Statement for the Record from the Rural Referral Center/Sole Community Hospital Coalition 500 N. Capitol Street Washington, DC 20001

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1 Statement for the Record from the Rural Referral Center/Sole Community Hospital Coalition 500 N. Capitol Street Washington, DC U.S. House Committee on Energy and Commerce Health Subcommittee: Opportunities to Improve the 340B Drug Pricing Program July 11, 2018 On behalf of the Rural Referral Center/Sole Community Hospital Coalition (the Coalition ), thank you for holding the July 11, 2018, hearing entitled, Opportunities to Improve the 340B Drug Pricing Program. The Coalition appreciates the opportunity to provide comments and support for H.R. 2889, the Closing Loopholes for Orphan Drugs Act. Formed in 1986, the Coalition is comprised of hospitals designated as Rural Referral Centers ( RRCs ) and Sole Community Hospitals ( SCHs ) under the Medicare Program. Member hospitals of the Coalition share the common goal of ensuring that federal hospital payment policies recognize the unique and important role of these hospitals in providing access to quality care in their communities. Overview In 2010, Congress made possible for certain safety net hospitals to participate in the 340B Program, but also at the same time excluded certain drugs with orphan designation from the Program s drug discount requirements. The U.S. Department of Health and Human Services (HHS) sought to implement regulations defining the scope of these provisions, but those regulations were invalidated following litigation brought by the pharmaceutical industry in federal district court. As a result, many pharmaceutical companies are now broadly reading the statutory carve-out and withholding drugs with orphan designation, even where the drug also is commonly used for large patient populations for conditions unrelated to the condition for which the drug was granted orphan drug status. In such instances, the affected hospitals are largely deprived of any benefit from participation in the 340B Program. Congress should now clarify the scope and intent of the original expansion and limitation provision. The Origins and Purpose of the 340B Program In 1990, Congress established the Medicaid drug rebate program, which ensures that state Medicaid programs do not pay more for certain outpatient drugs than other purchasers in the U.S. market. Under the program, pharmaceutical manufacturers that wish to have their drugs reimbursed by Medicaid must enter into agreements with HHS that obligate them to pay rebates to Medicaid based on their best price for the drugs.

2 In 1992, Congress expanded the discount program to require pharmaceutical manufacturers to extend similar discounts to certain qualifying safety net health care providers that serve the nation s most vulnerable patient populations. This program is commonly referred to as the 340B Program because the provisions were set forth in section 340B of the Public Health Service Act. Under the 340B Program, certain hospitals and other health care providers ( covered entities ) may purchase outpatient drugs from manufacturers at discounted prices, providing they comply with certain program requirements. The 340B Program is administered by the U.S. Health Resources and Services Administration (HRSA), an agency of HHS. HRSA, among other things, establishes guidelines and rules to govern the program, administers lists of covered entities, and calculates a 340B ceiling price (the maximum price a manufacturer can charge for a 340B drug) for each covered outpatient drug, which represents the maximum price a manufacturer can charge a covered entity for the drug. Eligible Entities Congress specified a list of provider types eligible to receive 340B discounts, including, for example, Migrant Health Centers, Black Lung Clinics, Community Health Centers, and entities receiving assistance under the Ryan White Care Act. Congress also enabled hospitals that treat a high rate of lowincome patients to qualify. Specifically, prior to changes enacted in 2010, for a hospital to qualify to participate in the 340B Program, it must have had a Medicare Disproportionate Share Hospital (DSH) payment adjustment of (i.e., more than 27 percent of its patient population must qualify for Medicare Supplemental Security Income or Medicaid). Congress designated these provider types, because, in various ways, they fulfill a special role in serving low-income, special-needs, and otherwise vulnerable populations. Rural Hospital Eligibility In 2010, Congress again extended 340B Program eligibility by making it easier for free-standing cancer hospitals, Critical Access Hospitals (CAHs), RRCs, and SCHs to qualify to participate. Under this change, free-standing cancer hospitals and CAHs are eligible by virtue of their status as one of these provider-types. Congress made it easier for RRCs and SCHs to qualify, but did not automatically deem these hospitals to be eligible. Instead, hospitals with RRC or SCH status are eligible to participate in the 340B Program if they also have a DSH patient percentage of eight percent (instead of percent). In other words, the threshold of the hospital s patient population that must qualify for Medicare Supplemental Security Income or Medicaid, was lowered to 22.7 percent instead of 27 percent. This change made it easier for RRCs and SCHs to qualify to participate in the 340B Program. 1 The original 2009 legislation making it easier for rural and cancer hospitals to participate in the 340B Program was endorsed by the American Hospital Association, AARP, and National Rural Health Association, among others. RRCs and SCHs The Rural Referral Center program was established to support certain high-volume hospitals that treat a large number of complicated cases and function as regional referral centers. RRCs act as hubs in regional health care networks, and as the referral destination for residents of rural areas who need 1 Id., Medicare Payment Advisory Commission, p.10. 2

