Federal Gov't Can Learn From State Drug Pricing Efforts

By Margaux Hall, Scott Falin and Dustin Schaefer
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Law360 (March 23, 2021, 6:26 PM EDT) --
Margaux Hall
Margaux Hall
Scott Falin
Scott Falin
Dustin Schaefer
Dustin Schaefer
The federal government's interest in regulating prescription drug pricing has not dissipated, even as the government looks to the biopharmaceutical industry to expeditiously innovate and bring to market and distribute COVID-19 vaccines and therapeutics.

Indeed, drug pricing featured prominently in President Joe Biden's campaign[1] and continues to garner significant interest on both sides of the aisle.

Thus far, with the exception of the lifting of the recent Medicaid drug rebate cap under the COVID-19 relief bill,[2] there has been limited legal action relating to drug pricing under the Biden administration.

Yet, this will inevitably change in the coming months, given the strong, bipartisan interest in drug pricing. We do not yet know which specific drug pricing legislative or regulatory proposals Congress or federal agencies will put forward. Several concepts have drawn broad-based support and are more likely contenders. These include:

  • Empowering the government to directly negotiate for drug prices;

  • Penalizing manufacturers for larger price increases; and

  • Mandating reporting to increase general transparency regarding drug pricing.

According to the U.S. Supreme Court in New State Ice Co. v. Liebmann in 1932, states have already served as "laboratories of democracy,"[3] pursuing their own legislative approaches in each of these areas — with lessons learned and mixed results. This article explores those state legislative efforts and considers how the Biden administration and Congress might learn from states' experiences as the federal government crafts its own drug pricing policy for the next four years.

Direct Government Negotiation of Drug Prices

The Democratic Party has demonstrated keen interest in having the federal government directly negotiate drug prices, as has Biden.[4] Last Congress, Democrats in the U.S. House of Representatives passed a bill, H.R. 3, which would have required the secretary of the U.S. Department of Health and Human Services to directly negotiate drug prices with manufacturers for up to 250 drugs per year, with emphasis on those drugs that have resulted in the greatest net spending under the Medicare Part D and Medicare Advantage programs.[5]

H.R. 3 died in the then-Republican-controlled U.S. Senate. However, with Democrats now holding a narrow majority in both chambers of Congress, there is increased chatter about whether Democrats will pursue a similar measure in the new Congress, especially if they can achieve some level of bipartisan support in order to overcome a filibuster.

Most recently, Sens. Tim Kaine, D-Va., and Michael Bennet, D-Colo., proposed direct price negotiation as part of their larger health care reform bill,[6] and the Biden campaign expressed support for the concept.[7]

States similarly have pursued measures to use their leverage and purchasing power to attempt to negotiate or secure particular drug prices, with mixed results. States' efforts to directly regulate drug prices have been subject to legal challenge.

For instance, in 2017, Maryland enacted a law to prohibit unconscionable price increases for essential off-patent or generic drugs. The U.S. Court of Appeals for the Fourth Circuit struck down the law as a violation of the dormant commerce clause, reasoning that it effectively regulated the prices charged in upstream transactions that occurred outside of Maryland, thus imposing a significant burden on interstate commerce.[8]

Since then, states, including Maryland, have sought to regulate prices in less direct ways. For instance, there is growing momentum among state lawmakers to create drug affordability or drug price review boards to establish target payment limits for drugs.

These boards aim to limit the amounts that state-regulated purchasers may pay for certain therapies, rather than the amount that manufacturers may charge for therapies. To date, at least eight states have created drug affordability boards, but these boards' powers are largely limited to providing nonbinding recommendations.[9]

This idea continues to generate interest among state lawmakers — in 2020, bills to establish such boards were introduced in approximately 20 states.[10] This concept has not yet been tested in the courts, although, if and when a state board seeks to exercise its rate-setting powers, litigation will almost certainly follow.

Another state approach less likely to trigger litigation — and that has had a reasonable amount of success — has been incentivizing manufacturers to offer discounts or rebates by offering preferential access to therapies.

States have pursued this approach in different manners — often (like in the federal policy proposals) by focusing on drugs that result in the greatest costs to state budgets.

