Pharma Group Sues to Block California’s New Drug Pricing Law

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By Greg Langlois

A new California law requiring pharmaceutical companies to provide advanced notice of price increases and justify them is unconstitutional, drugmakers said in a lawsuit filed Dec. 8.

California Senate Bill 17, which Gov. Jerry Brown (D) signed Oct. 9, requires pharmaceutical companies to notify insurers and government health plans 60 days in advance of a price increase above a certain threshold and provide a rationale for it. Both those requirements are unconstitutional, and the law should not be allowed to take effect, the Pharmaceutical Research and Manufacturers of America (PhRMA) argued in its filing.

The case is one in a series of contentious lawsuits pharmaceutical industry groups have filed this year challenging state laws seeking to rein in drug costs. PhRMA and the Biotechnology Innovation Organization sued Nevada in September seeking to block a law that requires drugmakers and pharmacy benefit managers to disclose pricing and rebate information for diabetes drugs. In October, a generic drug association failed to stop a Maryland law prohibiting generic drugmakers from making an “unconscionable increase” in the price of a generic.

PhRMA advanced an innovative attack in its California suit, said Stephane Trunk, a partner in Arent Fox LLP’s health-care practice and Bloomberg Law advisory board member: S.B. 17 violates the First Amendment. “It’s a novel argument,” Trunk told Bloomberg Law. “It’s not one we’ve seen in prior cases.”

Notice, Justification Requirements

The California law requires a drugmaker to give 60 days’ notice of a price increase if the increase will be 16 percent or more over a federally defined wholesale acquisition cost list price, assessed cumulatively over the prior two to three years. If it doesn’t provide notice, the drugmaker cannot increase its wholesale acquisition cost. This would prevent drugmakers from increasing prices anywhere during the 60-day period and violate the Constitution’s commerce clause, which courts have said bars states from regulating interstate commerce, PhRMA argued.

S.B. 17 also violates the First Amendment because it compels speech, the group argued, by requiring drugmakers to issue the notices and also by requiring them to justify a price increase as based on either a change or improvement in a drug. The law unconstitutionally forces drugmakers to make a price increase justification, allows only state-approved justifications, and ignores other common reasons for increasing prices, such as funding research and rewarding investors, it argued.

Drugmaker Focus, Responsibility Debated

PhRMA said in a statement the law’s “myopic focus on manufacturers” ignores other factors affecting drug pricing.

“The law creates bureaucracy, thwarts private market competition, and ignores the role of insurers, pharmacy benefit managers and hospitals in what patients pay for their medicines,” James C. Stansel, PhRMA executive vice president and general counsel, said.

The California Association of Health Plans said in a statement the suit was part of PhRMA’s “usual obstructionist playbook.”

"[W]e aren’t surprised that they would try and overturn this bipartisan law,” Charles Bacchi, CAHP president and chief executive officer, said. “From day one they have been unable to acknowledge their outsized role in driving health care costs skyward.”

New Policy, Legal Arguments

PhRMA’s suit was expected but some of its arguments stand out, Trunk said.

Drugmakers advanced similar commerce clause arguments in the Nevada and Maryland suits, but the First Amendment argument is unique, she said.

“That’s definitely a novel argument being driven by this advanced notice requirement that isn’t present in the Nevada or Maryland laws,” she said.

PhRMA’s assertions that the law could have anticompetitive effects and lead to stockpiling drugs also are notable, Trunk said. After giving the required notice, competitors in the same therapeutic class could raise prices at the same time, PhRMA argued in its suit. Pharmacies and others might stock up on supplies before the increase takes effect, possibly leading to shortages.

“I thought it was very interesting that they were using this constitutionality argument and then kind of supplementing with these policy arguments that I think are very valid,” Trunk said.

The office of California Gov. Jerry Brown (D) did not immediately respond to Bloomberg Law’s request for comment. The California Office of Statewide Health Planning and Development, which PhRMA also named as a defendant, declined to comment.

Arnold & Porter, Kaye Scholer LLP, and Downey Brand LLP filed PhRMA’s complaint.

The case is Pharm. Research and Mfrs. of Am. v. Brown , E.D. Cal., No. 17-cv-2573, 12/8/17 .

To contact the reporter on this story: Greg Langlois in Washington at glanglois@bloomberglaw.com

To contact the editor responsible for this story: Randy Kubetin at rkubetin@bloomberglaw.com

For More Information

The complaint is available at http://src.bna.com/uP8.

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