3 sophisticated, tertiary level services, such as burn, cardiac or neonatal care. RRCs often support smaller primary and secondary care providers in more remote areas, such as critical access hospitals and rural health clinics. There are 395 hospitals in 45 states with RRC status. The Sole Community Hospital program was created to maintain access to needed health services for beneficiaries in isolated communities. The SCH designation is conferred upon hospitals that are the sole source of inpatient hospital services available to individuals in an area. The SCH program ensures the viability of these geographically isolated hospitals that play a critical role in providing access to care. There are 448 hospitals in 47 states with SCH status. RRCs and SCHs are the health care providers that provide rural populations with access to a wide range of health care services. In so doing, RRCs and SCHs localize care, minimize the need for referrals and travel to urban areas, and provide services at costs lower than would be incurred in many urban areas. These hospitals also commonly establish satellite sites and outreach clinics to provide primary and emergency care services to surrounding underserved communities, a function which is becoming increasingly important as economic factors force many small rural hospitals to close. For these and other reasons, Congress has long appreciated the special role of RRCs and SCHs in the rural health care community and the need to afford RRCs and SCHs special recognition and protections to ensure their continued viability and role in the rural health care network. Orphan Drug Exclusion At the same time that Congress was making it easier for hospitals to participate in the 340B Program, Congress also sought to ensure that the discounts would not stifle investment in and development of drugs for rare diseases or conditions. Specifically, in the provisions expanding eligibility, Congress included language that exempted from the discount requirements any drug designated by the Secretary under section 360bb of title 21 for a rare disease or condition when purchased by one of the expansion entities: freestanding cancer hospitals, Critical Access Hospitals, RRCs, and SCHs. Congress enacted the Orphan Drug Act of 1983 to stimulate the development of drugs for rare diseases. A drug is designated by the U.S. Food and Drug Administration (FDA) as a drug for a rare disease or condition pursuant to section 526 of the Federal Food Drug and Cosmetic Act (FFDCA), if FDA finds, among other things, that the approval will be for a rare disease or condition. 2 The orphan drug program provides a number of incentives to encourage development of drug therapies for rare diseases or conditions. These incentives include: (1) seven-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 these new therapies to treat and/or diagnose rare diseases; and (4) an exemption from the usual drug application user fees charged by the FDA. Notably, each of the orphan drug incentives applies only when the drug is used to treat the rare disease or condition, and not when used for other indications. 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. 2 See, 21 U.S.C. 360bb(a)(1), 21 CFR

