Raising the Blinds – Gaining Meaningful Insight into Pharmaceutical Pricing through Legislation
Rising healthcare costs are a growing concern across the United States; in 2016 U.S. health care spending was $10,348 per person – or 17.9 % of the nation’s Gross Domestic Product (GDP). To counter this alarming rise in healthcare costs, states are addressing one of the largest factors in rising healthcare costs – high drug prices.
Many factors contribute to the high price of healthcare in our country, some of which are natural to an aging populace due to the baby boom of the 1950’s as the proportion of the population that is 65 and over is projected to experience a large increase in the coming years. An increase in costs is natural with a larger number of consumers – addressing this change is an important, but avoidable, challenge to overcome.
One avoidable factor of increasing healthcare costs is rapidly increasing pharmaceutical prices. Variance in drug prices may be geographic; based on where the drug is sold , or whom the drug is being sold to (pharmacy v. government). Many factors contribute to price differences, but an important factor are Pharmacy Benefit Managers (PBMs) as an intermediate in the market. States have been working to roll back the PBM layer of the market for the pharmaceutical industry.
Pharmaceutical pricing has long been the target of legislators, but with a lot of talk and a surprising lack of action. Drug pricing is discussed in both major party’s campaign platforms of the major parties and has been featured prominently in speeches by President Trump, and has featured in initiatives by previous administrations. There has been an uptick of legislation passed in the past decade, at all levels of government, with state action against pharmacy benefit managers and President Trump’s signing the Know the Lowest Price Act and the Patient Right to Know Drug Prices Act. A common thread in the legislation is increased transparency because a big factor in the high drug prices — and medical care generally—is the lack of information for consumers and purchasers. Since 2015, California, Oregon, Louisiana, Nevada, Vermont, Connecticut, and Maryland imposed reporting requirements on pharmaceutical manufacturers who increase prices over an established threshold in a set time period. For example, California requires reporting when a drug that costs more than $40 and its wholesale acquisition cost (WAC) increases by more than 16% over two calendar years. The WAC is similar to a “list” price for pharmaceuticals to wholesalers and direct purchasers. The WAC, however, does not include discounts or rebates offered by pharmacy benefit managers.
The new transparency offers insight to price increases; if there are no legitimate reason for the increase other than higher profits due to market control, state officials, drug customers and the public can take action.
The states with transparency statutes have imposed different methodologies with manufacturers reporting to different government officials such as the Department of Health and Human Services, creation of new departments, or to the state’s Attorney General.
Oregon currently requires the most detailed reporting; manufacturers must report to the Department of Consumer and Business Services the following:
- Name, price of drug and net increase in price (in %) over previous calendar year
- Length of time on market
- Factors contributing to price increase
- Name(s) of any generic version(s) of the drug
- Research & Develop Costs from Public Funds
- Direct costs to Manufacturer
- Total sales revenue for drug over prev. calendar year
- Profit from drug over previous calendar year
- Drug’s price at release and yearly increases over the past 5 years
- 10 highest prices paid for the drug during past year outside of the US
- Any other info relevant to price increase
- Supporting documentation
In contrast, California’s requirements provide for advance notice of price increases and unearthing the reasoning for the increase. The California law requires manufacturers to report (A) Date of increase, current WAC, and future increase in WAC (in dollar amounts); and (B) The change or improvement, if any, that necessitates the price increase. Purchasers then have notice of any forthcoming price changes and if the increase is warranted. California also requires a report for new drugs if its price exceed $670—the 2017 Medicare Part D threshold. California’s reporting scheme has been a model for other states.
Maryland’s approach was more severe, with a provision banning “price gouging” of generic drugs. An “unconscionable price increase” of any “essential off-patent or generic drug” is illegal and Maryland can levy a fine and take action to reverse the price change. The state did not include any limitation of the law to drugs that have come into or passed through Maryland.
The generic drug lobby, the Association for Accessible Medicines, challenged the law and the Fourth Circuit Court of Appeals struck down the law as an unconstitutional regulation of interstate commerce. Maryland has petitioned the Supreme Court to revisit the case.
The Pharmaceutical Research and Manufacturers (PhRMA), one of the largest pharmaceutical lobbying groups, has sued California alleging the law, like Maryland’s, is unconstitutional. Because California’s law is informational—and does not allow forced price changes—it is likely constitutional. In fact, PhRMA’s initial complaint was dismissed, and subsequently filed an amended complaint on Sept. 18, 2018.
It will be imperative for states seeking to regulate pharmaceutical manufacturers to observe where courts determine the extent of reporting they may require when they go after a manufacturer for increasing the price of their drug. For the time being, it appears that information-gathering may be the easiest available avenue for states seeking to curtail increases in drug prices. Seeking justifications and reasoning for large increases in drug prices may create a barrier for pharmacuetical companies seeking to impose unsubstantiated increases in drugs. Going further towards affirmative control of pricing appears to be off limits to states going as far as Maryland, but more careful structuring of the controls to the specific state may be permissible.
