Maryland became the first state to enact legislation that outlaws “price gouging” in the generic drug market. H.B. 631, enacted on May 27, 2017 (the “Act”), has two components: (1) a prohibition on price gouging; and (2) a mechanism for reporting, investigating, and penalizing price gouging in the state’s Medicaid program.

First, the Act prohibits a manufacturer or wholesale distributor from engaging in price gouging in the sale of an “essential off-patent or generic drug.” An essential off-patent or generic drug is any drug or drug and device combination that (1) is no longer subject to marketing exclusivity rights; (2) appears on the World Health Organization’s most recent Model List of Essential Medicines or is designated as an essential medicine by the Secretary of the Maryland Department of Health and Mental Hygiene; (3) is actively manufactured and marketed in the United States by fewer than three manufacturers; and (4) is made available for sale in Maryland. Price gouging is “an unconscionable increase in the price of a prescription drug.” Whether a given price increase is unconscionable is a function of the amount of the increase and the importance and availability of the drug. A price increase is unconscionable if it is “excessive and not justified by” the cost of producing the drug or the cost of the appropriate expansion of the availability of the drug, and if the increase results in consumers having no “meaningful choice” about whether to purchase an excessively priced drug because the drug is important to their health and there are an insufficient number of competing drugs on the market.

The Act, which will become effective on October 1, 2017, also allows the Maryland Attorney General (the “AG”) to investigate possible drug price gouging in the Medicaid program and request judicial intervention to enjoin or penalize Medicaid drug price gouging. The process is initiated by the state’s Medicaid authority, The Maryland Medical Assistance Program (the “MMAP”). The Act gives the MMAP the authority to notify the AG of any increase in the price of an essential off-patent or generic drug when (1) the price increase, by itself, or in combination with other price increases would result in an increase of 50% or more in either the wholesale acquisition cost of the drug in the previous year or the price paid by MMAP for the drug in the previous year; and (2) a full course of treatment or a 30-day supply of the maximum recommended dosage would cost more than $80 at the drug’s wholesale acquisition cost. The AG may request that a manufacturer of a product identified in a notice submitted by MMAP provide a statement (1) itemizing the components of the cost of producing the drug; (2) identifying the circumstances and timing of any increase in the cost of materials or manufacturing that impacted the price of the drug in the preceding year; (3) identifying the circumstances and timing of any spending by the manufacturer to expand access to the drug; (4) explaining any improvement in public health associated with those expenditures; and (5) providing any other information relevant to a determination of whether price gouging has occurred.  The statement must be submitted within 45 days of the AG’s request. The AG may additionally require that a wholesale distributor or manufacturer produce documents and records relevant to determining if the Act has been violated. The information provided by a manufacturer or wholesale distributor is considered confidential commercial information, unless confidentiality is waived.

If a manufacturer or wholesale distributor fails to comply with the AG’s request, the AG may seek judicial intervention by the Circuit Court to compel compliance. Upon a motion of the AG, the Circuit Court also may restrain or enjoin violations of the Act; restore to a consumer (include a third party payor) money paid as a result of price gouging; require a manufacturer that has engaged in price gouging to provide the drug to Medicaid beneficiaries at a lower price for a year; and impose a civil penalty of up to $10,000 for each violation of the Act.

The Act created some controversy, but ultimately, Governor Lawrence Hogan allowed the law to go into effect without his signature. In a letter to Maryland’s Speaker of the House, Governor Hogan notes that the bill raises constitutional concerns. Specifically, the Act may violate the dormant commerce clause by “prohibiting and penalizing” manufacturer pricing decisions that occur across state lines. In addition, the definitions of “unconscionable increase” and “excessive” may be unconstitutionally vague under the Due Process Clause of the Fourteenth Amendment. The governor states that it is “very difficult for manufacturers to know whether they are in violation of these provisions, leaving the decision entirely to the Attorney General.”

According to the National Conference of State Legislatures, 30 states considered or are still considering over 150 bills regarding pharmaceutical pricing and payments in the 2017 legislative session. Nevada’s S.B. 539 is currently awaiting Governor Brian Sandoval’s signature. If enacted, S.B. 539 would impose certain reporting obligations on manufacturers of drugs used to treat diabetes, their sales representatives marketing those drugs in Nevada, and pharmacy benefit managers (PBM) that receive rebates on diabetes drugs, as well as Nevada non-profit organizations that receive funds from drug manufacturers. Among the reports required from diabetes drug manufacturers by S.B. 539 is an explanation of certain price increases. The bill additionally would  prohibit unlisted sales representatives from marketing in Nevada, require Nevada’s Department of Health (DOH) to post certain pricing and marketing information online, and allow DOH to impose civil penalties of up to $5,000 per day that a manufacturer, non-profit organization, or PBM and $500 per day that a sales representative fails to submit a required report in certain circumstances.

We will continue to monitor enforcement of H.B. 631, the progress of H.B. 539, and other developments in proposed drug price transparency legislation.

Posted by Amy N. Westergren