Federal Appeals Court Finds State's Drug Price-Gouging Law Unconstitutional

States are continuing to do battle with budget-busting prices of prescription drugs. But a recent federal court decision could limit the tools available to them — underscoring the challenge states face as, in the absence of federal action, they attempt on their own to take on the powerful drug industry.

The 2-to-1 ruling Friday by the U.S. Fourth Circuit Court of Appeals invalidated a Maryland law meant to limit "price-gouging" by generic drug manufacturers, inspired by cases such as that of former Turing Pharmaceutical CEO Martin Shkreli, who raised one generic drug's price 5,000 percent after buying the company.

The law, which had been hailed as a model for other states, is one of a number of state initiatives designed to combat rapidly rising drug prices. It gave the state attorney general power to intervene if a generic or off-patent drug's price increased by 50 percent or more in a single year.

If dissatisfied with the company's justification, the attorney general could file suit in state court. Manufacturers could face a fine of $10,000 and potentially have to reverse the price hike. The generics industry was fiercely critical of the law.

"We are evaluating all options with regard to next steps," Maryland Attorney General Brian Frosh said, in a written statement. His office would not elaborate further.

The state could appeal to have the case heard "en banc," meaning by the full Fourth Circuit, as opposed to just the three judges.

Such appeals aren't commonly granted, but this law could be a strong candidate, suggests Dr. Aaron Kesselheim, an associate professor at Harvard Medical School who researches drug-price regulation.

The Friday ruling looms large as other state legislatures grapple with ever-climbing drug prices.

Similar price-gouging legislation has been introduced in at least 13 states this year, though none of those measures became law, according to the National Conference of State Legislatures. Three other bills failed to gain passage.

The NCSL also cited the law in a March advisory for states seeking new approaches to regulating drug prices.

The appeals court's finding could have a chilling effect on such efforts, especially as more state legislatures wrap up business for 2018.

"A negative court ruling will put a damper or a pause on state activities," says Richard Cauchi, NCSL's health program director. "Unless this topic is your number one priority of the year, your legislators are juggling multiple bills, multiple strategies. When bill three gets in trouble, they move to bill four."

The appeals court held that Maryland's law overstepped limits on how states can regulate commerce — specifically, a constitutional ban on states controlling business that takes place outside their borders. The majority ruling argues that since most manufacturers of generic drugs and medication wholesalers engage in trade outside Maryland, the state cannot control what prices they charge.

In a dissenting opinion, the panel's third judge argued Maryland can regulate the drug prices charged within the state since it only is meant to affect medications being sold to its own residents.

Kesselheim, in an article published last month in the medical journal JAMA, argued a similar point.

Regardless, striking down a law on constitutional grounds can be particularly discouraging, says Rachel Sachs, an associate law professor at Washington University in St. Louis, who researches drug regulations.

"If it had been a rejection on vagueness grounds, that's something you can cure with a more specific statute," she says. "But the fact that they said this is unconstitutional poses real concern for other states."

That's important. While the federal government has talked a big game on bringing down drug prices, it's done little. Instead, states have taken the lead — spurred by the budget squeeze pricey prescriptions impose on their Medicaid programs and on benefits packages for state employees.

But states have far fewer tools at their disposal than does Congress. Most state laws so far only tackle pieces of the problem — targeting a specific drug or particular practice, specialists in health law say.

"We'll get more broad and better evolution on this issue if the federal government decides to take it seriously — which it hasn't so far," Kesselheim says.

In the meantime, Maryland's law is only one of a bevy of approaches.

Other states have focused on price transparency laws. In California, drug companies must disclose in advance if a price might increase by more than a set percent, and the companies must justify that increase.

Drugmakers have sued to block the California law.

New York has limited what the state will pay for medications, establishing a process to review if expensive drugs are priced out of step with their medical value.

Since 2017, a number of states have passed laws regulating pharmaceutical benefits managers — the contractors who negotiate discounted drug coverage for insurance plans, but who rarely reveal what level of discount they actually pass on to consumers.

Health policy specialists expect that activity to continue, especially as drug prices show little sign of letting up.

"The states are going to keep trying and experimenting," Sachs says. "This is a problem that isn't going away."

Even efforts such as Maryland's — which targeted price gouging — will likely remain at the forefront.

"I don't think this is the end of states trying to do something on price gouging," says Ellen Albritton, a senior policy analyst at the consumer advocacy group Families USA, who consults with states on drug pricing policy. "It's such an issue that offends people's sensibilities. It's crazy [that] people can do this."

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