How States, Federal Agencies Are Challenging Drug Prices

April 23, 2018
19 minutes
Thomas N. Bulleit
Rebecca H. Williams

This article by partner Tom Bulleit and associate Rebecca Williams was published by Law360 on April 23, 2018.

In recent years, prescription drug prices have become a focal point in the discussion of U.S. health care spending. While political rhetoric in many areas may imply some degree of consensus that prices generally are “too high,” any agreement doesn’t go much beyond this broad generalization.

It seems that everyone has a voice in the debate — not just consumer and patient advocacy groups, but manufacturers, payers, legislators, government agencies and even the president. However, with multiple different agendas and no uniform articulation of an underlying problem, the result has been a somewhat disjointed approach, with federal and state governments casting broad nets across the industry in an attempt to see what they might catch.

This article summarizes several of the key developments in this area and what they may portend.

The Recent Politics of Prescription Drug Pricing

Complaints about high costs of many prescription drugs were unusually loud during the 2016 presidential campaign. In the preceding two years, two different drug companies obtained approval for new — and radically effective — hepatitis C treatments that had a price tag of nearly $100,000 for a course of treatment.1 Also during this period, and addressing very different settings, the national press reported on several instances in which formerly low-cost generic drugs saw their prices increase by thousands of percentage points.2

Congress held hearings and President-elect Donald Trump made a special point of saying that the pharmaceutical industry was “getting away with murder,” and pledged to do something about it after his inauguration.3

Since the election, attention to the issue has, if anything, spread more broadly. While the congressional hearings have continued4 and a handful of federal bills have been introduced, there does not appear to be any congressional consensus to take action.5 However, there has been considerable activity in the federal executive branch and state legislatures.

Although those who have articulated concerns most loudly will regard these as baby steps where they say broad leaps are required, this unusual level of government activity has led to unprecedented levels of response from the pharmaceutical industry.

Regulation: FDA Encourages Generics

U.S. Food and Drug Administration Commissioner Scott Gottlieb has said he will do everything “within my lane” to address high prices.6 To date, FDA’s approach has been seeking to improve access to lower-cost generic drugs. In June 2017, FDA announced a Drug Competition Action Plan that sought to facilitate the entry of lower-cost alternatives.7

To encourage such entry, the FDA published a list of off-patent, off-exclusivity branded drugs without approved generics and implemented an expedited review process for generic drug applications of the listed drugs.8 Additionally, Gottlieb stated that the plan would target branded drug manufacturers that “gamed the system” by limiting access to their testing samples or making their branded drugs unavailable to generic companies for comparative testing.9

Both the Centers for Medicare and Medicaid Services and the private sector also have put their toes in the water. CMS’ recently-published final rule for the 2019 Prescription Drug Benefit Program includes biosimilars and interchangeable biological products under the Medicare Part D generic cost-sharing subsidies, and allows Medicare Part D plans to substitute newly-approved generics for brand drugs on their formularies at any time, without CMS approval.10

And although it is too early to tell if this private sector initiative will have legs, in January 2018, more than 300 U.S. hospitals, including several of the most prominent hospital systems, announced plans to form a nonprofit that will focus on the commercialization of inexpensive generic drugs.11

Enforcement: OIG, DOJ and IRS Put PAPs Under the Microscope

Several federal enforcement authorities are approaching the drug pricing issue through increased scrutiny of prescription drug patient assistance programs. PAPs provide cost-sharing assistance to insured patients with high prescription drug expenses, and a significant amount of their funding comes from drug manufacturers.

Critics have long claimed that PAPs serve to prop up artificially high prices by covering patient cost sharing for expensive, brand-name drugs when cheaper alternatives exist that patients would use if they had to pay the cost-sharing themselves.12 Despite this concern, there was affirmative, if limited, governmental support for PAPs run by charitable organizations that were independent of their drug company donors, and little governmental effort to disrupt PAP activities. That has begun to change.

HHS' Office of the Inspector General

The U.S. Department of Health and Human Services' Office of the Inspector General first expressed concern in 2005 that PAP payment of patient cost-sharing could violate the federal health care programs Anti-Kickback Statute, an abuse that the OIG thought could be worthy of enforcement because it could lead to overutilization and increased costs.13

However, recognizing that many patients could face significant barriers to the affordability of some prescription drugs, the OIG issued guidance supporting PAPs operated by charitable organizations independent of manufacturers.14 In recent years, it appears that the OIG’s support may have diminished as its standards for approval have narrowed.

