Although there is a fierce debate among policy analysts and stakeholders in the U.S. healthcare system regarding the underlying causes of high drug pricing, state legislatures are taking an aggressive approach to controlling drug costs. Motivated by a desire to reduce spending and costs associated with “high cost” drugs, eleven states have already established a prescription drug affordability board – or “PDAB” – and no less than a dozen additional state legislatures are considering similar measures. Drug price affordability is a bipartisan issue, and state lawmakers are clearly getting out ahead of the federal government’s initiative to lower prescription drug prices under the Inflation Reduction Act of 2022. Recent weeks have seen a flurry of activity on the state level, particularly in the state of Colorado, which is likely to reverberate throughout not only the pharmaceutical industry, but also the healthcare sector in general.
Colorado Leads State Efforts to Impose Upper Payment Limits
Although the composition, operation and scope of authority of the PDAB varies from state to state, most PDABs consist of state-appointed healthcare experts and stakeholders who are empowered by state law to identify drugs for evaluation and conduct reviews designed to bring drug prices into alignment with clinical value. In other words, the PDAB is tasked with setting value-based prices for drugs. The Colorado PDAB is a five-member board that is within the Colorado Division of Insurance. It is charged with evaluating drugs for affordability, performing affordability reviews, and then determining if a drug is “unaffordable,” at which point the PDAB may set an upper payment limit for commercial insurers regulated by Colorado’s Division of Insurance (its scope of authority does not apply to federally regulated plans). At its June 7, 2024 meeting, it considered whether Johnson & Johnson’s Stelara, a biologic used for Crohn’s disease, ulcerative colitis, plaque psoriasis and psoriatic arthritis treatment, was “unaffordable” for Colorado consumers. The PDAB unanimously concluded that it was unaffordable, setting up a future vote on whether Stelara will be subject to an upper payment limit. The PDAB supported its decision with an analysis of the effectiveness of the drug, as well as the impact of cost on access to consumers, and on the healthcare system as a whole. It noted that the average cost of Stelara per Colorado patient in 2022 was $155,000.
This decision did not go unchallenged by Johnson & Johnson (J&J). Prior to the PDAB’s June 7th meeting, J&J commented on the draft Affordability Review Summary Report in a letter to the PDAB from Michael J. Valenta, J&J Vice President of Value, Access & Pricing, Strategic Customer Group. In particular, the manufacturer noted, among other issues, that the PDAB relied on out-of-date data, contained pricing data that was redacted and hence unverifiable, and failed to account for the fact that patient out of pocket cost is set by health plans as part of insurance benefit design, with little to not control or input from drug manufacturers. J&J concluded, based on its own analysis of out-of-pocket costs, that the drug is indeed affordable, setting the stage for potential litigation.
It is noteworthy that another drug on Colorado’s list, Amgen’s Enbrel, is the subject of the PDAB’s upper payment limit, and Amgen responded with a lawsuit filed in Colorado federal court. The complaint alleges that the decision to impose price controls on Enbrel is unconstitutional because it (a) conflicts with the protections offered to drug manufacturers under federal patent laws, including the Durg Price Competition and Patent Term Restoration Act of 1984 (“Hatch-Waxman Act”); (b) violates the Due Process Clause of the Fourteenth Amendment because of the lack of procedural protection necessary to guide the PDAB’s decisions; (c) violates the Supremacy Clause because the upper payment limit encompasses federal payers such as Medicare; and (d) violates the Commerce Clause because it regulates commercial transactions that occur entirely outside of the state of Colorado.
In addition to Colorado, PDABs in Maryland, Minnesota and Washington have the authority to set upper payment limits. Furthermore, while they do not have the authority to set upper payment limits, nine additional state boards can analyze cost and affordability data and make appropriate recommendations to their respective states, which will certainly influence, perhaps dispositively, state efforts to control prescription drug prices.
Drug Manufacturer Strategies and Responses
Clearly, drug manufacturers may resort to litigation against the efforts by state PDABs to impose price limits on both generic and brand drugs. Manufacturers may also seek a more active role on state PDABs, and the opportunity to proactively engage with these state boards earlier in the process. Drug makers should carefully review the criteria used by PDABs to ensure that any determination fairly and adequately takes into account quality, access and actual prices paid by consumers and the state. More broadly, drug makers should view this as an opportunity to lead a collation of parties that may suffer adversely from the imposition of price controls – including patient groups that have already expressed concern that drug price controls might inhibit the willingness of manufacturers to make significant investments in drug development. While drug manufacturers might also consider withdrawing drugs that are the targets of state PDABs (which Vertex, the manufacturer of Trikafta threatened to do), states may limit this option by imposing regulatory restrictions on the ability of manufacturers to withdraw products from the state. If manufacturers did pull targeted drugs out of certain states, they would have to consider the impact this would have on brand reputation, and on their long-term business and contractual relationships with their customers.
The Industry Wide Impact of Upper Payment Limits
Finally, the ripple effect of drug pricing controls impacts the entire healthcare ecosystem and will require expensive and administratively burdensome changes to systems that are not designed to cope with state-by-state upper payment limits. For example, providers may face reductions in reimbursements due to the imposition of upper payment limits. The upper payment limit applies only to what the final purchaser pays (which may be insurers, patients or both). As a consequence, pharmacists may be in a position where they have to pay more for a drug than they can charge the patient, and therefore may decline to stock the medication. Hospitals, which often purchase drugs through Group Purchasing Organizations on a national scale, will have to integrate the upper payment limits into their purchasing models. Upper payment limits may also have a significant impact on health plans, resulting in necessary adjustments to cost sharing and formulary tiering, as well as revisions to the plans’ claims systems to allow for single copay amounts specific to one drug. In turn, formulary changes and increased cost sharing may burden patient access to these medications. Policy makers should consider the impact of upper payment limits on Medicaid best price calculations and 340B drug pricing programs, as well as on the drug pricing structure, for example, AWP, WAC and AMP, and affected stakeholders need to take direct action to make sure this occurs.
How Frier Levitt Can Help
Navigating the often-complex regulatory scheme surrounding prescription drug pricing can be onerous. Critically, a multi-state effort to fundamentally change the pricing methodology for certain drugs will require long term planning on the part of drug makers, and other affected stakeholders in the healthcare system. Changes of the sort implicated by active state PDABs will impact not only the ability of stakeholders to comply with existing business and contractual arrangements, while continuing to deliver the care patients deserve and expect, but also may result in a challenging compliance environment and expensive litigation. Thus, with significant revisions to drug pricing methodologies on the horizon, stakeholders (e.g., manufacturers, providers, health plans, GPOs, patient advocacy groups) must get out ahead of these changes and ensure that their operations are compliant, as well as anticipate the long-term impact of the new drug pricing regime in the states in which they operate.
At Frier Levitt, we regularly engage with regulators and policy-makers to successfully influence policy, guide legislation, overcome regulatory issues and develop vital long-term relationships on a state-by-state basis. Upper payment limits may implicate, at a minimum, the availability of patient treatments, creating tension between patients and the system and adversely affecting your ability to deliver value to your patients. Accordingly, affected stakeholders may have rights to address these restrictions in litigation, starting with whether PDABs have conformed to state laws around the authorizing legislation and rulemaking procedures, and challenging the authority of the PDAB under federal law, and particularly the U.S. Constitution. For help understanding the legal requirements applicable to your company, contact Frier Levitt. Our attorneys have the experience and knowledge to help your company operate compliantly in a dynamic environment, including analyzing your existing arrangements to ensure compliance, and guiding you with up-to-date analyses on a state-by-state basis so that you may plan your business strategies accordingly.
