Pharma Litigation Threatens to Limit State Drug Pricing Policy

The generic drug industry aims to build on its success in challenging state anti-price gouging laws with a new lawsuit filed in Illinois—the outcome of which analysts say will affect policy makers’ willingness to pursue efforts to rein in drug costs.

The complaint filed Jan. 22 by the Association for Accessible Medicines, which represents generic and biosimilar manufacturers, alleges an Illinois law (HB 3957) imposing penalties for certain generic drug price increases improperly seeks to regulate commerce outside the state. The group wants the US District Court for the Northern District of Illinois to enjoin state officials from enforcing the law, which took effect Jan. 1.

The lawsuit comes a month after AAM won a preliminary injunction on a Minnesota law that similarly sought to limit price hikes for generic drugs. The judge in that case said AAM was likely to succeed on its claim that the law violates the commerce clause of the US Constitution because “it directly regulates transactions that take place wholly outside of Minnesota.”

AAM’s victories against anti-price gouging laws date back to 2018, when the US Court of Appeals for the Fourth Circuit cited the commerce clause, which gives Congress broad authority to regulate business among the states, in striking down a Maryland law regulating generic drug prices. Courts have interpreted this doctrine as the “dormant” commerce clause—an implied prohibition on states enacting legislation that discriminates against or excessively burdens interstate commerce.

But the US Supreme Court refined this interpretation with its May 2023 decision in National Pork Producers Council v. Ross, in which justices said a state law that has some interstate effects isn’t automatically unconstitutional.

Drug pricing researchers and legal analysts see the AAM lawsuits in Illinois and Minnesota as an attempt to shape how courts apply the Pork Producers decision to the pharmaceutical industry. More AAM lawsuits against states are likely, and analysts say the threat of litigation will be enough to ward some lawmakers away from pursuing a range of drug pricing policies, including affordability review boards and upper payment limits.

“Lawsuits from the drug industry are an inevitable result of any and all state initiatives to curb excessive drug prices,” said Michelle Mello, a health policy and law professor at Stanford University.

“Everyone expects to see more of them, and they’ve deterred some states from even trying to make progress on the problem,” Mello said.

A Winning Past

When announcing the Illinois lawsuit, AAM cited its previous victories in challenging states with similar drug pricing laws.

Maryland’s anti price-gouging law, which passed in 2017, aimed to target price hikes of certain generic and off-patent brand drugs made by three or fewer manufacturers. The Fourth Circuit declared the law unconstitutional—a decision the US Supreme Court affirmed in 2018 by declining to review the case.

In the Minnesota lawsuit, AAM argued the law that attempts to lower prescription drug costs for patients actually “threatens patients’ access to affordable generic alternatives.” Minnesota Attorney General Keith Ellison (D) has filed a notice of appeal in the Eighth Circuit and plans to submit a brief in support in February.

Ellison told Bloomberg Law after the judge’s ruling that the Minnesota law is needed for Americans “to be able to afford drugs which have lifesaving effects and which they need to survive.”

In AAM’s latest lawsuit in the Northern District of Illinois, the trade group argues generic drugs offer lower-cost alternatives to brand-name drugs, and that the Illinois law “conspicuously does not apply to patented drugs sold by brand-name pharmaceutical companies.”

Federal Judge Virginia M. Kendall has set an initial status hearing in the Illinois case for Feb. 27.

The Illinois attorney general’s office said it is reviewing the complaint, but declined to comment further on the pending litigation.

Commerce Clause

The Pork Producers ruling was pivotal in giving states more wiggle room to regulate commercial activities, but policy analysts say AAM is citing its previous success in using the commerce clause to limit the Supreme Court’s decision to the pharmaceutical industry.

The latest high court ruling “may have made state legislators feel like the door was a little more open to pass legislation to regulate the sale of pharmaceuticals in the state,” said Katherine Gudiksen, executive editor of the Source on Healthcare Price and Competition, a project of the University of California College of the Law, San Francisco.

Minnesota’s generic drug pricing law passed the state’s legislature just days after the decision in Pork Producers. Illinois Gov. J.B. Pritzker (D) signed his state’s price-gouging bill into law in July 2023—two months after the high court ruling.

The AAM lawsuits “leverage current uncertainty around the scope of a legal doctrine” when it comes to pharmaceutical sales, Mello said.

“The pharmaceutical market is dominated by a few large wholesalers that aren’t located in their borders, so drug manufacturers can characterize pretty much all drug sales as being out of state,” Mello said.

In its complaint challenging the Illinois law, AAM argues the Supreme Court in the Pork Producers decision “went out of its way to confirm the vitality of the rule that state laws that ‘directly regulate’ the price term of ‘out-of-state transactions’” are “unconstitutional.”

Legislative Future

AAM declined to comment on its future litigation strategy, but policy analysts predict the latest lawsuits won’t be the last from the trade group. This could ultimately affect what policies states decide to pursue, analysts say.

“AAM is likely to aggressively target laws in the near future to establish legal precedent that the decision in the Pork case doesn’t apply to most state laws regulating drug prices,” Gudiksen said.

As a result, “state legislators may decide to focus their efforts elsewhere anticipating a legal challenge in these situations,” she said.

From January 2022 to January 2023, more than 4,200 drug products had price increases—46% of which were larger than the rate of inflation, according to an October 2023 report published by the US Department of Health and Human Services.

There is also the potential to see lawsuits expanded to other state drug pricing laws, especially state boards measuring prescription drug affordability, said Kate Sikora, associate principal at the health-care consulting firm Avalere.

Legal analysts have predicted the pharmaceutical industry is likely to take states to court over the enactment of prescription drug affordability boards with the authority to establish limits on what health plans pay for some products. Maryland and Minnesota have both enacted PDABs, and lawmakers in Illinois introduced legislation this month to set up their own PDAB.

“Just the threat of a lawsuit could deter reasonable state efforts to control exorbitant generic drug prices,” Gudiksen said.