Over the past few years, many high-profile clashes over drug prices between pharmaceutical companies and the public have reflected the growing scrutiny of the pharmaceutical drug industry. From the 500% price increase of the EpiPen to Martin Shkreli’s 5000% price hike for an AIDS-related infection drug at Turing Pharmaceuticals, the general public and policymakers are demanding pharmaceutical companies justify these price hikes. To compound the outrage, many of the drugs subjected to these outrageous price hikes are generics that are cheap to produce and have been around for years. One result of these price increases is that policymakers are pushing for caps on drug pricing. For example, here is what is happening in the state of California.

 

Proposition 61: California’s Drug Price Standards Initiative

In the fiscal year 2014-2015, the state spent $3.8 billion on prescription drugs. More than 80% of the money was paid to Medi-Cal and California’s Public Employees’ Retirement System (CalPERS). State agencies in California can negotiate drug prices with the manufacturers; in some cases, they negotiate jointly, but in other cases, each agency negotiates independently. This leads to an untenable situation where different state agencies pay different prices for the same drug.

If passed in November, Prop 61 will prohibit state payers (i.e. Medi-Cal, CalPERS, etc.) from paying prices above what the U.S. Department of Veteran Affairs (VA) pays for drugs. Tying prices to the VA is a key move, as the VA gets a federally mandated 24% discount on a drug’s price. On top of that, VA state officials often negotiate the prices down further. Out of all government payers, the VA often comes out ahead in getting the best prices for drugs.

In contrast to the VA, Medicare, the largest government-run healthcare program, is prohibited by law from negotiating drug prices. Inability to negotiate is deeply concerning as Medicare Part D spending is projected to grow faster than other parts of Medicare by 5.8% between 2015 and 2025. Comparing the drug spending of these two programs (VA vs Medicare) reflects how important negotiations and discounts are as tools for curbing the government’s drug bills.

Because California is a large and influential state, if passed, Prop 61 could set a precedent for the rest of the nation. It should be no surprise that supporters and opponents of the proposition are both fighting hard to influence the vote—in fact, Prop 61 has become one of the priciest ballots to date in California.

If passed, it is estimated that Prop 61 would directly impact 12% of Californians—or 4.4 million people. This includes 3 million Medi-Cal patients, 838,000 state employees, and 294,000 University of California and Cal State University teachers and employees. Those who are unaffected include 10.4 million Medi-Cal managed care patients, private insurance enrollees, and public school district employees.

 

Financial impact

According to California’s nonpartisan Legislative Analyst’s Office, the potential savings from the initiative is unknown. The Office notes two key challenges for calculating the savings:

  1. How the measure’s implementation challenges are addressed.
  2. The responses of drug manufacturers regarding the provision and pricing of their drugs.

Regarding prices, while the VA’s drug pricing schedule is public, the actual price that the VA ends up paying is hidden in non-disclosure agreements. Without knowing the true prices, it’s extremely difficult to calculate the true financial impact of the initiative.

Another factor to consider is how drug companies might respond. Opponents warn that any savings would be null if drug companies simply raised their prices in retaliation. Some veteran groups were concerned that the bill would jeopardize the deals that the VA wins on behalf of veterans.

In all, it’s hard to tell what the financial impact would be without knowing what the VA truly pays, and without knowing how drug companies will respond—the savings could be in the millions, or the bill might backfire if drug companies retaliate with higher prices, leaving the state in a worse-off position.

 

Who is supporting Prop 61?

Proponents of Prop 61 have raised $9 million, championed by the AIDS Healthcare Foundation. Other notable supporters include the California Nurses Association, the American Association of Retired Persons, former U.S. Secretary of Labor Robert Reich, and U.S. Senator Bernie Sanders, who has featured in many ads supporting the proposition.

Supporters focus on the financial burden that consumers bear over skyrocketing drug prices, and others are hopeful that the bill’s passage will set off a domino effect for the rest of the nation. Other supporters focus on the potential cost savings of the measure, believing that it could save $5.7 billion for California over the next 10 years.

 

Who opposes the proposition?

Unsurprisingly, the main opponents of the bill were almost all major pharmaceutical companies, represented under the Pharmaceutical Research and Manufacturers of America (PhRMA). The Committee against the bill raised $86 million by August, which makes the $9 million from the pro-side pale in comparison.

Other opposing groups span from taxpayer, labor, community, health, and veterans groups, such as Veterans of Foreign Wars, the California State Council of Laborers, and the California Medical Association.

As stated before, the opposition warned that the bill’s attempt to control prices would backfire if drug manufacturers raise prices. Veteran groups have said that it would endanger current and future negotiations that state payers and drug companies agree on. Consumer and patient advocacy groups are worried that the state might lose access altogether for valuable drugs, which would significantly lower the value of state-funded insurance and put its beneficiaries, namely at-risk elderly and low-income populations, at risk for ineffective treatments.

 

What can we learn from the failure of past drug pricing initiatives?

Two separate bills attempting to curb pharmaceutical drug prices were proposed—and failed—this past year in California legislation. SB 1010, introduced earlier this year, would have mandated health insurers to report drug costs to state regulators and would require drug manufacturers to send price increase notifications to resellers. However, the bill was significantly watered down as it circled through committees and was pulled just before a vote, killing the bill.

AB 463, introduced in 2015, would have required drug manufacturers to publish operational costs for drugs priced over $10,000 per year or per treatment to understand and justify the high prices behind them. The bill was also pulled before a vote due to concerns that there wouldn’t be enough votes for it to pass.

In both cases, pharmaceutical companies lobbied ferociously, and the bills were killed before the vote. These two cases reflect the overwhelming power and influence of the drug lobby in the legislative process, which explains why no meaningful reform has been accomplished to date despite national outcry over high drug prices. It is also the challenge that Proposition 61 faces as it makes its way to the November vote.

 

The verdict

Prop 61’s strategy to tie drug prices to the VA is a notable attempt to reign in what many feel is out-of-control drug spending. When evaluating the bill solely on administrative efficiency, Prop 61’s main weakness is that it only regulates state payers in the contracts they enter with drug companies. But without federal restrictions on the other end, manufacturers can easily hike up their prices to state payers, which does nothing to fix the problem. Ultimately, the most difficult barrier to passing any meaningful drug reform policy will be overcoming the intense and well-funded efforts of the “big pharma” lobby. The battle over Prop 61, regardless of whether it passes or fails, will certainly add fire to the nation’s fight over drug pricing.

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