Last Friday a federal district court invalidated a regulation that had authorized the 340B discount for critical access hospitals, sole community hospitals, rural referral centers and free-standing cancer hospitals when they purchase orphan drugs for off-label purposes.

Two concepts are necessary for understanding what this means.  First, an “orphan drug” is one developed for a disease so rare (fewer than one in 2,000 people) that without special financial incentives, no company could afford to develop and market it.  Some orphan drugs cost as much as $300,000 a year for a single patient.

Second, the 340B program requires pharmaceutical companies to sell drugs at a discount to hospitals that serve large populations of low-income patients.  Over the years the companies have increasingly expressed concern that hospitals are benefiting from the discounts but not necessarily limiting the discounted drugs to low-income patients.

The Affordable Care Act (ACA) added new facilities to the 340B program: critical access hospitals, sole community hospitals, rural referral centers and free-standing cancer hospitals.  But the Act excluded orphan drugs from 340B pricing.  Then last July the Health Resources & Services Administration (HRSA) issued a regulation saying that this exclusion applied only when the orphan drug was used for the rare condition for which it was designated as orphaned.  In other words, the regulations allowed 340B pricing of orphan drugs in all cases except when used for the orphan condition.

Last fall a pharmaceutical trade group sued to prevent enforcement of the regulation.  Friday the court ruled that the regulation is invalid because HRSA did not have the legal authority to issue it.  The effect of the ruling is that 340B pricing is unavailable to the newly-added facilities whenever they purchase orphan drugs, whether or not for the orphan condition.