In less than a month, Vermont could become the first state in the country to require drug makers to justify price hikes on their medicines, a move that may prompt others to take similar action but also spark a battle with the pharmaceutical industry.
A bill that would force companies to explain their pricing recently passed the legislature, but must still be signed by Governor Peter Shumlin. A spokesman for the governor said he is expected to take action on all recently passed bills by June 9, but that a review was not completed and so he otherwise declined to comment.
The development comes amid mounting furor over prescription drug costs. Several states have responded by proposing legislation that requires drug companies to either reveal their costs or explain their pricing. These demands reflect industry arguments that rising prices reflect rising R&D costs.
Among the states where bills have been introduced, with varying degrees of success, are California, Massachusetts, Virginia, Oregon, and North Carolina. And New York Governor Andrew Cuomo included similar language earlier this year in his annual budget proposal.
The Vermont legislation, however, appears to be the closest to becoming law.
The bill would require state officials to identify 15 drugs for which “significant health care dollars” are spent, and where list prices rose by 50 percent or more over the previous five-year period. Alternatively, they must identify list prices for 15 medicines that rose 15 percent or more over a 12-month period.
Once that process is completed, the state attorney general must contact each drug maker to obtain justification for the price increases. The companies would have to submit information concerning all factors that contributed to the price hikes, including detailed cost breakdowns. Ultimately, this information would be collected in a report and posted on a public web site. Each violation carries a $10,000 penalty.
It’s not clear, though, what else the state might do with the information. But one Vermont legislator, who was active in pushing the legislation, believes that disclosure, by itself, may eventually force the pharmaceutical industry to reconcile its pricing with public explanations about its own costs.
“Transparency is the first step in getting prices under control,” said Chris Pearson, the vice chair of the House health committee, who expects Shumlin to sign the bill. “I don’t think this bill will lower prices next year, but hopefully it will get other states to pass similar laws and pressure Congress to act.”
A spokeswoman for the Pharmaceutical Research and Manufacturers of America, the industry trade group, wrote us that the bill is misguided and “disappointing,” because it “accepts the false notion that spending on medicines is the primary driver of growth in health care costs” and “ignores savings that medicines provide to the health care system.”
If the Vermont bill does become law, drug companies can be expected to push back, according to James Matthews, a partner at the Foley & Lardner law firm, who has defended drug makers in litigation over wholesale pricing matters.
“Some companies will resist turning over this information because it looks at the most important business metrics that they don’t want to share with the world,” Matthews said.
He believes that the language in the bill is troublesome, because it is “virtually impossible” to comply with what he described as an “open-ended” requirement for companies to provide all of the relevant information and documents to justify price hikes. He added that there is also a “long history of disputes” about the precise meaning of “wholesale acquisition cost,” which is industry lingo for list prices.
“The mix of an ill-defined and ambiguous reporting obligation with the potential for large penalties for noncompliance is a toxic combination,” said Matthews.
There is one portion of the bill, however, that pleases the pharmaceutical industry. Insurers will be required to give the state information on their formularies — the list of preferred drugs for which coverage is provided — cost sharing, and various tactics used to manage the use of medicines. These include prior authorization, which is when an insurer must first approve the use of a prescription drug.
A spokeswoman for the America’s Health Insurance Plans told us that most insurers already provide this information to state regulators.
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