State Drug Price Cap Laws: How Do They Work?

By Rachel Sachs

Two weeks ago, I blogged here about various state bills designed to encourage transparency in the pharmaceutical industry, by requiring companies to disclose information about their research & development costs, marketing expenses, and prices charged to different purchasers. In that post, I glossed over the state initiatives to cap drug prices directly, but as these initiatives have been more recently in the news, I want to focus on them here and ask a basic question: can someone explain to me how they would work?

Let’s back up. Two states, California and Ohio, are considering ballot initiatives that propose to cap what drug manufacturers can charge to public payers in the state (such as Medicaid).  The texts of the initiatives are nearly identical, with a few state-specific differences in the enumeration of entities eligible to pay the capped price.  As clearly stated in a comprehensive POLITICO article earlier this week by Nancy Cook and Sarah Karlin-Smith, the initiatives “would require the state to pay no more for prescription drugs than the U.S. Department of Veterans Affairs — one of the few federal agencies allowed to negotiate drug prices.”

We can and should debate whether price caps like these are a good idea, as a policy matter, and the Cook & Karlin-Smith piece canvasses a number of the arguments on both sides.  But first, we should be clear that the laws we’re enacting can actually accomplish their intended purpose.  And if they can’t, we should acknowledge that publicly.  I see at least two primary obstacles to the implementation of these price cap initiatives, and since they’ve largely been absent from the public discussion, it’s useful to state them explicitly.

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