[Federal Register Volume 76, Number 98 (Friday, May 20, 2011)]
[Proposed Rules]
[Pages 29183-29190]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-12423]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

42 CFR Part 10

RIN 0906-AA94


Exclusion of Orphan Drugs for Certain Covered Entities Under 340B 
Program

AGENCY: Health Resources and Services Administration (HRSA), Department 
of Health and Human Services (HHS).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The ``Veterans Health Care Act of 1992,'' enacted section 340B 
of the Public Health Service Act (PHSA) ``Limitation on Prices of Drugs 
Purchased by Covered Entities.'' Section 340B implemented a drug 
pricing program by which manufacturers who participate in Medicaid are 
required to sell covered outpatient drugs to particular covered 
entities listed in the statute and must agree to charge a price that 
will not exceed the amount determined under a statutory formula. The 
manufacturer's obligation to sell at no greater than the ceiling price 
extends only to covered outpatient drugs and does not apply to 
inpatient drugs. Covered entities are required to ensure that drugs 
purchased under 340B are used only for outpatients. The Patient 
Protection and Affordable Care Act expanded the types of covered 
entities eligible to participate in the 340B Drug Pricing Program (340B 
Program) under the PHSA to include certain free standing cancer 
hospitals, rural referral centers, sole community hospitals, critical 
access hospitals, and children's hospitals. Of these entities, 
children's hospitals were already eligible to participate in the 340B 
drug pricing program under the Deficit Reduction Act of 2005. The 
Health Care and Education Reconciliation Act (HCERA) (the Patient 
Protection and Affordable Care Act and HCERA collectively hereinafter 
will be referred to as the ``Affordable Care Act''), as amended by the 
Medicare and Medicaid Extenders Act of 2010, contained a provision that 
limits the types of drugs that free standing cancer hospitals, rural 
referral centers, sole community hospitals and critical access 
hospitals could obtain through the 340B Program. Under the changes made 
by the Affordable Care Act, orphan drugs, when used for the rare 
condition or disease for which that orphan drug was designated under 
the Federal Food, Drug, and Cosmetic Act (FFDCA), are excluded from the 
definition of covered outpatient drug for the specified newly-eligible 
covered entity types for purposes of the 340B Program. This regulatory 
action details how these exclusions will be implemented under the 340B 
Program.

DATES: Comments on this proposed rule must be submitted by July 19, 
2011.

ADDRESSES: You may submit comments, identified by the Regulatory 
Information Number (RIN) 0906-AA94, by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include RIN 0906-AA94 in the 
subject line of the message.
     Mail: CDR Krista Pedley, Director, Office of Pharmacy 
Affairs (OPA), Healthcare Systems Bureau (HSB), Health Resources and 
Services Administration (HRSA), 5600 Fishers Lane, Parklawn Building, 
Room 10C-03, Rockville, Maryland 20857.

All submissions received must include the agency name and RIN for this 
rulemaking. All comments received will be available for public 
inspection and copying without charge, including any personal 
information provided, at Parklawn Building, 5600 Fishers Lane, Room 
10C-03, Rockville, Maryland 20857, weekdays (Federal holidays excepted) 
between the hours of 8:30 a.m. and 5 p.m.

FOR FURTHER INFORMATION CONTACT: CDR Krista Pedley at the mail address 
or by telephone at (301) 594-4353.

SUPPLEMENTARY INFORMATION: 

I. Background

    The purpose of the 340B Program is to permit covered entities ``to 
stretch scarce Federal resources as far as possible, reaching more 
eligible patients and providing more comprehensive services.'' H.R. 
Rep. No.102-384(II), at 12 (1992). The 340B Program was established by 
section 602 of the Veterans Health Care Act of 1992 (Pub. L. 102-585) 
and is codified as section 340B of the PHSA. Section 340B instructs HHS 
to enter into Pharmaceutical Pricing Agreements (PPA) with drug 
manufacturers. (42 U.S.C. 256b(a)). If manufacturers sign a PPA, they 
agree that the prices charged for covered outpatient drugs to covered 
entities (organizations eligible under section 340B to receive 340B 
discounted pricing) will not exceed defined ceiling prices, which are 
based on pricing data reported to the Centers for Medicare & Medicaid 
Services (CMS). The 340B ceiling price is calculated by subtracting the 
Unit Rebate Amount from the Average Manufacturer Price. Drugs purchased 
by covered entities through the 340B Program may not be sold or 
transferred to anyone other than the patients of the covered entities. 
Since 1992, the program has grown; there are currently over 16,000 
participating covered entity sites in the 340B Program.
    The Affordable Care Act introduced several changes to the 340B 
Program. The 340B Program has not previously published codified 
regulations on the operation of this program, instead relying on 
published program guidance documents, which were typically finalized 
after a notice and comment period. However, a number of the provisions 
of the Affordable Care Act necessitate the development and publication 
of regulations. This is the first of a series of regulations that will 
outline certain requirements in the 340B Program.
    Section 7101 of the Affordable Care Act added several new 
categories of eligibility for program participants, allowing them to 
have access to 340B drug pricing except in the case of an orphan drug 
when used for a rare disease or condition. The entity types added to 
the list of eligible entities listed under 340B(a)(4) included: 
340B(a)(4)(M) (children's hospitals and free-standing cancer 
hospitals), 340B(a)(4)(N) (critical access hospitals), and 
340B(a)(4)(O) (rural referral centers and sole community hospitals). As 
amended by the Affordable Care Act, and section 204 of the Medicare and 
Medicaid Extenders Act of 2010 (Pub. L. 111-309), section 340B(e) of 
the PHSA (42 U.S.C. 256b(e)) states the following:

     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.

