Drug Pricing Continues to be a Hot Topic for State Legislatures

Due to the recent significant increases in certain drug prices that have led to allegations of “price gouging” and antitrust violations, several state legislatures have enacted new laws aimed at controlling prescription drug prices. California is the most recent state to enact such a law, which applies to manufacturers of prescription drugs that are purchased or reimbursed by the state of California, licensed health care service plans, health insurers, or pharmacy benefit managers. The scope of the law likely encompasses the vast majority of pharmaceutical manufacturers. The law itself does not place any direct limitations on prescription drug prices, but requires reporting of certain pricing information. Manufacturers of drugs with a wholesale acquisition cost (WAC) greater than $40 for a course of therapy must notify purchasers of the product if the WAC will increase more than 16%. “Course of therapy” under this law us a 30 day supply of the recommended daily dosage as per the FDA-approved prescribing label, or for a smaller supply if the normal course of treatment if less than 30 days. The 16% increase threshold encompasses both the proposed increase and the cumulative increases that occurred within the last two calendar years prior to the current years. The Pharmaceutical Research and Manufacturers of America (PhRMA), a major pharmaceutical industry trade group, is challenging the law in court. PhRMA asserts that the law is unconstitutional because it is a violation of interstate commerce, free speech, and due process.

California is not the only state that has enacted legislation in attempt to rein in rising prescription drug prices; Vermont, Nevada, and Maryland have similarly enacted new laws with similar objectives. The governor of Vermont signed a law on June 2, 2016 that requires pharmaceutical manufacturers to submit justifications for price increases for certain drugs. The state will identify prescription drugs on which the state spends significant healthcare dollars and for which the WAC has increased by 50% or more over the past five years, or by 15% or more over the past 12 months. Vermont will publish a list of up to 15 drugs from different therapeutic classes that meet these criteria. Manufacturers of drugs on this list must submit documentation to the Office of the Attorney General supporting the WAC increase, including all factors contributing to the WAC increases, the percentage of the total increase attributable to each factor, and an explanation of the role of each factor in contributing to the WAC increase.

On June 15, 2017, Nevada enacted a statute requiring pharmaceutical manufacturers, pharmacy benefit managers, and some third party patient advocacy organizations to report certain pricing and payment information to the state on an annual basis. However, the Nevada law is limited in scope to drugs that state determines to be “essential for treating diabetes.” Nevada will publish a list of drugs it has determined to be essential for treating diabetes. Manufacturers of drugs on this list must submit an annual report to the Nevada Department of Health and Human Services that includes, among other data, the WAC of the drug, the history of WAC increases in the preceding five years, and the costs of producing the drug. PhRMA and the Biotechnology Innovation Organization, another industry trade association, are challenging the Nevada law as unconstitutional in court.

A Maryland law that went into effect on October 1, 2017, covers two drug pricing provisions for essential off-patent or generic drugs. The Maryland law stands out from the other state laws in that it specifically targets generic drugs as opposed to branded pharmaceuticals, which are typically more expensive. The first provision of the law prevents “price gouging” and the second authorizes the Maryland Medical Assistance Program (MMAP) to notify the state’s attorney general in the case of certain price increases. “Essential” drugs have no unexpired marketing exclusivity under the Federal Food, Drug, and Cosmetic Act, are made by three or fewer manufacturers, and are either included on the World Health Organization’s Essential Medicines List (EML), or are designated such by the Secretary of Health.

Under the first provision, price gouging occurs when there is an “unconscionable increase” in the price of the drug that is not justified by the cost of producing the drug and results in consumers for whom the drug has been prescribed having no meaningful choice but to purchase the drug at the excessive price. Lack of meaningful choice results from either the importance of the drug to the consumer’s health, or insufficient competition in the market for the drug. Price gouging has been the focus of recent Congressional inquiries.

Under the second provision, MMAP may notify attorney general if there is an increase in the price of an essential off-patent or generic drug that would result in a WAC increase of 50% or more over preceding year, or would result in an increase of 50% or more in the price paid by MMAP for the preceding year, and the full course of treatment as approved by FDA would cost more than $80 at WAC. On request of the attorney general, a manufacturer will submit an itemization of the cost of producing the drug and the circumstances and timing of any expenditures made by the manufacturer to expand public access to the drug. The Association for Accessible Medicines (AAM), a generic pharmaceutical industry trade association, challenged the law as a violation of the Commerce Clause and due process because the law is unconstitutionally vague. AAM sought an injunction barring implementation of the law. A federal judge refused to block the implementation of the law and dismissed the Commerce Clause claim, but allowed the vagueness claim to proceed.

Notably, what all four of these laws have in common is that they do not directly control drug pricing. The laws require reporting of certain price-related information, but do not place specific limitations on what manufacturers may charge for a particular drug. While the California drug pricing law is not the first of its kind, it is the broadest. The Vermont, Nevada, and Maryland laws are all limited to a predetermined list of drugs, but the California law applies to all prescription drugs purchased or reimbursed by the state, licensed health care service plans, health insurers, or pharmacy benefit managers. PHRMA argues that the scope of the California law is a violation of the Commerce Clause because “in purpose and effect, it regulates drug pricing beyond California’s jurisdiction.”

In reviewing the recent legislation two trends seem clear: states are going to continue to pass drug price control legislation and industry will continue to challenge the legislation in court. In addition, significant increases in drug prices with also potentially regulatory scrutiny.

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