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California law may minimally impact drug pricing transparency
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California Gov. Jerry Brown approved legislation that will require pharmaceutical companies to give the state advanced notice of, as well as justify, dramatic drug price increases.
The intent of this bill is to increase transparency of drug price increases to the public, Ben R. Handel, PhD, an assistant professor of economics at the University of California, Berkeley and a faculty research fellow at the National Bureau of Economic Research, told HemOnc Today.
“This is something that most people in the health care sector are in favor of and pharmaceutical companies are heavily against,” he said.
Retail prices for 268 widely used brand name prescription drugs increased by 15.5% from 2014 to 2015, which marked the fourth straight year of double-digit average annual price increases, according to a 10-year price trends report by AARP’s Public Policy Institute.
Additionally, the average retail price for 113 common brand name drugs used to treat chronic conditions increased 188.7% from 2006 to 2015; for comparison, general inflation increased 19.4% during the same period.
“The social and political fabric is being ripped apart,” Gov. Brown said during a press conference announcing the legislation. “The inequities are growing. The rich are getting richer, the powerful are getting more powerful and a growing number of people are getting more desperate, more alienated.”
Shift toward increased regulation
The legislation would require pharmaceutical companies to provide 60 days’ notice to health plans and other purchasers of a planned price hike if the increase exceeds certain thresholds.
“Hopefully health plans, by having forewarning about drug price increases, will be better able to plan for this, and then not push the costs onto consumers; or better yet, be able to push back on the price increases,” Lisa Kroon, PharmD, chair of the department of clinical pharmacy at the University of California, San Francisco, told HemOnc Today.
“I think the timing of the notices to health plans about intended drug price increases will be important, as consumers make decisions about their choice of a health plan in the fall every year. Health plans will need information about drug cost increases in their planning for open enrollment season, so consumers have this information when making choices.”
Although there are some positive aspects about the bill, Handel does not envision it having a significant impact.
The bill places some constraints on drug manufacturers by setting a threshold — 16% over 2 years — before being required to give notice and justification, but Handel said manufacturers will likely make it a priority to come in under that threshold.
“I’m not sure if drug companies will actually care about this,” he said. “They don't like the law because it’s moving toward a more regulated environment, but drug companies could also say, ‘well we’re going to raise our prices by 40% and we’re going to justify it in some way and that’s it,’ because there’s nothing in the law actually restricting their prices. It just requires them to justify them.”
‘All eyes on California’
California could impose hassle costs on manufacturers if the state believes the justification is invalid.
“But at the end of the day, I think they’d be able to raise the price if they wanted to,” Handel said.
Both Kroon and Handel said that there is a strong possibility that California will serve as a leader and that this legislation will help propagate similar legislation and create a ripple effect across the rest of the country.
“All eyes are on California now with this law,” Kroon said. “There is a reason the drug companies lobbied so hard to not have this pass.”
However, Handel said drug manufacturers could take drastic steps if more states try to enact similar legislation.
“Say that this was a nationwide rule, then from an economics standpoint, a drug manufacturer would probably consider charging a high initial price,” he said.
For instance, a drug manufacturer could consider charging an initial price of $1,500 for a drug instead of $1,000, because the company would not have to worry about meeting certain requirements laid out in legislation.
“Drug companies are learning what the optimal price of a drug is when they go to offer a drug for the first time,” he said. “If they’re learning in an environment [that has this legislation], then they might want to shade the initial price higher, and I think that’s something people are generally missing.” – by Ryan McDonald
References:
http://www.aarp.org/content/dam/aarp/ppi/2016-12/trends-in-retail-prices-dec-2016.pdf
https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB17
https://www.gov.ca.gov/news.php?id=19995
https://www.youtube.com/watch?v=wF38WmiVIW4
Disclosures: Handel and Kroon report no relevant financial disclosures.