Unpredictable and unrelenting drug price increases drive up health insurance premiums and challenge states’ public purchasers as they weigh escalating costs against balanced budget requirements. The National Academy for State Health Policy’s (NASHP) newest model law, an Act to Protect Consumers from Unsupported Price Increases on Prescription Drugs, levies hefty fines on manufacturers that impose unjustified price increases and then uses the fines’ revenues to lower costs for consumers.
Section 1. Statement of Legislative Intent; Purpose
The purpose of this Chapter is to protect the safety, health and economic well-being of [Name of State] people by guarding them from the negative and harmful impact of unsupported price increases for prescription drugs. In enacting this Act, the legislature finds that:
1) Access to prescription drugs is necessary for XXXXX people to maintain or acquire good health;
2) Unsupported price increases negatively impact the ability of XXXXX people to obtain prescription drugs and thereby endanger the health and safety of XXXXXX people to maintain or acquire good health;
3) Unsupported price increases for prescription drugs threaten the economic well-being of XXXXXX people and endanger their ability to pay for other necessary and essential goods and services including housing, food and utilities;
4) Unsupported price increases for prescription drugs contribute significantly to a dramatic and unsustainable rise in health care costs and health insurance that threaten the overall ability of XXXXXX people to obtain health coverage and maintain or acquire good health;
5) Unsupported price increases for prescription drugs contribute significantly to rising state costs for health care provided and paid for through a) state-funded medical assistance programs for XXXXX people who are older, living with disabilities or have low incomes; and b) health insurance programs for public employees, including employees of the state, municipalities and counties, school districts, institutions of higher education, and retirees whose health care costs are funded by public programs, thereby threatening the ability of the state to fund those programs adequately and further threatening the ability of the state to fund other programs necessary for the public good and safety, such as public education and public safety;
6) Analysis of the increase in prices charged by manufacturers of prescription drugs demonstrates that many price increases for high-cost and high-volume prescription drugs are not supported by adequate evidence of improved clinical benefit or by significant increase in costs to the manufacturer related to the production or sale of the product; and
7) Based on findings (1) through (6) the legislature finds that unsupported price increases for prescription drugs threaten the safety and well-being of XXXXXX people and find it is necessary to act in order to protect XXXXXX people from the negative impact of unsupported price increases.
Section 2. Definitions
(a) “Prescription Drug” has the same meaning stated in [Cite to State’s Pharmacy Act]
(b) “Unsupported Price Increase” is an increase in price for a Prescription Drug for which there was no, or inadequate, new clinical evidence to support the price increase. In order to determine whether a price increase for a Prescription Drug is unsupported by new clinical evidence, the state shall utilize and rely upon the analyses of Prescription Drugs prepared annually by the Institute for Clinical and Economic Review (ICER) and published in its annual Unsupported Price Increase Report.
(c) “Identified Drug” is any Prescription Drug that has at any time been identified as having an Unsupported Price Increase
(d) “Wholesale Acquisition Cost” has the meaning stated in 42 U.S.C. § 1395w-3a.
(e) “Consumer Price Index” means the Consumer Price Index, Annual Average, for All Urban Consumers, CPI-U: US City Average, All items, reported by the United States Department of Labor, Bureau of Labor Statistics, or its successor or, if the index is discontinued, an equivalent index reported by a federal authority or, if no such index is reported, “Consumer Price Index” means a comparable index chosen by the Bureau of Labor Statistics.
Section 3. Penalty Imposed
(a) A penalty shall be assessed on the sales within the state of Identified Drugs and payable by the manufacturers of the Identified Drugs. The penalty shall be calculated as described in subsection 3(b) below.
(b) The penalty in any calendar year shall equal 80 percent of the difference between the revenue generated by sales within the state of the Identified Drugs and the revenue that would have been generated if the manufacturer had maintained the Wholesale Acquisition Cost from the previous calendar year, adjusted for inflation utilizing the Consumer Price Index.
(c) In order to be subject to the penalty a manufacturer must have at least $250,000 in total annual sales within the state in the calendar year for which the tax is assessed.
(d) Within sixty (60) days of the annual publication by ICER of the Unsupported Price Increase Report, the Tax Assessor shall identify the manufacturers of Identified Drugs. The Tax Assessor shall notify each manufacturer that sales within the state of Identified Drugs shall be subject to the penalty assessed in this Section for a period of two calendar years following the Identified Drug’s appearance in the annual publication by ICER.
