United States: State Drug Price Transparency Laws Present Reporting Issues For Biopharma

Last Updated: November 15 2018
Article by Stephen Paul Mahinka and Amaru Sanchez

Some states have recently enacted legislation regarding drug price transparency in an attempt to respond to the public and payor concerns regarding prescription drug cost and pricing, with some penalties for noncompliance beginning in 2019. Pharmaceutical manufacturers will need to continually review and update their approaches to comply with such statutes, which are often inconsistent across states and unclear as to what products are covered and what data is relevant.

The cost and pricing of prescription drugs continue to be central issues of national political concern. Earlier this year, the Trump administration released a plan to reduce prescription drug prices—American Patients First: A Trump Administration Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs—and the commissioner of the Food and Drug Administration and the secretary of the US Department of Health and Human Services (HHS) have both devoted considerable time to considering drug price reduction initiatives.

It is important for pharmaceutical manufacturers to be aware that, while federal efforts on drug pricing remain at the proposal stage and enactment of any new federal legislation in this area is obviously adversely affected by the split in party control of Congress following the midterm election, several states have already enacted legislation imposing drug price transparency obligations on biopharma companies in an attempt to respond to the public and payor concerns regarding prescription drug cost and pricing. Some of these states will have penalties for noncompliance with their reporting obligations beginning in 2019. The following presents the major takeaways relating to two of these state approaches: drug transparency and anti–price gouging.

Drug Transparency

State legislation falling under the “drug transparency” category encompasses the required disclosure—usually by drug manufacturers—of information relating to certain percentages or absolute levels of increase in the pricing of drugs. Such disclosures may be required if and when a predefined percentage or dollar increase threshold is met, with some statutes going further and prohibiting certain types or levels of increases outright. In addition, some state legislation also requires manufacturers to provide financial and nonfinancial information justifying particular levels of price increases. Noncompliance on the part of the drug manufacturer also may result in civil monetary penalties. States that have enacted such legislation include California, Connecticut, Nevada, New York, Oregon, and Vermont.

Anti–Price Gouging

The “anti–price gouging” approach focuses on prohibiting an increase in the price of a prescription drug that is above a predefined threshold considered to be “excessive.” Only one state, Maryland, enacted legislation utilizing this approach; however, other states, such as Illinois, have considered such legislation. The Maryland law (which has since been ruled unconstitutional, see below) prohibited “a manufacturer or wholesale distributor” from “engaging in price gouging in the sale of an essential off-patent or generic drug.” The law defined “price gouging” generally as “an unconscionable increase in the price of a prescription.” An “unconscionable increase” was further defined as an increase that “is excessive and not justified by the cost of producing the drug or the cost of appropriate expansion of access to the drug to promote public health” and “results in consumers . . . having no meaningful choice about whether to purchase the drug at an excessive price” due to the drug’s “importance . . . to their health” and “insufficient competition in the market.” A drug manufacturer determined to be in violation of the statute would have faced a number of consequences including a civil monetary penalty.

Legal Challenges

Drug manufacturers have filed several suits against some of these states claiming, among other things, that the enacted laws violate the dormant commerce clause, violate the First Amendment by compelling speech in their requirements to submit certain financial and nonfinancial information, and are unconstitutionally vague. The various suits have had mixed success. For instance, in April 2018, a panel of the US Court of Appeals for the Fourth Circuit held that Maryland’s anti–price gouging law was unconstitutional, in a lawsuit brought by the generic drug manufacturers’ association, because the law attempted to regulate national, not merely state, drug pricing decisions. On July 24, 2018, the Fourth Circuit en banc refused to review the panel decision invalidating Maryland’s law. The State of Maryland has filed a petition for certiorari for review by the US Supreme Court in October 2018.

