sales through the limitation.
Some drug industry analysts who have taken the time to review the rule and think about its impact also believe that HRSA struck the right balance. Prevision Policy’s Michael McCaughan says there is a significant takeaway message from the rule that should not be lost. “In its own small way, the 340B exemption is still a sign that rare disease therapies are a ‘special’ class for public policy,” he says.
“In fact, HRSA’s narrow reading probably helps reinforce that message. By limiting the exemption solely to products used for the FDA-approved rare disease indication, HRSA cuts off the potential that manufacturers might seek orphan designations solely to avoid discounts on non-orphan uses.”
“At the same time,” McCaughan continues, “it assures that products approved for orphan uses benefit from the exemption—and especially for those orphan drugs that are approved solely for rare diseases. It may not make much difference to the manufacturers in terms of net pricing, but it does underscore that, from a public policy perspective at least, rare diseases receive special consideration.”