State Drug Pricing Boards Tee Up New Front in Pharma Legal Fight

A wave of state boards aiming to set limits on what health plans pay for prescription drugs is likely to trigger lawsuits from drugmakers, policy analysts and lobbying groups say, as the industry also fights government price-setting policy at the federal level.

The Michigan Senate voted Oct. 4 to pass a package of bills (SB 483, 484, and 485) that would create an independent board to evaluate the impact of prescription drug costs on patients in the state, and to establish upper payment limits on some of the most expensive products. The legislation, if enacted, would make Michigan the ninth state to establish a prescription drug affordability board (PDAB), and the sixth with the ability to set payment limits.

The boards are one way states aim to curb high prescription drug prices—a key priority for policymakers concerned about rising health-care costs. More than 4,200 drug products saw price increases from 2022 to 2023, 46% of which were larger than the rate of inflation, according to data from the US Department of Health and Human Services. In Michigan, the state’s prescription drug task force found nearly a third of residents ages 19 to 64 stopped taking their prescriptions because of costs.

The pharmaceutical industry has lobbied hard against the largely Democratic-backed effort, characterizing the boards as a form of government price setting that won’t address what it argues are the root causes of high drug costs—plan benefit design and high rebates to the entities that manage prescription drug benefits. Drugmakers are already fighting Medicare’s drug price negotiation program under the Inflation Reduction Act in court.

With Colorado and Maryland set to begin enacting payment limits within the next year, patient groups and board members expect drugmakers to bring their legal prowess to the states. The outcome of any lawsuits, though, will depend largely on how federal courts weigh in on the authority of governments to control what they pay for prescription drugs, analysts and policymakers say.

“That’s part of their lobbying process to try to prevent legislators from enacting these—they threaten lawsuits, which makes the legislators nervous,” said Jon Bartholomew, government affairs director for AARP, which has supported legislation to establish PDABs.

“It really remains to be seen if anything regarding the federal lawsuits is going to be successful and if that’s going to impact what’s happening at the state level,” Bartholomew said, adding affordability boards were designed with the potential for litigation in mind.

Payment Limits

Years before the IRA was enacted, states began considering drug pricing boards and upper payment limits (UPLs) to address concerns around prescription drug affordability. Maryland in 2019 became the first state to form a PDAB, and has since been gathering feedback from industry, patients, and other stakeholders on state regulations around payment limits.

“A PDAB is like an envelope, in the sense that it’s a place where you could formalize the consideration of drug policies and drug prices,” Mark E. Miller, executive vice president of health care at the philanthropy-funded Arnold Ventures, said. One of the group’s grantees, the National Academy for State Health Policy, has developed model PDAB legislation for states like Maryland.

While the majority of these drug cost boards can set upper payment limits, others—New Hampshire, Ohio, and Maine—don’t have this authority, and are focused on studying drug pricing and accessibility in those states and making recommendations on how to lower costs.

In most states with the boards, the policies apply to all state-regulated health plans, though PDABs in states like Maryland only have authority to regulate public plans, including Medicaid and state employee health plans. Payment limits in other states, including Colorado, also include commercial health plans operating within the state.

The legislative package in Michigan would allow a board of state-appointed drug pricing experts to establish upper payment limits, as well as review the impact of prescription drug costs on Michigan residents. The package, which now goes to the state House, is among the top legislative priorities of Gov. Gretchen Whitmer (D).

“Prescription drug prices are too high for too many Michiganders, especially those on fixed incomes,” state Sen. Darrin Camilleri (D) said in a press conference unveiling the legislation in September.

New Jersey also has an active bill (A1747) to establish a drug affordability board, though the legislation hasn’t moved since it was reported out of a committee in May 2022.

Colorado is the furthest along in the UPL process. On Aug. 4, the state board announced Enbrel, manufactured by Amgen Inc.‘s Immunex Corporation, and Johnson & Johnson‘s Stelara would be among the five prescription drugs up for affordability reviews. Both are also among the first 10 that will face Medicare-negotiated price cuts under the IRA.

Fighting Back

Drugmakers have attempted to dismantle efforts to form PDABs since their inception, and this is only expected to grow as states get closer to establishing payment limits.

“There will be some legal challenges at the state level, much like there has been at the national level, and I think it will be over very similar issues, like the effect on innovation,” said Gerard Anderson, a member of Maryland’s PDAB and a health policy professor at the Johns Hopkins University Bloomberg School of Public Health.

The Johns Hopkins Bloomberg School of Public Health is supported by Michael Bloomberg. Bloomberg Law is operated by entities controlled by Michael Bloomberg.

Minnesota’s board has taken the federal government’s lead in how it approaches payment limits. In May, the state enacted a law requiring its PDAB to use Medicare’s maximum fair price for the state’s UPL on a drug that’s also been selected for federal government price negotiations.

The federal government faces nine lawsuits against the Medicare drug price negotiation program. Drugmakers and industry groups argue the IRA gives the federal government unconstitutional authority in shaping prescription drug costs, and that the price cuts would limit future pharmaceutical innovation.

Similar to the Medicare price talks, the state boards are “government schemes in which patients may face significant barriers to lifesaving medicines because of government price setting,” said Reid Porter, senior director of state public affairs at the Pharmaceutical Research and Manufacturers of America.

The factors PDABs consider when setting a price limit don’t provide a full picture of what’s fueling drug costs, said Laura Hobbs, director of health-care policy for the conservative-leaning think tank American Action Forum.

“States and the federal government are trying to get at ‘this drug costs too much, we’re spending too much on it, so let’s reduce that.’ But that doesn’t really get at ‘what does the patient pay at the end of the day?’” Hobbs said.

Many of the boards don’t factor in the practices of pharmacy benefit managers, Porter said, which he argued is vital to understanding drug affordability issues. PBMs manage prescription drug benefits on behalf of health plans and others, including by collecting rebates from drug manufacturers in exchange for preferred placement on a health plan’s formulary.

If a drugmaker does decide to file a lawsuit, it’s likely the first will be in Colorado after a UPL is decided, said Kate Sikora, associate principal at the health-care consulting firm Avalere.

“They would want to avoid that kind of potential of getting involved where they might not necessarily need to be involved,” Sikora said.

Looking at Precedent

Despite the industry’s arguments, states regulating payments across the health-care system aren’t a new phenomenon, Miller said.

In 2020, the US Supreme Court ruled in Rutledge v. Pharmaceutical Care Management Association that Arkansas could enforce state regulations on what PBMs reimburse to pharmacies for dispensing drugs.

The ruling rejected the argument from PCMA, the national trade group representing the PBM industry, that the Employee Retirement Income Security Act (ERISA) preempts state law prohibiting PBMs from reimbursing pharmacies at a lower rate than what the pharmacies pay to fill prescriptions.

To effectively challenge upper payment limits, drugmakers would “have to argue, why is it fair in the PBM-driven market broadly, but not here?” Miller said.

NASHP, which developed the model legislation for several of these boards, used the lessons learned from previous attempts to combat high drug costs to inform PDAB laws, Bartholomew said.

In 2018, the US Court of Appeals for the Fourth Circuit struck down a Maryland law aimed at preventing drug companies from excessively raising prices on certain products. The court ruled the law unconstitutionally regulated trade beyond the state’s borders.

“They put a lot of thought into making sure that these are constitutional,” Bartholomew said of PDABs.