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The End of 340B Discounts for Orphan Drugs: Court Rules HHS Without Authority to Promulgate Orphan Drug Exclusion

on Friday, 6 June 2014 in Health Law Advisory: Zachary J. Buxton, Editor

On May 23, 2014, a federal district court invalidated the 340B Program’s orphan drug exclusion after finding that the U.S. Department of Health and Human Services (HHS) acted beyond its statutory authority when it implemented the rule.

The 340B Program requires manufacturers to give substantial discounts on outpatient prescription drugs to participating providers. When Congress made critical access hospitals, rural referral centers, sole community hospitals, and free-standing cancer hospitals eligible to participate in the 340B Program under the Affordable Care Act, it also made them subject to an “orphan drug exclusion.” The newly eligible providers were not entitled to 340B discounts on products approved by the Food and Drug Administration (FDA) as “orphan drugs” to treat diseases affecting very few patients, such as rare forms of cancer and muscular disorders.

In July 2013, HHS issued regulations interpreting the exclusion to prohibit 340B pricing only where a provider was purchasing the drug to treat the specific rare condition or disease for which the FDA had designated it as an orphan drug. If the same drug was prescribed for any other FDA-approved, non-orphan indication, the provider would qualify for the 340B discount. Pharmaceutical Research and Manufacturers of America (PhRMA), a trade association representing makers of brand-name drugs, filed suit late last year to prevent HHS from enforcing the rule.

Finding in PhRMA’s favor, the district court judge stated that while he agreed that the federal regulation seemed “like the most reasonable way for implementing the orphan drug exclusion, unfortunately Congress did not delegate to HHS broad rulemaking authority as a means of doing so.” The decision permanently enjoins the agency from enforcing the rule as promulgated last year. Because this effectively eliminates the existing regulation at 42 C.F.R. § 10.21, rural and cancer hospitals subject to the orphan drug exclusion should immediately cease purchasing orphan drugs under 340B, regardless of whether they are prescribed to treat an orphan indication.

It is unclear whether this decision will delay or otherwise impact the 340B Program proposed “mega-rule,” currently under review by the White House Office of Management and Budget and expected to be published this summer.

Whitney C. West

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