Congress passed the Orphan Drug Act of 1983 to stimulate the 
development of drugs for rare diseases. The Food and Drug 
Administration (FDA), Office of Orphan Products Development, 
administers the Orphan Drug Act and reviews requests for designations. 
Orphan status designation by the FDA indicates that the drug has been 
found ``promising'' for treating a rare disease. The award of an orphan 
designation does not alter the standard regulatory requirements and 
process for obtaining

[[Page 29184]]

marketing approval, which is a separate process administered by the FDA 
Center for Drug Evaluation and Research and the Center for Biologics 
Evaluation and Research. In fact, a large majority of drugs with orphan 
designations do not have approval to be marketed in the United States. 
Generally, only outpatient drugs that have been approved for marketing 
in the United States are included in the 340B Program. Thus, among 
outpatient drugs that have received an orphan designation, only those 
that have also received marketing approval by the FDA meet the 
definition of covered outpatient drugs for the 340B Program.

Rationale for Rulemaking

    The purpose of issuing this proposed rule is to clarify HHS's 
stated effort in: (1) Providing clarity in the marketplace, (2) 
maintaining the 340B savings and interests to the newly-eligible 
covered entities; and (3) protecting the financial incentives for 
manufacturing orphan drugs designated for a rare disease or condition 
as indicated in the Affordable Care Act as intended by Congress.
    First, HHS is aware of confusion in the marketplace, having been 
notified of such by affected parties, including covered entities and 
drug manufacturers. This confusion is due to varying interpretations of 
the statutory exclusion: whether the language prohibits these newly 
covered entities from purchasing all orphan drugs through the 340B 
Program or whether the language only prohibits purchase of orphan drugs 
when used for the rare disease or condition for which the orphan drug 
is designated. In response to this uncertainty, some manufacturers have 
ceased selling orphan drugs through the 340B Program to the newly-
eligible covered entities to avoid best price implications. Other 
manufacturers are waiting for Federal policy before taking action, 
while still other manufacturers have stated that they will stop selling 
orphan drugs through the 340B Program to newly-eligible covered 
entities effective immediately. In addition, the affected covered 
entities are not sure if they are permitted to purchase orphan drug 
products and, if they are, at what price. These covered entities do not 
know if they can buy these orphan drugs using group purchasing 
organizations or if there are additional record-keeping requirements 
that they must meet for 340B compliance. Other 340B stakeholders such 
as wholesalers are also not sure which systems need to be in place to 
ensure compliance with this new statutory provision. HHS has received 
numerous requests from these affected parties asking for clear Federal 
policy on the scope of this provision. The Secretary believes that this 
proposed rule will provide requested clarity on this issue.
    Second, the Affordable Care Act added four newly-eligible covered 
entity categories to benefit from the 340B Program. As Congress wanted 
these new covered entities to participate and benefit from the 340B 
Program ``to stretch scarce federal resources as far as possible, 
reaching more eligible patients and providing more comprehensive 
services,'' it is critical that HHS recognizes these covered entities' 
ability to benefit from the 340B Program savings so there is sufficient 
value for them to participate in the 340B Program. HHS has been 
notified by the covered entities that some of the hospitals such as 
free-standing cancer hospitals are significant purchasers of orphan 
drugs and if these drugs were excluded from the 340B Program entirely, 
it is not clear if there would be sufficient financial benefits to 
participating in the 340B Program. As of October 1, 2010, only 337 
hospitals out of approximately 1,500 eligible hospitals have enrolled 
in the program. Some covered entities are still weighing the benefits 
while other covered entities are waiting for Federal guidance to 
clarify how the orphan drug exclusion will impact their organizations. 
Interpreting the statutory language to exclude all uses of drugs with 
an orphan designation, including uses for common diseases or 
conditions, would place a substantial burden on the affected entities 
and potentially nullify the benefits of the 340B Program for those 
entities considering enrolling. Thus, this proposed rule would apply an 
interpretation of the statutory language prohibiting purchase of orphan 
drugs through the 340B Program by certain newly covered entities that 
limits the prohibition to uses for the rare disease or condition for 
which the orphan drug was designated under section 526 of the FFDCA.
    Finally, HHS has to maintain financial incentives for the 
manufacturing of an orphan drug designated for a rare disease or 
condition. A drug is designated by the FDA as ``a drug for a rare 
disease or condition'' pursuant to section 526 of the Federal Food, 
Drug, and Cosmetic Act at the request of the sponsor if FDA finds that 
the drug is being or will be investigated for a rare disease or 
condition and, if approved by FDA, the approval will be for that 
disease or condition. 21 USC 360bb(a)(1). This designation is referred 
to as orphan-drug designation. 21 CFR 316.24. FDA has interpreted the 
law as permitting the designation of a drug for a rare disease or 
condition in situations where the drug is also approved for a different 
disease or condition that does not qualify for such a designation. 21 
CFR 316.23(b). Some drugs may be used to treat multiple diseases or 
conditions. This designation provides a number of incentives for the 
development of the orphan drug for the particular disease or condition. 
These incentives include: (1) 7-year market exclusivity to sponsors of 
approved orphan products; (2) a tax credit of 50 percent of the cost of 
conducting qualified human clinical trials; (3) Federal research grants 
for clinical testing of new therapies to treat and/or diagnose rare 
diseases; and (4) an exemption from the usual drug application or 
``user'' fees charged by the FDA. Each of these incentives applies only 
when the orphan drug is targeted or used to treat a rare disease or 
condition and not for other indications. First, the marketing exclusion 
only applies if the drug is the first approved by the FDA to be 
marketed for an orphan indication and not if the drug is only approved 
by the FDA for a common condition. Second, the tax credit must relate 
to testing of the drug for the rare disease or condition underlying the 
orphan designation and not for other diseases or conditions (non-rare 
uses). Third, the Federal research grants are for testing the treatment 
of rare diseases and not for other indications. Finally, the exemption 
from FDA user fee payments only applies to user fees charged when 
seeking marketing approval to treat the orphan designated rare disease 
or condition. Thus, the incentives associated with orphan drug 
designation do not apply to any indication for a disease or condition 
that has not itself received orphan drug designation (the product would 
not be considered to be an ``orphan drug'' for such additional uses). 
The approach proposed in this rule (in which the exclusion of orphan 
drugs is limited to uses for the rare disease or condition for which 
the orphan drug was designated) is consistent with the general 
application of incentives associated with orphan drug designation, 
described above.
    To the extent Congressional intent was to not undermine pricing for 
drugs used to treat rare diseases, a broad exclusion appears to be 
overly inclusive. Drugs that are marketed for a rare disease are in 
some cases also approved, or used without approval, for other 
indications and some such drugs are among some of the most widely used 
today. This rule, as proposed, serves to maintain orphan drugs outside 
of 340B

