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The ballot measure to regulate drug pricing in California, headed to voters this fall, is so new it doesn’t have a proposition number yet. It’s called the California Drug Price Relief Act, and it would mandate that the state pay no more for prescription drugs than the U.S. Department of Veterans Affairs.

The idea is to lower medication costs for any program in which the state pays for a drug, even if it doesn’t directly purchase it. That includes health coverage for Californians in state hospitals, state prisons, and Medi-Cal fee-for-service (about one-sixth of the state’s Medi-Cal population), as well as current and retired state employees in the California Public Employees Retirement System (CalPERS).

David Gorn sat down with Rand Martin, Sacramento lobbyist for the AIDS Healthcare Foundation, which is sponsoring the ballot measure, and Kathy Fairbanks, campaign consultant for the committee opposing it.

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Here’s an edited transcript of the conversation:

David Gorn: This is David Gorn, Kaiser Health News, with a discussion of a new ballot measure in California — one to regulate the price of some prescription drugs.

The high cost of medication has made headlines recently with two high-profile stories. The introduction of a drug called Sovaldi did not just cause a stir because of its breakthrough treatment of Hepatitis C, but because the cost for treatment was pegged at $1,000 a pill.

This story can be republished for free (details).

And Martin Shkreli may be the first CEO of a drug company known by name to many Americans – for acquiring a drug used to treat toxoplasmosis, which often afflicts AIDS patients, and then hiking the price 5-thousand-percent — from $13 a pill to $750 per pill.

That kind of seemingly random price-setting by drug companies has provoked outrage across the country about the high cost of medication. In California, a new ballot initiative proposes to do something about it.

The ballot measure before voters in November would require the state to set its prescription drug prices at the same rate paid by the U.S. Department of Veterans Affairs.

With me is Rand Martin, Sacramento lobbyist for the AIDS Healthcare Foundation, which is sponsoring the ballot measure; and Kathy Fairbanks, campaign consultant for the committee opposed to the initiative. That committee is funded in large part by PhRMA, the Pharmaceutical Research and Manufacturers of America.

Gorn: Rand Martin, I’d like to start by asking you to explain why you think this initiative is so important.

Martin: This is an issue that’s been hovering in the public consciousness literally decades. I think back to my early years at AHF [AIDS Healthcare Foundation] as their lobbyist. They’ve sponsored bills repeatedly since the early 2000s because of concerns that have gone back to the mid-’90s relative to increased drug prices.

I recall in the late ’90s the editor of the New England Journal of Medicine, Marcia Angell, took this on as a cause and found that, even back then, the cost of drugs was much greater than the cost of actually making the drugs or doing the research and development. And it’s just gotten worse in the 20 years since she brought this to everybody’s attention. You already mentioned Sovaldi and Daraprim as two of the high-profile situations, but they are just indications of a much deeper problem.

California Voters Will Have Their Say On Drug Prices

Martin Shkreli, who’s been viewed as an outlier … is in fact indicative of how the game is played by more traditional members of the pharmaceutical industry.

We’ve seen drug prices skyrocketing in a matter of days, a matter of months. Most recently, doxycycline, which is one of the most commonly prescribed generic antibiotics, went up by about 9,000 percent in about a six-month period.

Gorn: The question is what to do about it. So Kathy Fairbanks, who represents the opposition: I know you have a number of questions and concerns about the viability of this measure. But maybe you could start with the opposite side of the question I just asked – why it’s so important to vote against this measure.

Fairbanks: Well, I want to go back to something you said, when you described what the initiative does. The way you described it was it would require the state to set its prescription drug prices at or below VA pricing. That’s not actually what it does. The language of the initiative, which governs how this would work in the real world, says that state agencies in California cannot enter into contracts with drug manufacturers for anything but at or below VA prices.

That’s all fine and well and good. However, the proponents would want us to believe that that language would lead to lower drug prices in California. We don’t think that’s going to be the likely result. We think the state could actually end up paying more for prescription drugs in California, patients could pay more, state taxpayers could pay more, and one really big red flag for a number of patient groups is patients could find themselves with reduced access or delayed access to needed medications.

