Professor Jaime King’s article, “The Burden of Federalism: Challenges to State Attempts at Controlling Prescription Drug Costs,” coauthored with Katherine Gudiksen and published in Journal of Legal Medicine, is a clear and cogent piece that adds to her distinguished scholarship on some of the most complex challenges facing the U.S. healthcare system. In the process, Professor King and her coauthor pull together an impressive amount of information that provides a wealth of information for policy makers and future researchers.
Against the backdrop of stymied federal efforts to address skyrocketing drug prices, the article paints a comprehensive picture of the legislative landscape that states have undertaken to curtail rising drug costs. By broadening the analysis to include potential legal challenges that pharmaceutical manufacturers could bring against specific laws, the article draws attention to the importance of striking a balance between the effectiveness of a law at controlling costs and the likelihood that it prevails in court. The article groups the variety of laws recently passed by state legislatures to reduce drug costs into three categories and offers insight into their political feasibility, their effectiveness at reducing overall drug expenditures, and the likelihood of legal challenge or industry retaliation.
The first category of legislation is comprised of consumer protection statutes that target specific inefficiencies in the pharmaceutical market. These include biosimilar substitution laws that allow or require pharmacists to substitute a lower-cost interchangeable biosimilar for a brand name medication and gag-clause prohibitions that disallow provisions in pharmacy-PBM contracts that prevent pharmacists from informing customers they could pay less for a prescription if they paid the full price of the drug out-of-pocket rather than using their insurance. While these are important consumer-protection laws and may become increasingly important ways for states to control costs with little risk of legal challenge, the article argues that they are unlikely to significantly decrease overall drug expenditures due to the specificity of the market imperfections that the laws intend to affect. To date, for example, no biosimilar approved in the United States has been granted the interchangeable designation by the FDA, and a study cited in the article suggests that overpayments arising from patient copayments that exceed the reimbursement paid by insurers represent a negligible percentage of overall drug expenditures.
The second category of state legislation aims to lower drug prices by improving the functioning of the market through increased competition and transparency. These laws include PBM-regulation laws that require PBMs to be licensed in the state or disclose additional information about drug prices; pricing-transparency laws that would shed light on supra-competitive drug-pricing practices and help policymakers understand how drug prices affect insurance premiums; and laws establishing drug-importation programs from other countries. The author suggests that legislation in this category has greater potential to serve as effective interventions in lowering drug prices, especially when integrated with laws that identify specific market inefficiencies. However, the article also emphasizes the stiff resistance that lawmakers pursuing these approaches should be prepared to encounter. Federal preemption of state law by the Employee Retirement Income Security Act of 1974 (ERISA), the Dormant Commerce Clause, and trade secret laws threaten the ability of states to demand transparency from PBMs. Even after weathering routine legal challenges, states are likely to face industry retaliation in the form of cost-shifting, hiding fees, or rewriting distribution contracts.
Laws that directly regulate and prevent excessive increases in drug prices comprise the third and final grouping. While legislation in this category has the greatest potential to meaningfully reduce overall drug expenditures, the article illustrates how these laws are also the most likely to face significant legal challenge and retaliation by industry. Price-gouging prohibitions, considered by fifteen states in 2018, would prevent manufacturers from raising pharmaceutical prices by an “unconscionable” amount. While price-gouging prohibitions would prevent drug manufacturers from exploiting market inefficiencies to raise prices without justification, states fight an uphill battle in pursuing their implementation. Not long after Maryland became the first state to pass a law prohibiting price gouging for generic medications, the U.S. Court of Appeals for the Fourth Circuit held that Maryland’s law was unconstitutional and in violation of the Dormant Commerce Clause. This decision, along with the Supreme Court’s denial of certiorari for Maryland’s appeal, significantly hampered state legislation in this domain. The article suggests that the most effective way to control prescription-drug costs is through rate-setting legislation, which would effectively set a maximum price for both public and private payers within the state via a newly established drug-review commission or standard benchmarks. Similar to the price-gouging prohibitions and PBM-regulation laws, however, laws that seek to establish an all-payer cap are likely to trigger aggressive legal action from industry.
Beyond legislative action, the article highlights the various tools that states have at their disposal to control drug costs such as state public-employee plans. For example, in 2018, California’s Public Employees Retirement System (CalPERS), a state agency that manages retirement benefits for public employees, implemented a reference-pricing system for pharmaceuticals that incentivizes patients to choose lower-cost drugs by allowing them to obtain a more expensive drug only if the patient pays the difference between the cost of that care and a reference price that establishes the highest amount CalPERS will pay for a treatment. Other states have similar savings-reward programs for public employees that encourage them to shop for higher-value care by offering financial incentives for choosing providers with lower than average costs.
The article closes with four eminently sound suggestions for state legislative action to lower pharmaceutical costs: (1) states should ensure that any new policies they implement directly target the reasons for increases in drug expenditures; (2) states should consider consolidating purchasing power to mitigate the effects of industry retaliation; (3) states should elect to pursue a multifaceted policy approach that tackles the various underlying reasons for increasing drug expenditures; and (4) states should consider whether policies to address drug prices are the most effective use of their resources at all. Professor King and her coauthor’s insightful and engaging article, on the various approaches that states have taken, are taking, and should take to curb rising drug costs and the “ever-expanding legal thicket that states must traverse,” is a compelling piece that state policymakers and lawmakers would greatly benefit from reading. The article serves as a rallying cry “for states to try innovative new legislative and regulatory methods to control drug prices and combat legal challenges by the pharmaceutical industry.” It is a crucial reminder that states should concentrate their efforts and resources on the most effective and far-reaching policies.