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Targeting Unconscionable Prescription-Drug Prices — Maryland’s Anti–Price-Gouging Law

Article · October 2, 2017

Interview with Dr. Jeremy Greene on a Maryland law that prohibits price gouging on older essential drugs. 

 

Why, in the early 21st century, are so many drugs that were cheaply available in the 20th century becoming prohibitively expensive? The past few years have seen a series of dramatic price hikes on essential off-patent medications, from albendazole to albuterol, digoxin to naloxone, Daraprim to EpiPen. In the storm of allegations and indignation that has followed each of these revelations, one explanation has remained consistent. To paraphrase Senators Susan Collins (R-ME) and Claire McCaskill (D-MO), who were the chair and the ranking member of the Senate Special Committee on Aging, firms that corner the market on off-patent medications and raise prices wildly often do so simply because they can. When the committee issued a 130-page report last December documenting the parallel strategies used by firms to engage in monopolistic price gouging on older essential drugs, the senators pointed out that these actions, though arguably unethical, have so far not been found to be illegal.1

Until now. In April, the Maryland General Assembly voted by substantial, bipartisan majorities to pass legislation prohibiting price gouging on essential off-patent or generic drugs; by the end of May, this bill had passed into law. The law authorizes Maryland’s attorney general to prosecute firms that engage in price increases in noncompetitive off-patent–drug markets that are dramatic enough to “shock the conscience” of any reasonable consumer. Manufacturers of innovative drugs will not be affected, nor will the majority of generic drug manufacturers, who collectively generated $1.7 trillion in cost savings over the past decade by participating in competitive markets to bring drug prices down. Rather, the law specifically targets companies that intentionally pursue a strategy of hiking prices on noncompetitive off-patent drugs.

To establish that a manufacturer or distributor engaged in price gouging, the attorney general will need to show that the price increases are not only unjustified but also legally unconscionable, as unconscionability is defined by doctrine in contract law. A relationship between buyer and seller is deemed unconscionable if it is based on terms so egregiously unjust and so clearly tilted toward the party with superior bargaining power that no reasonable person would freely agree to them. This standard includes cases in which the seller vastly inflates the price of goods.

A classic case is the 1965 Williams v. Walker-Thomas Furniture Co., which involved a layaway furniture plan under which the customer, after missing a single installment payment on a stereo, lost all the furniture she’d purchased from the store over the course of 5 years. The appeals court ruled that contracts may be found unconscionable if the transaction entails “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.”2

Beyond the high bar posed by unconscionability, the new Maryland law constrains the attorney general’s discretion in two additional respects. First, the attorney general may take action only if an off-patent pharmaceutical market has become noncompetitive — that is, if three or fewer manufacturers are actively participating in it. This threshold is based on data suggesting that robust price competition in off-patent pharmaceuticals does not occur until four manufacturers have entered the market.3 When the digoxin market contracted from eight manufacturers to three after a change in Food and Drug Administration inspections, for example, the price of this drug that’s been available since 1930 increased by 637% within a decade.4

Second, the new law requires the attorney general, before bringing legal action, to afford the manufacturer or distributor an opportunity to explain the basis of a price increase. Increases driven by external factors, such as price fluctuations for raw materials or active ingredients, logistic difficulties with manufacturing or distribution, or changes in international trade or tariffs, would not meet the law’s definition of unconscionability.

The law contains a provision authorizing Maryland’s Medicaid program to notify the attorney general of price increases of 50% or more in a given year for drugs that cost more than $80 per 30-day course. The attorney general may also learn about price hikes from other sources, such as hospitals, providers, and consumers. This notification provision, however, does not establish a minimum threshold for the definition of price gouging, which would be harmful because of compounded price increases and perverse incentives: if a 50% increase per year were set as a threshold for price gouging, a manufacturer could simply raise the price of a noncompetitive medicine by 49% each year. The results would be disastrous: a pill that cost $30 per month in 2017 would cost $44.70 per month after 1 year, $66.60 per month after 2 years, $99.24 per month after 3 years, and nearly $150 per month (a roughly 500% increase) after 4 years. Any percentage-increase threshold would render legitimate any price hike pegged just below that threshold, regardless of the reasons for it or how many years it recurred.