(e) Such penalty shall be collected annually. Any manufacturer notified by the assessor pursuant to subsection (d) of this section shall submit to the Tax Assessor a return on a form prescribed and furnished by the Tax Assessor and pay the penalty by the XXth day of XXXXX for the previous calendar year.
(f) The form described in subsection (e) above shall contain information including but not limited to:
- The total amount of sales of the Identified Drug within the state
- The total number of units sold of the Identified Drug within the state
- The Wholesale Acquisition Cost of the Identified Drug during the tax period and any changes in the Wholesale Acquisition Cost during the calendar year
- The Wholesale Acquisition Cost during the previous calendar year
- A calculation of the penalty owed
- Any other information that the Tax Assessor determines is necessary to calculate the correct amount of the penalty owed
(g) The failure by any manufacturer to file the return required by subsection (e) shall result in an additional penalty of 10 percent or $50,000, whichever is greater.
Section 4. Use of Revenue
(a) Revenue generated as a result of the penalty described in Section 3 above must be segregated into a separate fund and made available to the Superintendent of Insurance to offset costs to consumers. The Superintendent of Insurance may work in cooperation with other state agencies to determine the most effective method of optimizing the consumer benefit.
(b) Upon request from the Tax Assessor, the Superintendent of Insurance may make funds generated as a result of the penalty available to the Tax Assessor for the purpose of ensuring sufficient resources are available to 1) assess and collect the penalty; 2) audit manufacturers that are required to submit returns pursuant to Section 3(f) above; and 3) defend appeals from manufacturers. The Superintendent of Insurance may grant such request only upon finding that there will be no significant negative impact on the availability of funds to provide the consumer impact described in subsection (a) above.
(c) The Superintendent of Insurance shall on an annual basis submit a report to the legislature describing 1) the amount of revenue that had been generated in the previous year on account of the penalty segregated by manufacturer and product; 2) the current amount available for use as a result of the tax; 3) how the tax revenue has been utilized to benefit consumers pursuant to subsection (a) above; and 4) funds made available to the Tax Assessor pursuant to subsection (b) above.
(d) Any revenue in excess of the administrative costs described in subsection (a) above
Section 5. Prohibition on Withdrawal of Prescription Drugs for Sale
(a) It shall be a prohibition of this Chapter for any manufacturer or distributor of an Identified Drug to withdraw that drug from sale or distribution within this state for the purpose of avoiding the penalty set forth in Section 3 above.
(b) Any manufacturer who intends to withdraw an Identified Drug from sale or distribution from within the state in order to avoid a penalty as described in Section 3 of this part shall provide a notice of withdrawal in writing to the Board of Pharmacy and to the Attorney General 180 days prior to such withdrawal.
(c) The Attorney General shall assess a penalty of $500,000 on any entity, including any manufacturer or distributor of an Identified Drug, that it determines has withdrawn an Identified Drug from distribution or sale in the state in violation of subsection (a) or (b) of this Section.
Getting a grip on pharmaceutical manufacturers’ pricing strategies is a 2020 priority for the National Academy for State Health Policy (NASHP), but how drugs are marketed also significantly impacts spending on drugs. In 2016, pharmaceutical companies spent $6 billion on direct-to-consumer advertising, but a whopping $20.3 billion to market their brand name drugs to health care professionals.
State price-gouging laws (PGLs) seek to prohibit and authorize action against the practice of offering prescription drugs for sale at an unconscionable or excessive price. During the 2018-19 legislative session, at least 15 states considered price-gouging legislation specific to prescription drugs. As of March 10, 2020, NASHP was tracking pending legislation in four states.
When state PGLs have become law, they have encountered tough challenges in the courts, leading to high-profile adverse decisions about laws adopted by Washington, DC and Maryland. The US Supreme Court has not weighed in in these cases, and commentators question whether courts in other parts of the country would rule in the same way; however, these rulings may have a chilling effect on states. This brief addresses the question, given the legal obstacles encountered to date, how can the price-gouging model be successful at the state level going forward? It outlines the key legal challenges state PGLs may face and offers recommendations for surmounting them.
What do state prescription drug price-gouging laws (PGLs) do?
