Understanding the Complicated Patchwork of State Drug Pricing Reform Legislation

The pressure on state budgets exerted by new approvals of costly therapeutics has led many states to implement legislation aimed at regulating drug prices, but the success of these efforts is not uniform across the nation, explained Melissa Andel, MPP, principal at CommonHealth Solutions, LLC, in a session at the Academy of Managed Care Pharmacy Nexus 2020 meeting.

Andel calculated that states have regulatory authority over prescription drug spending that covers approximately 119 million Americans, about half through Medicaid and the remainder through state employee benefit plans and fully insured plans in the individual and small group commercial market. Historically, states' tools to contain drug spending by impacting either the price or the volume of drugs have included joint purchasing consortiums, use of preferred drug lists, requirement of prior authorization, and negotiation of supplemental rebates.

However, these tools are becoming less effective as states struggle with the costs of newly approved breakthrough therapies. According to Andel, the case study of new drugs for hepatitis C represents the “perfect storm” of a disease state that affects a large Medicaid population and is effectively treated by high-cost drugs with little competition. Some states initially responded by restricting access to the drugs based on clinical criteria, prompting a letter from CMS warning that they cannot unnecessarily limit access to treatment. As more competitors entered the market, states began to see more success with negotiating supplemental rebates.

Still, the case of hepatitis C drugs and states’ lack of preparedness to cover their costs illustrates that “with the continued use of accelerated pathways for FDA approval, this is likely going to be a challenge that states will face with other high-cost breakthrough therapies in the future,” Andel said.

Other state experiments to control the cost of prescription drugs have received media attention, but their impact has been somewhat limited, she continued. The subscription model is a great idea but applies under narrow circumstances. Value-based contracts are worthwhile but not a one-size-fits-all solution due to the administrative resources needed to develop and implement them.

Today, states are confronted with the reality of limited budgets that are further strained by the coronavirus disease 2019 pandemic and its associated decreases in sales tax revenues and increases in unemployment and Medicaid enrollment. Vocal constituents’ concerns around out-of-pocket costs and a lack of significant federal action on drug pricing has created a vacuum that states are trying to fill, Andel said. Their efforts fall into 4 main categories.

1. Cost sharing, coupons, and co-pay accumulators. California led the pack in enacting legislation that capped co-payments and pharmacy deductibles, and other states are getting involved in this area but limiting their action to insulin. Massachusetts and California have banned coupons for certain drugs, and 4 states have enacted legislation prohibiting the use of co-pay accumulators, with 8 more considering similar legislation. Andel sees the co-pay accumulator bans as a topic of particular interest at the state level going forward, but she questioned whether they may be associated with a downstream impact on higher health premiums in response.

2. Rate setting initiatives, via price review and budget caps. Andel explained these mechanisms as a method of targeting the “budget busters”—prices with high costs or dramatic price increases. New York has a comprehensive process with consequences for manufacturers that cannot negotiate supplemental rebates with the state for the targeted drugs. However, the magnitude of these savings has been relatively small, even in New York, which has the most specific mechanism granting authority to the state to regulate prices of specific drugs compared with other states taking action in this area, such as Maryland and Maine.

3. Transparency. The idea of price transparency has been “percolating at the state level for years,” Andel said, with the intent to “force a bit of public shaming” on manufacturers with high launch prices or drastic price increases. However, implementation has been difficult; of the 35 states with transparency laws, only 6 states had laws considered effective, according to a 2019 review. What hinders these efforts is that no law requires the disclosure of real transaction prices at each stage of the supply chain, due to concerns about confidentiality and protecting trade secrets. Andel questioned the utility of the released data and noted that many state agencies simply lack the resources to compile and publish reports on price information.

4. New initiatives on the radar. States have shown interest in legislation that uses Canadian reference pricing, but Andel was skeptical of the claim that this would steer clear of patent law and Commerce Clause conflicts and wondered whether states would even have the bandwidth to implement these efforts. Still, she anticipated seeing state legislation around this issue as early as next year.

Andel also cited California’s bill directing the state to partner with drug companies to make and distribute generic and biosimilar drugs, which demonstrates the desire to address the supply side of the equation. Although this effort is in the early stages, it merits watching, Andel said.

She also highlighted some factors that could dim the likelihood of such initiatives at the state level. If Democrats win the White House and both chambers of Congress in the 2020 election, Andel thinks the chances of action on drug pricing at the federal level would increase, thus decreasing the pressure on state legislatures to solve these issues themselves. Furthermore, the fiscal realities that states face amid the pandemic will “really hamper a lot of plans to do any type of reform at the state level.”

Still, some hope for the prospects of state drug pricing reform could be gleaned from an unlikely example: California’s recent agreement with car manufacturers that will set environmental standards for cars sold in the state higher than those required federally. This illustrates a test case in which a state can find agreement with the private sector to address a mutual problem, Andel explained.

When asked by an audience member how the challenges in enacting drug price reform vary across states, Andel replied that certain states have both the political support and the administrative resources to be able to test these innovative methods, whereas others do not. “That is going to be a problem, when you have 50 states with 50 different capabilities and 50 different levels of willingness to play in this area, and how are you going to keep up with all 50 states? If you overlay federal regulation on top of that or instead of that, what happens? Those are the challenges that states face,” Andel said.