4 HRSA Rulemaking Many commonly used drugs have orphan designation for one or more indications, even though the drug also is approved for more common indications too. Indeed, a January 2017 study by Kaiser Health News (KHN) found that about one third of orphan approvals made by the FDA since the orphan drug program was enacted in 1983 have been either for mass market drugs repurposed for an orphan designation, or for drugs that received multiple orphan designations. 3 For example, Remicade is a drug commonly used to treat rheumatoid arthritis, ulcerative colitis and Chron's disease. Remicade also has orphan designation for juvenile rheumatoid arthritis and pediatric ulcerative colitis, because these diseases rarely occur in patients 16 and under. Under an interpretation where any drug with an orphan designation, regardless of how it is used, is exempt from the 340B Program, Remicade also would be exempt from the 340B Program discount obligation when used to treat adult patients with rheumatoid arthritis and ulcerative colitis, as well as anyone with Chron's disease. A 2010 study showed that orphan drugs may be used as much as 90 percent of the time for conditions or illnesses other than the designated orphan indication. 4 In 2011, HRSA published a proposed rule that sought to define the orphan drug exclusions established by the 2010 legislation. 5 HRSA proposed that a drug with orphan designation would be exempt from the 340B Program s discount requirements only when used for the rare condition or disease for which that drug received orphan designation. Affected hospitals and patient organizations supported the agency s recommendation, and urged HRSA to finalize the proposed regulations. The pharmaceutical industry, however, urged HRSA to interpret the exception as applying to any drug with orphan designation, regardless of the clinical condition for which the drug was prescribed. Two years later, HRSA published a final rule in which it largely adhered to the proposed interpretation of the 2010 legislation. 6 Specifically, among other things, HRSA s regulations provided that 340B Program exceptions for orphan drugs apply only when the drug is prescribed for the rare condition or disease for which that drug received orphan designation. Ensuing Litigation In September 2013, shortly after HRSA promulgated its final rule, the pharmaceutical industry sued the agency seeking to enjoin implementation of the final rule. The pharmaceutical industry argued, among other things, that HRSA lacked authority to issue regulations on this question. In May 2014, a federal district court issued an opinion siding with the pharmaceutical manufacturers. In July 2014, HRSA responded by reissuing its notice in a different form: As an interpretive rulemaking, which essentially announces the agency s interpretation of the statute, but does not include regulations 3 Drugmakers Manipulate Orphan Drug Rules to Create Prized Monopolies, Kaiser Health News, January 17, 2017: ontent= &_hsenc=p2anqtz-- Iz5qttLkkNBVUJN3TerDq15vXUOZzQROhDe9_cERt1nPkP_T44hddg2bb5zf1AkZB00isTyHt_xt- 4PcGIhjl7UwJ0w&_hsmi= Reforming Off-Label Promotion to Enhance Orphan Disease Treatment, Brian A. Liang and Tim Mackey, Science Magazine, Jan. 14, 2010, pp , Fed. Reg. 29,183 et seq. (May 20, 2011) Fed. Reg. 44,016 et seq. (July 23, 2013) 4

5 enforcing that interpretation. The pharmaceutical manufacturers responded with a new lawsuit challenging the agency s interpretive rule. This time the pharmaceutical manufacturers attacked the merits i.e., the agency s interpretation and not the process, and whether the agency promulgated the interpretation in the right manner. The manufacturers argued that the statutory language applied to drugs and not a particular use of a drug. In October 2015, the same federal district court again sided with the pharmaceutical manufacturers. Specifically, the court concluded that HRSA exceeded its authority in interpreting the statute as limiting the exclusion to the uses of the drug for which it has orphan status. Congressional Action Needed Since the latest court decision, many pharmaceutical manufacturers are restricting access to 340B Program discounts on drugs with orphan designations, thereby substantially undermining the benefits of the 340B Program for RRCs, SCHs, CAHs, and freestanding cancer hospitals. Many affected hospitals report substantial increases in drug spending since the court decision. Congress established the orphan drug program to encourage development of drugs for the diagnosis and/or treatment of rare diseases or conditions. Without these incentives, drug companies might see inadequate financial incentive to develop drugs for rare diseases because the patient population is so small (i.e., drug sales might not surpass investment costs). To sufficiently encourage the investment necessary to bring a drug to market, Congress provided various incentives for manufacturers to develop products targeted to rare diseases or conditions (extended market exclusivity, tax credits, Federal research grants, and exemption from the drug application user fees). Consistent with the construct of section 526, the major incentives attach only if the drug will be used to treat a rare disease or condition i.e., a manufacturer of an orphan drug may not avail itself of the benefits attendant to orphan drug status where the use is for a common disease or condition. The exclusion of orphan drugs from 340B pricing is, in effect, yet another incentive to promote investment in drugs for the diagnosis or treatment of rare diseases or conditions. Congress did not want to dilute the potential revenues that the drug could receive when used for that orphan population. Congress could not have intended to extend this benefit to a drug use for which there is a substantial and lucrative market. As noted in the recent KHN study, seven of the 10 best-selling drugs in the U.S. in 2015 were drugs with an orphan designation even though some of these drugs were first approved for more common indications and only later received their orphan designation. Conclusion As the Committee continues to examine the 340B program, we urge thoughtful consideration and passage of H.R. 2889, which would clarify the orphan drug exception to limit the carve-out only to those uses for which the drug received orphan status. We are available for questions, further comments, and additional information. Please feel free to reach out to Eric Zimmerman (ezimmerman@mcdermottplus.com) or Rachel Stauffer (rstauffer@mcdermottplus.com). 5