Federal Judge Upholds Legality of Drug Transparency Law Requiring Manufacturers to Report Drug Price Increases to Department of Insurance

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By Hannah Ohman

On January 4, 2021, the United States District Court for the Eastern District of California filed an order upholding the legality of a 2017 California drug price transparency law in Pharmaceutical Research & Manufacturers of America (“PhRMA”) v. David, No. 2:17-cv-02573-MCE-KJN, 2021 WL 22473 (E.D. Cal. Jan. 4, 2021). This law requires manufacturers to, among other things, report price increases of 16% or more over a two-year period, and to provide a 60-day notice and an explanation for the increase to the Department of Insurance and the Department of Managed Healthcare. The Departments are then required to compile the reported information into a report for the public and legislators that demonstrates the overall impact of drug costs on health care premiums and publish the reports annually. In this lawsuit, plaintiff PhRMA alleges the 2017 law is unconstitutional and seeks a permanent injunction preventing its implementation.

On October 9, 2017, former California Governor Edmund G. Brown signed SB 17 (Hernandez)(Chapter 603, Statutes of 2017), which amends the law to require the manufacturer of a prescription drug to notify purchasers “at least 60 days before increasing the drug’s federally defined wholesale acquisition cost (“WAC”) if: (1) a course of therapy has a WAC of more than $40, and (2) the proposed increase would result in a cumulative increase of 16 percent or more over the two calendar years prior to the current year.” The notice must include a statement explaining why the drug price is increasing. The legislative intent behind the law states in part as follows:

[T]he State of California has a substantial public interest in the price and cost of prescription drugs. California is a major purchaser through the Public Employees’ Retirement System, the State Department of Health Care Services, the Department of General Services, the Department of Corrections and Rehabilitation, and other entities acting on behalf of a state purchaser…It is the intent of the Legislature in enacting this chapter to provide notice and disclosure of information relating to the cost and pricing of prescription drugs in order to provide accountability to the state for prescription drug pricing.

On December 8, 2017, plaintiff PhRMA filed suit against Robert P. David, in his official capacity as director of the California Office of Statewide Heath Planning and Development, seeking declaratory and injunctive relief. PhRMA claims the law is unconstitutional on its face, because it (1) violates the Dormant Commerce Clause of the United States Constitution by directly regulating interstate commerce through a de facto 60-day price freeze nationwide on qualifying drugs, and (2) violates the First Amendment by compelling pharmaceutical manufacturers to communicate specified information when they would otherwise remain silent.

In the order, Senior U.S. District Judge Morrison C. England, Jr. rejected PhRMA’s arguments that the law violates the Dormant Commerce Clause and First Amendment and denied the plaintiff’s motion for summary judgment. As to the Commerce Clause claim, Judge England found that the law does not regulate commerce outside California’s borders and agreed that the state has a substantial public interest in the price and cost of prescription drugs. Judge England concluded that SB 17 does not necessarily dictate the transaction price of prescription drugs in other states. In addition, PhRMA did not meet its burden in showing that SB 17 violates the Dormant Commerce Clause on its face because there are genuine disputes of material fact as to whether providing advance notice of certain increases in a prescription drug’s WAC results in either direct or extraterritorial regulation.

As to the First Amendment claim, Judge England found that the speech in question was “hardly inflammatory” and did not force manufacturers to promote a state-sponsored message. Further, PhRMA failed to show that the state does not have a sufficient interest [in drug pricing] or that its interests are unrelated to SB 17’s notice and justification requirements.

As a result of the court’s decision, SB 17 remains in effect. On January 22, 2021, PhRMA filed a motion for certification of interlocutory appeal and is awaiting a decision.

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