Column: Battling a California law, drug industry reveals it may not always have a good reason for price hikes

Nothing brings an industry’s dirty little secrets to light as effectively as litigation, especially when the industry gives up those secrets voluntarily, in the service of making more profit than it could obtain by remaining silent.

Consider the attack by the pharmaceutical industry on California’s new drug-pricing law, which was enacted last year as Senate Bill 17 and will fully go into effect on Jan. 1. The law was aimed at adding a bit more disclosure to one corner of the healthcare system — drug prices.

Gov. Brown, in signing the measure last Oct. 10, called it “a step at bringing transparency, truth, exposure to a very important part of our lives, that is the cost of prescription drugs.�

Big Pharma struck back quickly. In a lawsuit originally filed last Dec. 8, the Pharmaceutical Research and Manufacturers of America (Phrma), the industry’s lobbying arm, made clear that the provision it’s most exercised about requires drugmakers to give 60 days’ notice to California health programs and insurers of any drug price hike over a certain threshold, to state whether the price increase is justified by any “change or improvement� in the drug and, if so, to identify that change.

Big Pharma doesn’t care for this provision at all. The lawsuit says manufacturers would be compelled to “publicly explain whether that justification applies, even when the manufacturers disagree as to the need for any justification, let alone the appropriateness of this one.�

If you’re following the dotted line, you’ll see that the industry essentially says that in some cases there may not be “any justification� for a price increase, or at least that sometimes the reason for the increase may not be obvious even to the manufacturers themselves.

The industry posed several other objections to the new law, some of them transparently fatuous. It complained that the law would restrict drug prices nationwide by forcing manufacturers to comply with California’s standard, which required advance notice and the disclosure for any price increase amounting to more than 16% over prices two years earlier. That would mean that California was sticking its nose into interstate commerce, which is unconstitutional.

Phrma said SB 17 “singles out� drugmakers even though other participants in the healthcare system also play a role in higher medical prices; but, of course, plenty of those other participants, including hospitals and doctors, have to make extensive disclosures to state and federal regulators in the course of their work. Moreover, as state officials pointed out in their response to the lawsuit, SB 17 doesn’t mandate any particular price level for any drug.

And the drug lobbyists asserted that the law requires the companies “implicitly to endorse a message� that drug price increases “are primarily or even solely responsible for patients and payers’ increased prescription drug costs.� That’s because requiring an explanation of the increases makes them seem “inherently suspicious.�

Phrma also argued that the law overlooks rationalization for price increases that have little to do with changes or improvements in the products themselves, such as “raising capital for research, recognizing the value of a drug in generating cost savings for the healthcare system and compensating investors for assuming the enormous risks� in drug development.

That’s fair as far as it goes, but the truth is that the role of all those factors is widely debated. The lawsuit even trots out one of the more dubious statistics advanced by the industry, which is that the average cost of developing a new drug is $2.6 billion. As we’ve reported in the past, the figure is based on a Tufts University survey based on internal industry figures that aren’t open to public review and therefore should be regarded as suspect.

Federal Judge Morrison England Jr. of Sacramento placed some of these claims within “the realm of conjecture.� On Aug. 28, he instructed the drugmakers to amend their lawsuit to remove Gov. Brown as a named defendant and tighten up their claims of damage. Among other things, he observed that when the lawsuit was filed, no drugmakers actually had implemented price hikes that would have been affected by the law. The plaintiffs refiled on Sept. 28, this time mentioning that several companies had imposed price increases that required them to make “justification� statements “to which they object.�

The most curious aspect of Big Pharma’s attack on SB 17 is its grousing about the mandated release of information that drug companies have to make public anyway, including the “wholesale acquisition price� of their drugs, which is the benchmark used in the law and is readily available from public sources.

“The legislation is clear that no reporting is required of any information that is not already in the public domain,� Ian Spatz of Manatt Health observed last October, just before Gov. Brown signed the measure. “It requires companies to make transparent what is already transparent.�

This undercuts Phrma’s assertion that SB 17 infringes on drugmakers’ 1st Amendment rights of free speech, though the industry’s real complaint is not that it has to make price hikes public, but has to do so 60 days in advance of imposing them and expose itself to public obloquy.

It’s proper to observe that there’s considerable doubt that SB 17 will bring down drug prices, and some speculation that it could even lead to price increases — if industry middlemen use the 60-day advance notices to stockpile drugs during the notice period and jack up prices to retailers, or if competing manufacturers use the notices to fix prices on their own products. The industry lawsuit makes these arguments itself.

But it’s probably fair to say that the drug industry wouldn’t be mounting this kind of attack on a state law if it thought the law would clear the way for higher prices. Whether SB 17 actually will lead to lower prices is open to question, but the drug companies plainly fear it will, and we should take them at their word.

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