Critics of such legislation argue that without explicit numerical definitions of price gouging, such a law could have a chilling effect on generic drug competition. But generic pharmaceutical firms that are truly interested in fostering market competition — and thereby contributing to the overall cost savings of which the generics industry is rightly proud — have nothing to fear from the new law. Pricing patterns that stay within the norm of the generic drug industry — which has, on the whole, brought drug costs down — will not be deemed unconscionable. Similarly, increases in drug prices that can be explained by volatility or other reasonable justifications will not subject companies to prosecution. Arguments made by lobbying groups that this law will deter generic competition ignore the standard of unconscionability and the severity of the conduct that would be required to trigger its protective mechanisms. Rather than inhibiting competition, it will deter manufacturers who would take a page from the playbook of Amedra (which raised prices on albendazole), Turing (pyrimethamine), or Valeant (penicillamine and isoproterenol) by exploiting noncompetitive drug markets for short-term profit through unconscionable behavior that imperils public health and individual welfare.

As Maryland lawmakers debated this bill, they received inquiries from other state governments seeking to take action against unwarranted, untenable price increases for essential, off-patent medications. Though it might be preferable for federal law to address this issue uniformly throughout the United States, it is each state’s prerogative to act to protect its citizens’ health if federal law fails to do so. That was the case in the late 1970s, when pharmacies’ substitution of generic drugs for brand-name drugs was illegal in much of the country until Kentucky passed a controversial law regarding off-patent drugs. Within 8 years, similar laws had been passed in every U.S. state, and ultimately generic drug substitution became the law of the land. Yet even as a single measure, the Maryland law should deter off-patent pharmaceutical price increases nationwide.

An increasing proportion of drug expenditures derives from the astronomical costs of new “specialty drugs,” which are outside the focus of Maryland’s law. But because it authorizes only actions regarding off-patent medications with no federal marketing exclusivity, it won’t affect manufacturers that could claim they need high prices to recoup innovation costs. Perhaps, however, it will help reestablish public trust in U.S. policy’s balancing of innovation and access, by reaffirming that older drugs of proven value should be accessible and subject to competition so that they are priced as the commodities they’ve become.

It is too soon to tell what the local and national effects of the Maryland law will be. But this effort is part of a growing movement among states to address untenable increases in prescription-drug prices. Other efforts include Louisiana’s recent inquiry invoking U.S. patent and copyright law to ensure the affordability of hepatitis drugs, Nevada’s recent passage of a bill regarding insulin pricing, and other pharmaceutical price-transparency laws proposed in 16 states and Puerto Rico.5 Maryland’s law has overwhelming support from its legislators and citizens — and is an important demonstration of state governments’ role in ensuring the affordability of essential medicines.


SOURCE INFORMATION
From the Departments of Medicine and the History of Medicine, Johns Hopkins University School of Medicine (J.A.G.), and the Department of Health Policy and Management, Johns Hopkins University Bloomberg School of Public Health (W.V.P.), Baltimore.

1. Sudden price spikes in off-patent prescription drugs: the monopoly business model that harms patients, taxpayers, and the U.S. health care system. Washington, DC: Senate Special Committee on Aging, United States Senate, December 2016.
2. Korobkin R. A ‘traditional’ and ‘behavioral’ law-and-economics analysis of Williams v. Walker-Thomas Furniture Company. Univ Hawai’i Law Rev 2004;26(441):441-68.
3. Berndt ER, Mortimer R, Bhattacharjya A, Parece A, Tuttle E. Authorized generic drugs, price competition, and consumers’ welfare. Health Aff (Millwood) 2007;26:790-799. CrossRef | Web of Science | Medline
4. Alpern JD, Stauffer WM, Kesselheim AS. High-cost generic drugs — implications for patients and policymakers. N Engl J Med 2014;371:1859-1862. Free Full Text | Web of Science | Medline
5. Tribble SJ. Louisiana proposes tapping a century-old patent law to lower hepatitis C drug prices. Washington Post. May 2, 2017.

This Perspective article originally appeared in The New England Journal of Medicine.

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