Editor’s Note: In a recent article for the Health Affairs Blog, Manatt Health examines the California legislature’s recent passage of SB-17 to facilitate greater transparency in brand-name and generic drug pricing. On October 10, after the article’s publication, California Governor Jerry Brown signed SB-17 into law. Summarized below, the Health Affairs Blog post addresses whether SB-17 truly represents meaningful change—or just gives the illusion of progress. To read the full Blog post, click here.

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On September 13, 2017, the California state Senate followed the Assembly in passing SB-17 to increase the transparency around brand-name and generic drug pricing. California Senator Ed Hernandez called the legislation “one of the most transformative pieces of health legislation in the country.”

Governor Jerry Brown has now signed the bill into law. Backed by a broad coalition of consumer advocates, insurers, employers and unions, and opposed by the Pharmaceutical Research and Manufacturers of America (PhRMA) and life sciences companies, SB-17 is unlikely to have any impact on drug prices—other than, potentially, to push them higher.

A Public Policy Conundrum

The context for SB-17 is the increasingly charged political atmosphere around drug pricing. President Trump’s statement that drug companies are “getting away with murder” has added a bipartisan note to the debate.

Drug pricing represents a political conundrum. On one hand, policies such as patents and market exclusivity give drug manufacturers the power to set and raise prices, so they have the incentive to undertake risky research and development work. On the other hand, once a new drug comes out, everyone wants to pay less to address cost and access concerns.

Congress and state legislatures have failed to wrestle this conundrum to the ground. Several proposals—such as prescription drug importation—have gotten close to passage, only to fall short in the end.

Key Provisions of SB-17

SB-17 represents one of the new strategies—often pursued at the state level—to push drug companies into reducing their prices and price increases. The bill, as finally approved by the legislature and signed by Governor Brown, has several key provisions:

  1. SB-17 requires health plans to describe the components of their premium increases, presumably to blame growing costs on prescription drugs. However, as inpatient and outpatient care make up a larger portion of health spending than drugs, the reports are likely to highlight these factors as relatively stronger drivers of health insurance cost increases.
  2. Starting in 2019, SB-17 requires drug manufacturers to prepare a report to the state—which would appear quarterly on the web—for any drug that had increased its list price by at least 16% over a period of less than three years. The report must include factors such as pricing history; the reasons for the increase, including any changes to the drug; and the drug’s patent expiration date. For acquired drugs, the report has to include the acquisition prices. This transparency is virtually useless. It applies only to the wholesale acquisition or list price, which is already readily available—and is not the price that insurers and pharmacy benefit managers actually pay, because it doesn’t include rebates and other discounts. In addition, the legislation is clear that drugmakers are not required to report any information that is not already in the public domain. In essence, it requires companies to make transparent what is already transparent.
  3. SB-17 requires a similar report for any new specialty drug, which the legislation defines as any drug costing $670 a month or more. Like the other report, the specialty drug report does not require manufacturers to reveal anything that isn’t already public.
  4. Most significantly, SB-17 requires companies meeting the threshold of a product price increase of at least 16% over less than three years to provide customers with 60-days’ advance notice of the increase. Given that price increases consistently stay close to but just below the 10% mark—with increases averaging 9.8% in 2016, according to Credit Suisse—this threshold means most brand-name drug price increases would trigger advance notices. What will customers do with this information? The bill’s sponsors assert the advance notice will aid purchasers, perhaps leading to a scale-back in prices. Purchasers, however, already can push back against increases through rebate negotiations, so it’s unclear how advance notice will facilitate that process. There is the theory that manufacturers will be reluctant to increase prices and trigger a notice. In reality, however, the trigger point is so low that most increases will generate notices—and companies willing to live with the public relations consequences of price increases are unlikely to be moved by experiencing those consequences 60 days earlier.

Potential Negative Consequences 

Countering the illusory advantages of the advance price increase notices is the risk of unintended negative consequences. We can expect drug wholesalers and distributors to react to the notices by increasing their purchasing to beat the price rise. Basically, they can buy low and sell their inventory at higher prices later.

Even more troubling, the disclosures that SB-17 mandates may provide competitors with information that would allow them to coordinate tacitly to raise prices. While directly working with competitors to set prices is a violation of antitrust law, drugmakers certainly keep an eye on each other’s pricing—and the SB-17 disclosures would make competitive pricing information even more easily accessible.

In highly competitive markets, price transparency can be a force that brings prices down. In the prescription drug world, however, many classes of drugs have few competitors. Therefore, there is a greater risk that competitors will look at a dominant competitive brand’s price increase to judge how far they might go without risking a significant loss of sales. While this is already an industry dynamic, SB-17 has the potential to make such price shadowing easier.

With SB-17, competitors only have to wait for the 60-day notice to become public to see each other’s final price changes. They can then decide on their own strategies and issue their own notices. Furthermore, as there is no requirement to proceed with the noticed increases, competitors can take each other’s actions into account before finalizing their own prices—without ever speaking to each other.

Whether such behavior raises antitrust concerns is beyond the scope of this article. It is safe to anticipate, however, that manufacturers would offer the defense that the price disclosures were required by California law. It is also important to note that the price increases that SB-17 might theoretically drive would affect all U.S. purchasers.

Conclusion

SB-17 has succeeded in serving as an outlet for frustration with high and rising prescription drug prices. However, it will certainly fail as an actual remedy for the policy conundrum that drug pricing represents—and could potentially cause real harm.