Earlier this fall, California passed two bills—SB-17 and AB-265—targeted at prescription drug pricing controversies.  This post is about SB-17, a transparency bill aimed at soliciting and collecting information about the cost of medications, as well as the litigation that it has prompted.

SB-17 does several things, but has two main components.

First, it implements reporting requirements for certain health plans and insurers regarding the costs of covered prescription drugs.  This information is to be submitted to state agencies who will then compile a public report shedding light on the relation between these costs and health care premiums.

Second, it requires prescription drug manufacturers to provide 60-days written notice of certain price increases to specified purchasers.  This notice provision applies to prescription drugs that have a wholesale acquisition cost (WAC)—or list price—of greater than $40 where the price increases are greater than 16% “including the proposed increase and the cumulative increases that occurred within the previous two calendar years prior to the current year.”[1]  The notice must be accompanied by a statement indicating whether the price increase is required by a change or improvement in the drug.[2]

The purported motivation behind SB-17 is making prescription drug pricing more transparent.  Collecting information is phase one of what one would expect to be at least a two-phase plan.  As the legislative analysis associated with the bill states:

“Expensive drugs and steady price increases are becoming common-place with little transparency for astounding prices. This high-priced trend is a costly burden for patients, state programs, employers, and other payers, making it crucial that we understand what’s behind the exploding prices. The public and policymakers need greater insight that will allow us to identify strategies to ensure prices do not threaten access to life-saving treatments.”[3]

A lack of transparency in the biopharmaceutical pricing space would seem to be a major problem.  The biopharmaceutical supply and financing chain is complex with numerous intermediaries between a manufacturer and a patient.  Data about how this process works is either generally non-existent or not publicly accessible,[4] and “[t]his lack of transparency frequently makes it impossible to pinpoint the root causes of increasing drug prices.”  Thus, steps towards increasing transparency appear to be a good thing.

Yet, it is worthwhile to reflect on what exactly is meant by transparency as well as how SB-17 advances that goal.  When I think of increasing transparency surrounding drug pricing, for instance, I have in mind transparency in a comprehensive sense.  That is, a search for better understanding the system as a whole, both in terms of why prices are the way they are, and in parsing which actors have played what role in making those prices come to pass.

SB-17 tackles a smaller chunk of this larger project.  The notice and reporting provisions that have attracted the most attention focus on drug manufacturers, and the metric utilized is increases in WAC.  The choice of focus on manufacturers is understandable—it’s going to be a herculean task to understand how the drug pricing system works and manufacturers are predominant players.  This focus, of course, only will provide a partial picture of what is going on, but seems like a reasonable place to start if taking on the whole project is, for whatever reason, not possible.  Use of the WAC, however, is prima facie not quite so obvious.  One commentator has even called it “largely, if not completely useless.” [5]

WAC, as SB-17’s legislative analysis acknowledges, is not the price that anyone actually pays.[6]  WAC is a manufacturer’s list price and does not include any discounts or rebates.[7]  Moreover, as others have noted and the federal statute itself defining WAC articulates, WAC is information that is already available “as reported in wholesale price guides or other publications of drug or biological pricing data.”[8]  One, for instance, can access this information through databases like First Databank Inc.  Thus, the law “requires companies to make transparent what is already transparent.”[9]

So, if SB-17’s goal is to increase transparency, why use a metric that 1) is already publicly available, and 2) by definition does not reflect what is actually being paid?

Purely speculatively, I would guess that use of the WAC may be an attempt to avoid potential problems pertaining to the compelled disclosure of proprietary information.  Indeed, SB-17 explicitly states that manufacturers can limit information provided “to that which is otherwise in the public domain or publicly available.”[10]  Use of the WAC thus might be a creative, albeit imperfect proxy for getting at actual price increases—under the assumption that increases in WAC have an impact throughout the system.

Of course, focus on increases in WAC does not itself explain why there was an increase and the accompanying explanatory statement is limited to only certain information.  The advanced notice of a planned increase in WAC, however, is not information that has been previously publicly available.

The value of these provisions is presently unclear.  Perhaps even if the requirements do not assist in drug pricing transparency, the 16% cutoff might effectively encourage manufacturers to limit increases to avoid triggering the notice and reporting requirements.  It is too soon to know. There is also concern that SB-17 will have deleterious unintended consequences.  For instance, some speculate that pharmacies could receive a windfall by having advanced notice of price increases.

In any event, SB-17 is now the subject of litigation.

On December 8^th, the Pharmaceutical Research and Manufacturers of America (PhRMA) filed a complaint for declaratory and injunctive relief in the U.S. District Court for the Eastern District of California.  PhRMA alleges that SB-17 violates the Dormant Commerce Clause, the First Amendment, and because of vagueness the Fourteenth Amendment’s Due Process Clause.

The Dormant Commerce Clause and Due Process claims are interesting and important to consider.  These types of claims, however, have been seen in this context before—for instance, in the litigation challenging Maryland’s generic drug price gouging law (though this isn’t a transparency law).  The First Amendment claim, however, is unique to SB-17.  I won’t comment on the merits of these legal claims here, but this is certainly going to be an interesting case to watch.  I’m looking forward to seeing California’s response due the end of January.

Rebecca E. Wolitz is a Fellow in the Center for Law and the Biosciences

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[1] § 127677(a).

[2] § 127677(b)(2).

[3] California Senate Committee on Health, Bill Analysis 4 (April 19, 2017), http://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201720180SB17

[4] Making Medicines Affordable: A National Imperative, Engineering National Academies of Sciences 16 (2017), https://www.nap.edu/catalog/24946/making-medicines-affordable-a-national-imperative

[5] Ian Spatz, California Takes on Drug Pricing: Real Progress or Illusion?, Health Affairs Blog (Oct. 2, 2017), https://www.healthaffairs.org/do/10.1377/hblog20171002.062240/full/

[6] California Senate Committee on Health, Bill Analysis 6 (April 19, 2017), http://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201720180SB17 (“The WAC price of a drug on the market, as originally announced by the company is also rarely the price paid by a payer. The actual price paid by any one payer is proprietary information, complicating discussions of value and cost to consumers.”).

[7] 42 U.S.C. § 1395w-3a(c)(6)(B).

[8] Id.

[9] Spatz, supra n.5.

[10] § 127679 (b).