The Patient Protection and Affordable Care Act of 2010 contained new regulations covering the inclusion of orphan drugs in 340B programs. As a reminder, manufacturers can request an orphan drug designation for either of two broad reasons:

1. The drug is intended to treat a disease or condition with fewer than 200,000 patients in the U.S.

2. The drug may be used to treat a disease or condition with more than 200,000 patients in the U.S., but the manufacturer expects that revenues from the drug will not cover research-related expenses.

If approved, the manufacturer receives an orphan drug designation specific to the disease or condition mentioned in the application (see sidebar for examples). These designations are tied to the manufacturer receiving the approval and do not extend to generic or co-licensed versions. In exchange for developing these products, manufacturers receive certain tax incentives and marketing exclusivity.

Note that orphan drug designations may be different than FDA-approved indications. This means that manufacturers may not market the drug for the orphan drug indication, but can provide the drug for off-label use. If the drug is not approved for marketing in the U.S., it may be provided under compassionate use protocols (subject to proper procedures).

Orphan Drugs and 340B

The PPACA amended Section 340B of the Public Health Service Act (42 U.S.C. 256b) by adding a new subsection (e): “EXCLUSION OF ORPHAN DRUGS FOR CERTAIN COVERED ENTITIES—For covered entities described in subparagraph (M), (other than a children’s hospital described in subparagraph (M)), (N), or (O) of subsection (a)(4), the term ‘covered outpatient drug’ shall not include a drug designated by the Secretary under section 526 of the Federal Food, Drug, and Cosmetic Act for a rare disease or condition.” The covered entities in subparagraph (M) are critical access hospitals (CAHs), sole community hospitals (SCHs), rural referral centers (RRCs) and stand-alone cancer hospitals (CANs).

In July 2013, HRSA published a final rule interpreting this legislation to mean orphan drugs should be excluded only when used for the orphan designation. (For example, Spiriva® would only be excluded when used for cystic fibrosis.) PhRMA quickly responded, stating that the exclusion was for all uses of the drug, not just the orphan designation. Over the next 27 months, the two groups battled in court about which interpretation was correct. A U.S. District Court ultimately found for PhRMA, finding HRSA’s interpretive rule to be invalid. (Over the course of this battle, HRSA’s legislative rule-making authority was called into question and subsequently limited to the three areas in the original 340B statute. Outside of these areas, HRSA’s rule-making is interpretive and non-binding.)

The upshot for affected covered entities? Orphan drugs must be excluded in their entirety, regardless of the usage. However, manufacturers can voluntarily offer covered entities 340B-like discounts, similar to how some offer below-ceiling price rates on certain products. According to anecdotal evidence from a recent 340B summit meeting, many affected hospitals are still receiving 340B pricing on orphan drugs.

If the exclusion was fully implemented, what’s the real impact?

  • Most affected hospitals are small facilities (<50 beds) with a primary-care focus and few, if any, specialty clinics (with the exception of some RRCs). Most orphan drugs have very limited uses and are targeted towards diseases or conditions treated by subspecialists. Therefore, it’s unlikely the affected hospitals would see large volumes of prescriptions for orphan drugs within their programs, or be administering these agents in clinic settings. That greatly reduces the financial risk of the exclusion.
  • Many orphan drugs have limited FDA-approved indications that match their orphan designations, especially drugs used in oncology and metabolic disorders. This means that excluded drugs are not being used for common chronic conditions in large patient populations, where covered entities would lose 100% of their savings due to 5% of the usage. Again, this limits the financial impact of the exclusion.
  • Many FDA-approved orphan drugs have designations that are held by companies without marketing or sales staff. Since the orphan designation is held by only one company and does not move to licensed or generic products, the orphan exclusion is not relevant in a practical sense.

So, the true economic impact of the orphan drug exclusion is very small for most affected hospitals. In fact, some may have no orphan drug prescriptions in their programs at all.

If an affected hospital wants to truly manage the exclusion according to the statute, then all uses of the drugs need to be excluded from their program. This means carving out orphan drugs at the 11-digit NDC level. HRSA publishes an updated list of orphan drugs each quarter, generally two weeks before the end of the quarter (for example, around March 20th for an April 1st effective date). The list can be accessed at In the most recent list (April-June 2016), HRSA included 3,161 orphan drugs. Of these, 1.923 have no associated trade name, meaning they are not actively marketed in the U.S. The remaining 1,238 are associated with approximately 1,500 NDCs – these would need to be excluded in full unless the manufacturers are willing to provide supplemental discounts to the affected hospitals.

For auditing purposes, covered entities should compare their in-clinic drug usage and included contract pharmacy prescriptions against the list of excluded NDCs. If any are found, they should be reversed out of the program. A corrective action plan should be implemented to ensure the products are not included in the future, and appropriate communications made to HRSA and manufacturers.

MegaGuidance and Orphan Drugs

The proposed Omnibus Guidance of August 2015 did not contain any language about orphan drugs. Therefore, no changes are expected in the foreseeable future. The exclusion will continue to apply to the hospitals named in the PPACA, as will the blanket exclusion of orphan drugs regardless of the usage. As noted above, manufacturers may negotiate with affected hospitals to offer supplemental discounts, so some hospitals may receive savings on orphan drugs.

Orphan Drugs: FDA-Approved Indications vs. Orphan Designations


Approved: Schizophrenia, acute mania, major depressive disorder, autism, Tourette’s

Designated: Tourette’s syndrome


Approved: Relapsing forms of MS

Designated: Primary-Progressive MS, ALS


Approved: COPD

Designated: Cystic fibrosis

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