Abstract
- Issue: The Orphan Drug Act of 1983 has helped spur the development of drugs targeting rare diseases for which no treatment exists. However, lack of investment in research and development, high levels of financial risk, extremely high costs for these new drugs, and manufacturing and regulatory hurdles remain major problems.
- Goal: To provide an overview of the law and its impact, outline concerns and challenges, and discuss proposals to address shortcomings.
- Methods: Review of federal government reports, documents, and data; academic research; and media stories.
- Key Findings and Conclusions: Some of the problems associated with the orphan drug market result from the actions of drugmakers exploiting loopholes in the Orphan Drug Act to take advantage of the law’s incentives for financial gain. Federal policymakers have a number of options for closing these loopholes and otherwise reforming the law, among them: 1) revisiting how rare diseases and orphan drugs are defined; 2) limiting the period of drugmakers’ market exclusivity to orphan-only drugs; 3) realigning manufacturers’ incentives; and 4) ensuring the availability and affordability of rare-disease treatments by leveraging Medicare’s negotiation authority to negotiate prices.
Introduction
One of the most complex issues in health care is the development and commercialization of treatments and cures for rare and orphan diseases — those for which no drug has been developed because its limited use would make it unprofitable. In 1983, there were an estimated 6,000 such diseases, affecting some 25 million people in the United States. That year, the Orphan Drug Act was passed with bipartisan support to introduce incentives for drug manufacturers to invest in new treatments.1
The Orphan Drug Act has been successful in driving attention and incentives to develop drug therapies for rare diseases.2 After more than 40 years, however, many challenges remain. Patient advocates, drug manufacturers, and policymakers continue to grapple with underinvestment in research and development (R&D), the complexities with clinical trials, the high costs and financial risks associated with drug development, issues of patient access and affordability, and manufacturing and regulatory hurdles. Some of these challenges stem from drug manufacturers’ attempts to exploit loopholes in the law’s incentives for orphan drug development in order to maximize profits.3
In this issue brief, we offer an overview of the Orphan Drug Act, look at its impact to date, and discuss continuing issues surrounding the development of treatments for rare diseases. We also review the options available to congressional policymakers to address these challenges and incentivize more rapid development and commercialization of treatments.
What the Orphan Drug Act Does and What Impact It’s Had
Before the Orphan Drug Act became law, drug manufacturers faced two challenges in developing treatments for rare and orphan diseases. The first was the high level of financial risk involved: with a very small, very sick patient population, the likelihood of earning a return on investment was low, and the chance of liability claims was high.4 The second challenge was the high cost of developing drugs, owing to the difficulty of recruiting a sufficient number of patients for a clinical trial and the higher chance of adverse events.
The new law sought to address these issues. It granted orphan drug status to any rare or orphan disease that 1) affects fewer than 200,000 people in the United States or 2) affects more than 200,000 people, but there is no reasonable expectation that sales of the drug will recover R&D costs. The law also created incentives for drug researchers and manufacturers, including:
- a seven-year marketing exclusivity period granted by the U.S. Food and Drug Administration (FDA)
- tax incentives in the form of an R&D tax credit for clinical trials
- exemption from FDA user fees that the manufacturer would have to pay as part of their application for a drug approval
- research grants for clinical trials.
In the 10 years leading up to the Orphan Drug Act, there were only 34 orphan drugs on the market — 10 developed by drug manufacturers and the remainder by the federal government.5 Since the law’s passage, the FDA has approved nearly 800 drugs through the law’s pathway.6
The Orphan Drug Act has led to the development of treatments for cystic fibrosis, Gaucher’s disease, hemophilia, and rare forms of cancer.7 It also set an important precedent for other countries, leading Japan and members of the European Union, for example, to adopt their own version of the policy.8
Despite this success, there continues to be an unmet need for patients of rare and orphan diseases, which number between 7,000 and 10,000 and affect an estimated 30 million people in the United States.9 About 95 percent of these diseases now known today remain without an approved treatment.10
Concerns and Challenges with the Law
Rising Prices
As prescription drug prices have generally increased, so have the prices of orphan drugs. To put this into context, in 2014, the average price for a non-orphan drug was $23,331 per year, compared to $118,820 for an orphan drug — five times as much.11 A more recent study found that drugs with an orphan indication cost an average $218,872 annually for each patient, compared to $12,798 for drugs without an orphan indication.12 In 2024, the highest-priced drugs to enter the market were for rare diseases, and the top three had a list price exceeding $3.5 million each.13
In comparing five-year net sales of drugs first approved for an orphan indication (orphan drug) to those whose approval for an orphan indication came after approval for a nonorphan indication (non-orphan drug with an orphan indication),14 a recent study determined that those for the former were $719 million while those for the latter were $812 million over the same period. Generally, the orphan drugs in the study were just as lucrative as the non-orphan drugs with an orphan indication. It’s likely no coincidence that more than half the drugs approved by the FDA in recent years have an orphan indication.15
Non-Orphan Drugs with Orphan Indications
Drug companies’ practice of obtaining approvals for orphan indications and incentives for drugs that are also approved to treat more common conditions is called “indication seeking.”16 About 20 percent of drugs are approved for both orphan and non-orphan indications, and about one-third of them are among the top-selling drugs in the world.17
AbbVie, the maker of Humira, the best-selling drug in history, generated billions in revenues through its gaming of the Orphan Drug Act, first by accruing non-orphan indications and then by accruing orphan indications.18 Other drugmakers used the same approach for top-selling Keytruda (Merck), Enbrel (Amgen), and Avastin (Genentech).19 In doing so, these companies are benefiting from the Orphan Drug Act’s incentives to extend their monopolies but adding little benefit for patients with rare diseases.