Gorn: I definitely want to get into each one of those points. The basic idea of the measure is to match the VA rates, the rates of the Veterans Administration, but you do that by restricting the state from entering a contract to purchase drugs unless they can match the VA rates. So what happens if the state is unsuccessful in negotiating the same rate as the VA? Does the state have to make do without that drug?

Martin: I think the first question that needs to be answered really gets to Kathy’s assertion, and she’s absolutely correct: the language of the initiative talks about the contract requirements, not the price of the drug itself. But the reason why the situations Kathy is describing might occur is because the pharmaceutical industry comes back to California and says,” We’re going to go someplace else. We’re going to show our middle finger to the people of California and not give them a price that’s comparable to what our veterans are getting on a national basis.”

We really hope the pharmaceutical industry will make that the cornerstone of their argument against this initiative – that we’re going to say no to the people of California, that we’re going to continue to charge you excessive amounts of money for these drugs, as we don’t want to cut back on our profits.

Gorn: A related question is that the VA doesn’t reveal how it negotiates its drug prices. How is the state supposed to get that information? Can the state force a federal agency like that to cooperate with it that way?

Martin: The state cannot force the federal VA to provide that information. But I do know in years past the state Department of Health Care Services has done a pretty good job of estimating what those VA prices are.

The Congressional Budget Office, in a report that was done a decade ago but is still relevant, was able to demonstrate some differences in costs  the government pays, including the VA, including the federal supply schedule. And so there are ways of achieving substantial compliance with that drug price that the VA has for individual drugs.

I also should point out that the initiative only applies to drugs that are on the VA formulary. Obviously if it’s not a drug on the VA formulary the state would have to do as they’ve always done with those drugs.

Gorn: Well, I’m guessing that Kathy Fairbanks has something to say about the “estimating” and the “substantial compliance.”

Fairbanks: Yes, I think Rand’s right, there are estimates floating around out there. But again, looking at the language in the initiative, it says we need to know the ultimate net price paid by the VA. There’s the list price  Rand alluded to earlier that’s public, but that’s not always the final price paid by the VA.

Drug manufacturers offer additional discounts to the VA, and they offer additional discounts to the state — to Medi-Cal fee-for-service, for example, and other agencies. Those final prices are confidential. Federal law keeps that price confidential. And  the state of California also has the same confidentiality agreements in place here.

How will this be implemented? Because you can’t make an apples-to-apples comparison. We have a lot of initiatives in California, and many times we find  there are complications in the drafting. A lot of times these initiatives put on the ballot by one organization or one individual are drafted with one attorney or a couple of attorneys — a handful of people in a room —and they aren’t able to vet the policy thoroughly.

Gorn: So from your point of view then, what happens if the VA doesn’t cooperate?

Fairbanks: Well, litigation. How else do you enforce anything in California? Someone will sue the state, the state will be tied up in red tape, and lawsuits and litigation for years to come. Ultimately, that’s another taxpayer cost, it’s a delay. We would argue this is not the best way to put forward an initiative here in California.

Martin: Let’s be clear, there’s going to be litigation regardless of whether PhMartinA thinks this is a well-written initiative or not.

I’m absolutely confident that Obama did not sit back, when he was putting the Affordable Care Act together, and contemplate whether to move forward or not simply because the ACA could get wrapped up in litigation. It did get wrapped up in litigation. Obviously, we’ve seen lots of headlines about that. But he was ultimately successful.

We have every confidence that if there is litigation, we would be successful. The bottom line here is this is not so much an issue of the detail, because unlike most legislation that’s created in California, we’re not into the detail. We’re into setting the policy.

The people of the state of California set the policy and leave it up to the state of California to figure out how to implement that policy – whether it’s the Department of Health Care Services, which governs Medi-Cal, or CalPERs that has 1.6 million members.

Fairbanks: But no. That’s the problem with the initiative. You should be all about the details. The initiative can’t be drawn with one broad stroke. The details matter, because they can’t be changed.  This initiative [if approved by voters] can only be changed with a two-thirds vote of the Legislature and only in furtherance of the goals of the initiative.

