This article by partner John Chesley, counsel Ira Parghi and associate Elizabeth Whitkin was published by Law360 on November 16, 2017.

On Oct. 9, 2017, California Gov. Jerry Brown signed into law SB-17, a law intended to foster transparency in connection with drug pricing and its impact on insurance costs. The law imposes significant new reporting requirements on many drug manufacturers, pharmacy benefit managers, and health care service plans and health insurers operating in California, and mandates state agencies to report to the public about drug price increases and their effects on health care premiums.

Requirements to Notify Purchasers of Drug Price Increases

The new California law applies to any manufacturer of a prescription drug that is purchased by certain public and private bodies, including California state agencies, and California-regulated health care service plans, health insurers and pharmacy benefit managers. The law requires such a manufacturer to provide 60 days’ notice to those purchasers of any planned increase in the drug’s wholesale acquisition cost (WAC) of 16 percent or more over a two-year period, if the drug has a WAC of over $40. The notice must include the date and amount of the increase, and a statement as to whether the price increase is necessitated by a change or improvement in the drug.

A pharmacy benefit manager that receives such a notice from a manufacturer must, in turn, notify large contracting purchasers with coverage of 500 or more persons.

Requirement to Report Price Increase Information to OSHPD

Beginning Jan. 1, 2019, for each drug price increase that meets the criteria set forth above, a drug manufacturer must also provide the following information to the Office of Statewide Health Planning and Development (OSHPD) on a quarterly basis:

  1. A description of the specific financial and nonfinancial factors used to make the decision to increase the WAC of the drug and the decision as to the amount of the increase;
  2. If the drug has been manufactured by the company for at least five years, a schedule of WAC increases for the drug for the previous five years;
  3. If the drug was acquired by the manufacturer within the previous five years, the WAC at the time of acquisition, the WAC in the year prior to acquisition, the name of the company from which the drug was acquired, the acquisition date, the acquisition purchase price, the year the drug was introduced to market, and its WAC at that time;
  4. The patent expiration date, if applicable;
  5. Whether the drug is classified as a single-source, multiple-source, innovator multiple-source or noninnovator multiple-source drug under 42 U.S.C. § 1396r-8(k)(7)(A);
  6. A description of the change or improvement in the drug, if any, that necessitates the price increase; and
  7. The volume of U.S. sales of the drug for the previous year.

Further requirements apply to certain specialty drugs. A drug manufacturer must notify OSHPD three days after U.S. Food and Drug Administration approval of a new prescription drug to market at a WAC that exceeds the Medicare Part D specialty drug threshold (currently $670). Within 30 days of that initial notification, the manufacturer must also provide to OSHPD the following:

  1. A description of the marketing and pricing plans used in the launch of the new drug;
  2. The estimated volume of patients that may be prescribed the drug;
  3. Whether the drug was granted breakthrough therapy designation or priority review by the FDA prior to final approval; and
  4. The date and price of acquisition, if the drug was not developed by the manufacturer.

A manufacturer may limit the information that it reports to OSHPD regarding price increases and specialty drug prices to that which is publicly available. OSHPD will publish the reported information on its website, identifying the drug to which it applies.

Amanufacturer that fails to comply with these reporting requirements could face a civil penalty of $1,000 per day for every day after the reporting period for which the information is not reported. Any such penalty received by OSHPD will be paid into the state’s managed care fund.

Reporting Requirements for Health Care Service Plans and Health Insurers

Although the enhanced reporting requirements set forth in the new bill generally apply to drug manufacturers, some of them also apply to certain health care plans and insurers. Under current state law, health care service plans and health insurers that operate in California and are regulated by the California Department of Managed Health Care (DMHC) and the California Department of Insurance (CDI) are required to report to those agencies certain rate information related to their health plan contracts and health insurance policies. Under the new law, beginning Oct. 1, 2018, each such plan and insurer will also be required to report to DMHC and CDI, in connection with these rate information reports, the following drug pricing information:

  1. The plan or insurer’s 25 most frequently prescribed drugs;
  2. The plan or insurer’s 25 most costly drugs by total annual plan spending; and
  3. The 25 drugs with the highest year-over-year increases in the plan or insurer’s total annual plan spending.

Beginning Jan. 1, 2019, DMHC and CDI will compile this information into a public report that demonstrates the overall impact of drug costs on health care premiums. The data available in the report will be aggregated and will not reveal information specific to health care plans and insurers, unlike the information contained in the OSHPD report discussed above. Moreover, beyond publishing the aggregated information in the report, DMHC and CDI will otherwise keep confidential the information that is reported to them.

In addition, beginning Oct. 1, 2018, health care plans with large group health care service plans contracts will have to report annually certain information regarding the impact of drug prices on patient premiums. This information will be used as part of the large group rate review process rather than in connection with DMHC’s and CDI’s reports.

Drug Pricing Laws in Other States

Federal lawmakers have also investigated drug pricing and introduced several related bills on the subject, but thus far there has been no major federal legislative action; however, a number of states have, like California, responded legislatively to growing consumer concerns about prescription drug pricing.

For example, Vermont recently passed a law directed at the manufacturers of the drugs on which the state Medicaid program spends the most money. The law requires each such manufacturer to justify any WAC increases of 50 percent or more over the past five years, or of 15 percent or more over the past 12 months. The manufacturer must also submit supporting documentation to the state attorney general, who will in turn include the information in a report he provides to the state legislature and makes publicly available.

Nevada has passed a new pricing transparency law focused on certain drugs that it deems essential for treating diabetes. A manufacturer of such a drug must submit an annual report containing certain information about the cost of the drug. If the drug has been subject to a significant price increase within the preceding two years, the manufacturer must also submit a report discussing the reasons for the cost increase. As in California and Vermont, the state is required to compile the information and publish a report regarding the reasons for, and effect of, the pricing of these essential diabetes drugs. Additionally, the Nevada law expressly provides that any such pricing information required to be disclosed under the law does not constitute a trade secret.

The Maryland attorney general, meanwhile, is now authorized to take action against certain increases in generic drug prices. The new law prohibits a generic drug manufacturer from engaging in “price gouging” or “unconscionable increases” in the price of the drug. The state’s Medicaid program may notify the attorney general of any increase of 50 percent or more in the WAC of, or the price paid by Medicaid for, a generic drug in a one-year period, if the WAC of a full-course of treatment or 30-day supply of the drug is more than $80. The manufacturer of any such drug may be asked by the attorney general for records or documentation, as well as a statement that itemizes the components of the cost of producing the drug and identifies the circumstances leading to its price increase. If the attorney general determines that the manufacturer has violated the prohibition against price gouging, he may petition a court to restrain or enjoin the violation, to impose a civil penalty of up to $10,000 for each violation, or to require the manufacturer to reimburse consumers (including third-party payors) or make the drug available to state Medicaid participants at its previolation price.

It is clear that state legislatures are beginning to focus heavily on drug pricing transparency measures. An individual drug manufacturer may be subject to varying requirements in multiple states, and, notably, many of these requirements may affect its drug pricing activities nationally. It is important that manufacturers and other entities subject to some of these new laws, including insurers and pharmacy benefit managers, pay close attention to legislative developments in this area.