The California Senate Wednesday gave final approval to a landmark bill that would require drug makers to report on and justify certain price increases. The bill's author says the ultimate goal is lower prices.
The bill, SB 17, would make California the first state to impose that level of transparency, said Sen. Ed Hernandez (D-West Covina), who wrote the measure.
If Governor Jerry Brown signs the measure into law, "SB 17 will set national health care policy, having impact for consumers and providers in other states," Hernandez said in a statement following the 31-8 Senate vote.
The legislation would apply in cases when a firm wants to raise the wholesale price more than 16 percent over two years on drugs that cost more than $40 for a course of therapy.
Besides having to report the increase, the manufacturer would have to describe the financial and non-financial factors behind the decision.
The requirement to publicize and justify price hikes would serve as a deterrent to excessive increases, said Hernandez. "They’re going to think twice before they raise it past the 16 percent every two years, which is good for consumers," he said.
Economists are divided over whether the measure would work to shame drug makers into holding prices down.
"I believe in shaming," said Stewart Schweiter, professor of health policy and management at the UCLA Fielding School of Public Health.
That should be the case when there is no reasoning behind a price increase, he explains. Schweiter gives the example of the EpiPen, which saw its price shoot up 500 percent over 10 years.
However, there are many pills on the market that are undervalued based on their usefulness, he said.
"That product is much more than a manufactured product 3/8 of an inch long. There was a huge amount of scientific research going behind it and then applied research to make it useful for consumers," said Schweiter.
Representatives of the generic drug market, a part of the industry working on tighter profit margins, argue that SB 17 would place an undue burden on their sector.
"Our companies would be hitting triggers on a daily basis by virtue of doing their normal course of business," said Carrie Hartgen, vice president of state government affairs for the Association of Accessible Medicines, the generic industry's trade group.
Hernandez disputes Hartgen's claim, maintaining that the $40 threshold would hold generic drug makers mostly harmless.
USC economist Jeff McCombs argues that the bill would unnecessarily interfere with the free market. He also believes the measure's focus on wholesale prices is a mistake. Regardless of the wholesale price, a drug maker will negotiate different prices with different buyers, said McCombs.
"The price it sells to Kaiser Permanente is far lower than it sells to other buyers," he said.
Pharmaceutical industry officials have argued that it would be costly to comply with the legislation, but UCLA's Schweiter disagrees.
"This isn’t going to drive firms to the poor house. It’s certainly going to raise their costs ever so slightly to collect the data," he said.
Still, Schweiter believes policies that spur competition would better attack the problem of high prescription drug prices, as competition in theory keeps prices down.