In 2019, the Maryland state legislature, to much fanfare and despite a massive lobbying effort by the drug industry, passed a bill establishing a groundbreaking, first-in-the-nation means to try to tamp down drug prices: a Prescription Drug Price Affordability Board with power to limit what state and local facilities and health plans pay for medications.

Although six more states have since followed suit, the board has all but disappeared from the public’s radar — leaving some wondering what it’s been up to for the ensuing three years and when to expect tangible results.

The board has gotten off to a slow start — derailed by a 2020 gubernatorial veto — and faces the daunting task of setting up an independent government agency as well as developing the complex processes by which it carries out its work. The board is now on the precipice of releasing its first report outlining supply chain issues in the drug market as well as policy options and the first steps to address them.

“These kinds of things just take a long time if you do it the right way, so I think we’re on track,” said Andrew York, the board’s executive director. He notes that Gov. Larry Hogan’s veto “set us back a year or so, but everything else is moving as we would have expected.”

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Most state attempts to regulate the drug industry have been met with lawsuits alleging violation of federal law, underscoring the difficulty of trying to regulate a global industry within state borders.

Still, the board will release its first policy recommendations this month and a drug industry transparency initiative and insulin affordability program will follow shortly thereafter.

Work is off to a slow start

As often happens, the loftier aspirations of the bill creating the board were curtailed in order to reach a compromise that allowed it to pass. Instead of lowering drug prices for all Marylanders taking certain drugs, the limits set by the board now only apply to drugs purchased by state and local government facilities and health plans — which are typically dispensed to government employees and their families.

The measures have potential to impact drug costs for well over half a million people, said York. The board’s scope also applies to drugs paid for by state Medicaid plans that cover 1.2 million people. However, since Medicaid beneficiaries pay nominal co-pays, any savings would be reaped by Maryland taxpayers. It is also currently unknown how payment limits would interact with the rebates manufacturers must pay for drugs purchased by Medicaid in order to lower costs for state programs.

The 2019 bill did not include a funding source for the board; rather, it stipulated that one would need to be found by the following year. The legislature passed a bill during the 2020 session that imposed a $1,000 annual fee on drug manufacturers, pharmacy benefit managers (PBMs), insurance carriers, and drug wholesalers in order to fund the board. To get off the ground, the board received a $750,000 loan from the Maryland Health Care Commission.

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But Hogan’s veto slowed that timeline, arguing it would be “unconscionable” to raise Marylanders’ taxes to fund the board during a pandemic with vast economic impacts. Supporters of the bill expressed their confusion with that rationale and the legislature overrode Hogan’s veto in 2021. The board was finally able to begin its work.

Board members were appointed throughout 2019, with four seats currently filled and one still vacant. Van Mitchell, the board chair, previously served as Hogan’s health secretary. Members include academic experts in prescription drug policy and pricing.

Construction on the Maryland State House in Annapolis began in 1772 and it's the oldest state capital building in the nation still in continuous legislative use. The building's dome is undergoing a rehabilitation project.
Construction on the Maryland State House in Annapolis began in 1772 and it’s the oldest state capital building in the nation still in continuous legislative use. (Pamela Wood/The Baltimore Banner)

“Frankly I couldn’t think of a better team than some of the folks who are on there," said C. Alan Lyles, professor at the School of Public and International Affairs and School of Health and Human Services at the University of Baltimore. “I have great confidence that on the analytics side, they’re going to provide strong and robust results.”

For the legislative session beginning in January, the first priority will be to secure full funding for the board and find a way to alleviate its debt, said Vincent DeMarco, President of Maryland Health Care for All, an advocacy organization that helped spearhead the board’s creation. Advocates and policymakers eventually will focus on expanding the scope of the board to cover all Marylanders, DeMarco said.

The members of the state General Assembly who were key in drafting the Prescription Drug Affordability Board bill and getting it passed are in favor of expanding its purview, should its efforts prove successful.

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Sen. Brian Feldman, who chaired the Senate Finance Committee when it drafted the 2019 bill and now serves as vice chair, said the board’s current reach is “something of a pilot program” and “ultimately if this does work for state and local government in terms of controlling prescription drugs, the expensive ones, the ones with big increases in prices, then we could expand it to a broader universe.”

Del. Bonnie Cullison, chair of the Insurance and Pharmaceuticals Subcommittee, which drafted the House version of the bill, said “If things work the way that I believe they can, we can ultimately expand the scope and regulatory authority of the board, but we need to do it cautiously.”

Feldman added that the upcoming change in administration means a smoother path for any future expansion. “I think having a governor who’s not going to be resistant to all that will be helpful,” he said.

For now, though, upper payment limits, if and when they are enacted, will apply only to a subset of drugs taken by a fraction of the population. Capping what insurance pays for a drug also doesn’t guarantee any direct benefit for patients.

Jane Horvath, drug policy expert and mastermind behind the bill creating the board, said upper payment limits matter for patients who are still meeting their insurance deductible and paying out-of-pocket for prescriptions. She also pointed out that most of the high-cost drugs that will be targeted for payment limits are subject to coinsurance, not co-pays, where the patient must pay a percentage of the total cost at the pharmacy counter. Horvath previously worked for the National Academy of State Health Policy, where she drafted the bill.

