Blog Post

What to believe (and not believe) about the new CA drug price law

November 8, 2017

    California's new drug price transparency law (SB 17) has, understandably, sent shock waves across the pharmaceutical industry—after all, the measure has been called "the nation's most sweeping effort" to make prescription drug pricing more transparent.

    In a nutshell, the law requires drug manufacturers to provide notice to payers and consumers 60 days in advance of a planned price hike of 16% or more. Furthermore, it requires manufacturers to provide justification for the hike.

    Though the law may disrupt the drug supply chain, we believe that the measure will not have considerably harmful implications for pharmaceutical manufacturers. Below, we've distilled out three myths and facts that you should bear in mind in light of this measure being approved.

    Myth: Patients will benefit the most from the law

    Fact: Pharmacies and PBMs will emerge as winners

    Contrary to what policymakers intended to achieve, the measure may offer minimal benefits to patients as it won't help decrease soaring drug prices. In fact, the main beneficiaries of this law will be pharmacies and pharmacy benefit managers, because they will have the opportunity to arbitrage. The 60-day notice window gives them the opportunity to increase profits through arbitrage.

    Once notified that drug prices will increase, pharmacies and PBMs can speculatively buy extra inventory at the lower price. After the price increase goes into effect, they can administer the drugs they bought at the cheaper rate and get reimbursed at a higher rate. The hoarding of inventory could create an artificial sense of shortage, possibly disrupting the pharmaceutical distribution chain and reducing patients' access to crucial drugs.

    Myth: The law will drastically impact drug utilization and prescribing patterns

    Fact: The law will not significantly change purchasers' and clinicians' behavior

    While it may seem that manufacturers' revenue prospects will be adversely affected by the CA law, our Advisory Board research points to the opposite. Consumers and prescribing physicians will unlikely change their behavior due to increased drug price visibility. Most evidence shows there isn't a strong link between increased access to price and quality data and increased consumer usage of this data. Our research illustrates that even payers' own cost estimator tools don't strongly influence consumers' purchasing behavior or encourage increased shopping of medical services.

    The impact on physicians will also be limited. We've heard very few anecdotal reports of physicians actively tracking drug prices and factoring those costs into formulary and prescribing decisions. Until consumers, employers, and physicians can view the actual prices paid, including rebates and discounts, we don't think this kind of transparency will yield any substantial buyer pressure that could affect future pricing, prescribing, or utilization decisions.

    Myth: The law is a one-off, isolated regulatory effort

    Fact: The law will continue to push greater drug price transparency

    Though there is resistance to adopt drug pricing legislation—Nevada and Maryland have drug price transparency laws and are both being sued—and Ohio voters on Tuesday rejected a measure to cap drug prices, we do expect many states to drive various forms of drug pricing transparency in the future. Manufacturers should keep negative PR implications in mind as the law will motivate state officials and media to closely track pricing trends and potentially bring a story to the forefront if there is a perception of price gouging.


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