Innovation Labs or Frankenstein’s Monster: States and Health Care Legislation

From Oregon to New York, Maryland to California and everyplace in between, states are proposing legislation to address pharmaceutical access, pricing and transparency. While such legislation is well intentioned, the devil is in the details. Yes, states are the laboratory of invention — but they must avoid becoming the laboratory of Dr. Frankenstein. When it comes to state legislation, there are many problematic issues. Some cross-state examples:

  • Price increase “thresholds” that trigger price gouging actions do not take into account discounts and rebates (which we know are growing and offsetting price increases).
  • Much of the information requested by states is proprietary, and others are impossible to report. For example, itemizing the cost of producing a medicine is problematic. Products aren’t priced based solely on input costs.  Production costs may be split across multiple medicines (e.g., equipment), so it is unclear how a manufacturer would account for that. Some of the pricing information of materials may be contained in confidential agreements with suppliers.
  • There are no protections to keep any of the information reported or documents turned over confidential. 
  • Restoring any money acquired as a result of the price increase to consumers/third parties is problematic. In other words, when it comes to the perennial question of cui bono, the answer isn’t the patient – it’s the state.
  • Third parties also receive rebates; so effectively they insurers would be collecting rebates and then also collect any dollars associated with a price increase.
  • Most importantly, the large majority of consumers have insurance, and it is the insurer that decides what a patient pays for his or her medicine (via co-pays and co-insurance) — not the manufacturer. 

One policy item that everyone agrees on (except the Martin Shkreli’s of the world) is that the issue of price gouging of single-source generics must be addressed. But the best way is through a more robust regulatory process driven by the Food & Drug Administration on the federal level.

According to best estimates, there are 500 generic drugs — for everything from cancer, to multiple sclerosis to heart disease — that currently have virtual monopolies. And some companies have taken advantage. The FDA has pledged to cut the application process from 2-3 years to as short as six months. This will help clamp down on some of the price gouging. The FDA says it has 125 current submissions for drug approvals that will be expedited. 

We must also focus on the issues related with inadequate CMS reimbursement policies as a cause for single source products. We need to focus on the perverse economic incentives of Average Sales Price (ASP) as a key factor behind the problem.

We need federal legislation to deal with:

  • Price Stability — Change the Medicare reimbursement rate for generic injectable products with four or fewer active manufacturers from Average Sales Price + 6 percent to Wholesale Acquisition Cost in order to achieve market price stability.
  • Medicaid/340B Rebate Exemption — We must exempt generic injectable products with four or fewer active manufacturers from Medicaid rebates and 340B discounts in order to achieve market price stability.

Both the FDA Congress must step up to the plate.

When patients have access to more effective medications, their overall health improves, even as their overall medical expenses go down. That, in turn, reduces national health-care spending and boosts the economy.

Rather than pointing the finger to score cheap political points, we would all do well to remember that disease is the enemy.


Peter J. Pitts, a former FDA associate commissioner, is president of the Center for Medicine in the Public Interest.

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