To combat excessive drug prices, PGLs may focus on a drug’s base price, the magnitude of price increases over a defined period of time, or both. Laws regulating price increases typically examine whether the change in a drug’s price exceeds a specified benchmark on an annual basis or cumulatively over several years. One approach is to adopt a law that applies all the time and caps price increases at the rate of inflation or a defined percentage increase. Another approach is to have the law apply only during a declared emergency and define the illegal increase in terms of whether a “gross disparity” exists between the price before and after the emergency declaration. Laws may provide that price-gouging penalties are automatically triggered or may provide that a presumption of price gouging is established if the benchmark is exceeded but allow the manufacturer to rebut it by showing its cost increase was justified. (For example, because a market disruption made it more costly to acquire ingredients). Penalties in PGLs may take a variety of forms, from a tax on the excess amount to traditional remedies for unfair business practices available under state consumer protection statutes.
Laws can also regulate a drug’s base price, i.e., the price it is today, or the price at which a new drug is launched. Such an approach would need to specify the unit to which the price applies — e.g., a month’s supply at the most commonly prescribed dose. A dollar cap could be specified or the law could peg the maximum price to some external reference, such as prices in other high-income countries (although the latter may involve heightened risk of a dormant or foreign Commerce Clause problem, as discussed below). Regulating both base price and price hikes makes price regulation harder to evade. Otherwise companies can skirt laws focused on price increases by launching new drugs at a high price and evade base-price regulation by launching low with a plan to raise prices significantly over time.
An important decision that state lawmakers must make for PGLs is which price to assess (Table 1). Although average sales price (ASP) is the best indicator of what purchasers in the United States are actually paying, because of data limitations, PGLs generally specify either the average manufacturer price (AMP) or wholesale acquisition cost (WAC). State drug price transparency laws generally use the WAC. The AMP more closely approximates actual prices than the WAC.
Table 1. Understanding Different Drug Prices1,
|What is it?||Advantages||Disadvantages|
|Wholesale Acquisition Cost (WAC)||Offering (“list”) price set by the manufacturer for wholesalers and direct purchasers, before discounts and rebates||
|Average Manufacturer Price (AMP)||Average price actually paid by wholesalers for drugs distributed to the retail pharmacy class of trade, after prompt-pay discounts but before rebates||
|Average Sales Price (ASP)||Manufacturer’s unit sales of a drug to all US purchasers in a calendar quarter divided by the number of units sold, after all discounts and rebates (except Medicaid rebates).||
What legal challenges did PGLs in Maryland and Washington, DC face?
The biopharmaceutical industry has challenged PGLs laws on a number of grounds, but the most important are patent preemption, vagueness, and dormant Commerce Clause (Figure 1).1
Patent preemption claims allege that a state law impermissibly intrudes into a policy area that the Constitution reserves to the federal government: patent rights. For example, Washington, DC’s Prescription Drug Excessive Pricing Act of 2005 prohibited drug manufacturers or their licensees (except retailers) from selling patented prescription drugs in DC “for an excessive price.” “Excessive” was defined by reference to prices paid in other high-income nations. In a case known as BIO, the Court of Appeals for the Federal Circuit affirmed the DC District Court’s decision that this scheme interfered with patent rights by penalizing high prices, and therefore upset the balance established by Congress in the patent system between giving incentives for innovation and ensuring access to patented products.3 Mindful of the BIO decision, Maryland chose to limit its PGL, known as HB 631, to off-patent or generic drugs for which all federally granted market exclusivities had expired.
Vagueness challenges assert that a law’s definition of price gouging is so ambiguous that it fails basic requirements of constitutionally protected due process rights. Courts have interpreted the Due Process Clause of the 14th Amendment to require states to ensure that people have fair notice of what constitutes illegal conduct and that officials enforcing the law have standards to govern their decisions.
Vagueness arguments were deployed against Maryland’s HB 631, which barred manufacturers from engaging in “price gouging” for generic or off-patent drugs that were “essential” and made by 3 or fewer manufacturers. The law defined “price gouging” as “an unconscionable increase” in the price of a drug, which it in turn defined as an increase that is (1) “excessive and not justified” by the cost of making the drug or expanding access to it, and that (2) results in consumers “having no meaningful choice” but to buy the drug at that price the drug is important to their health and the market has insufficient competition. The legislature further signaled what might constitute excessive pricing by authorizing Maryland’s Medicaid program to notify the state attorney general if there was an increase of 50 percent or more in a drug’s WAC that hiked the drug’s cost to $80 for more for defined periods of time, doses, or courses of treatment. Once notified, the attorney general could seek an injunction, restoration of money acquired through illegal pricing, and civil penalties.
The biopharmaceutical organizations challenging HB 631 argued that these provisions did not give companies enough information to know what constituted an “unconscionable increase” or “excessive” price. The courts never ruled on their claim, except to deny Maryland’s request to dismiss it, because the case was decided on a different basis. Vagueness remains a viable avenue of challenge to state PGLs.