[[Page 29185]]

pricing when the drug with such a designation is used for a rare 
disease or condition. This approach is consistent with the 
implementation of the FFDCA by FDA without generating an unintended 
benefit for those manufacturers with drugs that have an orphan 
indication under section 526 of the Federal Food, Drug, and Cosmetic 
Act, but are widely or even exclusively utilized for common 
indications. The fact that drugs can have multiple indications, only 
some of which qualify for designation, has led HHS to conclude that the 
exemption from the term ``covered outpatient drug'' under section 
340B(e) of the PHSA only applies to orphan drugs when they are 
transferred, prescribed, sold, or otherwise used for the rare condition 
or disease for which the orphan drug was designated.

II. Summary of the Regulation

General Provisions (Subpart A)

    In 1992, Congress enacted the Veterans Health Care Act to provide 
certain purchasers with a process through which they received drug 
discounts or rebates. Section 602 of the Veterans Health Care Act 
provided for drug discounts primarily for certain grantees of the 
Public Health Service. Since 1992, HHS has administratively established 
through documents published in the Federal Register the terms and 
certain elements of the 340B Program. HHS is now establishing a 
regulatory structure for the 340B Program and will also be publishing 
regulations on other provisions of this program. This is the first 
regulation to be published.
    Section 340B(e) of the PHSA does not alter a manufacturer's 
obligation to sell covered outpatient drugs at no greater than the 
ceiling price to the designated covered entities. A manufacturer may 
not condition the offer of statutory discounts upon a covered entity's 
assurance of compliance with section 340B provisions. Accordingly, 
manufacturers cannot condition sales upon receiving prior assurance 
that the 340B drug will not be used to treat a rare disease or 
condition. Manufacturers must offer covered entities covered outpatient 
drugs for purchase at or below the applicable 340B ceiling price if 
such drug is made available to any other purchaser.
    Section 340B(e) of the PHSA creates no additional obligations or 
restrictions upon drug manufacturers. As provided under section 
340B(a)(10) of the PHSA, the law does not prohibit manufacturers from 
charging a price for a drug that is lower than the maximum price that 
may be charged under section 340B(a)(1). CMS is delegated the 
responsibility for regulating the Medicaid best price exemption, and 
HRSA is working with CMS to develop policy on the treatment of orphan 
drugs to covered entities under 340B(a)(4)(M) (other than a children's 
hospital described in subparagraph (M)), (N), and (O) with respect to 
Medicaid best price. Until HHS issues this policy, which will be 
prospective in its effect, manufacturers are permitted to make 
reasonable assumptions regarding the Medicaid best price calculations, 
including exclusions applicable to those calculations.

Eligibility To Purchase 340B Drugs (Subpart B)

