Maryland's Drug Price Gouging Law: The Potential Consequences

Maryland's Drug Price Gouging Law: The Potential Consequences
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On May 26, Maryland became the first state to pass a law which applies specifically to “price gouging” practices by generic pharmaceutical manufacturers of essential drugs.  This law passed with overwhelming bipartisan support, 137-2-2 in the Maryland House of Delegates, and 38-7-2 in the Maryland Senate, had more than enough votes to override the Governor’s veto.  Maryland Governor Larry Hogan (R), in a letter to the speaker of the Maryland House, explained that he withheld his signature because the bill vaguely defines what constitutes “price gouging” and may not withstand a legal challenge on constitutional grounds.  Moreover, the Governor said, “I am not convinced that the legislation is truly a solution to ensuring Marylanders have access to essential prescription drugs, and may even have unintended consequences of harming citizens by restricting their access to these drugs.”

Under this legislation, the Maryland Attorney General will enforce this new law against manufacturers of essential generic drugs engaged in “price gouging” business behavior. “Price gouging” is defined under this law as “an unconscionable increase in the price of a prescription drug.”  An “unconscionable increase” in the price of the drug is defined as “excessive and not justified by the cost of producing the drug or the cost of appropriate expansion of access to the drug to promote public health.”  This is an ambiguous definition that provides no effective managerial guidance on complex pricing decisions for generic drug manufacturers, but does allow a strong proponent of the legislation, Maryland Attorney General Brian Frosh, broad interpretation and enforcement authority to have a circuit court restrain and enjoin certain violations, and impose civil penalties of up to $10,000 per violation.

Caitlin A. Carroll, a spokesperson for the Pharmaceutical Research and Manufacturers of America (PhRMA), which represents the country’s leading drug companies, in a statement indicated that PhRMA recognizes the need for maintaining a competitive generic drug marketplace that ensures patients access to innovative, low cost medicines, but is concerned about the broad and ambiguous authority that the bill grants to the Maryland state attorney general. It is also not surprising that a representative of the Association for Accessible Medicines, the generic drug industry’s lobbying association, was quoted in The Wall Street Journal last week saying that the new law is “unconstitutional.”

But will this new law improve the situation for the average Marylander in need of essential new generic drugs?  Not likely.  Recent data from the Generic Pharmaceutical Association reveals that Maryland saved $3.7 billion in 2015 due to a competitive marketplace in generic drugs.  Furthermore, while over 89 percent of all prescriptions are written for generic drugs, they account for only 27 percent of total prescription drug costs. In an August 2016 U.S. Government Accountability Office (GAO) report on Medicare Part D Program generic prescription drug prices, generic pharmaceutical manufacturers reported that the primary driver of generic drug prices is influenced by such factors as raw material shortages, production difficulties, consolidation among manufacturers, and a significant backlog of 4,000 new generic drug applications awaiting U.S. Food and Drug Administration review.

While the GAO report did find evidence that over 300 of the 1,441 established generic drugs analyzed had one extraordinary price increase of 100 percent or more between 2010 and 2015, this still represents a ratio of less than 1 in 4, the overwhelming majority of generic drug prices declined by two-thirds since 2008.  If public policymakers ostensibly want essential generic pharmaceuticals to be less costly, they need to help create a competitive business environment for the generic drug industry to flourish.  This law, as written, can only be interpreted by the generic pharmaceutical industry as punitive in nature, casting a chilling effect on the state’s marketplace.  Let us hope that this well intended populist approach to protecting Maryland citizenry does not affect the future availability of essential generic drugs to the people who this legislation is intended to protect.

Thomas A. Hemphill is a professor of strategy, innovation and public policy in the School of Management, University of Michigan Flint and a senior fellow at the National Center for Policy Analysis, Dallas, TX.

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