Specifically, in a 2014 special advisory bulletin, the OIG expressed concern for PAPs that defined eligibility so narrowly as to effectively provide support for only one manufacturer’s products.15 Additionally, in November 2017, the OIG took the unprecedented step of rescinding an advisory opinion that had protected the activity of a PAP from enforcement, finding that the charity was not sufficiently independent because, in the OIG’s view, donors had directly or indirectly influenced the identification or delineation of the PAP’s disease categories, and donors received information that enabled them to base the amount and frequency of their donations on the subsidies that were being offered for their products.

In explaining its rescission, the OIG specifically called out the effect on drug prices, noting that when the manufacturer has a “greater ability to raise the prices of their drugs while insulating patients from the immediate out-of-pocket effects of price increases, [that can leave] Federal health care programs … to bear the cost.”16

Department of Justice

While PAPs and their manufacturer donors were reacting to the OIG’s changing attitude, the U.S. Department of Justice began to open its own investigations into the PAP-donor relationship. From 2015 to 2017, U.S. Attorneys' offices have issued subpoenas to as many as 20 drug manufacturers, seeking information about their relationships with PAPs, presumably probing the prospect for action under the False Claims Act.17

By late 2017, two manufacturers, Aegerion Pharmaceuticals Inc. and United Therapeutics Corp., had announced sizable settlement agreements to resolve claims relating to misuse of PAPs.18 In conjunction with their respective settlement agreements, each manufacturer also entered into a corporate integrity agreement with OIG, which imposed additional restrictions on how the manufacturer donates to PAPs.19

While the Aegerion and United Therapeutics settlements may indicate that the DOJ is most interested in PAPs that provide support for rare diseases or diseases for which there is only one FDA-approved treatment, the breadth of the investigation can only increase the likelihood of a broader examination of PAPs impact on drug prices.20

Internal Revenue Service

Finally, the U.S. Internal Revenue Service has issued summonses to at least six pharmaceutical manufacturers that had donated to a PAP that is undergoing a years-long IRS audit.21 Presumably, the IRS’s interest is in whether the benefits flowing to the manufacturers implicate the requirements for tax-exempt organizations, such as the prohibitions on private inurement and private benefit.

The States Take Action

New and increasingly loud voices in this discussion can be heard from state capital buildings. Recent state legislation has targeted a range of stakeholders and issues, from requiring the state to establish a drug importation program for certain high cost pharmaceuticals22 to prohibiting “price-gouging” of generic drugs.23

By far the most prevalent approach so far has been to force greater transparency in how drug prices are set, which typically employs one of two mechanisms. The first requires state agencies to designate a list of certain drugs, such as drugs that are essential to treating diabetes, or “critical drugs” that impose a significant financial burden on the state, and requires the manufacturers of the listed drugs to report detailed financial information to the state.24 The second requires that manufacturers notify the state when the wholesale acquisition cost of a drug increases by an established threshold, and provide a justification for such increases.25

State legislatures also have heard the message of the manufacturing community (discussed below) that high drug prices cannot be laid only at their door. Eight states have adopted “gag clause” legislation, which prohibits pharmacy benefit managers from preventing pharmacists from, or penalizing pharmacists for, informing consumers when the out-of-pocket cost for a therapeutically equivalent drug is less than the patient’s copay when purchasing the drug through insurance.26

Additionally, a number of states have introduced legislation that requires that pharmacy benefit managers be licensed by the state or requires PBMs to provide increased transparency in how they determine the maximum amount a plan will pay for the generic and brand-name drugs.27

As of this writing, more than 300 bills dealing with drug pricing have been introduced, and in every state — although only a small number (less than 10 percent) have been signed into law.28 Interestingly, states appear to be more comfortable starting to regulate PBMs than targeting drug manufacturers directly.

While 36 states have adopted laws that require licensure of or increased transparency for PBMs,29 only six states have adopted laws that restrict or impose reporting requirements on drug manufacturers.30 Moreover, of the laws that target manufacturers, half already are the subject of lawsuits brought by industry associations on constitutional grounds.31

The Industry Response

The extent of adverse attention on drug manufacturers has prompted a robust response from the pharmaceutical industry. The industry has long contended that research and development of new drugs is an expensive, multiyear process, and the cost of those drugs that are successful must offset research that fails to yield an approval.32

Industry also has pointed to the long-term cost savings that accrue in the health care system when a patient is cured of an expensive chronic illness.33 These arguments have proved persuasive to Republican and Democratic administrations and Congresses, and no significant federal legislation regulating the prices of prescription drugs has yet been enacted.

