Following in the steps of Maryland and Nevada, California just adopted a comprehensive drug pricing transparency law that will have a significant impact on the pharmaceutical industry, particularly on drug manufacturers. On October 11, 2017, California governor Jerry Brown signed Senate Bill – 17 into state law. While one of the law’s stated purposes is to “provide notice and disclosure of information relating to the cost and pricing of prescription drugs in order to provide accountability to the state,” it is unclear exactly how and to what extent the state may use the information gained from drug manufacturers to actually effect any pricing controls. Manufacturers and pharmacy benefit managers (PBMs) should take note of the many ways this law will impact their operations.

Several New Manufacturer Obligations

The new law imposes a number of obligations that will require drug manufacturers to report increases in drug prices to purchasers, provide quarterly reports on drug increases to the state government, and notify the state government of introductions of certain new drugs to the commercial market whose initial price exceeds certain thresholds.

Manufacturers Required to Notify About Increases in Drug Prices

The law will add a new Chapter 9 to the existing Part 2 of Division 107 of the Health and Safety Code (the Code). Pursuant to the new Section 127677, a manufacturer of a drug with a wholesale acquisition cost (WAC) of more than $40 dollars for a course of therapy must provide 60 days’ advance written notice of any increase more than 16% in the WAC of the drug to drug purchasers, which includes state agencies, healthcare service plans, insurers, and PBMs. For purposes of this notification requirement, a “course of therapy” is defined as either the recommended daily dosage units of a prescription drug pursuant to its prescribing label as approved by the federal Food and Drug Administration for 30 days, or for a normal course of treatment that is less than 30 days. The notice must include the date of the scheduled price increase, the current WAC of the drug, the dollar amount of the increase, and the cumulative increases that occurred for the past two years. The notice must also include a statement regarding “whether a change or improvement in the drug necessitates the price increase” and if so, a description of the specific change or improvement.

The law is silent as to the notification process in the event a manufacturer does not possess 60 days’ advance internal knowledge of a price increase, which can be common, particularly for generic drug manufacturers. In the generic drug space, a manufacturer may increase its drug price quickly in response to one or more generic competitors increasing their drug prices to prevent purchasers from creating a “run” on cheaper drugs, which can lead to drug shortages and potentially trigger “failure to supply” penalties contained in agreements with customers.

Manufacturers Required to Report Additional Information Quarterly

Starting no earlier than January 1, 2019, manufacturers must report to California’s Office of Statewide Health Planning and Development (OSHPD) additional information on a quarterly basis relating to increases in the WAC of those drugs that fall under the notification requirement described in the above paragraph. Specifically, under new Section 127679 of the Code, manufacturers must report the following:

  • an explanation for the price increase, to include “specific financial and nonfinancial factors used to make the decision to increase” the price;
  • a schedule of WAC increases for the drug for the previous five years;
  • historical pricing information, to the extent that the drug was acquired by its current manufacturer within the previous five (5) years;
  • the patent expiration date, if applicable;
  • confirmation of whether the drug at issue is a multiple source drug, an innovator multiple source drug, a non-innovator multiple source drug, or a single source drug;
  • a description of the change or improvement in the drug, if any; and
  • the sales volume for the drug in the United States for the previous year.

OSHPD will publish this information online for consumers.

Finally, new Section 127681 of the Code will require manufacturers that introduce a new drug at a WAC that exceeds the threshold set for a specialty drug under Medicare Part D (currently $670/month for 2017) to notify OSHPD within three (3) days after the release of the drug in the commercial market. Within 30 days of providing the notification, manufacturers must also report the following information to OSHPD:

  • a description of the marketing and pricing plans used in the launch of the drug, both for the U.S and internationally;
  • the estimated volume of patients that may be prescribed the drug;
  • whether the drug was granted breakthrough therapy designation or priority review by the FDA; and
  • the date and price of acquisition if the drug was not developed by the manufacturer.

Manufacturers are permitted to limit information in reports required under new Sections 127679 and 127681 of the Code to that which is in the public domain. The law also imposes civil penalties for noncompliance. Manufacturers that fail to timely report the information required under new Sections 127679 and 127681 may be penalized with fines of $1,000 per day, making compliance with these new obligations imperative. Manufacturers should also keep an eye out for OSHPD’s implementing regulations on its reporting requirements and the implementation date for reporting WAC increases.

PBMs: Price Notification Obligations

The law also imposes obligations on PBMs. PBMs that receive the WAC increase notices described above from manufacturers must themselves identify and notify “its large contracting public and private purchasers” of the price increase. Under the law, a “large purchaser” is a purchaser that provides coverage to more than 500 individuals. The law does not specify the required content or format for these notices to large purchasers. PBMs should watch for guidance from OSHPD, which is authorized to adopt regulations and issue guidance on the new law.

Advantages to Pharmacies and Providers

Although the law purports to benefit consumers by increasing transparency on drug pricing, pharmacies and healthcare providers may end up being the real winners under this law, while payers and patients may see little benefit. Generally, pharmacies are reimbursed by payers based on a drug’s Average Wholesale Price list price, which is based on WAC. Because manufacturers will be required to provide advance notice of WAC increases, pharmacies and providers will have ample opportunity to purchase large inventories of drugs before a price increase takes effect, and then earn substantial profit by selling the drugs to payers based on reimbursement at the new WAC price. However, it remains to be seen how exactly the availability of this information will impact the behavior of patients, as the patient community takes ever increasing interest and action with respect to the economics of healthcare decisions.

California’s new drug pricing law imposes substantial reporting obligations on manufacturers along with the possibility of harsh financial penalties for noncompliance. While only a handful of states, including Maryland and Nevada, have passed similar drug pricing transparency laws, we expect that other state legislatures will be considering adopting similar legislation. We also expect to see litigation challenging the adoption and enforcement of these laws as well.