March 18, 2021– One of the quieter debates around the 340B drug pricing program is percolating on Capitol Hill as lawmakers consider whether to plug a loophole in the law that costs rural hospitals much-needed resources. Members of Congress from both parties are looking to pass legislation to make a change on this issue. And a recent study in the prestigious journal Health Affairs could breathe new life into these efforts.
The study looks at the growth of the U.S. market for so-called orphan drugs, products that the Food and Drug Administration (FDA) has designated to treat rare conditions. These are drugs that could be used to treat diseases or conditions affecting no more than 200,000 people or are costly to develop. But such drugs often are used to treat other, more prevalent conditions than the ones qualifying them for orphan status. The authors note that, of the total spending on top orphan drugs approved to treat both rare and common conditions, only 21.4% of U.S. spending in 2018 was assigned to orphan indications. That means more than 70% of the spending total involved situations where the drugs were used to treat a health condition that is not rare.
So why should the 340B community care that most of the spending for orphan drugs is to treat common conditions? Most 340B hospitals, health centers, and clinics can purchase eligible orphan drugs at a discounted 340B price and use the savings to expand patient care or assistance. However, for a key subset of hospitals serving rural communities and treating cancer, those discounts are not available for orphan drugs. These safety-net providers must pay full freight, no matter whether the drug is used for a rare disease or for a more common condition.
In 2010, as part of the Affordable Care Act, Congress strengthened the health care safety net by adding rural referral centers (RRCs), critical access hospitals (CAHs), sole community hospitals (SCHs), and free-standing cancer hospitals to the list of 340B-eligible entity types. But that expansion contained a loophole – actively sought by drug industry lobbyists – that prevented these hospitals from gaining the full benefits of 340B eligibility. Under that pharma pressure, Congress excluded orphan drugs from the list of 340B covered outpatient drugs for those hospitals.
Since the enactment of the 340B “orphan drug exclusion” in 2010, hospitals have argued that when orphan drugs are used to treat common conditions they should be able to access 340B discounts. The new research confirms that orphan drugs are very commonly used for non-orphan purposes, demonstrating that the orphan drug exclusion is causing rural and cancer hospitals to miss out on significant drug savings.
A Quick History
The Orphan Drug Act is a bipartisan 1983 law coauthored by Sen. Orrin Hatch (R-Utah) and Rep. Henry Waxman (D-Calif.). The law authorized the FDA to grant approval to orphan drugs and provide manufacturers with seven years of market exclusivity and a tax credit covering up to 50% of their research and development costs. The notion behind the act was that manufacturers had little incentive to develop such drugs if the market was going to be tiny. Enactment of the law garnered praise from organizations representing people with such rare disorders as Huntington’s disease, myoclonus, amyotrophic lateral sclerosis (ALS), Tourette syndrome, and muscular dystrophy.
According to an FDA history of the law, the agency had designated 370 products for orphan status by 1990, and of these 49 were approved for orphan indications. By 2002, the number of orphan designations grew to almost 1,100 and approvals to 232, providing treatment to an estimated 11 million patients. By 2020, the FDA had approved more than 700 orphan drugs, and such products are considered one of the fastest-growing parts of the market. Thanks to the market exclusivity provided by the law, many of these drugs can command very high prices.
In the 28 years since the Orphan Drug Act was enacted, many of the approved orphan drugs have shown to be effective in treating other conditions that affect many more patients and can reach a much larger market. A classic, much-cited example is Crestor (rosuvastatin), manufactured by AstraZeneca. Originally designed to treat a rare childhood condition known as familial hypercholesterolemia, it now is sold to millions of adults with high cholesterol. Over the lifetime of the drug, the company has earned $62.8 billion in sales. Another example is Eli Lilly’s Prozac (fluoxetine hydrochloride), which the FDA approved to treat autism and certain types of body dysmorphic disorders but now is taken by millions of Americans to treat depression. At its peak, Prozac sales totaled $2.6 billion a year.
Just last year, the FDA granted orphan drug status for remdesivir to treat coronavirus disease 2019 (COVID-19), a disease that has infected millions in the U.S. After a fierce reaction from patient advocates, manufacturer Gilead Sciences withdrew its orphan drug application two days later.
Court Rulings Hinder Progress
After the enactment of the 340B exemption for rural and cancer hospitals in 2010, the Department of Health and Human Services (HHS) issued guidance applying the exemption only to instances in which the orphan drug is being used for its orphan purpose, allowing hospitals to access 340B pricing for orphan drugs when used for non-orphan, common purposes. The drug industry fought hard to protect the exemption, including by going to court twice to block HHS’s orphan drug policy.
In 2013, HHS issued a final rule requiring drug makers to offer discounts to rural and cancer hospitals for orphan drugs but indicating that hospitals may not use orphan drugs purchased at 340B pricing for orphan purposes. The Pharmaceutical Research and Manufacturers of America (PhRMA) sued, saying HHS did not have the authority to issue such a policy through regulation. A federal court agreed on procedural grounds without addressing the merits of the policy and invited HHS to repropose the rule using the correct procedural rules.
HHS then issued what it called an “interpretive rule” in 2014 articulating the same orphan drug policy. PhRMA sued again and the court threw out the rule. The decision said the 340B statute does not require drug manufacturers to offer 340B pricing to rural and cancer hospitals for orphan drugs, regardless of how the drugs are used. The court ruling has left the broad prohibition in place.
Bipartisan Legislation Would Close the Loophole
With the courts effectively blocking HHS from addressing this problem, members of Congress stepped up to lead the fight. Earlier this year, Reps. Peter Welch (D-Vt.) and David McKinley (R-W.V.) introduced legislation to limit the orphan drug exclusion to a drug’s orphan purpose and allow rural and cancer hospitals to access 340B pricing for orphan drugs when used for non-orphan purposes.
Proponents of the legislation are hoping the new Congress will enact the Welch-McKinley legislation, which the authors of the new study say would address concerns that manufacturers are able to benefit financially when orphan drugs are used for common purposes. The authors note that their findings suggest the 340B orphan drug exclusion could result in “substantial revenue” for manufacturers that sell orphan drugs approved for both rare and common purposes.