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Cullison said reducing what insurance plans pay for drugs will also reduce premiums over the long term.

Perhaps most of all — and especially at first — upper payment limits will reduce costs for state and local budgets, which will trickle down to taxpayers. Feldman said the state currently spends $390 million on prescription drugs just for its own workforce.

A long process for setting payment limits

Since the legislature overrode Hogan’s veto, the board’s work has been to operationalize its legislative mandate to lower drug prices through upper payment limits and other methods it will determine, said York, the board’s executive director.

In other words, the board was given the “what” and asked to figure out the “how” — a monumental undertaking in the world of drug prices, notorious for both the complexity and opacity of its supply chain. York notes the administrative work involved in erecting an independent government agency from the ground up has also been time-consuming.

“We’re in the process of developing the process” for conducting cost reviews of certain drugs and determining upper payment limits, York said. Once this process is nailed down, it will need to be approved by the board and then the Legislative Policy Committee, made up of House and Senate committee leadership. Once approved, regulations governing the process must be drafted, with cost reviews slated to begin taking place next year. Then the board can decide whether to set a payment limit for a particular drug.

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The legislation lays out criteria for what constitutes a “high-cost drug” — the only medications the board can set payment limits on — York said, and there are a few hundred drugs that currently qualify. The board is in the midst of developing a process for how to narrow this long list to a more manageable “handful” of drugs that will undergo cost reviews, likely on a rolling basis, York added.

The cost review process itself also needs to be mapped out. Once a cost review of a drug is conducted, the board will determine if it presents an affordability challenge for Marylanders — a criteria the board has yet to define, York said.

If the price of a drug is determined to present an affordability challenge, it is then “on the table” to have an upper payment limit, York said, or could be subject to “any number of [other] policies” meant to lower its cost.

York expects the cost review process to be finalized in the next few months, with formal regulations completed by early spring and multiple cost reviews conducted by the end of 2023. He plans to have an upper payment limit action plan drafted by early next year and sent to the board and the Legislative Policy Committee for approval. Once the plan is approved, upper payment limits can be implemented.

Eberechukwu Onukwugha, Prescription Drug Affordability Board member and executive director of the Pharmaceutical Research Computing Center at the University of Maryland School of Pharmacy, speaking at a forum hosted by Maryland Healthcare for All in 2020. Seated (L-R) are James Gutman, AARP executive council member; Vincent DeMarco, President of Maryland Healthcare for All; Johnny Olszewski Jr., Baltimore County Executive; and Congressman John Sarbanes.

In the near term, the board expects to introduce an insulin affordability program and have it up and running early next year. The program will cap insulin co-pays for Marylanders not covered by other programs, such as employees of large companies and the uninsured.

The board is also set to unveil a transparency initiative delving into, and hopefully rectifying, challenges in obtaining data from the drug industry. The secretive nature of rebates — kickbacks given from manufacturers to PBMs in exchange for insurance coverage terms more favorable to the manufacturer — make the net price of a drug impossible to determine.

“There’s a lot of information that’s hidden at every different link in the chain and that’s all related to pricing,” Cullison said. The board is “working on a process that will get the data that they need in order to make informed decisions and informed recommendations,“ she added.

“The prescription drug market is so complex and so opaque that it allows different stakeholders to point fingers at each other and you can’t actually identify where the challenges are coming from,” York said. Once they have assessed what data can already be accessed, “We would probably develop different kinds of reporting requirements,” for insurers, manufacturers and PBMs, York said.

“A lot of states are already doing this, but I don’t think anyone’s figured it out yet,” York said. The federal government now requires commercial insurers to submit cost data, including manufacturer rebates, for their highest-priced, most-prescribed drugs. The first tranche of data must be submitted by the end of this month.

Cullison said the state may seek “legal support” in acquiring data from the drug industry. “We’re going to have to live within the laws of the free market, but we’ll be testing it as far as we can go,” she said. The state may even ask the Federal Trade Commission to change their rules governing this data, Cullison said.

This month, the board will check off the first item on its to-do list when it releases its inaugural annual report examining the prescription drug supply chain, identifying what’s causing challenges for patients being able to afford medicines and proposing policy options to address them.

The work before the board is reminiscent of another decades-old health policy effort in Maryland, said Lyles; namely the 1971 creation of the still-operating Health Services Cost Review Commission, or HSCRC. The independent government agency administers Maryland’s unique all-payer hospital rate-setting system, and took three years to study rates before it began regulating them in 1974.

The agency was able to set rates only for private payers until 1977, when the state obtained a waiver from the federal government that brought Medicare and Medicaid into the mix and enabled HSCRC to set a universal standard rate. The commission has since successfully constrained hospital costs and saved billions for both payers and patients.

“It took some learning experiences, legislative as well as regulatory, before [the HSCRC] could be robustly what it became eventually,” Lyles said.

“Change is uphill, always, in health care,” he said.

Can states regulate drug prices?

There is broad consensus among the American public and most policymakers that drug prices are unaffordable. This worsens illness and can lead to premature death among people who are priced out of accessing the medications they need. States have begun to take action to lower drug prices on their own, largely out of sheer desperation.

