California Will Require Pharma to Explain Rationale Behind Price Hikes in 2019

As President Trump continues to make promises to lower drug prices, the state of California is taking things into its own hands. Over the past year, California has passed several laws that impact drug prices, health insurers, pharmacy benefit managers (PBMs), and providers. One law in particular, Senate Bill (SB) 17 (Chapter 603, Statutes of 2017), now requires drug companies, as of January 2018, to announce if they plan to increase a drug price by more than 16% in a two-year period. The law has already seen some early success since it was first signed in October 2017, as earlier this year Novartis AG, Gilead Sciences Inc., Roche Holding AG, and Novo Nordisk A/S all informed California health plans that they would be rescinding or reducing previously announced price hikes, according to Bloomberg.

But that is just the beginning as the law will expand in the new year. Starting after January 2019, drug manufacturers will also be required to submit the rationale for those cost increases to California’s Office of Statewide Health Planning and Development (OSHPD). The OSHPD will collect the rationales they receive beginning April 2019 and publish them on its website within 60 days of receipt from each manufacturer on a quarterly basis.

Ever since the law was first announced, the Pharmaceutical Research and Manufacturers of America (PhRMA) has been fighting it in the courts. While its original lawsuit against the implementation and enforcement of SB 17 was dismissed by the United States District Court for the Eastern District of California, PhRMA recently filed an amended complaint in October 2018 as they claim this law will directly harm individual PhRMA member companies.

To learn more about the law and how it might affect the pharma industry, PM360 spoke with Stephanie Hoops, Senior Market Analyst, JD, MSJ, Market Access Insights at Decision Resources Group.

Stephanie Hoops, Decision Resources Group

PM360: What are its implications for pharma? How should they handle price hikes in the state once the law is established?

Stephanie Hoops: Unless and until the law changes, pharma must comply with the law. Each company’s legal team will oversee and interpret compliance, but here’s what the law requires:

  • Manufacturers must report to the state when introducing a prescription drug that is priced above Medicare’s specialty drug threshold.
  • Manufacturers must notify the state of marketing and pricing plans used in the launch of a new drug, and provide an estimated volume of patients that may be prescribed the drug.
  • Manufacturers must notify purchasers before increasing (by 16% in a two-year period) the wholesale acquisition cost of a prescription drug that costs more than $40.
  • Manufacturers must provide the state with a description of factors that led to the decision to increase a drug’s price, including documentation of increased clinical efficacy of the drug.

PhRMA has been battling this in courts since December 2017, so far to little effect. Will their efforts in the courts have any impact on this law?

Their efforts could nullify the law, should the court rule in their favor. But the case is still pending before the federal court (the Eastern District of California). PhRMA is asking that the law be declared unconstitutional and void because it violates the Commerce Clause.

The U.S. Constitution’s Commerce Clause blocks states from passing legislation that unduly burdens interstate commerce. Only Congress has the power to regulate interstate commerce, and court rulings have interpreted that clause of the Constitution to mean states are not permitted to tread into the federal government’s territory.

“The Commerce Clause prohibits California from foisting its policies onto other states in this manner, and for good reason,” PhRMA argues in its complaint. “California’s intrusion into the commerce among other states will disrupt the drug market. The Commerce Clause also prohibits California from imposing obligations that will result in stockpiling, opportunities for price coordination, and other burdens on interstate commerce in return for making already public information ‘more transparent.’”

The big question for states drafting this type of legislation is whether they can satisfy the mandates of the Commerce Clause because the pharmaceutical industry is interstate. Until it’s clear, I don’t see why the industry would stop using the Commerce Clause to challenge these state initiatives while Congress deliberates over drug prices.

Are there any other states with similar legislation? And could we expect more states to adopt something like SB 17 moving forward?

Nevada has a similar transparency law (SB 539) that applies to diabetes drugs. PhRMA sued Nevada just as it sued California, but Nevada made some concessions and settled the matter in June 2018.

California’s new policy endeavors could drive copycat activity across the nation, especially considering that California’s legislation has been a harbinger of legal trends. Ultimately, the federal government may fall into step with the plethora of emerging state laws. Harmonization at the national level would eliminate the Commerce Clause issue, and reduce confusion and administrative costs for companies selling interstate products.

California is increasingly moving toward European-style pricing policies with a focus on supply-side regulation. Defined profit margins are not yet appearing, but justification for price increases is now required. The new emerging trends are mandating drug price transparency, explaining price increases, and purchasing drugs through international sources. For example, one Utah insurer recently rolled out a “pharmacy tourism” option that involves paying to send the state’s public employees to Mexico to purchase expensive drugs.

What are the broader implications for this law beyond just its impact in California?

I expect other states will watch to see how the Golden State’s new policy works out. Some will follow suit, others will dig in their heels and abstain from change. The bottom line: Federal legislators are not responding to concerns about rising drug prices and the states are beginning to take it upon themselves to handle it. This is similar to what we saw before the Affordable Care Act was adopted—the states passed their own laws to expand health insurance coverage. The downside is that laws clamping down on pharma will inevitably impede research for new therapies.

If the country follows California’s lead and begins adopting European-style pricing controls, we will look more like Europe—and Europe is not the leading producer of new therapies. The U.S. leads the world in producing new medicines, because the drug companies here are incentivized to do research and development through strong intellectual-property laws and a system of comparatively free-market pricing. Policymakers and the public are fixated on controlling prices and are ignoring the fact that price controls come at a cost. The public will lose the value created by drugs that never reach the market. If I were a drug executive, I’d be working overtime to change the storyline to make that clear. Look at it from an economic and societal perspective. European-level price controls will mean fewer new drugs and fewer cures, which lowers longevity. I don’t think your average American considers that perhaps foreign countries should be contributing more if they want to enjoy American innovation. For now, Americans are bearing the weight of that expense alone.

Which of the other recent legislation passed in California regarding healthcare do you think could have an impact on pharma? Is there anything in particular those in the industry should be keeping a close eye on besides SB 17?

There is so much activity right now among states trying to control prescription drug costs it’s hard to keep up. I’d say the most important thing to know is that the states that have passed legislation shining a spotlight on drug price increases are on track toward even more regulation. The transparency laws are the first step down the road toward European pricing controls, so in the parts of the country that are already requiring transparency, expect more to come.

As for California, the drug coupon ban is another significant new law. It prohibits discounts, repayment, product voucher, and other out-of-pocket reductions as of Jan. 1, 2018. See AB 265, enacted in 2017. The ban on drug coupons does what copay accumulator programs do, which is not good for pharma. Several other states considered similar bills during the last session (NJ, Rhode Island, Vermont, and Michigan). Copay accumulator programs are a new challenge for pharma, and I urge anyone unfamiliar with copay accumulators to read up on them.


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