Federal Circuit Rules Prescription Drug Price Controls Preempted

The U.S. Court of Appeals for the Federal Circuit has ruled that the District of Columbia's attempt to exercise price controls over prescription drugs is preempted by federal patent law.  Biotechnology Industry Organization v. District of Columbia, No. 2006-1593 (Fed. Cir. Aug. 1, 2007).

The suit arises out of the District's enactment in December 2005 of the Excessive Pricing Act, D.C. Code § 28-4553, which provides, in pertinent part:

It shall be unlawful for any drug manufacturer or licensee thereof, excluding a point of sale retail seller, to sell or supply for sale or impose minimum resale requirements for a patented prescription drug that results in the prescription drug being sold in the District for an excessive price.

While the Act does not define "excessive price," it does note that a prima facie case of excessive pricing is made when the wholesale price of a prescription drug is "over 30% higher than the comparable price in any high income country in which the product is protected by patents or other exclusive marketing rights."  Id. at § 28-4554(a).

It is crucial to note that the substantive issue in the case is a narrow question of patent preemption.  That is, the issue is most assuredly not whether such price controls are constitutional, nor is it whether Congress could enact measures empowering agencies or states to impose price controls.  The issue is solely whether the District of Columbia's legislation is preempted by the federal patent scheme.

Really, the specific patent issues we are talking about here revolve around the Hatch-Waxman Act of 1984, which extend patent exclusivity and other kinds of protections to pharmaceuticals.  The rationale for doing so, of course, is that patent protection both rewards and encourages innovation.  However, patent protections exert upward pressures on pricing, and the Federal Circuit noted in its opinion that the two objectives of the Hatch-Waxman Act, to "reward innovators with higher profits and to keep prices reasonable for consumers—are in dialectic tension."  Biotechnology Industry Organization, 2006 at *16.

The Court reasoned that the patent provisions of the Hatch-Waxman Act reflect Congress's attempt to balance these divergent goals, and that the District's efforts to control prescription drug prices impermissibly usurp Congress's rule in striking the balance:

By penalizing high prices—and thus limiting the full exercise of the market power that derives from a patent—the District has chosen to re-balance the statutory framework of rewards and incentives insofar as it relates to inventive new drugs . . .

The District has thus seen fit to change federal patent policy within its borders. The underlying determination about the proper balance between innovators’ profit and consumer access to medication, though, is exclusively one for Congress to make.

Id. at *18.

Accordingly, the Court ruled that the Excessive Pricing Act is preempted by the federal patent scheme.

Again, the Court was not ruling on the policy wisdom of the District's efforts to control prescription drug prices.  Indeed, they conceded that the Excessive Pricing Act "may be a worthy undertaking on the part of the District government . . . ."  Id.

It is difficult for me to see how the Court could have reached any other conclusion.  I do not see how the Excessive Pricing Act is anything other than an attempt to redraw the boundaries of the patent scheme under which prescription drugs are priced in the U.S.  For better or worse, this scheme is well within the auspices of congressional authority -- patents are an enumerated power under Article I, § 8 of the U.S. Constitution.

What this decision means, then, is not at all that centralized control over prescription drug prices is inadvisable.  As Dan Callahan and Angela Wasunna note in their recent book, Medicine and the Market, it is beyond dispute that such government price controls are far and away the most effective downward pressure on prescription drug pricing.  Thus, the decision simply means that the discussion on whether such policy is advisable must take place on the federal, rather than the state level.

The full-text opinion is available on the Court's website (PDF).

UPDATE: As it turns out, Rep. Chris Van Hollen (D-Md.) has initiated the discussion on the federal level, by introducing a bill that would permit states to negotiate discounts on prescription drug prices for residents who lack drug coverage and who earn less than 300% of the federal poverty level.