Continuing its focus on consumer protection enforcement, the New York State Department of Financial Services (“DFS”) recently announced an investigation into alleged price spikes for six drugs connected to treatments of COVID-19 medical conditions.[1] According to DFS, its newly-formed Office of Pharmacy Benefits (“OPB”) commenced the investigations under Insurance Law § 111 into what it characterizes as “anomalously large spikes” in the prices of the six drugs, occurring since the onset of the COVID-19 pandemic. These medications are Ascor, Budesonide, Dexonto, Mytesi, Duramorph and Chloroquine phosphate, each of which has some actual or claimed therapeutic use for COVID-19 conditions.
DFS used its new authority under Section 111 to demand information from drug manufacturers, under oath, that explains the facts and circumstances surrounding the alleged price spikes. That provision provides broad authority for the Superintendent to demand “a statement in writing under oath or otherwise as to all the facts and circumstances concerning the price increase which [the Superintendent] believes it to be in the public interest to investigate.” The statute is implicated where (a) the cost of the pharmaceutical “is contemplated to be paid by a policy approved by the department for offering within the state,” and (b) the price of the pharmaceutical increases over the course of a 12-month period by more than fifty percent, to an amount greater than $5 per unit. Additionally, the statute appears to require some basis to believe that the party being investigated caused the price hike through fraud, false pretenses, or some other violation of law.[2]
Applying some historical gloss here, the New York legislature took a significant step in its 2010 enabling legislation, when it provided DFS with enforcement powers over non-licensed entities under the new Financial Services Law (“FSL”). Section 408 of that law is generally designed to deter and punish intentional fraud committed in connection with any covered “financial product or service,” without regard to whether the product or service is offered by an entity licensed by DFS. The agency has since used this authority to investigate unregulated companies both in and out of New York that have engaged in conduct sufficient to impact New York residents and confer jurisdiction upon the agency.
The legislature took a similar approach with its 2020 legislation establishing the OPB and providing it broad investigatory powers. The law sweeps into its ambit any person or entity that is involved in the “advertisement, purchase or sale” of a prescription drug within New York State under certain circumstances, or any person or entity involved in any “practice or transaction or course of business relating to the purchase, exchange, or sale of prescription drugs” that is “within or from this state []” under enumerated circumstances indicating impropriety. The scope of the law thus would appear to cover any entity involved in the supply chain for prescription drugs including manufacturers and pharmacy benefit managers[3] — entities typically not regulated by DFS.
Section 111 also provides DFS with broad subpoena powers to investigate allegations of drug pricing misconduct. As with the expansive subpoena powers under FSL § 306, this new section grants DFS the power to subpoena documents and compel testimony under oath. Moreover, the statute itself provides for enforcement by DFS of its information demand or an effort to obtain documents or testimony by subpoena – a violation is punishable by a civil monetary penalty of up to $1,000 per day.[4] An affirmative challenge to such a subpoena likely would have to be initiated in a New York state court of competent jurisdiction.[5]
Any information obtained by DFS pursuant to a Section 111 investigation is confidential and may only be disclosed to the Drug Accountability Board (“DAB”), which was created in the same 2020 legislation.[6] Upon receiving a referral from the Superintendent, the DAB shall report back about such things as “the drug’s impact on the premium costs for commercial insurance” in New York and “whether increases in the price of the drug over time were significant and unjustified.”[7]
Following receipt of the report from the DAB, the Superintendent may take a number of steps, including releasing the report publicly and holding a public hearing.[8] In its press release announcing the investigation, DFS stated that if its review “finds illegal conduct occurred or that a price spike was not justified,” the report also may result in a referral to other relevant legal authorities.[9]
Notably, should DFS find fraudulent conduct, it has the power itself to investigate the matter further. The Insurance Law provides DFS both civil and criminal authority to investigate fraud committed against a licensed insurer.[10] The DFS criminal authority is little noticed, but in 2019 the agency received more than 25,000 referrals for possible insurance fraud, opening 73 health care fraud investigations that resulted in 125 arrests.[11] In a recent podcast, DFS Superintendent Linda Lacewell said that her expectation is that this drug pricing investigation, while not “typically” resulting in a criminal referral, will create “transparency” that will be “motivating.”[12]
DFS also noted in its press release that commencement of the investigation did not mean that a price spike was unlawful “or even unjustified”; and promised that, if it is determined that a valid reason justified a scrutinized price spike, DFS would publicly announce that as well and close its investigation.[13] DFS thus will seek to provide some transparency in an area which has traditionally been opaque.
Some important takeaways from commencement of this investigation include the following:
- With these new powers, DFS has expanded its consumer protection capabilities in the controversial area of prescription drug pricing, and signaled it is ready to take action if improper conduct is found. However, determining what is improper may be quite complicated.
- Health insurers licensed in New York may benefit from this type of investigation as well, as they are the ones that bear the cost of many of these prescription drugs.
- The new DFS authority evinces similarity to (and maybe overlap with) authority conferred more generally upon the New York Attorney General, who can investigate unfair, deceptive or abusive practices under General Business Law in virtually any area impacting consumers.[14]
- How DFS uses this authority may influence future efforts to expand its jurisdiction even further. We expect this investigation will be closely watched.
Footnotes
[1] https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202101212
[2] See N. Y. Ins. L. §111(a).
[3] See id.
[4] N.Y. Ins. L. § 111(c). A violation may be found only following notice and hearing.
[5] N.Y. Ins. L. § 111(b).
[6] N.Y. Ins. L. § 202.
[7] N.Y. Ins. L. §§ 111(d) & 202.
[8] N.Y. Ins. L. § 202(g), (h).
[9] https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202101212
[10] See, e.g., N.Y. Ins. L. §§ 109, 404.
[11] “Investigating and Combatting Health Care Fraud,” (Mar. 2020) (PDF: 340 KB).
[12] See “The Capital Pressroom” (Feb. 1, 2020), available at wcny.org/new-state-watchdog-pursuing-prescription-drug-price-gouging/.
[13] https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202101212.
[14] See N.Y. Gen. Bus. Law. §§ 349, 350.
Matthew Levine is the president of the financial and regulatory compliance services practice at Guidepost Solutions, and previously served as the Executive Deputy Superintendent for Enforcement at the New York State Department of Financial Services.
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