Prescription Drug Pricing Pathfinder
Potential Problems with Controlling Drug Prices

Congress will likely encounter little resistance, beyond the normal political wrangling, in its efforts to add a Medicare drug benefit or otherwise adjust for high prescription prices, because Congress is clearly acting within its permitted legislative powers in regulating the drug industry. However, efforts by the states may be vulnerable to legal challenges if they exceed their regulatory authority by trying to cap prices. Both Congress and the states are sure to encounter fierce opposition from the politically powerful pharmaceutical industry.

 1. States may exceed their regulatory authority

The previous version of the Maine law, and perhaps the enacted version as well (see the Pathfinder Page on Current Legislation), are vulnerable to a legal challenge under the Commerce Clause (Article I, Section 8, Clause 3) of the United States Constitution. Under the Commerce Clause, only Congress may regulate "interstate commerce." While Maine is seeking to set prices in Maine alone, the effect of its setting prices may extend beyond state boundaries by forcing drug buyers in other states to bear more than their "fair share" of the cost of the drugs: that's a violation of the Commerce Clause. Although Maine's law does not directly regulate prices--instead, it creates a purchasing group--the fact that the purchasing group will represent half the purchasers in the state may in effect be construed as a form of price regulation. California's SB 393 could run into similar difficulties, as it caps prices for Medicare beneficiaries.

The U.S. Supreme Court has invalidated similar laws that sought to protect buyers within a particular state. The following Court cases may be helpful in understanding potential challenges to Maine's law, or others like it, that seek to set drug prices within the state. (Kudos to Boalt Professor Jesse Choper for pointing the way to these cases.)

Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573 (1986): The Supreme Court held 5-3 that a New York law requiring liquor distillers or producers selling liquor to wholesalers in New York to sell at a price that was no higher than the lowest price the distiller charges wholesalers anywhere else in the United States violated the Commerce Clause. Twenty other states had similar laws. Stating that "[e]conomic protectionism is not limited to attempts to convey advantages on local merchants; it may include attempts to give local consumers an advantage over consumers in other States," the Court found the law to be an unconstitutional "extraterritorial" attempt to regulate interstate commerce.

Healy v. The Beer Institute, 491 U.S. 324 (1989): The Court similarly invalidated a Connecticut law invalid where beer distributors were required to post monthly what their prices for the following month would be, and affirm that Connecticut prices were no higher than prices in the states bordering Connecticut.

Some products and services, such as insurance and milk, are regulated by states. However, the states regulate these products pursuant to a specific grant of Congressional authority. See, for example, 15 U.S.C. Sec. 1012(a) of the McCarran-Ferguson Act, granting states the right to regulate insurance and insurance prices. Absent similar legislation granting states authority to deal with prescription prices, the states may be exceeding their authority.

2. States may violate antitrust laws

A discussion of this issue is beyond the scope of this pathfinder. However, some economists feel that state efforts to fix prices, especially if the efforts extend across state lines, could have antitrust implications. For information on antitrust, see the Federal Trade Commission (FTC).

3. Price regulation may impair research and development of new drugs

A common argument in favor of American price regulation is that most every other industrialized country has it. Therefore, American consumers are paying a greater percentage of the research and development costs for pharmaceuticals than citizens of other countries. However, if American prices are forced down, there may be no one left to shift the costs to. See the Pathfinder page on Pharmacy Industry Costs.

4. The pharmaceutical industry has tremendous political clout

The pharmaceutical industry is one of the most powerful forces in politics, and one of the biggest political contributors. The industry's clout is evidenced, for example, by the fact that it has been able to get special legislation enacted to extend its patents.

For information on political contributions, see:

 



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