The dormant Commerce Clause is a judicial doctrine holding that states cannot regulate in ways that place undue burdens on interstate commerce. When a state PGL may be applied to business transactions that take place outside the state, it is potentially vulnerable to a particular kind of dormant Commerce Clause claim known as extraterritoriality. The extraterritoriality doctrine holds that “a state may not regulate commerce occurring wholly outside of its borders.”,
Such claims were brought in the Washington, DC case. The federal district court held that any application of the DC law to transactions outside the district’s borders would indeed violate the dormant Commerce Clause. (Washington, DC did not appeal that holding.)
A dormant Commerce Clause claim was also successful against Maryland’s HB 631; a divided, three-judge panel of the 4th Circuit Court of Appeals 4th Circuit held that the law could not be applied to situations in which both parties to a transaction are located out of state.4 The statute covered drugs “made available for sale in [Maryland],” many of which originated in a transaction between an out-of-state manufacturer and an out-of-state distributor. The court found that its practical effect was to control price in such transactions, which violated extraterritoriality. The act, said the majority, “is not triggered by any conduct that takes place within Maryland,” “controls the prices of transactions that occur outside the state,” and, if enacted by other states, “would impose a significant burden on interstate commerce.”4 A lengthy dissenting opinion argued that the majority’s conclusion conflicted with the rulings of several other federal circuit courts, which have limited application of the extraterritoriality doctrine to price control or price affirmation statutes that pegged in-state prices to out-of-state prices and discriminated against out-of-state actors.
*A price affirmation statute requires a seller to attest that it will not sell to others at a price lower than it gave the state.
How can patent preemption problems be avoided?
The clear route for a state to completely avoid legal challenges based on patent preemption is to follow Maryland’s approach and limit its PGL to off-patent drugs and biological products. This would include generic drugs and biosimilars as well as branded products for which all patents and federal regulatory exclusivities have expired but for which no generic or biosimilar competitors have emerged. The language in HB 631 is suggested for states that wish to take this approach: “off-patent or generic drug” is defined as “any prescription drug … for which all exclusive marketing rights, if any, granted under the federal Food, Drug, and Cosmetic Act, § 351 of the federal Public Health Service Act, and federal patent law have expired,” as well as “any drug-device combination product used for the delivery of a drug for which all exclusive marketing rights under [those laws] have expired.”
This approach limits the impact of the law on overall prescription drugs costs, since the most costly products are branded drugs and biological products that are within their period of market exclusivity. However, the end of market exclusivity does not always herald the beginning of a competitive market. Many generic drugs lack competitors and are surprisingly expensive, and price increases for some generics have been large in recent years, provoking significant public concern., Lack of competition is a particular problem for off-patent biological products. Therefore, PGLs may have salutary effects on costs even without including on-patent products.
An alternative approach would be to include on-patent as well as off-patent drugs and biologics and hope that the BIO decision will not govern the disposition of the litigation that will likely follow. BIO has not often been applied by other courts to resolve questions about patent preemption, and legal scholars have argued that it misapprehends the nature of the patent right. Further, the court in BIO emphasized the fact that Washington, DC’s statute applied only to patented drugs. State PGLs that cover all products, whether on- or off-patent, might be distinguishable on the basis that they less clearly signal a state’s intent to disrupt the patent scheme.13, Yet it is important to recognize that the BIO court’s reasoning — that “penalizing high prices” serves to “rebalance the statutory framework of risks and rewards” in the patent system — applies to at least some extent whenever a state law includes patented products. There would be some risk of a successful patent preemption challenge to a PGL that included patented products.
To minimize this risk, states could include all products in the PGL but structure the law as a tax on excess earnings rather than an outright prohibition on charging an unconscionable price. This would further distance the PGL from the Washington, DC statute, which made price gouging unlawful and provided a public and private right of action to seek fines and damages. Because states are permitted to impose sales taxes on patented goods, courts could choose to view this type of PGL as distinguishable from laws that impose direct price controls.14 Their willingness to do so would likely depend on the magnitude of the tax: the higher the tax, the more it looks a penalty imposed to disrupt patentholders’ rights — as the Federal Circuit characterized Washington, DC’s law in BIO. A drawback to structuring the law as a tax is that consumers and health plans are not assured of lower prices at the point of sale. The prospect of paying the tax may act as a deterrent for excessive pricing, but if the tax is substantially less than 100 percent, it would be economically rational for sellers to maintain the high price and pay the tax. If price reductions did not occur, states could find ways to pass along the tax revenue they instead collected to consumers who have paid high prices — i.e., through tax credits or rebates — though this would involve both delay and administrative costs.
