Yale group’s advice to states trying to curb drug spending

May 8, 2018

The Yale Global Health Justice Partnership (GHJP), a joint initiative between Yale Law School (YLS) and Yale School of Public Health, released a paper in August of 2017 entitled, “Curbing Unfair Drug Prices a Primer for States.” The paper is intended to inform  state legislative efforts by “identifying key steps that states can and should take to reduce drug prices.”

The paper is intended for legislators, government officials, advocates, and constituents concerned about high drug prices. It focuses on two categories of legislative efforts: bills which are intended to directly regulate drug prices/drug increases and transparency and reporting bills which require manufacturers to disclose information relevant to pricing decisions.

One premise of the paper is that evidence shows that high drug prices are not linked to costs of R&D but are a result of drug manufacturers' ability to charge whatever price the market will bear. The paper notes that the federal government has failed to take action to curb drug prices – partially attributed to drug manufacturer lobbying efforts - and that states have taken up the fight. Over 80 pharmaceutical pricing bills were proposed in over 30 states in 2017.

In reference to state legislature, the authors state that they believe:

  • States should target excessive pricing for both generic and brand-name drugs, both by prohibiting unfair launch prices and by capping annual price increases.

  • States should mandate the public release of as much information as possible about pricing, as well as development, manufacturing, and marketing costs on a drug-by-drug basis.

To support those beliefs, the authors cite a number of statistics related to drug pricing and consumer opinion:

  • More than one in four Americans currently taking prescription medications report difficulty affording them.

  • One in eight report that they or a family member have cut pills in half or skipped doses due to high drug costs.

  • Nearly two-thirds of Americans – regardless of political affiliation – believe that lowering the cost of prescription drugs should be a top policy priority.

  • 86% of Americans support actions requiring drug companies to release information to the public on the process of setting drug prices.

  • Nearly 80% of Americans want government to limit what companies charge for high-cost drugs for illnesses like cancer or hepatitis.

The paper was written in August of 2017 and cites Maryland's Prohibition Against Price Gouging for Essential 34 Off-Patent or Generic Drugs law (House bill 631) as a “path breaking” model states could follow to address drug pricing. Since then, however, The 4th U.S. Circuit Court of Appeals has sided with generic manufacturers and struck down the law.

HB 631 limited generic pricing in two ways. It prohibited generic drug manufacturers or wholesale distributors from making “unconscionable increases” in the price of an “essential off-patent or generic drug.” It also authorized the Maryland Medical Assistance Program to notify the attorney general of any increase in the price of an essential off–patent or generic drug when prices are increased beyond set parameters. The AG could then take actions that include injunctive and monetary relief and impose civil penalties.

Generic manufacturers argued, successfully, that the law violated the Dormant Commerce Clause of the Federal Constitution. Since pricing decisions are made on a national level, it was argued that Maryland's law would impact prices nationwide. This was determined to give the state too much influence on interstate commerce.

The lawsuit also argued that the bill included overly vague language. “Unconscionable increase” was an example of vague language.

A law cited by the authors as a model for transparency legislation is Nevada's insulin transparency law (SB 539). A letter to the editor in the Washington Post also cited the legislation as a model for other states. In October of 2017 a federal judge denied a request to block the law.

The law is under fire from the industry, however. A lawsuit filed by Phrma and BIO  claims the bill removes economic incentives protected under patent law for pharmaceutical companies, and it eliminates competition within the industry by removing protection of trade secrets:

“Trade secrets are property. SB 539 destroys the value of that property without recompense,” the lawsuit says.

The complaint also alleges that the bill violates the Fifth Amendment's Takings Clause, “by depriving affected manufacturers of trade-secret protection for their confidential information, forcing them to disclose it to the State, and ensuring that much of it is disseminated on the Internet, including to third-party payers and competitors.” The outcome of the lawsuit remains to be seen.

The paper casts doubt on the drug industry's claims that the steep costs of development justify prices. It also states several times that drug prices are “set by manufacturers fundamentally reflect their unchecked power to charge whatever the market will bear.”

The paper addresses a number of the issues manufacturers have raised to challenge pricing and transparency laws. These issues include trade secrecy and federal patent law preemption. In the matter of trade secrecy, the paper discounts the argument that most of the requirements amount to the types of trade secrets that are central to a company's business model. The authors also note that laws can be written to require disclosure of certain information to state officials but prohibit release of that information to the general public. They note, however, that limiting release of information to the public can greatly reduce the disclosures value in controlling prices.

In reference to federal patent law, the authors acknowledge that in Bio v. DC the courts found that, “the law regulating the prices of patented drugs was preempted by federal patent law.” They note that the court did leave room for price control laws that cover both patented and unpatented medications. Laws in NY and other states are mentioned as examples of how states can set prices without triggering federal patent preemption.

This method involves price restrictions via rebates and taxes instead of directly regulating prices. Rebates and taxes that are less than 100% of “excessive prices” do not strictly limit the price that manufacturers can charge the authors argue. The authors also note that generic drugs are not subject to patent law – concluding, therefore, “states can without question regulate the prices of generic drugs.”

The paper concludes with two recommendations:

States should pass laws that address unfair launch prices and price increases of patented and brand-name drugs.

  • The authors do recommend several methods for states to determine fair prices including: therapeutic value, costs of development and the use of reference prices (such as prices charged in other countries).

    States should pass legislation that mandates public release of as much information as possible about drug prices and development, manufacturing, and marketing costs on a drug-by-drug basis.

    • The authors argue for the disclosure of as much detail as possible about development, manufacturing, and marketing on a drug-by-drug basis. They argue that only with such information can there be an accurate public debate about the value of each individual drug treatment. 
    • At a minimum, the authors argue that such information should be released to all non-competitors such as regulators, payers, academic researchers and advocacy groups. 

    There is no doubt that healthcare prices are too high in the US. We pay more than other developed countries and we do not receive superior outcomes for the higher prices. As the authors of the paper note, $457 billion was spent on pharmaceuticals in 2015. So it is easy to understand why states and individuals are seeking ways to reduce spending on drugs.

    However, the authors give little attention to the possible unintended consequences of allowing government entities determine the prices companies can charge for their products. Also, little evidence is provided to support the idea that transparency will have an effect on drug prices. There was widespread outrage when Questcor raised the price of a 5ml vial of HP Acthar Gel from $40 to $28,000. A vial is currently approximate $40,000. Though Mallinckrodt, who purchased Questcor in 2014, recently agreed to pay a $100 million fine to settle charged of anti-competitive practices related to efforts to keep a competitive drug off the market.

    Given the need and the large number of bills working their way through state legislatures it is likely that states will find some ways to impose price controls on some pharmaceutical spending. It remains to be seen if this can be done in a way that  ultimately secures for citizens the benefits of life saving and life improving drugs combined with significant cost reductions.

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