An analysis of spending on drugs with both orphan and non-orphan indications showed that about 21 percent was for orphan indications and 71 percent was for non-orphan indications, with the remaining 8 percent for off-label use.20 In other words, the drugs are primarily used to treat non-orphan diseases.
Overrepresentation of Certain Rare Diseases
Studies estimate that only between 4 percent and 6 percent of rare diseases have FDA-approved drugs and treatments on the market.21 More than half (56%) of the orphan designation applications that the FDA receives are in four therapeutic areas: oncology, neurology, hematology, and gastroenterology/liver.22 The remaining 44 percent are split among 37 other therapeutic areas, with each one representing at most 5 percent of the applications.
Impact on Other Areas of Health Care Policy
Medicare Drug Price Negotiation Program
The Medicare Drug Price Negotiation Program, enacted as part of the Inflation Reduction Act (IRA) in 2022, originally included an orphan drug exclusion. According to the IRA, “a drug designated for only one rare disease or condition,” and one for which “the only approved indication (or indications) is for such disease or condition,” would not be eligible for negotiation.23 Some stakeholders argued this exclusion was not strong enough to protect incentives for investment in rare and orphan diseases. Instead, they advocated for the exclusion to be expanded to include multiple designations and to allow for drugs to be marketed for a longer period before they became eligible for price negotiation.24
The IRA specified that a small-molecule drug would be eligible for negotiation when it had been on the market seven years after its first FDA approval, or 11 years in the case of a biologic product.
The ORPHAN Cures Act — part of H.R. 1, the recently passed tax and spending bill — makes two changes to the Medicare Drug Price Negotiation Program. First, it allows a drug to have more than one designation for a rare disease or condition. Second, it changes the time at which a drug becomes eligible for price negotiation to when the FDA approves the drug’s first non-orphan indication. The Congressional Budget Office has estimated that this provision could cost the federal government nearly $8.8 billion in lost Medicare savings over 10 years.25
340B Drug Pricing Program
The federal 340B Drug Pricing Program is designed to generate revenue for safety-net hospitals and community clinics by enabling them to purchase discounted outpatient prescription drugs from manufacturers and bill payers at nondiscounted prices.26 However, drug manufacturers who participate in the program and have a drug approved under the Orphan Drug Act are not required to provide that drug at 340B pricing to certain safety-net providers, such as disproportionate share hospitals (although some drug companies offer a voluntary discount). For these providers, which include rural referral centers, sole community hospitals, critical access hospitals, and freestanding hospitals, monitoring the current orphan list of nearly 800 drugs to know which ones could be eligible for 340B pricing can be a difficult and expensive undertaking.
Companies that sell a drug with both orphan and non-orphan indications can benefit from this 340B policy. In the case of Neulasta, a drug used mostly to prevent infections caused by neutropenia, researchers have estimated that just 0.6 percent of spending on it is associated with its orphan indication; the safety-net providers listed above still cannot obtain the drug at 340B pricing for the drug’s primary indications, which account for nearly all utilization and sales.27
The Health Resources and Services Administration (HRSA), which administers the 340B program, attempted to narrow the orphan drug exclusion through the federal rulemaking process.28 However, PhRMA, the trade group representing the drug industry, sued the agency to prevent the change, ultimately prevailing in a precedent-setting case that limited HRSA’s regulatory authority for the 340B program.29 The limited ability of HRSA to issue regulations for the 340B program is a major reason why a resolution of the matter has yet to be reached.30
Proposals to Address Concerns with the Orphan Drug Act
Over the years, federal policymakers have considered a number of reforms to the Orphan Drug Act, focusing on manufacturer incentives, investments in R&D, and purchasing pools.31 While certain proposals have gained traction, others have stalled.
