California Seeks to Control Drug Prices With a Pair of Legislative Solutions

The California legislature has passed SB 17, a major effort to ensure transparency in drug pricing. Sponsored by State Senator Ed Hernandez (D), the bill requires health plans to provide cost information related to prescription drugs (including generics and specialty drugs) to the Department of Managed Healthcare (DMHC) and Department of Insurance (DOI). The 2 departments will aggregate publish the information online by January 1 of each year.

The bill also requires health plans to disclose to DMHC and DOI the relationship between prescription drug costs and premium charges.

Manufacturers of drugs with wholesale acquisition costs of more than $40 would be required to provide a 60-day notice to purchasers (including pharmacy benefit managers, state agencies, and other entities) prior to raising the cost of the drug by more than 16%. The notice would include a statement regarding whether an improvement to the drug warrants the price increase.

If drug makers introduce new drugs to market that exceed the threshold set for specialty drug pricing under the Medicare Part D program, they will be required to notify the state in writing within 3 days of launching the drug. If a manufacturer does not submit the required information, it would become subject to a penalty of $1000 per day of non-compliance in a civil action.

In some respects, the bill is among the more ambitious drug pricing initiatives to pass a US state legislature; a comparable law in Nevada, for example, requires that drug makes make annual disclosure of drugs’ list prices, profits, and discounts, but is targeted only at diabetes drugs. The Nevada law sparked a lawsuit and request for a restraining order from the Pharmaceutical Research and Manufactures of America (PhRMA) and Biotechnology Innovation Organization.

Unsurprisingly, PhRMA has criticized California’s newly passed legislation as well. The group has said that SB 17 “falls short of offering patients, providers, or policymakers any meaningful improvements on medicine access, affordability, or coverage. Rather, it calls for mounds of red tape and government reports that look only at the list price of a prescription drug rather than considering actual patient spending after negotiated discounts and rebates.”

While industry criticism of efforts to curb manufacturers’ profits is to be expected, other stakeholders questioned whether the bill would be effective. Some fear that the bill’s focus on transparency alone isn’t enough to address rising drug prices. Chapin White of the RAND corporation has said that gathering data about drug prices is only one part of determining fair pricing for pharmaceuticals, and that the bill’s provisions alone are unlikely to have a significant impact on costs.

However, a second California bill, AB 265, sponsored by Assembly Member Jim Wood (D), may provide some answers that skeptics of SB 17 are seeking. The narrower bill takes aim at drug prices by prohibiting drug manufacturers from offering any discounts to an individual on a branded drug if a cheaper generic is available (the bill does not specifically address biosimilars, however).

The bill, according to Wood, is designed to restrict the practice of drug makers’ seeking full reimbursement from insurers for products that were offered at a discount to consumers, which can increase insurance costs for all enrollees. “This behavior is purely profit-driven,” Wood told The Los Angeles Times. “The drug companies want to hold on to market share for as long as they can. But somebody has to pay for it.”

SB 17 was enrolled with Governor Jerry Brown on September 19, and AB 265 was enrolled the following day. Brown is expected to make a decision on whether to sign both bills by mid-October.