Targeting Generic Drug Prices

Merle M. DeLancey Jr., James R. Staiger, and Jennifer J. Daniels

For years, states and the federal government focused their drug pricing enforcement efforts on higher priced and more expensive branded drugs. Not surprisingly, private qui tam lawyers followed on the coattails of these government enforcement efforts. The focus on branded drugs was not wrongheaded. States, the federal government, and qui tam plaintiffs were handsomely rewarded for such efforts, as in the multiple Average Wholesale Price (“AWP”) cases against brand manufacturers. However, while regulators focused on brands, they subsequently found that the pricing for generic drugs had increased unimpeded. In more recent years, the focus has shifted to generic drug price increases. For example, effective for the first time at the start of 2017, the Medicaid Program applied an inflation penalty component to Medicaid rebate payments for generic drugs. Historically, the inflation penalty applied only to branded drugs. The inflation penalty provides that when a drug’s price increases faster than the increases in the Consumer Price Index for All Urban Consumers, a manufacturer is required to pay an additional Medicaid rebate amount to state Medicaid programs.

State legislatures are now entering the generic drug pricing arena. In April 2017, as part of a global effort to curb Medicaid drug expenditures, New York imposed limits on state generic drug spending. New York now requires generic drug manufacturers to pay additional rebates for a generic drug whose State Maximum Allowability Cost (“SMAC”) price, on or after April 1, 2017, increases more than 75% compared to its SMAC at any time during the preceding 12 months. Previously, additional rebates for generic drugs were triggered for price increases greater than 300% of SMAC. Under the new law, each February 1st, the New York Department of Health is required to report to the State Legislature generic price increase information for the current year as compared with price increases for certain prior years. Such reporting signals that the New York State Legislature intends to keep an eye on generic drug price increases in the coming years.

On May 26, 2017, Maryland became the first state to prohibit “price gouging” by generic drug manufacturers. (H.B. 631, 437th Gen. Assemb., Reg. Sess. (Md. 2017)) The law prohibits generic drug manufacturers and wholesale distributors from engaging in price gouging in the sale of an “essential off-patent or generic drug.” An essential off-patent or generic drug is a prescription drug (1) with no unexpired marketing exclusivity under the Food, Drug, and Cosmetic Act (“FDCA”); (2) that either appears on the World Health Organization’s (“WHO”) model list of essential medicines or is designated essential for treating a life-threatening or other certain chronic health conditions by the Maryland Secretary of Health and Mental Hygiene; (3) is actively marketed in the United States by three or fewer manufacturers; and (4) is available for sale in Maryland. Prohibited price gouging is an “unconscionable increase” in the price of such drugs. “Unconscionable increase” means “excessive and not justified” by the manufacturing cost or costs associated with expanding access to the drug for the purpose of promoting public health, and which results in patients having “no meaningful choice” whether or not to purchase the drug because of its importance to their individual health and insufficient market competition.

A price gouging inquiry starts with the Maryland Medical Assistance Program (“MMAP”), which notifies the Maryland Attorney General (“AG”) when the Wholesale Acquisition Cost (“WAC”) of a prescription drug increases by 50% or more from the WAC within the preceding one-year period, or when the price paid by MMAP would increase by at least 50% from the WAC within the preceding one-year period and the WAC for either a 30-day supply or a full course of treatment exceeds $80.

The AG may request the applicable manufacturer to provide a statement justifying the price increase within 45 days of such request. The AG may also require a manufacturer or distributor to provide records or documents relevant to a determination of whether the price increase violates the prohibition on price gouging. If a manufacturer or distributor refuses to comply, the AG may seek a court order compelling a justification statement or document disclosure. Further, the AG may also seek to enjoin violations of the law; obtain monetary relief for consumers, based on violative price increases; require a manufacturer or distributor to sell a drug to Maryland State health plans or programs at the price at which it was available in the year prior to the violative price increase; and impose civil penalties up to $10,000 per violation.

Absent court intervention, the law becomes effective October 1, 2017. Generic manufacturer trade associations appear to be preparing legal challenges, and the Governor of Maryland has noted his legal and constitutional concerns with the law.

Heightened scrutiny of generic drug prices does not appear to be a fad. States and the federal government continue to look for ways to curb healthcare spending. In light of this increased focus on generic drug prices, generic manufacturers should implement comprehensive procedures when considering price increases. All facets of the business need to be involved. Price increases must be vetted from multiple angles, including the potential impact on Medicaid rebates and reimbursement, price control programs such as the one being implemented by Maryland, and public perception. Just the administrative costs involved in responding to a Maryland AG inquiry, or even the related bad press coverage, could make a price increase not worthwhile, or could affect the timing of a planned price increase.

Merle DeLancey is a partner in Blank Rome, LLP’s Government Contracts Practice. He routinely defends healthcare clients in connection with government healthcare program investigations and compliance with government healthcare program requirements. James Staiger is a partner in the Firm’s M&A Practice, and represents companies in the healthcare sector and life science companies engaged in the manufacture, sale, and distribution of pharmaceutical products. Partner Jennifer Daniels provides counsel on regulatory and general corporate law matters for healthcare and pharmaceutical clients.