Revisit how we define rare disease and orphan drugs. Policymakers could consider granting Orphan Drug Act incentives only to therapies whose orphan indications combined would cover fewer than 200,000 individuals and then striking the “no reasonable expectation” definition.32 Another option is to restrict manufacturers from applying for orphan drug designation or approval for a subtype of a common disease or for a subgroup of patients — as in the case of an adult disease that may affect a very small number of children — in order to meet the current definition.
Limit drugmakers’ market exclusivity to orphan-only drugs. Policymakers could consider granting market exclusivity only to drugs with indications for rare diseases. Alternatively, they could cease a drug manufacturer’s orphan-drug market exclusivity if the FDA were to grant its drug a non-orphan approval.33
Eliminate market exclusivity for a drug at a certain sales threshold. Policymakers could end a drugmaker’s orphan-drug market exclusivity once the orphan drug’s U.S. revenues reach $1 billion.34 This would address manufacturers’ concern about not being able to secure a sufficient return on investment — part of the original intent of the Orphan Drug Act. A reform like this also would ensure the Orphan Drug Act does not unnecessarily prolong monopolies.
Realign incentives to develop therapies for diseases that have no treatments. Congress made a change to the Orphan Drug Act in 2017 that resulted in a reduction in the orphan-drug tax credit from 50 percent to 25 percent of qualified clinical testing expenses. Policymakers might consider, however, applying a sliding scale to the tax credit so that it’s more targeted to investments in rare diseases. For example, the 50 percent tax credit could be available for ultra-rare diseases or a rare disease that’s been prioritized, or it could be offered in exchange for reasonable pricing commitments. The 25 percent tax credit would continue to apply for all other orphan diseases.35
Policymakers also could consider a new provision of the law requiring drugmakers to return or repay the tax credits if U.S. revenues exceed $1 billion.36 Such a change would reframe the incentives as a minimum guarantee for the manufacturer’s investment.
Create mechanisms to collect real-world evidence. Research and development efforts could be bolstered with new patient registries and translational tools (such as those for data sharing or integration) as well as support for existing FDA programs like the Support for Clinical Trials Advancing Rare Disease Therapeutics (START) pilot program.37
Limit orphan drug exclusion in the 340B program. Policymakers could clarify that orphan drug exclusion in the 340B program applies only to drugs when they are prescribed for orphan indications. They also could clarify that 340B discounts are available to rural referral centers, sole community hospitals, critical access hospitals, and freestanding hospitals when drugs are administered for non-orphan indications.38
Ensure that rare disease treatments are available and affordable. A longstanding challenge is how to pay for the high cost of major medical breakthroughs, such as cell and gene therapies. One approach now being tested with states and manufacturers is the Center for Medicare and Medicaid Innovation’s Cell and Gene Therapy Access Model, a voluntary payment system for sickle cell therapies.39 Policymakers could consider leveraging Medicare’s drug price negotiation authority to reduce prices for these expensive treatments.
Another option would be to create a purchasing pool comprising multiple public and private payers. Such a pool would allow for risk sharing, price negotiation, and standards to ensure patient access.40
Conclusion
While the Orphan Drug Act has undeniably catalyzed innovation in rare disease treatments, the law’s shortcomings — particularly around pricing — have prompted calls for reform. In the near term, modest changes, especially those that align with broader drug pricing efforts already underway, appear most likely. More sweeping ones face steeper political and industry resistance. Redefining rare disease or eliminating a drug’s exclusivity at a certain sales threshold, for example, challenge entrenched business models and thus require significant legislative effort. Moreover, the evolving Medicare drug price negotiation program, particularly those changes included in the ORPHAN Cures Act, signals a growing willingness to protect drug manufacturers’ interests in maintaining their ability to manipulate Orphan Drug Act incentives.
As high-priced therapies continue to dominate the market, however, pressures will mount. The current climate suggests a strong appetite for incremental policy adjustments to address affordability concerns in federal programs such as Medicare and Medicaid, to improve price transparency, and to better target financial incentives at investment in diseases with unmet needs.
