pills-384846_960_720-300x200-4567758For the second year in a row, Governor Cuomo’s executive budget calls for aggressive action to slow rising drug prices.

No serious effort to rein in healthcare spending can ignore prescription costs, which have surged in recent years thanks to the introduction of highly expensive breakthrough medications and aggressive price hikes by certain manufacturers.

However, a close look at Cuomo’s proposed fix – which relies on heavy-handed state regulation of drug prices – raises doubts as to its fairness, effectiveness, workability, and even legality.

The plan establishes a multistep process through which the state would effectively cap the price of certain expensive drugs when sold within New York’s borders.

The Health Department would be empowered to identify a drug that seem excessively expensive, demand detailed disclosure from its manufacturer about costs and pricing, refer that information to a Drug Utilization Review Board, and establish a maximum “benchmark price” for the product.

If the manufacturer charges Medicaid more than that benchmark, it would be required to rebate 100 percent of the excess amount to the state. For sales to the private sector, any excess above the benchmark would be subject to a 60 percent surcharge – proceeds of which would be distributed to health plans, which would be ordered use the funds to offset premiums in the following year.

Separate sections of his proposal would roll back Medicaid’s “prescriber prevails” rule, which enables doctors to insist on higher-priced brand name drugs instead of generics for certain patients, and regulate pharmacy benefit managers, which negotiate discounts on behalf of health plans and play a major role in determining retail drug prices.

Despite the high stakes, the governor’s proposed bill is scant on some details. It devotes just 669 words to defining terms and laying out procedures for identifying drugs to be reviewed, weighing their costs and benefits, and determining benchmark prices. The section about surcharge collection is almost four times as long, at 2,486 words.

As they consider this plan, lawmakers should explore the following questions:

Which drugs would be targeted? Cuomo’s bill authorizes the department to go after drugs that are “prohibitively expensive” when first introduced, that suddenly see a “large price increase” for no obvious reason, or that are priced “disproportionately given that they offer limited therapeutic benefits.” But it does not further define any of these terms, giving the industry no clear guidelines to follow.

Who would set the benchmark price? The bill expands a pre-existing Drug Utilization Review Board from 19 members to 23, adding two health economists, one actuary, and a representative from the Department of Financial Services. But this board would only recommend the benchmark price, giving final say to the health commissioner. The bill also says the commissioner “may” refer high-priced drugs to the board for study, not “shall.” This seems to leave the possibility that the commissioner would bypass the board altogether.

What information will be considered? Manufacturers would be required to divulge detailed information on a drug under review, including marketing costs, profit margins, and “research and development costs of the drug.” However, there is no mention of how much a company spent on R&D overall – including on experimental drugs that turn out to be dead ends – the costs of which they need to recoup from the relatively few drugs that make it to market.

What standards would apply? The bill lists factors that the department should consider in setting the benchmark price, including the manufacturer’s costs, the seriousness of the disease, the effectiveness of the drug, and existence of alternative therapies. But it gives no guidance on how officials should balance costs and benefits, an inherently difficult question when people’s health and lives are at stake.

Would it be fair? Once the department initiates a review, honest players could in theory avoid benchmarking by proving that their prices met Cuomo’s definition of “reasonable.” But going through the review process itself would impose significant costs on those good actors, and expose them to the risk of having their trade secrets leaked to the competition.

Would it work? Given the severe consequences that benchmarking would entail, Cuomo may anticipate that simply initiating a review under the law would be enough to pressure the company into negotiating a discount – meaning the full process would rarely, if ever, be used. But companies could also threaten to pull a product off the market in New York, which would put pressure on state officials to back down.

Is it legal? If enacted, Cuomo’s plan is bound to face court challenges. The industry’s main lobbying group, Pharmaceutical Research and Manufacturers of America (PhRMA), contends that much of the proposal would be preempted by federal laws governing how Medicaid pays for drugs nationwide.


About the Author

Bill Hammond

As the Empire Center’s senior fellow for health policy, Bill Hammond tracks fast-moving developments in New York’s massive health care industry, with a focus on how decisions made in Albany and Washington affect the well-being of patients, providers, taxpayers and the state’s economy.

Read more by Bill Hammond

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