Drugmakers Lose Bid to Block California Price Transparency Law

SACRAMENTO, Calif. (CN) — The pharmaceutical industry’s effort to block California’s requirement that drug companies publicly notify and explain major price increases has stalled, with a federal judge ruling the landmark transparency law does not violate the First Amendment.

Siding with the state, U.S. District Judge Morrison England Jr. squashed an industry group’s arguments that the 2017 bill infringes drugmakers’ free speech and regulates interstate commerce. Noting the Pharmaceutical Research and Manufacturers of America (PhRMA) willingly bypassed discovery and pushed for summary judgment, England found the group’s case plainly underdeveloped and unfit for market.

“There are genuine disputes of material fact as to whether providing advance notice of certain increases in a prescription drug’s wholesale acquisition cost results in either direct or extraterritorial regulation,” the judge explained while denying the group’s facial challenge. “Ultimately, PhRMA has not met its burden in showing that Senate Bill 17 violates the dormant Commerce Clause on its face.” 

Hoping to force the industry to explain sudden increases to Californians, a bipartisan group of lawmakers approved the transparency bill in 2017. Then-Governor Jerry Brown quickly signed the bill, saying the public deserved more information on medication costs with “pharmaceutical profits soaring.”

Supported by an influential coalition of California unions and health care groups, SB 17 requires drug companies to give the state and insurers at least 60 days’ notice before planned price increases of more than 16% over a two-year period. It also forces insurance companies to file yearly reports with state regulators outlining the impact of medicine costs on health care premiums.

Additional reporting requirements include annual reports to regulators by health plans and insurers with specified information related to the proportion of the premium dollar spent on prescription drugs, the year-over-year increase in net costs and member costs, the 25 most frequently prescribed medications, most costly drugs by total plan spending, and drugs with the highest year over year increase in net cost.

The law also tasks regulators with compiling the information into a consumer-friendly report showing the overall impact of drug costs on health care premiums.

Shortly after its passage, the industry responded with its lawsuit in the Eastern District of California, arguing the state was picking on drug manufacturers and ignoring the underlying reasons for spiking costs.

“The law creates bureaucracy, thwarts private market competition, and ignores the role of insurers, pharmacy benefit managers and hospitals in what patients pay for their medicines,” the group’s president said at the time.

In court, the group contended the advance-notice requirement effectively triggers a “60-day nationwide price freeze” by preventing manufacturers from increase a drug’s wholesale acquisition cost or list price. It also claimed SB 17 interferes with Medicaid reimbursement schemes enacted in other states.

“That is unconstitutional,” the group claimed in court papers. “The Commerce Clause does not permit a single state to ‘project its legislation into other states by regulating the price to be paid for drugs in those states.’”

But in a ruling issued late Monday, Judge England said the impact of the notice requirement was far from obvious. England said the wholesale acquisition cost is a list price and that the final price consumers pay is settled down the line after negotiations between manufacturers and buyers. He continued that he was swayed by the state’s experts who countered that Medicare reimbursement rates aren’t solely tied to the wholesale acquisition cost and are flexible.

“Once again, it is unclear what impact, if any, SB 17 has on Medicare reimbursement,” the George W. Bush appointee said in denying the group’s request for a permanent injunction.

England also nixed the group’s argument the law directly regulates commercial speech by forcing companies to explain whether the price increase is due to a change or improvement to the drug.

The state defended the law by saying the added transparency was needed to “ensure that such prices do not threaten access to life-saving treatments” while the group responded that the state was simply looking to publicly shame the industry.

Unconvinced, England said the state has a right to seek out more information.

“Such explanations do not on their own reach the level of public condemnation [plaintiff] suggests and are related to the state’s interest in drug pricing transparency and understanding the rising costs of prescription drugs,” England added.

Following the defeat, the group’s public affairs director hinted an appeal was likely. 

“Our position remains that SB 17 is unconstitutional. We will continue to make that case,” said Nick McGee in an email.

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