Probably in light of the enhanced politicization of the drug pricing issue, manufacturers have begun putting more effort into education about other contributors to high drug prices, specifically, the “middlemen” in the prescription drug supply chain, including distributors and PBMs. For example, in March 2017, a top pharmaceutical executive stated in an interview that PBMs prevent manufacturers from lowering their prices because the PBMs want to ensure that their portion of the profit remains high.34

This position echoes a lawsuit filed in 2016 by health insurer Anthem against the PBM Express Scripts, which alleged that Express Scripts negotiated rebates with manufacturers but did not share those rebates with Anthem, causing Anthem to overpay by $3 billion annually.35

The increased politicization also has led some manufacturers to take voluntary steps on prices and price transparency. For example, within months of President Trump’s inauguration, at least five manufacturers had announced they would limit annual price increases for their drugs to single digits.36 At least two other manufacturers have since issued pricing transparency reports, showing aggregate price changes and discussing the factors that contribute to drug pricing.37

Investors also have taken notice, and recent shareholder proposals have called for increased disclosure both relating to drug price increases38 and to the relationship between executive compensation and drug prices.39

In addition, health insurers are taking action to reduce prices by making more rebates available to patients. In March 2018, two insurers announced that they would pass manufacturer rebates directly to beneficiaries with certain employer-sponsored health insurance plans.40 This is similar to federal proposals introduced both by President Trump and the Centers for Medicare and Medicaid, which would require Part D plans to pass at least one-third of their rebates to enrollees at the point of sale.41

While some Republican members of Congress have expressed concern that this proposal would amount to governmental interference in drug pricing negotiations, which is prohibited for drugs covered under Medicare Part D and the Affordable Care Act,42 CMS Administrator Seema Verma recently reiterated that CMS can require that Part D plans share rebates and price concessions with beneficiaries at the point of sale and stated that such a policy is still being considered.43

What Lies Ahead?

The current focus on prescription drug prices is truly unprecedented. In the short term, it can be expected that at least the following will persist through 2018 and beyond.

Focus on state action

The bulk of the legislative efforts have been at the state level, and the adoption of a drug pricing law in one state seems to incite the introduction of similar laws in other states. The most frequently adopted state legislation has targeted PBMs by prohibiting gag clauses, requiring PBM licensing or increasing transparency of PBM pricing.

States have faced greater difficulty in adopting legislation that targets manufacturers, and it is unclear the extent to which some of these laws will be blocked by the courts. While the outcome of the lawsuits remains uncertain, the cases demonstrate the novelty of these legislative efforts and the states’ willingness to push the boundaries of their authority to compensate for a lack of federal action.

More PAP enforcement

Based on the number of disclosed subpoenas, it is likely that the DOJ and the OIG will continue to collaborate on anti-kickback and related investigations that may result in settlements that could to some degree constrain the relationships that pharmaceutical companies will have with PAPs.

Greater transparency

While less certain, it seems likely that manufacturers, PBMs and distributors will be under increasing pressure to show their hand on pricing information.

In the case of manufacturers, where prices are generally ascertainable, the transparency could be around making public their price increases and statements of justification. In the case of the middlemen, where prices are much more obscure, we may see more efforts to obtain information on the amounts paid for prescription drugs, especially the amounts received in rebates and fees from pharmaceutical manufacturers.

Voluntary price concessions

Voluntary action is a traditional approach to warding off legislation or regulation. It reasonably may be anticipated that pharmaceutical companies will continue with these efforts. We also may see more health plans arrange for sharing manufacturer rebates with beneficiaries.

The pharmaceutical industry for many years has avoided the ultimate sanction of price controls, or the effective price controls that would result if manufacturers had to negotiate directly with Medicare and other federal payers on prices. So far, no concrete steps have been taken that appear likely to change this result. The ultimate question is whether this political dynamic will remain unchanged if some of the steps noted above take place, or whether these steps will build momentum towards a more intrusive federal government approach.

1 See Paul Demko, New hepatitis C drug costs nearly $100,000, Modern Healthcare (Oct. 11, 2014),

2 See Victoria Colliver, Prices soar for some generic drugs, SF Gate (Jan. 1, 2014),

3 See Sarah Karlin-Smith, Trump says drug industry ‘getting away with murder,' Politico (Jan. 11, 2017),

4 See, e.g., Thomas Sullivan, Bipartisan Senators Release Committee Report on Drug Pricing Investigation, Policy and Medicine (Jan. 10, 2018),; U.S. Senate H.E.L.P. Committee 2017 Hearings on Drug Pricing: Obfuscating the U.S. Cost-Sharing Crisis?, Type 1 Diabetes Defense Foundation (Dec. 16, 2017),

5 See, e.g . Improving Access to Affordable Prescription Drugs Acts, 771, 115th Cong. (2017); H.R. 1776, 115th Cong. (2017).

