Price gouging bills miss the mark

By / 3.19.2019

A bill working its way through the Minnesota state legislature would prohibit drugmakers from “price gouging” for essential prescription drugs. The law seeks to end some pretty egregious behavior by bad actors in the biopharmaceutical industry.

Like any industry, the drug industry has its share of bad actors. The loathsome “pharma bro” Martin Shkreli is now serving time in prison after his company, Turing Pharmaceuticals, increased the cost of a lifesaving AIDS drug by 5,000 percent. And one pharma executive has defended prices increases as a “moral requirement to sell the product at the highest price.” These examples of price-gouging, and more, are inexcusable.

In response, states have been looking for ways to curb this type of behavior. Maryland passed a first-of-its-kind anti-price gauging law. The law sought to stop drugmakers from hiking generic drug prices in an “unconscionable” way as determined by the state. It allowed the state attorney general to sue the makers of off-patent and generic drugs for particularly egregious price increases that could not be justified by new production or distributing costs.

However, the law has since been challenged in court and a federal appeals court ruled that it violated the commerce clause of the constitution because it forced manufacturers and wholesalers to act in accordance with Maryland law outside of the state. The Supreme Court decided not to take up the appeal, so the lower ruling stands.

Now a similar law is under consideration in Minnesota. SF 1518 would authorize the state to publish a list of “essential” generic or off patent drugs, defined as drugs which treat “a life-threatening health condition or a  chronic health condition that substantially impairs an individual’s ability to engage in  activities of daily living.” In other words, almost every drug. If a manufacturer increased the drug price more than 50 percent within a year without legitimate market considerations to substantiate the price increase, it would allow the Board of Pharmacy to take disciplinary action against the manufacturers or wholesale distributors. This law may end up having the same legal trouble as the Maryland one.

While intended to protect consumers, this law would add another level of bureaucracy to the already challenging and low-margin generic drug market. The passage of various state-level drug pricing laws may be counterproductive – with lawsuits challenging the legality of each one, conflicting rules, and a patchwork system across states, smaller companies or generic producers with small margins may find it too expensive to participate in the market.

As a result, as Michael Mandel and Elliott Long argued in a paper published last year by PPI,  state price gouging and drug transparency laws may end up raising health care costs, which is not what the sponsors want at all. Indeed, state legislators are focusing too much on pharmaceutical prices and not enough on other drivers of health care costs: hospitals and providers.