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.