Over bitter protests from the pharmaceutical industry, California this month enacted a law that requires drug makers to explain and justify prices for some medicines.
Predictably, those who backed the effort are hailing the move as a significant victory, because they hope this will become the first step toward reining in drug prices.
To be sure, this is an admirable goal — medicine should be affordable, and the industry has done a poor job of explaining why prices are so high. Any move that forces drug makers to become more transparent is a good thing.
But while the law may nudge some companies to behave differently, it is unlikely to be a panacea.
Here’s why:
For one, the law does not actually allow the state to control pricing. Instead, the effort is really designed to “shame and blame” companies by publicly calling out those that boost list prices for their drugs more than 16 percent cumulatively over two years.
To an extent, this approach makes sense, because drug makers want to avoid scrutiny. As a result, companies “will try, at least initially, to minimize being an outlier,” Leerink analyst Geoffrey Porges wrote investors. But over time, he suggested it might backfire, as some drug makers could raise prices significantly higher than the 16 percent mark, “since if they go above the threshold, they might as well go well above it.”
In other words, if a company is going to trigger a state review, it may as well squeeze as much juice from a price hike as possible.
Second, the law has few teeth. A drug maker that fails to file required information is fined $1,000 a day. Yes, this can add up over the months, but honestly, it’s hard to imagine how this wouldn’t represent anything more than a rounding error for companies with billions in annual sales.
Third, a lot of company data will still be kept under lock, as the new law mostly collects company data that is already in the public domain. (In all fairness, though, California lawmakers wrote it that way because they wanted to avoid lawsuits from companies reluctant to cough up confidential data.)
The law could also have unintended consequences.
For instance, the law requires drug makers to provide notice at least 60 days before a planned price hike, which means that pharmacies can game the system by purchasing drugs at the cheaper price and selling them at the higher price when the hike kicks in. “Pharmacies will have enormous incentives to purchase extra inventory and earn windfall profits,” Adam Fein wrote on his DrugChannels blog.
All this is not to say the law is pointless. Despite its limitations, it should make it easier to gather disparate pieces of information in one place, which could help outsiders assemble a more complete picture of pharmaceutical pricing and costs.
“Transparency may be insufficient by itself,” said Trish Riley, the executive director of the National Academy for State Health Policy, an independent group of state policymakers that is studying drug pricing. “But it’s an essential first step to unlock the black box.”
Poll after poll has shown Americans want Congress to tackle high drug prices, so given the lack of action in D.C., it’s not surprising the states are trying to fill the void. But as the California effort shows, the states can only do so much.
Just ask Chris Pearson, a Vermont lawmaker who shepherded a similar transparency law that went into effect last year. The impact, so far, has been “very modest,” he acknowledged.
“I’ll be the first to admit that it’s hard, because states are not the best vehicle for this,” Pearson said. “If nothing else, we’re fielding a lot of questions from other states, which is inspiring.” So far, though, the only other states to act have been Nevada, which enacted a transparency law for diabetes drugs, and Maryland, which has a new law that permits penalties for price gouging on generics.
It’s worth remembering that Supreme Court Justice Louis Brandeis once noted that “… a single courageous state may, if its citizens choose, serve as a laboratory.”
But no one should be surprised if the California law — and any other such effort — is nothing more than a grand experiment.