6 Sarah Jane Tribble & Liz Szabo, FDA Head Vows to Tackle High Drug Prices and Drugmakers ‘Gaming the System,’ Kaiser Health News (Feb. 15, 2018), Echoing this sentiment, the Trump administration’s new HHS Secretary, former Eli Lilly executive Alex Azar, stated that lowering drug prices is “a top priority.” See Yasmeen Abutaleb, Health secretary nominee Azar says lowering drug prices a top priority, Reuters (Nov. 29, 2017),

7 FDA Tackles Drug Competition to Improve Patient Access, (June 27, 2017),

8 In January 2018, the FDA published two sets of guidance documents relating to generic drug applications in an effort to streamline and improve the application submission and review process for generics. Statement from FDA Commissioner Scott Gottlieb, M.D. on new steps to facilitate efficient generic drug review to enhance competition, promote access and lower drug prices, (Jan. 3, 2018),

9 Scott Gottlieb, FDA Working to Lift Barriers to Generic Drug Competition, FDAVoice (June 21, 2017),

10 See CMS Finalizes Policy Changes and Updates for Medicare Advantage and the Prescription Drug Benefit Program for Contract Year 2019 (CMS-4182-F), (April 2, 2018),; Medicare Program; Contract Year 2019 Policy and Technical Changes to the Medicare Advantage, Medicare Cost Plan, Medicare Fee-for-Service, the Medicare Prescription Drug Benefit Programs and the PACE Program, at 575-609, (April 2, 2018),

11 See Reed Ableson & Katie Thomas, Fed Up with Drug Companies, Hospitals Decide to Start Their Own, New York Times (Jan. 18, 2018),

12 See, e.g., Michael Hiltzik, Why Big Pharma’s patient-assistance programs are a sham, Los Angeles Times (Sep. 25, 2015), A similar theory has been used to attack manufacturer-sponsored coupons. Critics argue that by reducing a patient’s copayment obligations, insurers are forced to cover more expensive brand drugs, increasing overall costs and defeating more competent cost-reducing measures. See Karen Van Nuys et. al., Prescription Drug Coupons: A One-Size-Fits-All Policy Approach Doesn’t Fit The Evidence, Health Affairs (Feb 16, 2018), A few state legislatures have taken notice, introducing legislation that prohibits the distribution of manufacturer-sponsored coupons when an FDA-approved lower cost generic is available. See e.g. Assem. Bill 265, Reg. Sess. (C.A. 2017).

13 See 70 Fed. Reg. 70,626 (Nov. 22, 2005).

14 See, e.g. id.

15 79 Fed. Reg. 31,121-22.

16 HHS OIG, Final Notice of Recession of Advisory Opinion No. 06-04 (2017).

17 See Pink Sheet, Pharma Companies Under Government Investigation, at 5–6 (Sep. 19, 2016),; Tracy Staton, J&J joins Pfizer, Celgene, Biogen and more in DOJ’s patient-assistance dragnet, FiercePharma (Feb. 28, 2017), See also Matthew E. Sloan et al., Enforcement and Litigation Strategies: Skadden’s Eighth Annual Pharmaceutical, Biotechnology and Medical Device Seminar, Lexology (March 29, 2018),

18 In September 2017, Aegerion agreed to pay $40 million to resolve the False Claims Act allegations. See U.S. Dep’t of Just., Drug Maker Aegerion Agrees to Plead Guilty; Will Pay More Than $35 Million to Resolve Criminal Charges and Civil False Claims Allegations, (Sept. 22, 2017), Three months later, United Therapeutics agreed to pay $210 million to resolve its own False Claims Act allegations. Drug Maker United Therapeutics Agrees to Pay $210 Million to Resolve False Claims Act Liability for Paying Kickbacks, (Dec. 20, 2017),

19 See supra note 18.

20 The DOJ has intervened in at least one qui tam complaint filed against a drug maker, alleging that its donations to PAPs were kickbacks for the purpose of inducing the PAP to cause patients to use its expensive blood cancer medications. See Tracy Staton, DOJ issues subpoena to Celgene as feds cast a wider net in assistance-program probe, FiercePharma (Aug. 1, 2016),

21 See Nate Raymond, IRS probes drug company-funded patient assistance charity, Reuters (June 29, 2017),

22 See, e.g. Sen. Bill 175, Reg. Sess. (VT 2018). A similar federal bill was introduced in the House in February 2017. Affordable and Safe Prescription Drug Importation Act, H.R. 1245, 115th Cong. (2017).