“This is another example where states, on certain topics where Congress isn’t acting, feel compelled to try to take the lead,” said Sen. Feldman.

Despite their best efforts, it is difficult for states to regulate drug prices without running afoul of federal law which governs trade taking place across state lines — such as that occurring in the drug industry.

In 2017, Maryland passed a law cracking down on “price gouging” by generic drug makers that would have given the state power to reverse steep price increases or impose fines on offending manufacturers. A trade group representing the generic drug industry filed suit, and the law was ultimately struck down for violating the so-called “dormant commerce clause,” a federal law prohibiting individual states from regulating interstate commerce.

The District of Columbia government ran into the same roadblock when it enacted a law in 2005 that made it illegal for manufacturers of patented drugs to charge “excessive prices.” The law was found to violate both the dormant commerce clause and a federal patent law that the court interpreted to grant manufacturers “unfettered rights” to profit from their patented innovation, said Horvath.

In studying previous state drug pricing efforts and learning from failed attempts, Horvath found a weak point in the seemingly impenetrable barricade of federal law protecting the drug industry. The gap was a distinction — negligible to the untrained eye — between “prices” and “payments” for drugs. The courts had been clear that states weren’t allowed to set prices for goods bought and sold in a national market, but what about the amount paid for these drugs by insurers — entities that were licensed and regulated by states?

“You have to regulate within the state market” in order to pass legal muster, Horvath said, and this requires creativity when dealing with a global industry like pharmaceuticals. This conclusion — arrived at through trial and error of other failed state policies — is how she came up with upper payment limits set by a state regulatory body that oversees drug pricing. States are legally able to dictate what state-licensed entities — pharmacies, health care providers, wholesalers, and insurers — are allowed to pay for a drug, while avoiding setting prices.

A couple of recent court decisions have provided even greater assurance that the prescription drug affordability board may stand on solid legal ground, protecting it from future drug industry assaults. Another legal avenue leveraged by pharma to challenge state policy is a concept contained in the Constitution called federal preemption, which says that when federal and state laws conflict, federal law will prevail.

In the case of prescription drugs, preemption comes into play due to the Employee Retirement Income Security Act of 1974, or ERISA, the federal law governing employer-sponsored health insurance and the prescription drug coverage it provides.

ERISA specifically “carves out” state laws regulating insurance from its preemptive power, but the way it does this is vague and has formed the crux of many lawsuits — one of which recently made it to the Supreme Court.

In Rutledge v. Pharmaceutical Care Management Association, the court ruled unanimously that the state of Arkansas did not violate ERISA when it passed a law establishing a minimum rate for reimbursement from pharmacy benefit managers to pharmacies for covered drugs.

The law did not violate ERISA because it does not regulate insurance plans or alter benefits, the Supreme Court found; rather, it regulates PBMs themselves, which are licensed and overseen by the state.

These court decisions upholding the states’ ability to rein in key players in the drug industry “reinforces the fact that this is really the way to go; regulating your state entities and setting up payment limits of what they will pay,” Horvath said.

While “lawsuits flew quickly, immediately” in response to the 2017 law, Feldman said, none have surfaced in the three years since the law establishing the board was passed. But, he concedes, the board has not yet made or implemented recommendations to lower drug prices, including upper payment limits.

The six other states that have created similar drug affordability boards have not seen any lawsuits to date either, but their boards also have yet to get off the ground in terms of fulfilling their intended purpose. Colorado and Oregon are closest to implementation of upper payment limits. The Colorado law covers drugs dispensed to all state residents, not just state and local employees.

“I will not be surprised if we don’t go to court over upper payment limits, the first time we try to do it,” said Cullison.

York and Cullison are both hopeful that the board’s transparency — reflected in its large stakeholder council that includes members up and down the supply chain — may deter lawsuits or blunt any chance of their success.

“When we are taken to court, we will have the best case possible, and we will have done everything to that point in a very transparent way so that everyone knows what we’re doing” and “there are no surprises,” Cullison said.

Stami Williams, spokesperson for Pharmaceutical Research and Manufacturers of America, said government efforts often mean reducing patient access to treatments.

“We need to take steps to lower costs for patients, but threatening access to medicines is never a trade-off we should have to make,” Williams said. “Instead of putting the government between patients and the medicines their doctors prescribe, we need policies that lower costs at the pharmacy and protect access.”

Horvath predicts that the drug industry will sue over violations of patent law, as it did in the 2005 lawsuit against the District of Columbia. Many of the high-cost drugs targeted by the board will likely still be under patent without any market competitors to help drive down prices.

Although federal action is the optimal way to control drug prices, Horvath said, states function as “laboratories” of health policy innovation and show the federal government what’s possible. She noted that the Children’s Health Insurance Program and mental health parity — a law requiring insurance to provide equal coverage for physical and mental health — were both modeled in states before being adopted federally.

When multiple states engage in similar policy efforts to fix a particular problem, the federal government “ultimately is forced to pay attention and that’s when things can change,” Cullison said. “But in the meantime we’re going to do what we can in Maryland.”