How can vagueness problems be avoided?
Several lessons can be learned from looking at vagueness challenges in other contexts relating to price regulation, including price-gouging laws that apply during times of emergency, state consumer lending laws, and how courts resolve contract disputes involving allegedly unconscionable price terms.1
First, among the potential approaches that PGLs could take to defining an excessive price, borrowing the “gross disparity” standard from other emergency price-gouging laws is not recommended. Even if agreement could be reached that it is reasonable to declare high drug prices to be an “emergency” as of some date, asking whether prices during emergencies are grossly higher than pre-emergency prices isn’t very helpful because drug prices arguably were already inflated in the pre-emergency period.
Second, PGLs that prohibit “unconscionable” prices will be interpreted by courts according to standard principles of contract law unless they specify a definition of that term. Falling back on the common law of contracts isn’t optimal because courts typically require a showing that the price is not only substantively unconscionable, but also procedurally unfair. That procedural standard is hard to apply to medicines at the population level. In contract disputes, courts typically look at whether the buyer was subject to coercion or surprise. States can argue that patients’ medical need for prescription drugs, especially when combined with a lack of alternative therapies in the market, creates a coercive situation. But there is adverse precedent from cases involving hospital bills holding that a person’s dire need for medical treatment isn’t enough to conclude that a medical bill is unconscionable from a procedural standpoint. Another problem is that in contract disputes, courts have assessed procedural unconscionability by looking at the characteristics of the particular buyer or class of buyers—whether, for example, the buyer(s) lacked education or sophistication. For prescription drugs, the buyer that transacts with manufacturers isn’t the patient, it’s a large purchasing organization, so it is hard to argue they are vulnerable to being taken advantage of.
States can avoid these pitfalls by putting a definition of “unconscionable” or “excessive” in the statute that says a showing of procedural unconscionability is not required. (For policy reasons, they may still wish to limit PGLs to drugs for which there aren’t many alternatives on the market, but it is better not to embed that choice in the definition of unconscionable price.)
Third, state consumer lending laws are an attractive model for defining unfair pricing practices for medicines.1 To address unfair lending practices, such as excessive interest rates, many states have taken a two-pronged approach. The have adopted (1) a usury statute that sets a maximum interest rate for consumer loans and (2) a general consumer protection act (sometimes called an Unfair or Deceptive Acts or Practices, or UDAP, statute) that prohibits a more general class of unconscionable business practices. For prescription drug prices, states could adopt both a maximum percentage cap on price increases in transactions covered by the statute and a more general statutory prohibition on selling drugs at an excessive price (Figure 2). The price increase law would address many of the pricing problems of greatest current concern and, because of its clear quantitative definition of what is excessive, would be straightforward to administer and enforce. The more general statute would serve as a backstop — a means of addressing high base prices that are not primarily due to recent, large price hikes. State attorneys general and/or individual consumers could bring actions under the general statute when they encounter an unconscionable price, just as they do for other unfair business practices under UDAP statutes.
This approach is attractive because it prevents gaming by companies (e.g., avoiding price hike regulation by setting launch prices higher). Additionally, states can write a definition of “unconscionable” or “excessive” base price into the statute that avoids tangles over procedural unconscionability. Finally, courts have repeatedly upheld consumer lending laws prohibiting unconscionable business practices against vagueness challenges. Case law concerning usury laws suggests that a maximum percentage increase for price hikes, too, would be highly defensible against vagueness claims.
Some guidance would, of course, need to be given as to what constitutes an excessive price. A variety of approaches could be taken — from establishing a dollar limit that the state considers unaffordable to its residents, given household income and living expenses in the state, to establishing criteria for evaluating price based on the clinical value of the drug.1 For reasons discussed below, establishing an unconscionable price by reference to what is charged in other countries or other states may involve some legal risk.
How can dormant Commerce Clause problems be avoided?
States could follow two pathways in addressing potential dormant Commerce Clause challenges: one with relatively high legal risk but higher potential reward, and another with lower risk but lesser reward. The core tradeoff to be considered is that confining a statute’s reach to transactions within the state avoids dormant Commerce Clause problems, but because for most states the transactions between drug manufacturers and wholesalers occur out of state, doing so may substantially limit the law’s impact.
Option 1 is to forge ahead with statutes that reach out-of-state transactions notwithstanding the 4th Circuit’s decision in Frosh. The language used in HB 631, drugs “made available for sale in” the state, could be used.
