Price Control Legislation for Generic Drugs – A Delaware Case Study
Loyola University Chicago School of Law, JD 2023
Earlier, I wrote here about how American drug prices are approximately 256 to 344 percent higher than prices in OCED member markets. Federal legislators confronting patent extensions, pay-for-delay agreements, and other tools which contribute to the inelasticity of pharmaceutical prices should look to state legislation on price controls for guidance. Delaware has introduced legislation enabling regulators to assess by what percent drug prices are inflated above a fair market value.
To address the lack of clear information on drug prices, state Rep. Kevin Ryan introduced HB 6224 “An Act Promoting Drug Price Transparency” to the Delaware legislature which requires manufacturers to report price increases when the year-over-year increase exceeds ten percent or when the price increase exceeds sixteen percent over a two year term. Unfortunately, HB 6224 did not receive the votes necessary and will need to be reintroduced. A second piece of state legislation introduced by State Rep. Andria Bennett, HB 62, aims to go beyond notification of price increases and proposes price control requirements in Delaware. HB 62, hereafter “the Act” is intended to “prevent excessive and unconscionable prices for prescription drugs” by prohibiting price increases that are not justified by market conditions.
Market adjusted price controls
Connecting drug prices to market conditions is a sensible approach to introducing price controls on inelastic drugs, as market conditions are (1) not dictated by pharmaceutical companies, lessening the likelihood of fraud and abuse; (2) unable to be fully controlled by the government, reducing concerns of nationalization of private companies and subsequent federalism issues; (3) a rationale means for gauging whether the average American can afford their prescription. Additionally, the Act does not prohibit price increases which are necessary for manufacturers respond to changes in materials costs, it prohibits only those price increases which are not justified by market forces. The Act provides “it is a violation . . . for a manufacturer to impose an excessive price increase, whether directly through a wholesale distributor, pharmacy . . . on the sale of any Generic or Off-Patent Drug” in Delaware.
First, the Act provides that price increases will be adjusted for inflation, which means pharmaceutical companies are granted the ability to respond to inflation by raising prices in step with inflation, but no further. A price increase is considered excessive when, adjusted for inflation, the increase is greater than fifteen percent of the previous year’s wholesale acquisition cost (WAC). WAC is an estimate of what price a wholesaler or other price taker must pay, excepting discounts, rebates, or other promotional reductions, and is codified at 42 U.S.C. 1395w-3a. Likely in response to debate on whether current inflation is transitory, the Act also provides that excessive prices can be measured across the proceeding three year period where a price increase greater than forty percent of the WAC across the three year term is held to be excessive. Since WAC comparison and inflation can feel attenuated from the core issue of whether prescriptions are affordable to the average consumer, the Act also sets a simple price term criterion for “excessive” price. If a price increase, adjusted for inflation, “exceeds $30 for: a) a 30-day supply of the Generic of Off-Patent Drug, or b) a course of treatment using the Generic or Off-Patent Drug lasting less than 30 days” the price increase is excessive and therefore prohibited.
Enforcement of the Act
The Act provides that, upon notice of a violation, the Attorney General (AG) may enjoin a manufacturer from making effective a proposed price increase. For those price increases which have gone into effect, the AG may require the manufacturer to submit information on revenue generated by excessive pricing. Under the Act, manufacturers are responsible for “restoring to any consumer . . . any money acquired as a result of a price increase” which was excessive or remitting revenue to the state if that is not possible. Further, the Act sets out that “every individual transaction” where the price charged constitutes a violation, with a civil money penalty of “up to $10,000 per day for each violation.”
, however it should serve as a model for Congressional action on prescription drug pricing. Congress has superior fact-gathering resources compared to individual states, as a matter of budget and staffing, to compile the relevant data on whether a company has set prices of an inelastic product above market price. Federal legislation would prevent a “patchwork” of regulations from developing on a state-by-state basis, benefiting both companies and consumers. Uniform regulation based on CPI data and inflation presents a fair and predictable model which considers rising materials costs on the side of the manufacturer and uses real wages rather than nominal-wages to gauge affordability on the part of consumers. Congressional action must consider the needs of constituents and industry members to create legislation favorable to all stakeholders.