Guest Column | June 20, 2018

Pharma's Battle To Stamp Out Transparency Laws

By Stephanie Hoops

If you won’t, we will. That is the attitude of state lawmakers who apparently are done waiting for Congress to show the way on rising drug prices. While federal officials mull what to do, two states recently took matters into their own hands: California and Nevada.

In October, California enacted Senate Bill 17, and in June, Nevada’s governor signed Senate Bill 539. Both new laws impose unprecedented transparency requirements on pharmaceutical companies and have given rise to fierce backlash from the industry. Within three months of each bill’s passage, the industry’s main lobby, the Pharmaceutical Research and Manufacturers of America, mobilized to fight. Powerhouse attorney Jeffrey Handwerker was drafted from the white-shoe, Washington, D.C., firm of Arnold & Porter. With a team of attorneys, Handwerker, who specializes in pharmaceutical pricing litigation and has worked with PhRMA in the past, filed lawsuits in California and Nevada federal district courts. In the Nevada case, PhRMA teamed up with another plaintiff, top lobby group Biotechnology Innovation Organization (BIO).

Skirmish over California’s SB 17

There are several elements to the new California law that are exasperating pharma.

  • Manufacturers must notify the state of marketing and pricing plans used in the launch of a new drug, and they must provide an estimated volume of patients that may be prescribed the drug.
  • Manufacturers must notify purchasers before increasing (by 16 percent 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.
  • Manufacturers must report to the state when introducing a prescription drug that is priced above Medicare’s specialty drug threshold.

Insurers, on the other hand, are pleased.

Bernard Tyson, chairman and CEO of Kaiser Permanente, praised the law as important to the country. “For millions of people to access coverage and care, we need pharmaceutical manufacturers to publicly explain the price of their products and to share responsibility for making health care more affordable,” Tyson said. “SB 17 is not the panacea for out-of-control drug prices, but it is the most significant and far-reaching drug pricing transparency legislation in the country.”

Officials with the California Association of Health Plans and Blue Shield of California also view the law as a prototype. Likewise, labor unions are satisfied that the law will lead the country down a new path. “SB 17 isn’t just important for California,” said Art Pulaski, secretary-treasurer of the California Labor Federation, “it’s a model for the rest of the country.”

But such comments may be the law’s undoing. They smack of disregard for the U.S. Constitution’s Commerce Clause, which 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.’”

After the law passed, the bill’s author, state Sen. Ed Hernandez, seized upon public anger and stood before a crowd to urge other states to pass similar legislation. “This is a groundbreaking law that will not only benefit millions of Californians,” he said, “but will hopefully become a model for the entire nation.”

PhRMA did not shy away from using Hernandez’s statements at that press conference to bolster its argument that the legislation violates the Commerce Clause: “The author of SB 17 proclaimed that it would ‘set national health care policy, having an impact for consumers and providers in other states.’ Because SB 17 seeks to regulate a national list price, these other states are saddled with California’s policy, even if they disagree with it.”

Squabble in Nevada

The transparency requirements in Nevada’s SB 539 apply to diabetes drugs. Manufacturers —markedly leading diabetes drugmakers Sanofi, Eli Lilly, Janssen Pharmaceuticals, Boehringer Ingelheim, Merck, Astra Zeneca, and Novo Nordisk — must file reports with the state detailing:

  • the cost to produce the drug
  • the total administrative expenditures, including marketing and advertising costs
  • the profit earned from the drug
  • the percentage of total profit for the previous calendar year attributable to each drug on the Nevada Department of Health and Human Services list
  • the total amount of financial assistance provided through patient prescription assistance programs
  • the cost associated with coupons provided to consumers and for other consumer cost assistance programs
  • the wholesale acquisition cost of the drug
  • the five-year history of any wholesale acquisition increases
  • the aggregate amounts of all pharmacy benefit manager rebates.

Just as in California, the industry is punching back with a Commerce Clause claim. The complaint filed in Nevada’s federal district court argues:

“By tying penalties to the national list price for a drug, SB 539 affects drug prices throughout the country, even for drugs bought and sold entirely outside of Nevada. The Act also eviscerates trade-secret protection not only in Nevada, but in every other state as well. Requiring disclosures, rescinding trade-secret protection for the information disclosed, and mandating its publication on the Internet destroys its confidentiality. Such disclosures cannot be undone —information cannot be undisclosed. SB 539 overrides the protections of other states that treat the information as trade secrets, including states where the affected manufacturers reside, pay taxes, and employ thousands of workers. Whatever purported local benefit SB 539 might seek for Nevada purchasers of diabetes medicines is far less substantial than the displacement of the laws of every other state in the union. Only Congress has the authority to override state trade-secret law or to impose national economic policies. Nevada cannot do so unilaterally.”

Oddly, Gov. Brian Sandoval in 2017 vetoed a similar bill (SB 265), in part because he found it problematic owing to Commerce Clause concerns. The fact that the initial bill ignored the role that PBMs play in pricing was among his other reasons for vetoing it. When lawmakers came back with SB 539, they had added a provision that mandates disclosure of rebates received and retained by PBMs for diabetes drugs. But SB 539 does not tackle the Commerce Clause issue, and Sandoval made no mention of that issue when he said he was “proud” to sign it into law.

PhRMA’s complaint took notice of that peculiarity: “SB 539 did not alleviate the (Commerce Clause) defects he identified.”

A Uniform System Of Regulation?

Among several legal arguments made in the cases filed to upend the new laws enacted in California and Nevada, the Commerce Clause issue arises in both matters and triggers a question: Considering that the pharmaceutical market is inherently national, does it require a uniform system of regulation that may exist only under federal law?

If so, it would seem near impossible for states to impose any regulations on the pharmaceutical industry, especially where laws have extraterritorial effects and negate trade-secret laws in other states that protect pricing and cost information.

In response to PhRMA’s challenge, Nevada argues that manufacturers can carefully draft reports to the state that don’t reveal trade secrets. California argues that SB 17’s “implementation of advance notice to purchasers has no extraterritorial reach; manufacturers continue to be able to sell drugs in California at whatever price they choose.”

But will those defenses fly?

Whether it is feasible to draft legislation at the state level that satisfies the mandates of the Commerce Clause remains to be seen. What is certain, however, is that the industry has in its pocket a method for challenging state initiatives that arise while Congress ruminates on drug pricing.

Stephanie Hoops is a Senior Market Analyst with Decision Resources Group. She is an authority on healthcare policy and regulatory issues.