A variant of this strategy would be to tighten up the wording of HB 631 that the 4th Circuit panel found unsatisfactory, and might pass muster with other courts. The following language strengthens the connection to in-state transactions and borrows from state cigarette escrow statutes, which courts have upheld notwithstanding the fact that in some states the supply chain of manufacturers and distributors is wholly out of state: “It is a violation of this subtitle to impose an Unconscionable Price Increase, whether directly or through a wholesale distributor, pharmacy or similar intermediary or intermediaries, on the sale of a Covered Product to any consumer in the State.”*
The Frosh decision is sufficiently at odds with past precedents on the extraterritoriality doctrine** that courts in other jurisdictions may well decline to follow it, making Option 1 a reasonable choice for states outside the 4th Circuit.*** The potential payoff associated with Option 1 is considerable: price gouging laws would apply to transactions between manufacturers and wholesalers, which is where the action is in terms of establishing a drug’s price. Another advantage is that WAC can be used as a benchmark for assessing violations of the statute, because the transactions covered by the statute include wholesaler purchases. Information about WAC is easier to find than alternatives such as the AMP or ASP. The main drawback to Option 1 is that legal challenges are likely to be brought, citing Frosh, which could be expensive even if ultimately resolved in states’ favor. But because the Frosh decision “calls into question the constitutionality of numerous state antitrust and consumer protection statutes,”4 this may be a fight well worth fighting.
Option 2 is to try to stay within the 4th Circuit’s decision and tailor the statute more narrowly to in-state transactions. For example, the statute could specify that “It is a violation of this Act to sell a Covered Product in the State of X at a price that represents an Unconscionable Price Increase.” This language would encompass (1) transactions between in-state pharmacies and consumers and (2) transactions between in-state distributors and in-state pharmacies or consumers. It would not directly apply to transactions between manufacturers and wholesalers that take place out of state.
The expected effect of restricting the ultimate price of a drug is to influence bargains made upstream in the distribution system. For example, if a pharmacy is only permitted to sell a drug for $100, it will refuse to pay a distributor more than $100, and the distributor will in turn refuse to pay the manufacturer more than $100. However, nothing in the statute would ensure that effect. Two possible adverse outcomes are that (1) wholesalers or manufacturers would refuse to sell the product altogether in the state if they could not maintain a certain profit margin, or (2) in-state pharmacies and in-state distributors would suffer an economic squeeze if they could not obtain the price concessions they sought from out-of-state manufacturers or distributors.
Option 2 is thus on surer footing in terms of dormant Commerce Clause claims but potentially less effective in achieving its objective. An additional drawback is that because Option 2 focuses on pharmacy transactions, pegging prices to the WAC or AMP—which is not what pharmacies pay—might be hard to justify.
The legal defensibility of both Option 1 and Option 2 may be enhanced by (1) requiring that manufacturers and distributors who wish to sell in the state must route those products through a state-licensed distributor located in state and (2) explicitly applying the PGL to transactions involving such distributors. Many states already have a licensure requirement for entities that operate as drug wholesalers within their borders, although drug manufacturers aren’t required to use an in-state distributor. Although it would be a significant expansion of current requirements for licensure, a state could condition license renewal on compliance with the state’s PGL.
Such a licensure requirement would not only improve incentives for compliance, but provide a stronger nexus between the PGL and in-state transactions. A drawback of this approach is that requiring in-state distributors might itself provoke dormant Commerce Clause challenges. However, the Supreme Court has made clear that state regulation does not violate the dormant Commerce Clause merely because it forces changes in “the particular structure or methods of operation in a retail market.”
Finally, because of the clear precedent that price affirmation statutes violate the extraterritoriality principle, state PGLs should not define excessive price solely according to whether the price for in-state buyers is higher than the price for out-of-state buyers, including buyers in foreign countries. Although courts have not spoken clearly about whether using prices in other high-income countries as a price benchmark violates the dormant or foreign Commerce Clause, the trial court in BIO hinted that it could, if applied as “a formulaic approach” or exclusive means of determining whether a price is excessive.9
Summary: Recommendations for State Lawmakers
Summarizing the foregoing, we offer the following suggestions for state PGLs (Table 2).
Table 2. Recommended Design Choices for State Price-Gouging Laws
|Which products should be covered?||
|Which transactions should be covered?||
|Which price should be assessed?||
|How should the maximum allowable price increase be specified?||
|How should an excessive base price for a drug be defined?||
|When enforcing the law, which products should state agencies target?||
* Indicates an option with somewhat elevated risk of legal challenge, but considerably greater potential payoff in terms of improving access to affordable medicines.
