Vermont recently became the first state to pass a law requiring pharmaceutical manufacturers to either disclose and explain company rationale for product price increases or face legal consequences. People within the industry naturally started to panic, as evidenced by numerous news articles. However, those who actually read the law carefully quickly realized that the law will probably not cause immediate changes for the industry. Rather, the real importance of this new law is not the law itself, but the directionality of public opinion concerning the pharmaceutical industry and the misconceptions leading up to the creation of the law.
First, let’s clarify the practical application of Vermont’s new law. Each year, the state will select up to 15 drugs that meet two criteria: (1) high cost and expenditure from the state and (2) either an increase of at least 50% to their Wholesale Acquisition Cost (WAC) over the past five years or an increase of WAC by at least 15% over the past 12 months. The manufacturers of each product will be required to explain the increases to the state’s Attorney General who will then give a report to the General Assembly. Due to privacy concerns, information that identifies a specific drug or company is not allowed to be made public. Companies that fail to comply are subject to a $10,000 penalty for each violation.
From this, it is clear that this law has no real teeth to it. Information specific to a particular company or drug will not be published. As long as a company supplies any explanation, there are no punishments for the price increases. Even if a company decides to ignore the request for a response, the fine is a modest $10,000.
Instead of worrying about this particular law, the primary concern relates to the trending direction of public opinion for the pharmaceutical industry. Though Vermont’s law will have a minimal impact on the industry, other states, including New York and California, are considering pricing transparency bills of their own. Over time, these laws may accumulate and gain the teeth that Vermont’s law lacks. As a result, the industry must come together to address the underlying concerns that drive legislators to craft these bills.
One misconstrued concern that legislators and journalists share is the rise in WAC pricing for drugs. In the Vermont law, price and WAC are essentially considered to be the same thing. In reality, WAC is not the true cost of a drug. Rather, WAC is akin to the MSRP found on the window sticker of a new car; it’s easily visible, but few people actually pay it. Instead, health insurers, public programs and other payers receive discounts in the form of rebates that bring the true prices of most drugs below the WAC price, sometimes by more than 50%. The fact that the public and many legislators do not grasp the nuances of WAC pricing should be the real concern for the pharmaceutical industry and lawmakers alike.
For now, pricing transparency laws like Vermont’s will mostly serve as high-profile, viral news stories. Laws of this nature are weak chastening tools legislated to placate the misinformed public perception of greedy drug manufacturers. Yet the passing of this act could be a forewarning of the proliferation of similar laws state by state that could result in a federal law. Therefore, the pharmaceutical industry must band together now to educate the public about the underlying reasons for its sometimes high prices. Pfizer’s new “Before it Became a Medicine” TV ad is a good start, but changing public opinion will require more campaigns like this. If the industry fails to do this, Vermont’s bill will merely be act one of a tragedy for the future of the pharmaceutical industry.