    Health care entity types that meet the requirements under section 
340B(a)(5) of the PHSA and which are listed under section 340B(a)(4) of 
the PHSA are eligible to enroll in the 340B Program. These safety-net 
organizations are referred to as ``covered entities.'' Section 7101 of 
the Patient Protection and Affordable Care Act (Pub. L. 111-148) 
expanded the types of covered entities eligible to participate in the 
340B Drug Pricing Program (340B Program) to include certain free-
standing cancer hospitals, rural referral centers, sole community 
hospitals, and critical access hospitals. After the enactment of the 
Affordable Care Act, section 340B(a)(4) includes the following entity 
types: (1) A Federally-qualified health center (as defined in section 
1905(l)(2)(B) of the Social Security Act); (2) A family planning 
project receiving a grant or contract under section 1001 of the Public 
Health Service Act; (3) An entity receiving a grant under subpart II of 
part C of title XXVI of the Public Health Service Act (relating to 
categorical grants for outpatient early intervention services for HIV 
disease); (4) A state-operated AIDS drug purchasing assistance program 
receiving financial assistance under title XXVI of the Public Health 
Service Act; (5) A black lung clinic receiving funds under section 
427(a) of the Black Lung Benefits Act; (6) A comprehensive hemophilia 
diagnostic treatment center receiving a grant under section 501(a)(2) 
of the Social Security Act; (7) A Native Hawaiian Health Center 
receiving funds under the Native Hawaiian Health Care Act of 1988; (8) 
An urban Indian organization receiving funds under title V of the 
Indian Health Care Improvement Act; (9) Any entity receiving assistance 
under title XXVI of the Public Health Service Act (other than a state 
or unit of local government or an entity described in 340B(a)(4)(D)), 
but only if the entity is certified by the Secretary pursuant to 
paragraph 340B(a)(7); (10) An entity receiving funds under section 318 
of the Public Health Service Act (relating to treatment of sexually 
transmitted diseases) or section 317(j)(2) (relating to treatment of 
tuberculosis) through a state or unit of local government, but only if 
the entity is certified by the Secretary pursuant to paragraph 
340B(a)(7); (11) A subsection (d) hospital (as defined in section 
1886(d)(1)(B) of the Social Security Act) that--(i) is owned or 
operated by a unit of state or local government, is a public or private 
non-profit corporation which is formally granted governmental powers by 
a unit of state or local government, or is a private non-profit 
hospital which has a contract with a state or local government to 
provide health care services to low income individuals who are not 
entitled to benefits under title XVIII of the Social Security Act or 
eligible for assistance under the state plan under this title; (ii) for 
the most recent cost reporting period that ended before the calendar 
quarter involved, had a disproportionate share adjustment percentage 
(as determined under section 1886(d)(5)(F) of the Social Security Act) 
greater than 11.75 percent or was described in section 
1886(d)(5)(F)(i)(II) of such Act; and (iii) does not obtain covered 
outpatient drugs through a group purchasing organization or other group 
purchasing arrangement; (12) A children's hospital excluded from the 
Medicare prospective payment system pursuant to section 
1886(d)(1)(B)(iii) of the Social Security Act, or a free-standing 
cancer hospital excluded from the Medicare prospective payment system 
pursuant to section 1886(d)(1)(B)(v) of the Social Security Act, that 
would meet the requirements of subparagraph (L), including the 
disproportionate share adjustment percentage requirement under clause 
(ii) of such subparagraph, if the hospital were a subsection (d) 
hospital as defined by section 1886(d)(1)(B) of the Social Security 
Act; (13) An entity that is a critical access hospital (as determined 
under section 1820(c)(2) of the Social Security Act), and that meets 
the requirements of subparagraph (L)(i); and (14) An entity that is a 
rural referral center, as defined by section 1886(d)(5)(C)(i) of the 
Social Security Act, or a sole community hospital, as defined by 
section 1886(d)(5)(C)(iii) of such Act, and that both meets the 
requirements of subparagraph (L)(i) and has a disproportionate share 
adjustment percentage equal to or greater than 8 percent.

[[Page 29186]]

Drugs Eligible for Purchase Under 340B (Subpart C)

Drugs Eligible for Purchase Under 340B (Sec.  10.20)
    In general, covered entities are eligible to purchase any 340B 
drugs (``covered outpatient drugs'') for their patients. However, as 
added by the Affordable Care Act, section 340B(e) of the PHSA excludes 
certain categories of covered entities from purchasing orphan drugs at 
340B pricing when used for rare diseases or conditions.
Exclusion of Orphan Drugs for Treating Rare Diseases or Conditions--
General (Sec.  10.21(a))
    For the covered entities described in Sec.  10.21(b), a covered 
outpatient drug does not include orphan drugs that are transferred, 
prescribed, sold, or otherwise used for the rare condition or disease 
for which that orphan drug was designated under section 526 of the 
FFDCA.
    However, for these same covered entities, a covered outpatient drug 
includes designated orphan drugs that are transferred, prescribed, 
sold, or otherwise used for any indication other than treating the rare 
disease or condition for which the drug was designated under section 
526 of the FFDCA. In other words, the affected entities can purchase 
these drugs at 340B prices when using them for common conditions for 
which they are approved or any other lawful use except when using them 
for the rare condition or disease for which they were given an orphan 
drug designation by the FDA.
Covered Entities to Which the Orphan Drug Exclusion Applies (Sec.  
10.21(b))
    The exclusion of orphan drugs when used for the rare condition or 
disease for which that orphan drug was designated under section 526 of 
the FFDCA is applicable only to covered entities qualifying under 
sections 340B(a)(4)(M), (other than a children's hospital described in 
subparagraph (M)) of the PHSA (free-standing cancer hospitals), 
340B(a)(4)(N) of the PHSA (critical access hospitals), and 
340B(a)(4)(O) of the PHSA (rural referral centers and sole community 
hospitals). The exclusion does not apply to entities that meet the 340B 
Program eligibility requirements and are enrolled under sections 
340B(a)(4)(A) through 340B(a)(4)(L) or to a children's hospital 
described in 340B(a)(4)(M)). For example, if a hospital potentially 
qualifies both under 340B(a)(4)(L) as a disproportionate share hospital 
and under 340B(a)(4)(O) as a sole community hospital, then that 
hospital must select which type and enroll under the requirements of 
the type that it selected.
    Covered entities enrolled under sections 340B(a)(4)(M) (other than 
a children's hospital described in subparagraph (M)), (N), and (O) that 
fail to ensure that orphan drugs that are purchased through the 340B 
Drug Pricing Program are not transferred, prescribed, sold, or 
otherwise used for the rare condition or disease for which orphan drugs 
are designated under section 526 of the FFDCA shall be subject to all 
sanctions and penalties applicable to failure to comply with section 
340B(a)(5)(B). The covered entities shall put in place tracking and 
recordkeeping requirements to demonstrate compliance with the limits on 
the use of orphan drugs. To demonstrate compliance, it will be 
necessary for the covered entities to create separate purchasing 
accounts and improve inventory and auditing capacity.
    In those few cases where safety-net organizations meet more than 
one eligibility criteria as covered entities that are eligible under 
sections 340B(a)(4)(L) through 340(a)(4)(O), these safety-net 
organizations shall be limited to participating in the 340B Program as 
only one covered entity type and shall abide by all applicable 
restrictions and requirements for that entity type.
Covered Entity Responsibility To Maintain Records of Compliance (Sec.  
10.21(c))
    The covered entities to which the orphan drug exclusion applies are 
responsible for ensuring that orphan drugs that are purchased through 
the 340B Program are not transferred, prescribed, sold, or otherwise 
used for the rare condition or disease for which orphan drugs are 
designated under section 526 of the FFDCA. These covered entities are 
required to provide auditable records upon the written request of the 
government or government-approved manufacturer audit request that 
directly pertain to the covered entity's compliance with this 
requirement.
    Affected covered entities that cannot or do not wish to maintain 
auditable records sufficient to demonstrate compliance, must purchase 
all orphan drugs outside of the 340B Program. Entities are required to 
notify HRSA that they will be purchasing all designated orphan drugs 
outside the 340B Program when they enroll in the program and during 
recertification.
Use of Group Purchasing Organizations by Free-Standing Cancer Hospitals 
(Sec.  10.21(d))
    The covered entities remain responsible for complying with all 
other 340B requirements and applicable Federal, state, and local law. 
Free-standing cancer hospitals enrolled under section 340B(a)(4)(M) of 
the PHSA must comply with the prohibition against using a group 
purchasing organization under section 340B(a)(4)(L)(iii) of the PHSA 
for the purchase of any covered outpatient drug.
    If auditable records are maintained that demonstrate full 
compliance with orphan drug purchasing requirements, then free-standing 
cancer hospitals enrolled under 340B(a)(4)(M) are permitted to use a 
group purchasing organization to purchase orphan drugs when they are 
transferred, prescribed, sold, or otherwise used for the rare condition 
or disease for which that orphan drug was designated under section 526 
of the FFDCA, as these drugs are not considered covered outpatient 
drugs. However, free-standing cancer hospitals enrolled under 
340B(a)(4)(M) are prohibited from using a group purchasing organization 
to purchase orphan drugs when used for any indication other than 
treating the rare disease or condition for which the drug was 
designated under section 526 of the FFDCA, as these drugs are 
considered covered outpatient drugs. To the extent that free-standing 
cancer hospitals elect to purchase all orphan drugs outside of the 340B 
Program, covered entities are permitted to use a group purchasing 
organization for those purchases.
 Identification of Orphan Drugs (Sec.  10.21(e))
    Designations under section 526 of the FFDCA are the responsibility 
of and administered by the FDA. FDA publishes information pertaining to 
orphan drug designations pursuant to 21 CFR part 316. Manufacturers and 
covered entities seeking to determine whether a drug is designated 
under section 526 of the FFDCA and the indication for which it is 
designated shall rely on the FDA. This list can be accessed by the 
public at http://www.accessdata.fda.gov/scripts/opdlisting/oopd/index.cfm.

