When Governor Jerry Brown signed California’s drug transparency law, Senate Bill 17 (SB-17), in 2017, the state took a crucial first step towards increased transparency and accountability in a landscape of skyrocketing prescription-drug prices. Not only does SB-17 require drug manufacturers and health insurers to disclose information about rising prescription-drug prices, but it also represents an important attempt to use state authority to regulate and curtail those increases.
For several years, Professor Jaime King’s outstanding scholarship has highlighted some of the most complex drivers of healthcare costs and efforts to promote transparency in healthcare pricing. In their compelling article, “California’s Drug Transparency Law: Navigating the Boundaries of State Authority on Drug Pricing,” published last year in Health Affairs, Professor King and her coauthors discuss the extent to which SB-17 can actually achieve its intended aim of lowering drug prices. They argue that although SB-17 symbolizes progress in the right direction, the bill was written to avoid legal pitfalls that other states have encountered in attempts to control drug prices, and that this may hinder its practical ability to reduce pharmaceutical spending. Ultimately, Professor King and her coauthors conclude, SB-17 must be combined with other strategies in order to truly make a difference.
To support this, Professor King and her coauthors first critically examine the legislation’s legal and regulatory aspects, discussing the specific disclosures that SB-17 requires. For example, certain health plans must submit annual reports naming their 25 most frequently prescribed and costliest drugs to the Department of Managed Health Care or the Department of Insurance. Large employer group plans must also show what portions of their premiums (and premium increases) are due to prescription-drug costs, and the departments must report aggregated information to the public. As for manufacturer disclosures, SB-17 requires drug companies to give purchasers 60-day advance notice of price increases of more than 16% for medicines that are above a specific wholesale acquisition cost (WAC) threshold, and to provide the California Office of Statewide Health Planning and Development with notice of new drugs that cost more than $670 per month. For these new high-cost drugs, SB-17 mandates that manufacturers also provide information on usage, cost-determining factors, and marketing materials to the office.
Despite the disclosure mandates, as the article demonstrates, SB-17 was crafted to avoid pitfalls of previous state regulation efforts. In turn, it may have crippled its own strength and effectiveness. For example, the Federal Employee Retirement Income Security Act (ERISA) prevents states from regulating self-insured employer plans. ERISA has affected state attempts to improve transparency in health care costs, including legislation in Vermont and Iowa. SB-17 avoids ERISA barriers by requiring disclosures from all health plans except for self-insured plans. But because around 60% of Americans with employer-sponsored insurance are covered under self-insurance, Professor King and her coauthors note that the bill could result in key information gaps for legislators. Due to the self-insurance exemption, lawmakers won’t have data for individuals who work for some of the largest employers in California.
SB-17 also attempts to bypass possible legal battles arising from trade-secret laws by limiting the required disclosures to information that is already publicly available, or by restricting state agencies from releasing confidential disclosures to the public. Consequently, the article notes, the law provides little additional transparency beyond what is already accessible in the public domain. Furthermore, it remains unclear whether certain required disclosures—including the 60-day advance notification of an impending cost increase—will be challenged as violations of trade-secret laws.
The article also discusses the law’s most immediate obstacle: a lawsuit filed by Pharmaceutical Research and Manufacturers of America (PhRMA) in the Eastern District of California alleging that SB-17 violates the Dormant Commerce Clause and the First and Fourteenth Amendments. PhRMA claims SB-17 regulates commerce that occurs beyond California’s borders, violating the Dormant Commerce Clause. Further, SB-17 allegedly infringes free speech because it requires manufacturers to justify price increases using only two potential justifications—a change or improvement in the drug—although other explanations might exist. Finally, according to PhRMA, SB-17 violates the Due Process Clause of the Fourteenth Amendment because it does not specify whether certain reporting requirements would apply retroactively. PhRMA’s lawsuit is pivotal: how courts rule in the case will help determine the extent to which states can regulate healthcare prices on the whole.
California’s drug-transparency law is certainly a step in the right direction. But as Professor King and her coauthors articulate so convincingly, considering its potential limitations and the unintended consequences that SB-17 could create (including price manipulation, price collusion, and pharmacy stockpiling), the bill may not be effective enough as a standalone measure. Their article a comprehensive analysis of and an indispensable resource on a law that plays a crucial role in defining the scope of California’s authority on drug pricing. It is an essential read for anyone interested in state regulation of healthcare, the challenges and implications of SB-17, or the work that remains to ensure that states are able to drive pharmaceutical prices down.