For instance, the Louisiana Department of Health and Department of Public Safety and Corrections entered into a contract with Asegua Therapeutics LLC (a subsidiary of Gilead Sciences Inc.) to offer access to Asegua's direct-acting antiviral medication for hepatitis C for a fixed subscription fee.[11]

State Medicaid agencies also have entered into voluntary supplemental rebates agreements with manufacturers to obtain additional rebates on Medicaid utilization of drugs — typically in exchange for the Medicaid agencies offering preferential access to the therapies.[12]

Because federal law requires states to cover virtually all drugs of manufacturers participating in the Medicaid Drug Rebate Program, states have limited leverage to demand supplemental rebates. Yet, states' available leverage can still be impactful, with the promise of fewer utilization controls being one of states' most powerful negotiating tools.

In recent years, several states have sought to further pressure biopharma manufacturers to enter into supplemental rebates agreements by imposing mandatory, onerous reporting requirements — or even the prospect of public hearing processes — on manufacturers that do not agree to the desired supplemental rebate targets.[13]

It is not clear whether such tools are effective at driving greater rebates, particularly given the fact that, under federal law, states must continue to cover the relevant therapies.

On the whole, it is worth noting that these state-driven approaches have focused on competitive, free-market contracting for particular, higher-cost therapies — not direct regulation of drug pricing. And they have been effective in reducing states' drug spend.

For instance, in 2018, federal rebates and supplemental rebates reduced overall prescription drug spending in the Medicaid program by almost 60%.[14] While the federal government likely has greater legal authority, as compared to states, to directly regulate drug prices, states' experiences with indirect regulation may point to alternative, or at a minimum complementary, approaches.

Penalties for Significant Price Increases

The federal government also has examined drug pricing proposals that would penalize pharmaceutical manufacturers for price increases above a certain percentage — often, the rate of inflation. The most recent COVID-19 relief legislation, which in 2024 sunsets the Medicaid Drug Rebate Program cap on rebates, will further penalize price hikes above inflation.[15]

The concept of inflation-based penalties has generated interest in Medicare program discussions as well. In the previous Congress, H.R. 3 and a bipartisan bill introduced by Sen. Chuck Grassley, R-Iowa, would have required manufacturers to pay a rebate to the federal government if prices for their Medicare Part B- or Part D-covered drugs increased faster than the rate of inflation.[16]

Biden's campaign endorsed the idea of capping price increases for certain drugs at the inflation rate.[17] In the current Congress, there may be renewed interest in both chambers to get inflationary adjustments to the president's desk.

Here too there are lessons to be learned from states.

The Republican governor of Massachusetts, Charlie Baker, proposed in his financial year 2022 budget an excise tax that would apply to drugs with prices that rise faster than the rate of inflation.[18] As it stands, no state has enacted such a measure, and any such effort at a state price control likely would be challenged in court, at the very least on similar dormant commerce clause grounds as were raised in reaction to Maryland's generics legislation.

Yet, several states have pursued other legislative approaches focused on therapies with more sizeable price increases. For instance, states including California, Oregon and Washington[19] require manufacturers to provide advance notification of price increases above a particular threshold and/or to report certain pricing-related information when they take price increases above the relevant thresholds.

While such approaches are conceptually distinct from those that would impose direct fines on manufacturers for taking certain price increases, states have reported some successes with such legislation.

An Oregon state agency reported that manufacturers submitted 70% fewer price increase reports during two successive years that the drug price reporting legislation was in place.[20]

The agency speculated that the law might have had a mitigating effect on drug price increases, although it also noted that "[o]ne explanation suggested by the data is that manufacturers are spreading price increases more widely across their portfolio of drugs to avoid triggering transparency requirements."[21]

Drug Price Transparency Reporting

Historically, the federal government has demonstrated interest in drug price transparency legislation and similar regulatory proposals. For example, HHS attempted to require manufacturers to disclose list prices in television advertisements,[22] although a federal court blocked the agency's efforts.[23]

A rule finalized under the Trump administration mandates public disclosure of negotiated prices for drugs in the commercial insurance market, beginning in 2022.[24]

While that rule is subject to the Biden administration's blanket regulatory freeze,[25] to the extent that rule — or other drug price transparency rules or legislative proposals — ultimately are implemented, states can share their experience around drug price transparency initiatives.