III. Economic and Regulatory Impact

    Executive Order 12866, as amended by Executive Orders 13258 and 
13422, directs agencies to assess all costs and benefits of available 
regulatory alternatives and, when rulemaking is

[[Page 29187]]

necessary, to select regulatory approaches that provide the greatest 
net benefits (including potential economic, environmental, public 
health, safety, distributive, and equity effects). In addition, under 
the Regulatory Flexibility Act, if a rule has a significant economic 
effect on a substantial number of small entities, the Secretary must 
specifically consider the economic effect of a rule on small entities 
and analyze regulatory options that could lessen the impact of the 
rule. Executive Order 12866, as amended by Executive Orders 13258 and 
13422, requires that all regulations reflect consideration of 
alternatives, of costs, of benefits, of incentives, of equity, and of 
available information. Regulations must meet certain standards, such as 
avoiding an unnecessary burden. Regulations which are ``significant'' 
because of cost, adverse effects on the economy, inconsistency with 
other agency actions, effects on the budget, or novel legal or policy 
issues, require special analysis.
Impact of the New Rule
Analysis of Impacts
    HHS has examined the impacts of the proposed rule under Executive 
Order 12866 and the Regulatory Flexibility Act (5 U.S.C. 601-612), and 
the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). HHS believes 
that this proposed rule is not a significant regulatory action under 
the Executive Order; however, the impact is difficult to fully 
estimate. HHS invites additional comments on the impact of the proposed 
rule from affected stakeholders.
    The Regulatory Flexibility Act (RFA) requires agencies to analyze 
regulatory options that would minimize any significant impact of a rule 
on small entities. For purposes of the regulatory flexibility analysis, 
we consider all health care providers to be small entities either by 
virtue of meeting the SBA size standard for a small business, or for 
being a nonprofit organization that is not dominant in its market. The 
current SBA size standard for health care providers ranges from annual 
receipts of $7 million to $34.5 million. States and individuals are not 
considered small entities under the RFA. Because the proposed rule does 
not create or mandate any new reporting requirements and provides 
flexibility to entities to voluntarily purchase orphan drugs based on 
the entities' best interests, the Secretary certifies that the proposed 
rule will not have a significant economic impact on a substantial 
number of small entities.
    Section 202(a) of the Unfunded Mandates Reform Act of 1995 requires 
that agencies prepare a written statement, which includes an assessment 
of anticipated costs and benefits, before proposing ``any rule that 
includes any federal mandate that may result in the expenditure by 
state, local, and Tribal governments, in the aggregate, or by the 
private sector, of $100,000,000 or more (adjusted annually for 
inflation) in any one year.'' The current threshold after adjustment 
for inflation is $135 million, using the most current (2009) Implicit 
Price Deflator for the Gross Domestic Product. HHS does not expect this 
proposed rule to result in any 1-year expenditure that would meet or 
exceed this amount.
    In accordance with Executive Order 12866, we analyzed the potential 
economic effects of the proposed rule. As stated above, we are unable 
to quantify the costs of the proposed rule and we are unable to 
quantify the benefits of the final rule. However, we expect the net 
benefits to exceed the costs of not promulgating a final rule, as 
explained below.
    HHS has reviewed this proposed rule in accordance with Executive 
Order 13132 regarding federalism, and has determined that it does not 
have ``federalism implications.'' This rule would not ``have 
substantial direct effects on the states, or on the relationship 
between the national government and the states, or on the distribution 
of power and responsibilities among the various levels of government.''
    The proposals made in this notice of proposed rulemaking, if 
implemented, would not adversely affect the following family elements: 
Family safety, family stability, marital commitment; parental rights in 
the education, nurture and supervision of their children; family 
functioning, disposable income or poverty; or the behavior and personal 
responsibility of youth, as determined under section 654(c) of the 
Treasury and General Government Appropriations Act of 1999.

