First Generic Drug Price Gouging Prohibition to Become Law in Maryland

Maryland will become the first state in the United States to enact a law prohibiting “price gouging” by generic pharmaceutical manufacturers. H.B. 631, 437th Gen. Assemb., Reg. Sess. (Md. 2017) (hereinafter, “the Bill”). The Bill was passed by the Maryland General Assembly on April 20, 2017 and, on May 26, Maryland Governor Larry Hogan sent a letter to the Speaker of the House stating that he would allow the bill to become law without his signature.

There are two essential provisions of the Bill. First, it prohibits a generic drug manufacturer or wholesale distributor from engaging in price gouging in the sale of an “essential off-patent or generic drug.” An essential off-patent or generic drug, for purposes of the Bill, is a prescription drug (1) with no unexpired marketing exclusivity under the Federal Food, Drug, and Cosmetic Act; (2) that either appears on the World Health Organization’s model list of essential medicines or is designated as essential for treating a life-threatening or certain chronic health conditions by the Maryland Secretary of Health and Mental Hygiene; (3) is actively marketed in the United States by three or fewer manufacturers; and (4) is available for sale in Maryland. Prohibited price gouging, according to the Bill, is an “unconscionable increase” in the price of such prescriptions drugs. This term is defined as a price increase that is “excessive and not justified” by the manufacturing cost or costs associated with expanding access to the drug for the purpose of promoting public health, and which results in patients having “no meaningful choice” whether or not to purchase the drug because of its importance to their individual health and insufficient market competition. The Bill exempts wholesale distributors from the price gouging prohibition when the price increase is “directly attributable” to additional costs imposed on the distributor by the manufacturer.

Second, the Bill authorizes the Maryland Medical Assistance Program (“MMAP”) to notify the Maryland Attorney General (“AG”) of a price increase when the Wholesale Acquisition Cost (“WAC”) of a prescription drug increases by at least 50% from the WAC within the preceding one-year period or when the price paid by MMAP would increase by at least 50% from the WAC within the preceding one-year period and the WAC for either a 30-day supply or a full course of treatment exceeds $80.

At the request of the AG, the manufacturer of a drug so identified must provide a statement justifying the price increase within 45 days of such request. The AG may also require a manufacturer or distributor to provide records or documents relevant to a determination of whether the price increase violates the Bill’s prohibition on price gouging. The AG may seek a court order compelling a justification statement or document disclosure.

In addition, the Bill allows the AG to seek other remedies, including:

• Restraining or enjoining violations of the Bill;
• Obtaining monetary relief to consumers, based on violative price increases;
• Requiring the manufacturer or distributor to sell the drug to Maryland State health plans or programs at the price at which it was available in the year prior to the violative price increase; and
• Imposing a civil penalty of up to $10,000 per violation.

The Bill has not been without controversy. Governor Hogan indicated, in his letter to the Speaker of the House, that “legal and constitutional concerns” with the Bill have been raised by his Chief Counsel. This places the Governor at odds with the AG, who championed the Bill, but largely echoes concerns raised by generic drug manufacturers through the Association for Accessible Medicines, the generic manufacturers’ trade association. The Governor stated that one issue concerns the fact that the Bill only addresses generic products, and not patented drugs and medical device drug delivery systems, which, according to the Governor, comprise a significant share of the market and “are often times the most expensive and essential pharmaceuticals.” He also stated that the Bill may suffer from defects under the U.S. Constitution. First, the Governor stated that the Bill potentially implicates the Constitution’s dormant commerce clause by regulating interstate commerce—that is, drug prices negotiated “outside of Maryland.” Second, the Bill may violate the Fourteenth Amendment due process clause due to the vagueness of the terms “unconscionable increase” and “excessive.”

The Bill will become effective on October 1, 2017. We will continue to monitor enforcement of this law and similar developments in other states.