Potential Changes to "Orphan Drug" Exclusions Under the Patient Protection and Affordable Health Care Act

Potential Changes to "Orphan Drug" Exclusions Under the Patient Protection and Affordable Health Care Act

In July 2003, my father was diagnosed with renal cell carcinoma (kidney cancer).   The disease would end his life in less than a year.  Shortly after he died, news broke regarding a drug that was showing promise for advanced stage kidney cancer patients.  The drug could extend life for an average of three months.  Three months does not sound like much.  It's not likely a healthful or vibrant three months provided either.  And yet, over the years, I have thought a lot about what an additional three months might have meant for my dad.   With very limited treatment options, most kidney cancer patients, and their families, are hanging on to the hope that there will be some kind of new breakthrough in the medical or pharmaceutical field.  Thus far, advances in the kidney cancer arena have emerged very slowly. 

Kidney cancer is considered an "orphan disease" because less than 200,000 people struggle with this disease annually.  Drugs designed to treat rare diseases are called "orphan drugs."  Because the market for a rare disease drug is by its nature limited, certain incentives have been created to encourage orphan drug development.  Tax incentives for research and development expenses and a seven-year monopoly on drug sales are among the most significant motivators.  See IRC Section 45C for information on the tax credit.   It is worth noting here that the monopoly on sales sometimes has the effect of driving the price for these drugs very high and this can backfire for the manufacturers.  In April 2011, the British equivalent of the U.S. National Institute of Health decided the kidney cancer drug mentioned above was too expensive, and did not produce enough benefit, to warrant a recommendation for treatment.   See Martin Beckford, "Rare Cancer Drug 'Too Costly' for NHS," UK Daily Telegraph (Apr. 19, 2011).

Among its provisions, the Patient Protection and Affordable Care Act of 2010, P.L. 111-148, ("PPAC Act") included a drug discount program that required manufacturers to make drugs more affordable to some providers.  Orphan drugs were excluded from this required discount.  The PPAC Act also imposed an annual fee on "covered entit[ies] engaged in the business of manufacturing or importing branded prescription drugs."  See Section 9008(a) of the PPAC Act.  Orphan drug manufacturers were similarly excluded from this fee. 

The Treasury Department is now considering whether to limit the exclusions for orphan drugs.  Under the Treasury's proposal, an exclusion would apply only if the original FDA approval was for orphan disease use and the drug did not have other approval for non-orphan purposes prior to the orphan drug application.  The IRS has requested comments on the proposal.  See Notice 2011-9.

Interestingly, a similar issue is being addressed in parallel by the Office of Pharmacy Affairs ("OPA") of the U.S. Health Resources Services Administration ("HRSA") with respect to the drug discounting component, and the corresponding orphan drug exclusion, of the PPAC Act.  The HRSA is looking at whether a drug that has orphan designation for one, but not all, of its uses should be excluded from the drug discounting program.  On May 20, 2011, the HRSA decided the exclusion depends on the indication for which the drug is used and proposed regulations to this effect.  Comments on the proposed rules are due by July 19, 2011.  See "Exclusion of Orphan Drugs for Certain Covered Entities Under 340B Program," 2011 Federal Information and News Dispatch (May 20, 2011).  It will be interesting to see what Treasury and HRSA determine with respect to the annual fee and drug discounting program, and to see if the two agencies reach similar decisions. 

Despite my personal experience with a rare disease, I find myself conflicted about the plethora of benefits extended to orphan drug manufacturers.  While I recognize the need to incent manufacturers, the potential for greed and price inflation does not escape me.  In the case of the drug discounting element of the PPAC Act, there is little enforcement mechanism to ensure that orphan drugs indicated for non-orphan use are indeed utilized as such when a discount is claimed.  The OPA has been accused of not being capable of adequately monitoring the discount drug program.  See, e.g., John Woolfolk, "Lawsuit Allegation:  Companies Violated Discount Program," San Jose Mercury News (Aug. 18, 2005).  If a similar approach is adopted with respect to the annual fee component, enforcement is definitely among my concerns.   Perhaps the IRS may be better equipped to handle audits and supervision of the annual fee component.  Maybe the IRS should be called upon to assist the OPA, as well, by cross-reporting violations and identifying potential offenders. 

In my opinion, incentives must exist in order to ensure orphan drug advances are made, but the players in this market should be compelled to follow the rules.  If a drug is not being used for an orphan drug purpose, the drug should not get special incentives.  This is complicated somewhat by the fact that some manufacturers have various reasons for not applying for orphan drug status, even if the drug would qualify.  This detail will have to be addressed by Treasury and perhaps another type of application for annual fee exemption could be created.  Stay tuned for more details on Treasury's decision and the developments in this interesting area of tax law.

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