A. Costs of the Regulation

1. Impact on Covered Entities
    The proposed rule will not create any new requirements or costs 
upon the affected covered entities beyond those imposed by statute. The 
proposed rule will provide covered entities clarity on the meaning of 
340B(e) and provide them flexibility in making their own business case 
in how to proceed. Under the rule as proposed, covered entities will 
have the choice to either purchase a drug with an orphan designation 
under the FFDCA outside of the 340B Program or purchase such drugs 
under the 340B Program while maintaining auditable records required 
under 340B(a)(5)(C) that show that such drugs are not used for an 
indication excluded under 340B(e). HHS is not able at this time to 
estimate the costs of showing compliance for those affected entities 
that choose to purchase orphan drugs under 340B. HHS does not currently 
mandate the method of demonstrating compliance and allows flexibility 
of covered entities to do so.
    The proposed rule is expected to result in a net benefit to the 
affected covered entities, by establishing certainty as to the 
applicability of the exclusion and ensuring the option of continued 
access to orphan drugs when used for indications other than those for 
which the entity received a designation. HHS does not have sufficient 
information to make a comprehensive assessment. HHS has received 
anecdotal information suggesting that without this rule, the cost of 
purchasing orphan drugs for certain covered entities will increase 
substantially where those drugs are used for indications other than the 
rare disease for which they received an orphan drug designation. Some 
drugs with orphan drugs designation are used widely for common 
indications.
    The total amount in reduced expenditures of drugs resulting from 
this rule depends on what the market would do absent this proposed 
regulation compared with the result from promulgating this rule in 
final as proposed. We have estimates that the orphan drug market as a 
whole for both inpatient and outpatient services is approximately $40 
billion. In general, covered entity purchases under the entire 340B 
Program are estimated to make up less than 2 percent of the 
prescription drug market. The only covered entities impacted by this 
proposed rule are the entities listed in 340B(e) which make up a 
projected 10 percent of the total purchasing volume of all covered 
entities. The savings for entities purchasing under 340B varies 
considerably with savings as high as 50 percent. We estimate that the 
rule as proposed will help ensure access to the 340B ceiling price in 
50 to 75 percent of sales where orphan drugs with a designation are 
used for an indication other than the rare disease or indication for 
which the orphan drug received its designation. Based upon these 
estimates, we project that the proposed rule may result in a $20 to $30 
million reduction in the cost to acquire drugs by the affected covered 
entities. We have no data on the breakout of inpatient versus 
outpatient drug use. Thus, this cost reduction would be less if 
outpatient purchases by these covered

[[Page 29188]]

entities are significantly less than inpatient purchases (e.g., if 
outpatient drugs are 50% of orphan drug purchases then the cost 
reduction may only be $10 to $15 million). We welcome additional 
information from stakeholders to improve the estimated impact of this 
rule.
    While we are unable to provide a concrete estimate, we conclude 
that this rule will result in a net economic benefit to the affected 
covered entities. This conclusion is based upon the assumption that the 
rule as proposed will result in greater access to 340B pricing on 
orphan drugs than without the rule and on the grounds that the 
flexibility provided to covered entities will permit them to utilize 
the program only where there is a net economic benefit. Without a rule, 
we anticipate continued uncertainty and variability with a general 
tendency among many manufacturers to take a broad interpretation of the 
exclusion and minimize or eliminate savings to the covered entities.
2. Impact on Participating Manufacturers
    The proposed rule creates no new reporting or record-keeping 
requirements for manufacturers that have a 340B Pharmaceutical Pricing 
Agreement with the Secretary. The proposed rule provides clarity to the 
meaning of section 340B(e) to assist manufacturers in complying with 
their statutory responsibilities. As noted above, by definition all 
340B covered drugs have marketing approval for at least one indication. 
There are approximately 350 drugs that have been approved for rare 
diseases and conditions. Also from the FDA's Rare Disease Repurposing 
Database, there are another 100 orphan designated drugs that have not 
been approved for the rare disease but are approved for a common 
disease. There is relatively little quantitative data published on the 
orphan drug sector and the data published emphasizes approval for rare 
indications. Data currently publicly available from the FDA on orphan 
designated drugs tends to focus on approval for rare indications as 
opposed to common indications. Of those drugs, only those used for 
outpatients are eligible for purchase under 340B. The pharmaceutical 
manufacturers of these orphan designated drugs with at least one 
marketing approval will be affected by this rule.
    The impact of this proposed rule is narrowed by the fact that the 
orphan drug exclusion only applies to a subset of newly-eligible rural 
hospitals and freestanding cancer hospitals which are expected to make 
up a small fraction of the total purchases of covered outpatient drugs 
through the 340B Program. The overall economic impact is therefore 
difficult to estimate. In general, having a drug subject to the 340B 
ceiling price provides a cost savings to the purchasing covered 
entities and, if the drug would have otherwise been purchased at higher 
cost, a loss of that additional revenue to the manufacturer. The impact 
of this rule would vary considerably from drug to drug depending on 
such factors as the level of utilization of drugs with orphan 
designations by the affected covered entities, the elasticity of demand 
by the affected patient population, and the availability and cost of 
alternative treatments. Such anticipated cost savings and revenue 
losses would not apply when orphan designated drugs are purchased for 
their designated rare uses. HRSA invites comments from manufacturers 
regarding orphan drugs and the expected impact of the orphan drug 
exclusion and this proposed rule.
3. Impact on Other Parties
    HHS has concluded that the proposed rule will not have a 
significant impact on those third party firms that do business with 
covered entities and drug manufacturers. To the extent that third 
parties are indirectly affected, HHS estimates that this will result in 
lowered cost due to increased certainty in the marketplace and reduced 
likelihood of disputes as to whether a covered entity was properly 
charged, and decrease the number of disputes between wholesalers and 
manufacturers.

