In the absence of federal action, states have attempted to rein in high pharmaceutical pricing by enacting laws aimed at regulating drug pricing. Following what now has become a trend, on March 13, 2018, Oregon became the newest state to enact such legislation, The Prescription Drug Price Transparency Act, H.B. 4005. But many of these laws have come under legal attack based on constitutional and other grounds. On Friday, April 13, 2018, the U.S. Court of Appeals for the Fourth Circuit found that Maryland’s excessive drug pricing law, H.B. 631, is unconstitutional as it violates the dormant commerce clause by directly regulating out-of-state transactions.

H.B. 631, or “An Act concerning Public Health – Essential Off-Patent or Generic Drugs – Price Gouging – Prohibition” (the “Act”), went into effect on October 1, 2017, and was aimed at prohibiting manufacturers and wholesale distributors from engaging in price gouging, which is defined as an “unconscionable” price increase that is not justified by the cost to produce or expand access of the drug, and where the drug is essential to an individual’s health and lacks market competition. The Act also provided mechanisms to investigate and report instances of price gouging, as well as enacting civil remedies and penalties for any price gouging violations within Maryland’s Medicaid program. Specifically, the Act authorized the Maryland Medical Assistance Program (“MMAP”) to notify the Maryland Attorney General when a price increase would lead to (1) an increase by 50% or more in the Wholesale Acquisition Cost (“WAC”) of a prescription drug within the preceding one-year period or an increase by 50% or more in the price paid by MMAP within the preceding one-year period, and (2) the WAC for either a 30-day supply or a full course of treatment exceeding $80.

On July 6, 2017, the Association for Accessible Medicines (“AAM”) filed suit challenging the constitutionality of the Act. Specifically, AAM argued that the Act violates the dormant commerce clause because it regulates out-of-state transactions, such as sales by a manufacturer outside of Maryland. Additionally, AAM argued that H.B. 631 is void for vagueness under the Fourteenth Amendment Due Process Clause. The U.S. District Court for the District of Maryland granted Maryland’s motion to dismiss AAM’s suit on the dormant commerce clause claim but denied as to the vagueness claim.

The Fourth Circuit recently reversed the district court’s dismissal of that claim and remanded with instructions to enter judgment in favor of AAM. In a majority opinion written by Judge Stephanie Thacker, the Circuit Court found that H.B. 631 was unconstitutional because the Act’s application is not limited to sales that actually occur within Maryland and the Act seeks to impact pricing and transactions outside of its borders. As the court noted: “[T]he Act aims to override prescription drug manufacturers’ reaction to the market and to regulate the prices these manufacturers charge for their products. This is more than an ‘upstream pricing impact’ — it is a price control.” Association for Accessible Medicines v. Frosh, No. 17-2166, 2018 WL 1770978, at *6 (4th Cir. 2018).

The Court further held that the Act’s requirements reach manufacturer or wholesale sales that occur upstream and typically out-of-state, compared to those consumer retail sales taking place only in Maryland. Furthermore, the Court found that even if the Act required a nexus to an actual sale in Maryland, it would still be insufficient because the legality of a price increase under the Act is measured by the price the manufacturer or wholesaler charges in the initial sale of the drug, which mostly takes place out of state. Additionally, the retailers that sell the drugs in Maryland cannot be held liable under the Act, meaning that H.B. 631 effectively aims to force manufacturers and wholesalers to act in accordance with Maryland law outside of the state or risk having disparate pricing practices for each state – a practice which would be entirely unworkable, thereby burdening the interstate commerce of prescription drugs.

Notably, the Court made it clear that its decision does not suggest that Maryland and other states cannot enact legislation combatting prescription drug price gouging, but rather that these practices should be carried out in a constitutional manner.

This is not the first of drug pricing laws and their challenges. For example, the Pharmaceutical Research and Manufacturers of America (“PhRMA”) has also brought a commerce clause challenge against California’s drug pricing transparency law, S.B. 17. Additionally, PhRMA and the Biotechnology Innovation Organization filed suit against Nevada’s drug pricing law, S.B. 539, and alleged violations under the Takings Clause of the Fifth Amendment, dormant commerce clause, the Supremacy Clause, and federal trade secrets law. In addition to price gouging and transparency laws, many states have proposed and passed legislation removing the ban on pharmacists from revealing to customers lower cost alternatives and money saving options for a prescribed drug. E.g., Florida’s H.B. 351.

Drug pricing is also receiving some recent attention at the federal level. President Trump is set to deliver his first major speech on drug prices on April 26, 2018. Controlling drug prices was a focus of Trump’s presidential campaign and budget proposal. The White House has indicated, however, that new policy ideas would not be revealed during the speech. President Trump’s speech overlaps with a request for information from the U.S. Department of Health and Human Services regarding drug pricing control ideas.

Drug pricing and transparency limits are hot topics on the state and federal levels and the Health Law Pulse will continue to monitor this evolving drug pricing landscape.