23 See, e.g. Sen. Bill 152, Reg. Sess. (CO 2018).

24 See, e.g. House Bill 1418, Reg. Sess. (NH 2018); Sen. Bill 539, Reg. Sess. (NV 2017).

25 See e.g. House Bill 239, Reg. Sess. (IL 2018); Leg. Bill 862, 2nd Sess. (NE 2018). A similar bill was introduced in the Senate in June 2017, which would require manufacturers to submit justification for wholesale acquisition cost increases to the Secretary of HHS. Stopping the Pharmaceutical Industry from Keeping Drugs Expensive (SPIKE) Act of 2017, S. 1348, 115th Cong. (2017).

26 See Pharmacy Benefit Manager Legislation, PBM Watch (last visited March 23, 2018),

27 Id. A similar federal bill, requiring PBMs to disclose the standard used for reimbursement, was introduced in the House in March 2017. Prescription Drug Price Transparency Act, H.R.1316, 115th Cong. (2017). That same month, a bill which would require PBMs to disclose the amount and type of rebates and discounts they received was introduced in the Senate. Creating Transparency to Have Drug Rebates Unlocked Act of 2017, S. 637, 115th Cong. (2017).

28 See generally State Legislative Action on Pharmaceutical Prices, (last visited March 26, 2018),

29 See National Community Pharmacists Assoc., 2012-2017 NCPA State Legislative Update, (last visited April 4, 2018),

30 See State Legislative Action on Pharmaceutical Prices, (last visited March 26, 2018),

31 See generally Theodore Lee et al., Legal Challenges to State Drug Pricing Laws, JAMA Network (March 6, 2018), Many of the lawsuits raise commerce clause, supremacy clause and vagueness concerns.

32 See, e.g. Carolyn Y. Johnson, Pharma, under attack for drug prices, started an industry war, Washington Post (Jan. 2, 2018), See also Richard Dixit & Frank David, Market watch: Trends in pharmaceutical company R&D spending: 2005–2015, Nature Reviews Drug Discovery (May 12, 2017).

33 Michael Rosenblatt, The Real Cost of “High-Priced” Drugs, Harvard Business Review (Nov. 17, 2014),

34 Laurie Toich, Pharmaceutical Manufacturers Blame PBMs for High Specialty Drug Costs, AJPB (March 8, 2017),

35 See Complaint, In re Express Scripts Inc., 2018 BL 5645, S.D.N.Y., No. 1:16-cv-03399-ER (March 21, 2016). See also Lynn R. Webster, Who is to blame for skyrocketing drug prices?, TheHill (July 27, 2017),

36 See Joanna Shepherd, The Pharmaceutical Industry’s Social Contract With Patients, Morning Consult (Sep. 5, 2017),

37 Id.

38 Eric Sagonowsky, Big Pharmas, top biotechs balk at investor group's push for pricing transparency, FiercePharma (March 2, 2017)

39 SEC Overrules Pharma Cos’ Challenges To Proposals Questioning Links Between Exec Comp And Drug Price Hikes, Valuewalk (March 26, 2018),

40 Jessie Hellmann, Aetna to pass discounts it gets from drug companies directly to consumers, The Hill (March 27, 2018), HHS Secretary Alex Azar praised this move, stating it is “a prime example of the type of movement toward transparency and lower drug prices for millions of patients that the Trump Administration is championing.” See HHS Press Release, Secretary Azar Statement on UnitedHealthcare Drug Discount Announcement, (March 6, 2018),

41 CMS included this as part of a proposed policy update it issued in November 2017 and President Trump included this in his FY2019 Budget Proposal. See Juliette Cubanski, Summary of Recent and Proposed Changes to Medicare Prescription Drug Coverage and Reimbursement, Kaiser Family Foundation (Feb. 15, 2018), FDA Commissioner Scott Gottlieb has also voiced his support for this approach. See Jessica Merrill, FDA's Gottlieb Applauds Drug Rebates at Point-Of-Sale, PinkSheet (March 28, 2018),

42 See 42 U.S.C. § 1395w–111(i); Patient Protection and Affordable Care Act, Pub. L. No. 111-148, § 1322(f), 124 Stat. 119, 191 (2010) (codified at 42 U.S.C. § 18042).

43 See John Wilkerson, CMS Says It Can Make Plans Share Rebates With Seniors, Despite Lawmakers' Warnings About Interfering In Rx Price Negotiations, Inside Health Policy (April 4, 2018),