B. Benefits of the Regulation

    HHS concludes that the regulation increases clarity for all 
stakeholders and flexibility for the affected covered entities in how 
to most efficiently comply with all statutory requirements. The 
proposed regulation will not create disincentive for manufacturers to 
pursue designations under section 526 of the FFDCA. It will maintain 
economic incentives for drugs used for rare diseases, and minimize the 
increases in health care costs that could result from a broader 
interpretation of 340B(e) than the one we are offering in the proposed 
rule.

C. Initial Regulatory Flexibility Analysis

    The proposed regulation provides flexibility for the affected 
covered entities while supporting all statutory requirements and 
harmonizing with the objectives of encouraging development of drugs for 
treating rare diseases. A broader interpretation of section 340B(e) 
would reduce flexibility for covered entities and particular smaller 
covered entities and potentially undermine the addition of entities 
added to section 340B(a)(4) by the Affordable Care Act, by making it 
economically infeasible for the entities to participate.
Paperwork Reduction Act
    The proposed rule contains information-collection activities for 
certain covered entities that voluntarily choose to purchase designated 
orphan drugs and that will be required to establish internal data 
systems to ensure compliance with the regulation. The information 
collection requirements will assist the covered entity in maintaining 
program integrity and compliance with the requirements in Section 340B 
of the PHSA. The information collection activities are based on data 
collection requirements approved by the Office of Management and Budget 
(OMB No. 0915-0176 and OMB No. 0915-0327). The proposed rule references 
statutory requirements to maintain auditable records sufficient to 
demonstrate program requirements. The currently approved information 
collection already includes burdens for certification of maintenance 
and compliance with statutory mandates of the 340B program and for 
recordkeeping and reporting requirements associated with potential 
audits.
    As required by the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 
3507(d)), a copy of this proposed rule is submitted to the Office of 
Management and Budget for its review of the collection of information. 
Comments concerning information collection requirements are being 
solicited to: (1) Evaluate whether the proposed information requirement 
is necessary for the proper performance of functions of the agency, 
including whether the information will have practical utility; (2) 
evaluate the accuracy of the Agency's estimate burden; (3) enhance the 
quality, utility, and clarity of the information to be collected; and 
(4) minimize the information collection burden on the affected public, 
including automated collection techniques.

    Dated: April 20, 2011.
Mary Wakefield,
Administrator, Health Resources and Services Administration.
    Approved: May 16, 2011.
Kathleen Sebelius,
Secretary.

List of Subjects in 42 CFR Part 10

    Biologics, Business and industry, Diseases, Drugs, Health, Health 
care, Health facilities, Hospitals, Orphan drugs, 340B Drug Pricing 
Program.


[[Page 29189]]


    For the reasons stated in the preamble, the Department of Health 
and Human Services, Health Resources and Services Administration 
proposes to add a new part to 42 CFR part 10 to read as follows:

PART 10--340B DRUG PRICING PROGRAM

Subpart A--General Provisions
Sec.
10.1 Purpose.
10.2 Summary of 340B Drug Pricing Program.
10.3 Definitions.
Subpart B--Eligibility To Purchase 340B Drugs
10.10 Entities eligible to participate in the 340B Drug Pricing 
Program.
Subpart C--Drugs Eligible for Purchase Under 340B
10.20 Drugs eligible for purchase under 340B.
10.21 Exclusion of orphan drugs for certain covered entities.

    Authority: Sec. 340B of the Public Health Service Act (42 U.S.C. 
256b), as amended; Sec. 215 of the Public Health Service Act (42 
U.S.C. 216), as amended; Sec. 526 of the Federal Food, Drug, and 
Cosmetic Act (21 U.S.C. 360bb); Sec. 701(a) of the Federal Food, 
Drug, and Cosmetic Act (21 U.S.C. 371(a)).

Subpart A--General Provisions


Sec.  10.1  Purpose.

    This part implements section 340B of the Public Health Service Act 
(PHSA) ``Limitation on Prices of Drugs Purchased by Covered Entities.''


Sec.  10.2  Summary of 340B Drug Pricing Program.

    Section 340B of the PHSA instructs the Secretary of Health and 
Human Services to enter into agreements with manufacturers of covered 
drugs under which the amount required to be paid to these manufacturers 
by certain statutorily-defined entities does not exceed the price paid 
for the drug under title XIX of the Social Security Act reduced by a 
rebate percentage. Manufacturers participating in the 340B Drug Pricing 
Program (340B Program) are required to provide these discounts on all 
covered outpatient drugs.


Sec.  10.3  Definitions.