Drew Kohlmeier is a student in the Boston University School of Law Class of 2020 and is a native of Manhattan, KS, graduating with a degree in Biology from Kansas State University in 2016. Drew decided on Boston for law school due to his interest in health care and life sciences, and will be practicing in the emerging companies space focused on the life sciences industry following his graduation from BU.
WHO LET THE DOGS OUT? CALIFORNIA BANS USE OF PUPPY MILL
In October 2017, California became the first state to pass a law to deter the use of puppy mills by potential puppy buyers. Under the new law, pet stores must work with animal shelters and other rescue operations to obtain dogs, cats and rabbits, and are prohibited from using breeders. However, private and individual customers can still use puppy mills, and nothing in the act adds direct regulations on domestic animal breeders in the state.
Over the past several years, there has been a nationwide conversation among pet lovers about the ethics of puppy mills. At the center of the debate is the competition for owners between adoption/rescue groups, and breeders. According to the American Pet Products Association (APPA), 34% of currently owned dogs were raised by a breeder, as opposed to 23% coming from an animal shelter or other humane rescue group. Origination data is not entirely clear however, as the American Humane Association (AHA) and the American Veterinarian Medical Association (AVMA) put breeder-acquired ownership figures at less than 20%. Shelter-based ownership figures vary even more, with the AVMA putting the adoption population at 84.7% and the AHA estimating a 22% adoption population. Available figures for breeder-acquired cats are below 5%. While it is difficult to claim that adoption and rescue agencies are at a disadvantage for owners strictly because of breeder competition, the sheer number of pets in shelters (5-8 million dogs and cats) and getting euthanized every year (3-4 million dogs and cats), makes many wonder why people use breeders at all. Proponents of laws like California's believe that people who buy breeder-bred animals could have instead adopted an animal from a shelter.
Another facet of the “puppy mill” debate is the living conditions in breeder facilites. Claims of animal cruelty plague the reputation of breeder businesses. Though breeder operations are governed by Federal USDA regulations and inspections, irresponsible breeders can evade these oversights and sell animals that have been bred improperly, leading to pets with physical and psychological ailments. Many times, these irresponsible breeders will focus on quantity, instead of quality of the animals (hence the term “mills”) possibly leading to poor health, abandonment, or even death of the animals. Since these disreputable breeders often sell to pet stores, instead of directly to screened buyers, laws like the one California just passed will likely serve as a significant deterrent for negligent breeders. However, some detractors of the bill say many cities statewide (including LA, San Diego, and San Francisco) already ban “mass breeding” and other unhealthy practices, so this new law is more likely to constrain the breeders who do not engage in these poor practices, yet sell to pet stores, than the irresponsible breeders.
Aside from animal welfare, steering potential pet owners and pet shops to animal shelters should benefit the state’s taxpayers. Publically run animal shelters cost the state approximately $300 million a year. If this law has its intended effects and decreases overcrowding in animal shelters, the state can accordingly decrease spending on housing, feeding, and servicing shelter animals. While California may pinch some pennies with decreased animal shelter populations, the breeding community may suffer economically under this bill. California has roughly 800 active breeders selling animals in the state. Even if only a small percentage are fully reliant on pet stores for income, that is still dozens of California’s workers being effectively forced out of a job under this law. However, some of this job loss may be offset by impacted breeders selling to out-of-state pet stores who do not have similar laws.
Though California’s new law was a key win for anti-puppy mill and animal welfare advocates, there are still some detractors. For example, this law may present challenges to those seeking specific breeds for their pet. Consumers may no longer easily get breed specific animals in pet stores, and specific breeds may become more costly. This might be particularly cumbersome for someone looking for a service animal of a particular breed best suited to help manage a condition. The American Kennel Club released a statement saying the law “not only interferes with individual freedoms, it also increases the likelihood that a person will obtain a pet that is not a good match for their lifestyle and the likelihood that that animal will end up in a shelter.” Further, this legislation may have the unintended consequence of increasing animal deaths and abandonment at puppy mills, because the mills no longer have access to their main customers. If the mills have not sold off all their animals by the 2019 effective date of this law, the animals may have nowhere to go. Breeders whose business is hurt as a consequence of this law may spend even less money on the care of the animals, or be forced to surrender the animals to a shelter. But given the delayed effective date of the law and the continued legality of breeder use by individual parties, the foreseeable issues will likely be negligible in light of the positive changes.
Since California passed this law, a Massachusetts lawmaker has also proposed a similar bill that would deter the practice of commercial breeding. Though California is the first state to pass this kind of prohibition, cities all over the country have been passing similar ordinances, so it is likely that states will follow suit if California’s law works as intended.
Andrea Ogechi-Okoro anticipates graduating from Boston University School of Law in May 2018.