In fiscal year 2014-2015, California spent nearly $3.8 billion on prescription medicines, equal to the entire GDP of Malawi. A bit over 80 percent of this amount was for Medi-Cal (the Medicaid welfare program) and the Public Employees’ Retirement System (CalPERS).
In California, state agencies negotiate medicine prices with manufacturers. In some situations, different state agencies can pay different prices for the same medicine. Proposition 61 is intended to restrict the amount that any state agency could pay for medicines , tying it to the medicine price paid by the US Department of Veterans Affairs (VA) which negotiates with pharma. Specifically, Proposition 61 would forbid state agencies to enter into any purchasing agreement with medicine manufacturers unless the net cost of the medicine is the same or less than that paid by the VA to the manufacturers. Pharma is not, however, obligated to offer the lowest VA prices. Prop 61 only applies to the purchasing of medicines by state agencies and does not apply to individual purchases.
The “No” lobby has outraised supporters by six-to-one. As of November 1, 2016, opponents had raised about $110 million, while the “Yes” lobby, lead by Californians for Lower Medicine Prices had received $16.86 million. The top ten donors to “No” on Prop 61 are all pharmaceutical companies or companies with interests in the pharma industry. Over 99 percent of contributions to Californians for Lower Medicine Prices came from the AIDS Healthcare Foundation. The most recent polls, if you believe them, indicate support for Proposition 61 to be around 50 percent.
California’s Proposition 61 is generating plenty of heat, but little light. A senior strategist in charge of the “Yes” campaign, asserted that “despite …. lies and distortions” by pharma, proponents are still confident of passage. Once one gets past the ‘official positions,’ there are plenty of different ways this could play out.
It appears that nobody in California, or anywhere else for that matter, has given an accurate estimate of how Proposition 61 would actually impact state finances.
It appears that nobody in California, or anywhere else for that matter, has given an accurate estimate of how Proposition 61 would actually impact state finances. This is probably because there are potentially several different ways that pharmaceutical companies could react to its passage, all with different possible fiscal impacts on the state.
Pharma Could Offer the Lowest VA Prices to the State
If pharma agrees to offer the lowest VA prescription drug prices to the state agency, this measure may achieve state savings to the extent that the lowest price paid by the VA is lower than that paid by state entities. However, these savings could be at least partially offset if manufacturers raise the prices of other medicines paid for by the state but not purchased by the VA. Personally, I wouldn’t put it past them to do that.
- If for some reason CalPERS may not be able to get the required medicine prices, it is effectively breaching its contracts with third-party pharmacies and insurers upon whom it relies. If Medi-Cal similarly could not achieve the VA prices—and therefore couldn’t purchase medicines—it would violate federal law.
- Pharma Could Decline to Offer the Lowest VA Prices to the State Since Prop. 61 does not require pharma to offer prescription drugs to the state at pharma’s lowest VA price, this could result in various state responses, such as modification of state formularies and/or offering medicines that the VA doesn’t purchase.
- Pharma Could Even Stop Giving Discounts to the VA This might happen if pharma wanted to make up for the lower amounts California would be paying under Prop 61. This particular scenario seems far-fetched at best, as it would likely end up increasing prescription medicine costs for veterans and that, as they say, is “bad optics.” For sure, pharma probably will leave a lot of money on the table if they decide to walk away from the California market- all the more reason to spend over $100 million to fight Proposition 61.
“Laboratories of democracy” is a phrase popularized by U.S. Supreme Court Justice Louis Brandeis to describe how a state has sufficient autonomy to act as a social “laboratory” where laws and policies can be created and tested at the state level without directly affecting the entire country. If any one or more of those policies are successful, they can be expanded to the national level by acts of Congress. California’s is one big experiment. I trust that policy analysts and academics are already sharpening their pencils in order to monitor and evaluate Prop 61 if it passes. We already know how things are in its absence. One year from now, people in Ohio are scheduled to vote on a medicine price standards initiative that’s pretty much identical to Prop 61. Let’s hope there is enough data to replicate the experiment… or try something else.
Featured image: Lisa Yarost