Life Science Compliance Update

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January 03, 2018

PhRMA Challenges California SB17 in Federal Court


On December 8, 2017, the Pharmaceutical Research and Manufacturers of America (PhRMA) filed a complaint in the United States District Court for the Eastern District of California, challenging SB 17, a law they allege is unconstitutional.

The law was approved this year in response to consumer outrage over a rise in drug spending and high costs for some prescription treatments, including new Hepatitis C medications and EpiPens to control allergic reactions.

SB 17 provides that if a manufacturer has increased the federally defined nationwide list price (wholesale acquisition cost, or WAC) of certain products by 16 percent or more cumulatively over the prior two to three calendar years, then that company may not increase the WAC in the current calendar year unless the company first provides registered purchasers and State purchasers with 60 days’ advance notice of the price increase. The WAC is a publicly available national price, not a price specific to California.

The law does not address the large rebates and discounts insurance companies and pharmacy benefit managers (PBMs) are receiving and that are not always passed on to patients.

In its complaint, PhRMA argues that SB 17: (1) attempts to dictate national health care policy related to drug prices in violation of the United States Constitution, (2) singles out drug manufacturers as the sole determinant of drug costs despite the significant role many other entities play in the costs patients pay, and (3) will cause market distortions such as drug stockpiling and reduced competition.

Specifically, the complaint alleges that SB 17 violates:

    1. the Commerce Clause, which prohibits California from regulating drug pricing beyond the State’s borders;
    2. the First Amendment, by compelling speech by manufacturers justifying their price changes; and
    3. the Fourteenth Amendment’s due process clause because the law is unconstitutionally vague.

“In this time of great innovation and advancement in therapies, we understand how important it is for patients to have affordable access to the medicines they need, but SB 17 is not only poorly conceived, it also misses the mark with its myopic focus on manufacturers and provisions that are in clear violation of the Constitution,” said James C. Stansel, PhRMA Executive Vice President and General Counsel. “The law creates bureaucracy, thwarts private market competition, and ignores the role of insurers, pharmacy benefit managers and hospitals in what patients pay for their medicines.”

The lawsuit is only the latest between industry and states as drug pricing remains a contentious topic around the country. States are increasingly taking the issue into their own hands. However, industry has now sued California, Maryland and Nevada for their respective attempts to take on drug prices. PhRMA is arguing in its lawsuits against both California and Nevada that their proposed laws are “unprecedented and unconstitutional.” In each case, drug makers argued that attempts to regulate drug prices at the state level would affect commerce nationally or outside of the state, making the laws unconstitutional.

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