Notes and Acknowledgements
*Michelle Mello, PhD, JD, is a professor of Law, at the Stanford Law School and a professor of Medicine at the Stanford School of Medicine.
Acknowledgements: The National Academy for State Healthy Policy’s Center for State Rx Drug Pricing, with support from the Laura and John Arnold Foundation, commissioned this analysis. This brief is adapted in part from Michelle M. Mello and Rebecca E. Wolitz’s article, Legal Strategies for Reining in “Unconscionable” Prices for Prescription Drugs, 114 Northwestern L. Rev. 859 (2020). The full article can be downloaded at https://scholarlycommons.law.northwestern.edu/nulr/vol114/iss4/1/. Michelle Mello’s contribution to this brief was as a paid consultant, and was not part of her Stanford University duties or responsibilities.
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Section 1. Statement of Legislative Intent; Purpose
The purpose of this Chapter is to protect the safety, health and economic well-being of [name of state] people by guarding them from the negative and harmful impact of excessive and unconscionable prices for prescription drugs. In enacting this Act, the legislature finds that:
- Access to prescription drugs is necessary for XXXXX people to maintain or acquire good health;
- Excessive and unconscionable prices negatively impact the ability of XXXXX people to obtain prescription drugs and such price increases thereby endanger the health and safety of XXXXXX people to maintain or acquire good health;
- Excessive and unconscionable prices for prescription drugs threaten the economic well-being of XXXXXX people and endanger their ability to pay for other necessary and essential goods and services including housing, food and utilities;
- Excessive and unconscionable prices for prescription drugs contribute significantly to a dramatic and unsustainable rise in health care costs and health insurance that threaten the overall ability of XXXXXX people to obtain health coverage and maintain or acquire good health;
- Excessive and unconscionable prices for prescription drugs contribute significantly to rising state costs for health care provided and paid for through a) state funded medical assistance programs for XXXXX people who are older, living with disabilities or have low incomes; and b) health insurance programs for public employees, including employees of the state, municipalities and counties, school districts, institutions of higher education, and retirees whose health care costs are funded by public programs, thereby threatening the ability of the state to fund those programs adequately and further threatening the ability of the state to fund other programs necessary for the public good and safety, such as public education and public safety; and
- Based on findings (1) through (5) the legislature finds that excessive and unconscionable prices for prescription drugs threaten the safety and well-being of XXXXXX people and find it is necessary to act in order to protect XXXXXX people from the negative impact of excessive and unconscionable drug prices.
Section 2. Definitions
(a) “Prescription Drug” has the same meaning stated in [Cite to State’s Pharmacy Act]
(b) “Wholesale Acquisition Cost” has the meaning stated in 42 U.S.C. § 1395w-3a.
(c) “Consumer Price Index” means the Consumer Price Index, Annual Average, for All Urban Consumers, CPI-U: U.S. City Average, All items, reported by the United States Department of Labor, Bureau of Labor Statistics, or its successor or, if the index is discontinued, an equivalent index reported by a federal authority or, if no such index is reported, “Consumer Price Index” means a comparable index chosen by the Bureau of Labor Statistics.
(d) “Generic or Off-Patent Drug” means any Prescription Drug as to which any exclusive marketing rights granted under the federal Food, Drug, and Cosmetic Act, § 351 of the federal Public Health Service Act, and federal patent law have expired including and any drug-device combination product for the delivery of a generic drug.
Section 3. Excessive Price Increases Prohibited
(a) It is a violation of this subtitle for a manufacturer to impose an excessive price increase, whether directly or through a wholesale distributor, pharmacy or similar intermediary or intermediaries, on the sale of any Generic or Off-Patent Drug sold, dispensed or delivered in the state to any consumer in the state.
(b) A price increase is excessive for purposes of this subtitle when
(1) the price increase, adjusted for inflation utilizing the Consumer Price Index, exceeds (A) fifteen per cent of the Wholesale Acquisition Cost during the immediately preceding calendar year, or (B) forty per cent of the Wholesale Acquisition Cost during the immediately preceding three calendar years, and
(2) the price increase, adjusted for inflation utilizing the Consumer Price Index, exceeds thirty dollars for (A) a thirty-day supply of such Generic Drug, or (B) a course of treatment of such Generic Drug lasting less than thirty days.