Indeed, price transparency laws have been popular among states. Nearly 20 states have enacted some form of drug pricing transparency legislation. These laws require manufacturers to report various information about drugs and often are triggered by price increases, or the launch of new drugs with list prices, above a defined threshold.

States have had different levels of success in using the collected information in a meaningful manner. It is unclear what, if anything, some states do with the often voluminous reported information.

Other states have sought to aggregate and publicly share collected information in a manner that is more meaningful and useful to the public. However, they have reported significant administrative expenses in doing so.

Oregon reported that the implementation of its price reporting statute has been costlier than expected, in part due to: (1) information technology costs, including enhanced security measures to protect manufacturer-reported information that is subject to trade secret protections; (2) legal costs associated with adjudicating manufacturer trade secret assertions; and (3) the costs of "procuring access to a database with market-wide information about drug prices to enable evaluation of manufacturer compliance with reporting requirements."[26]

Federal policymakers should take heed that transparency initiatives may be administratively burdensome, especially if such initiatives collect nonpublicly available information subject to trade secret protections, and especially if the end goal is to produce information that is digestible, actionable and helpful to patients.


Although federal drug pricing reforms have taken a back seat to the pandemic in Biden's first 100 days, interest in the topic remains strong among federal policymakers, state governments and voters.

As discussions in Washington turn to drug pricing, as they inevitably will, the Biden administration and Congress should recognize that states have already explored many drug pricing policy concepts, with successes and failures from which the federal government can learn.

One final lesson from the states that merits consideration is that of collaboration. While some states have adopted a more punitive approach to enforcing drug price reporting requirements,[27] others have opted to conduct outreach to, and collaborate with, manufacturers around reporting — with success.[28]

At a time when the pressures of COVID-19 have reinforced the need for unprecedented cooperation and partnerships, it merits consideration whether there are collaborative approaches — involving government and biopharma — that can meaningfully address concerns around drug pricing.

Margaux Hall is a partner, and Scott Falin and Dustin Schaefer are associates, at Ropes & Gray LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] joebiden.com/healthcare, Section III: Stand Up to Abuse of Power by Prescription Drug Corporations.

[2] American Rescue Plan Act of 2021 Public L. No. 117-2S. § 9816, 115 Stat. 2230 (2021).

[3] New State Ice Co. v. Liebmann , 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting).

[4] joebiden.com/healthcare, Section III: Stand Up to Abuse of Power by Prescription Drug Corporations.

[5] Elijah E. Cummings Lower Drug Costs Now Act, H.R. 3, 116th Cong. (2019). See also Tom Bulleit and Scott Falin, Drug Pricing: What Happened in 2019, What to Watch in 2020, Law 360, (Jan. 14, 2020), https://www.law360.com/articles/1232594/drug-pricing-what-happened-in-2019-what-to-watch-in-2020.

[6] Bennet, Kaine Announce Introduction of Medicare-X Choice Act to Achieve Universal Health Care, (Feb. 17, 2021), https://www.bennet.senate.gov/public/index.cfm/2021/2/bennet-kaine-announce-introduction-of-medicare-x-choice-act-to-achieve-universal-health-care.

[7] Biden-Sanders Unity Task Force Recommendations, Combating the Climate Crisis and Pursuing Environmental Justice, Bringing Down Drug Prices and Taking on the Pharmaceutical Industry, https://joebiden.com/wp-content/uploads/2020/08/UNITY-TASK-FORCE-RECOMMENDATIONS.pdf#page=32.

[8] Assoc. for Accessible Medicines v. Frosh , No. 17-2166 (4th Cir. 2018).

[9] Indiana, Maine, Maryland, Massachusetts, New Hampshire, New York, Nevada and Ohio have enacted legislation to create drug affordability review boards that may evaluate the cost of drugs, make recommendations on state spending targets, make recommendations related to SRAs, or make recommendations regarding Medicaid formulary changes.

[10] NASHP, 2021 State Legislative Action to Lower Pharmaceutical Costs, https://www.nashp.org/rx-legislative-tracker/.