A lawsuit filed by the pioneer pharmaceutical manufacturers’ trade association in the US District Court for the Eastern District of California challenging the state’s drug transparency law was dismissed on August 30, 2018, on the basis of lack of standing. However, the decision allowed the drug manufacturers association to amend its complaint to attempt to address this issue, which it subsequently did on September 28, 2018.1 Lastly, on June 28, 2018, a suit filed in the US District Court for the District of Nevada, also by the pioneer drug manufacturers association, challenging the constitutionality of Nevada’s drug transparency law was dropped by the association following the release of new regulations by Nevada’s Department of Health and Human Services. The regulations allow drug manufacturers to request that certain information in their drug price reports to the state be kept confidential based on their view that disclosure would constitute a misappropriation of a trade secret.2

Unanswered Questions for Biopharma Companies

The varied approaches taken by states to respond to prescription drug costs and pricing raise issues beyond their constitutionality and whether they are likely to be effective responses to these pricing concerns.3 These statutes raise some questions regarding their interpretations that present significant compliance issues for drug manufacturers, particularly the following three inter-related issues:

  1. Products Covered. The various prescription drug transparency and anti–price gouging statutes are often ambiguous as to what products are subject to the state statute. For instance, while several of the statutes have definitions for “drug” or “prescription drug,” it is unclear if biological products are within the scope of these statutes. This ambiguity is presented since biological products are not included in the Federal Food, Drug, and Cosmetic Act’s definition of “drug,”4 but instead fall under the Public Health Service Act.5 The state statutes do not ordinarily reference biologics, or expressly include them within their definitions of drugs, and thus it is unclear if they are subject to the reporting requirements of these statutes.
  2. Relevant Data. There are also unanswered questions concerning not only what relevant price and cost data must be analyzed in order to comply with the statute (e.g., wholesale acquisition cost (WAC)), but also when that analysis should start. For instance, in the California lawsuit, drug manufacturers assert that the statute is unconstitutionally vague as to whether past price increases, prior to enactment of the statute, require disclosure or inclusion in the calculation methodology, and thus are subject to the statute, and what time period properly should be used in calculating reportable price increase percentages.6 Additionally, several of the state statutes are unclear as to what would be an acceptable justification for a price increase coming within the statute.
  3. Inconsistencies Across States. Unsurprisingly, given the heterogeneous and inconsistent approaches taken by the various states, and the inevitable variances in how state officials will interpret these statutes, drug manufacturers will be required not only to develop mechanisms to monitor price increases and their differential effects in various states, but also to ensure that the bases they are using for price reporting decisions are as consistent as possible among states with these statutes. A new effort by a nonpartisan forum of state health policy advisers to help states implement and develop state drug price transparency statutes potentially presents additional complications by encouraging additional states to enact statutes.7 It is not obvious whether it will be possible to develop a consistent approach to reporting decisions as there has been no indication that this group will attempt to develop model state legislation that will reduce inconsistency of obligations and reporting. Drug manufacturer efforts to consistently address their obligations under state statutes may be further complicated by a recently proposed rule by the HHS requiring direct-to-consumer television advertisements of prescription drugs and biological products, under which payment is available through or under Medicare or Medicaid, to include the WAC price of that drug or biological product. The proposed rule contains a preemption provision related to any state law–based claim that depends in whole or in part on prescription drug pricing statements. Whether this proposed rule is likely or intended to preempt or otherwise affect state drug price transparency statutes has not thus far been addressed.

Finally, depending on the development of certain types of other potential federal initiatives such as discount/rebate transparency, there will be additional complexity regarding consistent evaluation of and reporting on pricing. Consequently, pharmaceutical manufacturers will need to continually review and update their approaches to compliance with this emerging regulatory and enforcement area.

Footnote

1 PhRMA v. Brown, No. 2:17-cv-02573-MCE-KJN (E.D. Cal. Aug. 30, 2018); see also PhRMA v. David, No. 2:17-cv-02573-MCE-KJN (E.D. Cal. Sept. 28, 2018).

2 PhRMA v. Sandoval, No. 2:2017-cv-02315-JCM-CWH (D. Nev. June 28, 2018).

3 For a recent review, see K. Gudiksen, et al., “California’s Drug Transparency Law: Navigating the Boundaries of State Authority on Drug Pricing,” 37 Health Affairs 1503 (September 2018).

4 21 U.S.C. § 321(g).

5 42 U.S.C. § 262.

6 PhRMA v. Brown, No. 2:17-cv-02573-MCE-KJN, at 5 (E.D. Cal. Dec. 8, 2017).

7 National Academy for State Health Policy, NASHP Issues RFP for Partner to Help States Develop a Drug Cost Transparency Database (Sept. 28, 2018).

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

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