(c) It is not a violation of subsection (a) of this section for a wholesale distributor or pharmacy to increase the price of a Generic or Off-Patent Drug if the price increase is directly attributable to additional costs for the drug imposed on the wholesale distributor or pharmacy by the manufacturer of the drug.
Section 4. Registered Agent and Office Within the State
Any entity that sells, distributes, delivers or offers for sale any Prescription Drug in the state is required to maintain a registered agent and office within the state.
Section 5. Enforcement
(a) The administrator of benefits for state employees, or any entity of state government that provides or purchases a pharmacy benefit, or any entity under contract with state government to provide pharmacy benefits, or any other entity of state government, shall notify the manufacturer of a Generic or Off-Patent Drug and the Attorney General of any price increase in violation of Section 3 above.
(b) Within 45 days of receipt of notice under subsection (a), the manufacturer of the Generic or Off-Patent Drug shall submit a statement to the Attorney General:
(1) itemizing the components of the cost of producing the drug;
(2) identifying the circumstances and timing of any increase in materials or manufacturing costs that caused any increase during the preceding year in the price of the drug;
(3) providing any other information that the manufacturer believes to be pertinent to a determination of whether a violation of this subtitle has occurred.
(c) The Attorney General may require a manufacturer and distributor to produce any records or documents that may be relevant to a determination of whether a violation of this subtitle has occurred.
(d) On petition of the Attorney General, a circuit court may issue an order:
(1) compelling the manufacturer of Generic or Off-Patent Drug:
(A) to provide a statement required under subsection (b) of this section; or
(B) to produce records or documents requested by the Attorney General under subsection (c) of this section that may be relevant to a determination of whether a violation of this subtitle has occurred;
(2) restraining or enjoining a violation of this subtitle, including an order requiring prices be restored to levels that comply Section 3 above;
(3) requiring the manufacturer to provide an accounting to the Attorney General of all revenues generated in violation of Section 3 above;
(4) restoring to any consumer, including any third-party payor, any money acquired as a result of a price increase that violates this subtitle;
(5) requiring that all revenues generating in violation of Section 3 be remitted to the state to be used for efforts designed to reduce the cost to XXXXXX consumers of acquiring Prescription Drugs, if a manufacturer is unable to determine the individual transactions necessary to provide the restitution described in subsection (d)(4) above;
(6) imposing a civil penalty of up to $10,000 a day for each violation of this subtitle; and
(7) providing for any other appropriate relief, including attorney’s fees and costs reasonably incurred by the Attorney General in bringing action against a manufacturer found in violation of Section 3 above.
(e) With respect to subsection (d)(5) above, every individual transaction in violation of Section 3 is determined to be a separate violation.
Section 6. Prohibition on Withdrawal of Generic or Off-Patent Drugs for Sale
(a) It shall be a prohibition of this Chapter for any manufacturer or distributor of a Generic Drug to withdraw that drug from sale or distribution within this state for the purpose of avoiding the prohibition of price increases set forth in Section 3 above.
(b) Any manufacturer who intends to withdraw a Generic or Off-Patent Drug from sale or distribution from within the state in order to avoid a prohibited price increase as described in Section 3 of this part shall provide a notice of withdrawal in writing to the Board of Pharmacy and to the Attorney General 180 days prior to such withdrawal.
(c) The Attorney General shall assess a penalty of $500,000 on any entity, including any manufacturer or distributor of a Generic or Off Patent Drug, that it determines has withdrawn a Generic or Off-Patent Drug from distribution or sale in the state in violation of subsection (a) or (b) of this Section.
The Centers for Medicare & Medicaid Services (CMS) has proposed a new rule with provisions designed to advance value-based purchasing (VBP) arrangements with drug manufacturers. Comments about the proposal are due July 20, 2020.
Removing wasteful drugs from formularies and replacing them with drugs that offer the same benefits at a lower cost, helps state employee health plans and other public purchasers reduce spending without sacrificing value – a critical strategy for savings as states face tremendous budget pressures.
States are experiencing a huge rise in the number of people without health insurance in the wake of mass layoffs resulting from the COVID-19 pandemic and are seeking strategies to protect them from high prescription drug prices. The uninsured are sometimes the only consumers left paying the full list price for a drug, while the insured benefit from drug discounts negotiated on their behalf.
Last week, a California Court of Appeal lifted an injunction that prevented the state from sharing drug manufacturers’ advance notice of drug price increases. The ruling was a win for states working to advance drug price transparency in the face of manufacturers’ sometimes overly-broad claims of trade secret protection for their prices.