California mandates new rules in drug cost pricing changes

The State of California has taken an unprecedented step with regard to transparency in the pricing of pharmaceuticals.

On Monday, October 9, 2017, California Governor Jerry Brown signed bill SB 17, which will mandate that drug manufacturers substantiate the need for price increases of their drugs to the public.  Specifically, the bill requires the manufacturers to notify both private and public health insurers and plans at least 60 days prior to any price hike for any drug that amounts to more than 16% over a two-year period.  Even more importantly, the drug manufacturer would be required to justify the need for a price hike by providing a public explanation.

According to Governor Brown, “Californians have a right to know why their medical costs are out of control, especially when pharmaceutical profits are soaring.”  One of the goals Brown hopes to achieve with this bill is to level the playing field between the pharmaceutical leaders and those who struggle to pay for necessary medication.

Those in support of such a bill are spread across a variety of industries, including labor, business, consumer, local government and healthcare.  Even health insurance companies have agreed to provide information and data to assist in effort toward transparency.  Under the bill, they will have to disclose the premium increases which are attributable to the costs of drugs.

Supporters believe that such regulation is a necessity given that there has been a 127% increase in U.S. prices for top brand-name drugs between 2008 and 2014.  In a world-wide comparison, other developed nations average just 41% of U.S. net drug prices for the 20 top-selling drugs. Scrutiny into these U.S. price hikes has been growing.  In 2016, Mylan Pharmaceuticals was strongly criticized and publicly condemned for increasing the price of the EpiPen by more than 500% over a 10-year period.

Not surprisingly, the drug lobby has spent significant time and money opposing SB 17.  This is likely out of fear that such a bill will become the national standard.  Specifically, they argue that Governor Brown is not keeping the best interests of the patients in mind and that the bill could result in a drug shortage.  They also assert that the bill does not allow for disclosure of the rebates and discounts that insurance companies and pharmacy benefit managers receive but fail to pass onto the patients.

Ultimately, SB 17 will not actually lower the prices of drugs in the U.S.  It will, however, shed some light on the process used by pharmaceutical companies to set drug prices.