On Friday, April 13, the U.S. Court of Appeals for the Fourth Circuit ruled in a 2 to 1 decision that Maryland’s generic drug pricing “gouging” law was unconstitutional because it violates the Commerce Clause.  This prudent decision will send a strong message to other state legislatures across the country not to pursue similar legislation.

The judges called the Maryland law what it was, a price-control measure, filled with ambiguities such as “price gouging,” “an unconscionable increase” that is “excessive” and “not justified.”  Maryland taxpayers should view this as a good decision, as there are better ways to drive down drug costs.

The Association for Accessible Medicines (AAM), the trade group for generic drugs, filed their lawsuit against the Maryland law on July 6, 2017, in U.S District Court, seeking an injunction to stop state officials from enforcing it on the grounds that it violated the Commerce Clause, was vague, and gave the attorney general arbitrary enforcement powers by allowing him to substitute his judgment for the free market.  AAM appealed when the district court ruled in favor of the state and argued its case before the Fourth Circuit on January 24, 2018.

The Circuit Court agreed with AAM’s arguments and stated the law is not triggered by conduct that occurs in Maryland, and even if it were, the law controls the prices of transactions that occur outside of the state, in this case the wholesale acquisition cost (WAC).  If similar laws should be enacted in other states, they would impose a significant burden on interstate commerce involving prescription drugs.

The Maryland law was the nation’s first generic price gouging bill.  It was pushed by Attorney General Brian Frosh and became law on May 27, 2017, without Governor Larry Hogan’s signature.  The governor’s letter to Speaker of the House Michael Busch (D-District 30A, Anne Arundel Cty.) said, “While I am very supportive of ensuring that essential healthcare needs, including access to affordable prescription drugs, are available to Maryland citizens, this legislation raises legal and constitutional concerns.”

Another important lesson about this law is that price controls are never the answer to lowering costs.  Anyone who was in their late teens or older in the 1970s felt the repercussions of the Nixon administration’s efforts to control inflation by instituting price controls.  Americans experienced higher prices in grocery stores, long lines at gas pumps, market distortions, and shortages across a spectrum of products.

It is understandable why people are concerned about high drug prices, but the best antidote is an environment that fosters competition.  “Pharma Bro” Martin Shkreli’s company Turing was able to jack up the price of the drug Daraprim from $13.50 to $750 per pill, even though its patent had been expired for many years, because there was no generic competition.

Generic drugs represent almost 90 percent of all prescriptions, yet account for only 26 percent of total prescription drug costs.  Generic manufacturers already face hurdles, including patent litigation, to get their pharmaceuticals approved by the Food and Drug Administration (FDA).  These companies face a FDA backlog of 4,158 abbreviated new drug applications (ANDAs).  That’s enough to discourage some generic firms from investing the funds needed for a drug’s approval, especially if it has a relatively small market. 

Attorney General Frosh stated he is “evaluating all options with regard to next steps” concerning the Circuit Court’s decision.  He should drop the case and not waste more tax dollars by taking it to the full Fourth Circuit en banc or the Supreme Court.

Instead, he should ask his congressional delegation to continue to hold the FDA’s feet to the fire to make sure the backlog of 4,158 ANDAs is cleared.  The agency is receiving $493.6 million annually until 2022 (adjusted for inflation) in generic drug user fees.  There are no more excuses for not reducing ANDA approval times.  More litigation and unconstitutional state laws won’t lower drug prices, competition will.