Vermont becomes first state to require drug makers to justify price hikes

Despite opposition from the pharmaceutical industry, Vermont late last week became the first state in the country to require drug makers to justify price hikes for medicines.

The law is part of a wave of state legislation that comes in response to growing concern over the rising cost of prescription drugs. Around the country, lawmakers have been introducing bills in hopes of forcing drug makers to either disclose costs or explain pricing. These demands reflect industry arguments that rising prices reflect rising R&D costs.

“This bill is about accountability,” Vermont Governor Peter Shumlin said in a statement.

Against a backdrop of innovation, the pharmaceutical industry has endured blistering criticism for pricing. The most notorious examples — Valeant Pharmaceuticals and Turing Pharmaceuticals buying older drugs and jacking up prices by sky-high amounts — generated mountains of headlines and congressional scrutiny.

But the outrage has not been confined to any one type of company or treatment. Concerns over affordability have spread to generics, which are traditionally lower-cost alternatives to brand-name medicines, as well as new drugs for hard-to-treat diseases, notably hepatitis C and some forms of cancer. Prices for older medicines, such as multiple sclerosis treatment, are also climbing.

The Obama administration convened a widely publicized forum last fall to address the issue and, more recently, proposed revamping costs for the Medicare Part B program. But Washington has taken few concrete steps, which explains why more states are pursuing legislation. Just last week, for instance, the California state Senate approved a bill to mandate drug makers disclose and explain price hikes.

The Vermont law requires state officials to identify 15 drugs for which “significant health care dollars” are spent, and where wholesale acquisition costs — otherwise known as 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.

Afterwards, the state attorney general must contact each drug maker to obtain justification for price hikes. The companies would have to submit information concerning all factors that contributed to the price increases, including detailed cost breakdowns. Ultimately, this information would be collected in a report and posted on a public website. Each violation carries a $10,000 penalty.

It is worth noting that the law is worded in such a way that, even though pricing information will eventually be made available publicly, the names of specific drugs and companies will not be released. This provision is designed to appease the pharmaceutical industry, which objected to disclosing this sort of data for competitive reasons.

Whether the law will accomplish its goal remains to be seen.

There is speculation drug makers may try to avoid having explaining price hikes by simply raising prices below thresholds stipulated in any state law. “That could cause companies to set a list price much higher than originally envisioned,” John LaMattina, a former head of R&D at Pfizer and now a senior partner at PureTech Health, a venture capital firm, wrote in his blog.

Then again, such a tactic could also backfire if new drugs are introduced at prices that physicians or payers believe cannot be justified easily. After all, more tools are being developed to assess value. The Institute for Clinical and Economic Review, for instance, has created a firestorm among drug makers for taking this approach to examining new medicines.