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California SB 17 and Its Unintended Effects

Mimi Chen, PharmD
MediMedia Managed Markets

Amid heightened focus on prescription drug prices and slow progress from Congress, states are taking matters into their own hands.

California is the prime example. Gov. Jerry Brown, a Democrat, signed SB 17 into law early last month. The law requires drug makers to report price hikes that accumulate to 16% over three years at least 60 days before the increase and provide justification for it.

Consumers and patient advocates have praised SB 17 for bringing some transparency to drug pricing and working against rampant price increases. The legislation was strongly opposed by Pharmaceutical Research and Manufacturers of America and life sciences companies.

But SB 17 could have the opposite of its intended effect on drug prices and patient spending on prescription drugs.

The 16% limit might seem like a good idea. But if a company is about to hit that threshold, it might decide to go well beyond 16% and increase the price of the drug even more.

The 60-day notice may also have unintended consequences. Pharmacists and health care facilities will have an incentive to stock up on the drug at a lower price because they will be reimbursed at the higher rate later once the higher price goes into effect. It is highly doubtful that this additional profit will subsequently go to the patient.

The 60-day notice requirement could also start a cat-and-mouse game: The drug maker announces a price hike to incentivize buyers, only to increase the price much later than 60 days, adding an element of suspense and uncertainty.

Other states that are taking action on drug prices include Nevada, which has SB 539 requiring diabetes drug makers to report manufacturing and marketing costs, and Maryland, which has HB 631 to rein in generic drug price hikes. All told, drug pricing laws have been either introduced or enacted in 27 states.

2017 Prescription drug pricing laws, enacted and pending

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Due to the lack of overarching federal policy, pharma will need to be increasingly mindful of laws and regulations at the state level. The website of the National Conference of State Legislatures can help stakeholders keep tabs on state-by-state developments in drug pricing.

Developing coherent, workable policies for drug pricing policies is difficult. Patents and market exclusivity are designed to encourage innovation and give drug companies the flexibility to invest in research and development. If the pendulum swings too far in the direction of capping prices, drug makers will become more cautious and research and development may suffer.

At the same time, the rate that drug pricing is increasing in the United States is simply unsustainable.

We must take the time to fully think through laws and their unintended consequences that shape our health care landscape.

Mimi Chen, PharmD, is a clinical services manager at MediMedia Managed Markets and a part-time community pharmacist.