Martin: Which means it can be changed.

Fairbanks: With a two-thirds vote. That’s very, very difficult to get, as you know, with anything in California.

So details do matter. That’s why we’ve got so many problems with initiatives. That’s why they fail. That’s why sometimes they result in unintended consequences. That’s what we’re worried about here. We’re worried about veterans paying higher prices — and Medi-Cal fee-for-service.

Gorn: So you’re worried about unintended consequences?

Fairbanks: Correct. Well, that’s one of the problems with the initiative.

Martin: But the reason veterans might be paying higher prices…

Gorn: Yes, let’s get into that, because that seems to be a critical point here…

Martin: Sure. Because pharmaceutical companies would charge more to the Department of Veterans Affairs to make up for what they lose because this initiative became law.

Fairbanks: It is possible that, yes, the VA might lose the discounts it currently gets. The VA today, as you know, gets discounts on drug prices. It’s a special program for the VA and the inducement is being on the Medi-Cal and Medicare formulary. It’s a program designed just for the VA, and when it was developed it was never intended to be broader than the VA. At the federal level there have been proposals over the years to expand the program to state and local governments and other entities, and the VA itself has come out against those proposals.

And the U.S. Government Accounting Office has also come out against them and said that the VA has been able to get lower prices from manufacturers, however if these manufacturers had to make these prices available to a larger market they might be less willing to continue to offer these prices.

Gorn: So the simple version of this is that the idea is a simple one — to match the low VA rates — but the end result of would be that California prices would remain the same and the VA prices would rise, is that accurate?

Fairbanks: Both could go up. It depends on the drug; it depends on the company; it depends on a lot of different things. I mean, this isn’t a one size fits all.

In some cases, the negotiations with the VA could result in the VA losing a discount. In other cases, maybe not. We can’t predict across the board with certainty what would happen.

You can’t apply a one size fits all solution like this and expect the market to continue its discounts.

Gorn: So Rand, why can we expect it?

Martin: [Manufacturers] have threatened that they might not maintain that discount, but we feel that’s a messaging piece in their campaign against this initiative — that people are going to lose if this becomes law.

If this becomes law and implementation begins, the industry is definitely going to be at a crossroads. They’re going to have to make a judgment about whether they want to screw over veterans and other people who are receiving prices that are far more fair, in exchange for maintaining their profits.

Are we as a society going to allow them to get away with that? Are we going to allow them to maintain the exorbitant profits that they have?

They make claims about how much money is going into research and development, as opposed to other cost centers in the pharmaceutical industry. And there is very clear research that they’re spending a whole lot more on advertising all of those wonderful drugs on television — where you have animated intestines talking to you and trying to get you to go to your doctor and ask for that particular very expensive drug — instead of putting that money into research and development.  Nineteen dollars are going into advertising for every dollar that’s going into research and development.

Gorn: The pharmaceutical industry stands to lose money here. They’ve raised $39 million already for this election, and it’s still nine months away. Why is it worth spending all of that money just to keep the state from matching VA rates?

Fairbanks: Because it’s going to have a lot of other consequences beyond what we’ve been able to talk about right now. But I want to go back to what Rand was saying.

And basically what I’m hearing is, “well we’ve got all these problems, we want to lower drug prices, we don’t care if our initiative is perfect, we don’t care if it would even work, but we’re ready to file lawsuits and just force the drug companies to do what we want.” But it doesn’t work like that.

Martin: To be clear, I didn’t say we don’t care.

Fairbanks: But you’re arguing that the language in the initiative is less important than the intent. And that just isn’t how it works. Unfortunately, the language matters and the consequences matter, because that’s what was filed with the Attorney General, and if it goes forward it can’t be changed unless we get a two-thirds vote of the Legislature.

This is very complicated policy and the Legislative Analyst’s Office hasn’t yet done its review because some of the pricing they couldn’t get their hands on.

We haven’t yet talked about how many people this impacts, I’d like to get into that.