    Ceiling price means the maximum statutory price established under 
section 340B(a)(1) of the PHSA.
    Covered entity means an entity that meets the requirements under 
section 340B(a)(5) of the PHSA and is listed within section 340B(a)(4) 
of the PHSA.
    Covered outpatient drug has the same meaning set forth in section 
1927(k) of the Social Security Act.
    Group purchasing organization (GPO) is an entity that contracts 
with purchasers, such as hospitals, nursing homes, and home health 
agencies, to realize savings and efficiencies by aggregating purchasing 
volume and using that leverage to negotiate discounts with 
manufacturers, distributors, and other vendors.
    Manufacturer has the same meaning as set forth in section 
1927(k)(5) of the Social Security Act.
    Orphan drug means a drug designated by the Secretary under section 
526 of the Federal Food, Drug, and Cosmetic Act (FFDCA).
    Participating drug manufacturer means a manufacturer that has 
entered into a Pharmaceutical Pricing Agreement with the Secretary.
    Pharmaceutical Pricing Agreement (PPA) means an agreement described 
in section 340B(a)(1) of the PHSA.
    Section 340B means section 340B of the PHSA.

Subpart B--Eligibility to Purchase 340B Drugs


Sec.  10.10  Entities eligible to participate in the 340B Drug Pricing 
Program.

    A covered entity means an entity that meets the requirements under 
section 340B(a)(5) of the PHSA and is listed within section 340B(a)(4) 
of the PHSA. Covered entities are eligible to purchase covered 
outpatient drugs under the 340B Program.

Subpart C--Drugs Eligible for Purchase Under 340B


Sec.  10.20  Drugs eligible for purchase under 340B.

    The definition of covered outpatient drug has the meaning given 
such terms in section 1927(k) of the Social Security Act except as 
provided in Sec.  10.21 of this chapter.


Sec.  10.21  Exclusion of orphan drugs for certain covered entities.

    (a) General. For the covered entities described in paragraph (b) of 
this section, a covered outpatient drug does not include orphan drugs 
that are transferred, prescribed, sold, or otherwise used for the rare 
condition or disease for which that orphan drug was designated under 
section 526 of the FFDCA. A covered outpatient drug includes orphan 
drugs when they are transferred, prescribed, sold, or otherwise used 
for any indication other than treating the rare disease or condition 
for which the drug was designated under section 526 of the FFDCA.
    (b) Covered entities to which the orphan drug exclusion applies. 
The exclusion of orphan drugs from covered outpatient drugs described 
in paragraph (a) of this section shall only apply to covered entities 
qualifying under sections 340B(a)(4)(M) (other than a children's 
hospital described in subparagraph (M)) of the PHSA (free-standing 
cancer hospitals), 340B(a)(4)(N) of the PHSA (critical access 
hospitals), and 340B(a)(4)(O) of the PHSA (rural referral centers and 
sole community hospitals). The exclusion does not apply to those 
entities that meet the 340B Program eligibility requirements and are 
enrolled under sections 340B(a)(4)(A) through 340B(a)(4)(L) or to 
children's hospitals enrolled under section 340B(a)(4)(M) of the PHSA. 
Where safety-net organizations meet more than one eligibility criteria 
as covered entities that are eligible under sections 340B(a)(4)(L) 
through 340(a)(4)(O), these safety-net organizations shall be limited 
to participating in the 340B Program as only one covered entity type 
and shall abide by all applicable restrictions and requirements for 
that entity type.
    (c) Covered entity responsibility to maintain records of 
compliance. The responsibility rests with the covered entities listed 
in paragraph (b) of this section to ensure that orphan drugs that are 
purchased through the 340B Program are not transferred, prescribed, 
sold, or otherwise used for the rare condition or disease for which 
orphan drugs are designated under section 526 of the FFDCA. The covered 
entities listed in paragraph (b) of this section that purchase orphan 
drugs under the 340B Program are required to maintain separate 
purchasing accounts and to provide auditable records upon the written 
request of the government or government-approved manufacturer audit 
request that directly pertain to the entity's compliance with this 
requirement. The covered entities listed in paragraph (b) of this 
section that cannot or do not wish to maintain auditable records 
sufficient to demonstrate compliance, must purchase all orphan drugs 
outside of the 340B Program. Covered entities are required to notify 
the Health Resources and Services Administration if they will be 
purchasing all designated orphan drugs outside the 340B Program.
    (d) Use of group purchasing organizations by free-standing cancer 
hospitals. The covered entities remain responsible for complying with 
all other 340B requirements and applicable Federal, State, and local 
laws. Free-

[[Page 29190]]

standing cancer hospitals enrolled under section 340B(a)(4)(M) must 
comply with the prohibition against using a group purchasing 
organization under section 340B(a)(4)(L)(iii) of the PHSA for the 
purchase of any covered outpatient drug. If auditable records are 
maintained that demonstrate full compliance with orphan drug purchasing 
requirements, then free-standing cancer hospitals enrolled under 
340B(a)(4)(M) are permitted to use a group purchasing organization to 
purchase orphan drugs when they are transferred, prescribed, sold, or 
otherwise used for the rare condition or disease for which that orphan 
drug was designated under section 526 of the FFDCA, as these drugs are 
not considered covered outpatient drugs. However, free-standing cancer 
hospitals enrolled under 340B(a)(4)(M) are prohibited from using a 
group purchasing organization to purchase orphan drugs when used for 
any indication other than treating the rare disease or condition for 
which the drug was designated under section 526 of the FFDCA, as these 
drugs are considered covered outpatient drugs. To the extent that free-
standing cancer hospitals elect to purchase all orphan drugs outside of 
the 340B Program, covered entities are permitted to use a group 
purchasing organization for those purchases.
    (e) Identification of orphan drugs. Designations under section 526 
of the FFDCA are the responsibility of and administered by the FDA. FDA 
publishes information pertaining to orphan drug designations pursuant 
to 21 CFR part 316. Drug manufacturers and affected covered entities 
seeking to determine whether a drug is designated under section 526 of 
the FFDCA must consult FDA listings of orphan drugs under section 526.

[FR Doc. 2011-12423 Filed 5-19-11; 8:45 am]
BILLING CODE 4165-15-P