[11] Louisiana Dept. of Health Press Release: Gilead's Asegua Therapeutics selected to partner with health department for hepatitis C drug subscription model, (March 26, 2021), https://ldh.la.gov/index.cfm/newsroom/detail/5097.

[12] 46 states and DC have entered into at least one SRA. See Medicaid Pharmacy Supplemental Rebate Agreement (December 2020), https://www.medicaid.gov/medicaid-chip-program-information/by-topics/prescription-drugs/downloads/xxxsupplemental-rebates-chart-current-qtr.pdf.

[13] See N.Y. Pub. Health Law §§280(5)(c), (6)(a), (7)(a); Mass. General Laws ch.118E § 12A; Ohio Rev. Code Ann. § 5164.7515.

[14] Medicaid and CHIP Payment and Access Commission, "MACStats: Medicaid and CHIP Data Book" (Washington: U.S. Department of Health and Human Services, 2019),https://www.macpac.gov/wp-content/uploads/2020/01/MACStats-Medicaid-and-CHIP-Data-Book-December-2019.pdf.

[15] American Rescue Plan Act of 2021 Public L. No. 117-2S. § 9816, 115 Stat. 2230 (2021).

[16] S.2543 Prescription Drug Pricing Reduction Act of 2019, https://www.congress.gov/bill/116th-congress/senate-bill/2543.

[17] Bringing Down Drug Prices and Taking on the Pharmaceutical Industry: https://joebiden.com/wp-content/uploads/2020/08/UNITY-TASK-FORCE-RECOMMENDATIONS.pdf#page=32.

[18] See H.B.1, An act making appropriations for Fiscal Year 2022 for the maintenance of the departments, boards, commissions, institutions, and certain activities of the Commonwealth, for interest, sinking fund, and serial bond requirements, and for certain permanent improvements, https://budget.digital.mass.gov/govbudget/fy22/.

[19] Cal. Health & Safety Code §§ 127675 et. seq. (2017); Or. Rev. Stat. Ann. § 646A.683 et. seq. (2019); Wash. Rev. Code Ann. § 43.71C.010 et. seq. (2019).

[20] Prescription Drug Price Transparency Results and Recommendations – 2020 As Required by House Bill 4005 (2018), page 7.

[21] See id. at pages 31, 48.

[22] See CMS-4187-F, Medicare and Medicaid Programs; Regulation to Require Drug Pricing Transparency, (April 26, 2019), https://www.hhs.gov/sites/default/files/cms-4187-f.pdf.

[23] Merck & Co., Inc. v. United States Department of Health and Human Services , Case No. 19-cv-01738 (APM), https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2019cv1738-32.

[24] 85 Fed. Reg. 72158 (Nov. 12, 2020), https://www.govinfo.gov/content/pkg/FR-2020-11-12/pdf/2020-24591.pdf.

[25] Memorandum for the Heads of Executive Departments and Agencies: Regulatory Freeze Pending Review, 86 Fed Reg. 7424 (Jan. 28, 2021), https://www.govinfo.gov/content/pkg/FR-2021-01-28/pdf/2021-01868.pdf.

[26] Prescription Drug Price Transparency Results and Recommendations – 2020 As Required by House Bill 4005 (2018) at page 43.

[27] Nevada's Department of Health and Human Services, for example, reportedly levied fines of more than $17 million on 21 diabetes drug manufacturers for either non-reporting or late reporting. See Thomas Sullivan, Nevada Fines Drug Manufacturers for Failure to Comply with Drug Transparency Law, Policy & Medicine (October 7, 2019), https://www.policymed.com/2019/10/nevada-fines-drug-manufacturers-for-failure-to-comply-with-drug-transparency-law.html. California reportedly collected nearly $11 million in 2020 for failures to comply with reporting obligations. See Brenna Goth and Jacquie Lee, State Drug-Pricing Laws Hampered by Resistance, Lack of Teeth, Bloomberg (February 3, 2020), https://news.bloomberglaw.com/health-law-and-business/state-drug-pricing-laws-hampered-by-resistance-lack-of-teeth.

[28] Prescription Drug Price Transparency Results and Recommendations – 2020 As Required by House Bill 4005 (2018) at page 42.

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