On August 30, 2018, the United States District Court for the Eastern District of California dismissed a lawsuit brought by the Pharmaceutical Research and Manufacturers of America (PhRMA). PhRMA had initiated the lawsuit to stop California’s drug transparency law (SB 17) from taking effect, alleging that the law was unconstitutional and seeking a permanent injunction preventing its implementation.
SB 17 Refresher
SB 17, as implemented, requires pharmaceutical companies to notify health insurers and government health plans at least sixty days prior to raising prices more than sixteen percent over a two-year period of particular drugs with wholesale acquisition costs over $40. The companies must also explain the reason behind the price increase PhRMA alleged that the law would discourage better negotiations between drug companies and purchasers.
SB 17 requires health plans and insurers that report rate information through the existing large and small group rate review process to also report specified information related to prescription drug pricing to Department of Managed Health Care (DMHC) and California Department of Insurance (CDI). DHMC and CDI must then compile specified information into a consumer-friendly report that demonstrates the overall impact of drug costs on health care premiums.
The law also requires companies to break down and report on premium and drug cost information – thereby providing the state with data on the percentage of premiums and the increases in premiums that can be attributed to prescription drug costs.
The legislation was presented to Governor Jerry Brown on September 19, 2017. In California, if the governor does not sign or veto the legislation within twelve days, it automatically becomes law. Therefore, the law became law on October 1, 2017, without Governor Brown’s signature. Governor Brown did sign the legislation into law several days later.
The PhRMA Lawsuit
On December 8, 2017, PhRMA attempted to stop the law from taking effect by filing a lawsuit in federal court. In the complaint, PhRMA alleged that the legislation attempted to dictate national health care policy related to drug prices in violation of the United States Constitution and to single out drug manufacturers as the sole determinant of drug costs despite the significant role many other entities play in the costs patients pay. The lawsuit also alleged the law would cause market distortions such as drug stockpiling and reduced competition.
With respect to the unconstitutional provisions, PhRMA alleged that the law violated the Commerce Clause (prohibits California from regulating drug pricing beyond the state’s borders); the First Amendment (by requiring speech of manufacturers justifying their price changes); and the Fourteenth Amendment (violating the due process clause due to unconstitutional vagueness of the law).
United States District Judge Morrison C. England, Jr., dismissed the case on August 28, 2018, opining that the complaint fails to “allege facts sufficient to establish PhRMA’s standing to bring suit.” However, in addition to dismissing the Complaint, Judge England also granted leave for PhRMA to amend the complaint no later than 30 days later.
With the lawsuit being dismissed, unless PhRMA amends its complaint to meet Judge England’s requirements, it looks as though manufacturers and health insurers will be stuck with the excessive red tape and government reports as required under the law. This does not offer patients, providers, or policymakers any kind of improvement on access, affordability, or coverage of medicine.