Will Rx Ballot Initiative Save Money? Report Offers An Educated Shrug

It is “highly uncertain” how much money the state of California would save if a ballot measure to cap drug prices passes in November — and it might not save money at all. That’s the key finding in a preliminary report by the Legislative Analyst’s Office.

The ballot initiative, known as the Drug Price Relief Act, would prohibit the state from paying more for a prescription drug than the lowest price paid by the U.S. Department of Veterans Affairs. The VA is thought by proponents of the measure to get the best bargains from drug companies.

But the financial impact on the state is unclear, the analyst’s office said, for two reasons.

One, the lowest prices paid by the VA are not known and there’s no guarantee they will be revealed to the public — or to state officials.

Two, it’s unclear how drug companies would react if the measure became law: The companies might, for example, raise prices on the VA, nullifying the intended effect.

The VA does publish drug prices, but has not confirmed those prices are the lowest it pays, the analyst’s report noted. Without that information, the Department of Health Care Services could not know whether the prices paid by state agencies equaled what the VA was paying. Under the measure, it would be the department’s job to calculate the net cost of drugs — including rebates and discounts — for state health programs.

The analyst’s office has tried to verify the lowest prices, but the VA wouldn’t provide the information, Ben Johnson, a fiscal and policy analyst at analyst’s office, told state lawmakers in an informational hearing on the ballot initiative Tuesday. Drug manufacturers often require confidentiality clauses in price negotiations.

The report echoes one of the main arguments made by opponents of the measure, who say it would be difficult or impossible to implement if the state doesn’t know the lowest prices paid by the VA.

In the most recent fiscal year, state health programs spent about $4.2 billion on prescription drugs. However, the figure excludes drug spending by Medi-Cal managed care plans, which account for 77 percent of total Medi-Cal enrollment.

The ballot initiative is intended to benefit nearly 5 million Californians, mostly Medi-Cal fee for service enrollees, public employees and retirees. It would not apply to the 10.3 million state residents enrolled in Medi-Cal managed care.

Even if the VA’s lowest prices could be identified and the measure enforced, according to the report, drug manufacturers would be free to respond in various ways.

They could refuse to offer VA-level prices to the state. They could offer the state the same reduced prices they charge the VA and then raise the prices on other drugs purchased by the state but not by the VA. Or, they could raise VA prices.

The last has been tried before, with success. Dr. Jeffrey McCombs, a health economist at the University of Southern California Schaeffer Center for Health Policy and Economics, said that in the early 1990s, Congress passed a law requiring pharmaceutical companies to give Medicaid the same discounts they gave the VA.

In response, drug companies raised prices, and the discounts evaporated. Congress then eliminated the link between VA and Medicaid pricing.

“I guarantee you won’t get the VA price because the VA price will cease to exist,” McCombs said. “Drug companies are not going to take that kind of loss.”

The Drug Price Relief Act is sponsored by the Los Angeles-based AIDS Healthcare Foundation.

drug-costs_770At Tuesday’s State House hearing, Assemblyman David Chiu (D-San Francisco) said the measure was important because the legislature has failed to address soaring drug prices and now voters will get a say.

“Regardless of what happens in November, it is my hope that we are able to move this conversation forward,” Chiu said after pressing opponents of the initiative for alternative solutions.

Garry South, lead strategist for supporters of the measure, said the AIDS Healthcare Foundation pushed it because the high cost of prescription medications often means patients who need them can’t get them.

“What good is it to have a life-saving drug if people can’t afford to take it?” South said.

The California Nurses Association also endorses the measure. Zenei Cortez, the union’s co-president, said it offers the best chance to stop the drug industry’s “excessive greed.”

But some veterans and patient advocacy groups say the initiative could do more harm than good.

“This measure is misleading and unworkable,” Hollaine Hopkins, executive director of the Lupus Foundation of Southern California, said in a prepared statement. “It will lead to increased red tape and bureaucracy, and could actually increase costs for the state’s taxpayers.”

Kathy Fairbanks, spokeswoman for Californians Against the Misleading Rx Measure, the lead group opposing the initiative, said it could actually increase drug prices and lead to higher insurance premiums. The group is mostly financed by pharmaceutical companies.

Fairbanks said the measure could invalidate existing rebate agreements between drug companies and the state, jacking up prescription costs by tens of millions of dollars.

In reply, South said that only the pharmaceutical companies have the power to hike drug prices. “These are not predictions; these are threats,” he said.

Opponents of the measure had raised more than $58 million as of May 4, according to the California Fair Political Practices Commission. The AIDS Healthcare Foundation has raised a little more than $4 million in support of the initiative.

Related Topics

Capitol Desk Cost and Quality Health Care Costs Medi-Cal