Gorn: Yes. So to be clear, this initiative does not affect all Californians. It is limited to medications bought through state programs. And even that has exceptions. For instance, there are roughly 13 million people in Medi-Cal, but it only affects fee-for-service Medi-Cal, which is maybe 2 million of those people. It’s a relatively tiny slice of that population, though 2 million is still 2 million.

This measure affects a total of only 5 million people altogether. What’s the purpose of limiting it?

Martin: Well, the number is higher than 5 million. We calculate anywhere from 6 to 7 million when you include all the people that are covered under the master contract that the Department of General Services does for prisons, for state hospitals, etc. – as well as the 1.6 million members in CalPERs.

And if you take this to its logical extreme, the realignment of indigent care to the county means the counties will also be governed by this VA price. So it still has the potential to affect a lot of people.

One of the questions that has come up is, why is Medi-Cal managed care excluded from this calculation.

Gorn: I did wonder.

Martin: And it’s actually very simple. It’s because the managed care rate is calculated differently from fee-for-service.

Fee-for-service on drugs is, you pay dollar for dollar what the cost is. There’s a direct link between the two of them.

A Medi-Cal managed care contract has all the costs associated with providing services to a beneficiary, added together and then calculated together – in a magical method that escapes me sometimes. But that drug cost is not so easily carved out as it is for fee-for-service.

In addition to which, those drug costs are based on the fee-for-service drug experience that’s already happened, so when you’re contracting for Medi-Cal managed care you’re going back and looking to see what fee-for-service was paying for those drugs, and then folding it in. So you’re basically covering it twice.

At some point, if we’re successful in this initiative, fee-for-service, which is on its way out anyway, is going to start reflecting the reduced drug costs, which would then be reflected in the managed care contracts, and eventually everything will even out.

And the managed care contracts, if you could parse out the drug costs specifically, will begin to look a lot more like what the fee-for-service would have looked like.

Gorn: So really we shouldn’t be looking so much at the roughly 2 million people in Medi-Cal because over time that population will decline.

Fairbanks: Everyone is being moved to Medi-Cal managed care. I’m confused, though, because Medi-Cal managed care is specifically exempted from this. There’s a line in there that specifically exempts it. I heard what you said, that the pricing behaves differently but I find that hard to believe because you just mentioned that CalPERs would be included.

CalPERs doesn’t manage health care plans. They pay Kaiser, they pay Aetna, they pay Blue Shield. That’s a managed care program. So why would you all want to see CalPERs, and CalSTERs let’s say, those two entities included, and yet specifically exempt [Medi-Cal] managed care which are basically the same programs?

The only difference I can find is AIDS Healthcare Foundation operates Medi-Cal managed care health programs. Is there some reason to exempt Medi-Cal managed care because there’s another motive?

Martin: Well, there’s no other motive, AHF provides a lot of services that are not Medi-Cal managed care, so would be impacted in their fee-for-service programs and other programs that they provide.

There is a difference in how the Department of Health Care Services handles Medi-Cal managed care contracting, as opposed to how CalPERs purchases from plans like Kaiser. The calculation is different in Medi-Cal managed care than it is in the relationship between CalPERs and Kaiser and any other. I think we’re trying to compare apples to oranges in that situation.

Fairbanks: Then you’re making an argument for my side, that the language in the initiative is important. You were saying earlier, “Well it doesn’t matter what the initiative says, our intent is what matters.”

So now you’re saying that initiative language does matter, which is why we’re excluding [Medi-Cal] managed care. I mean, which is it?

Martin: Well, I’ve never said that the language in the initiative…

Fairbanks: I know, I’m paraphrasing, I’m sorry, you implied it…

Martin: I didn’t even say it in a manner of paraphrasing. The implementation issues are what we’re getting caught up with, and that’s not the intent of the organization in sponsoring this.

They know there will be challenges in terms of implementing this for the state of California. No question about it, anything that is worthwhile in public policy is worth taking the time to do it right.

But it does mean the Department of Health Care Services, CalPERs, and the Department of General Services are going to have to look at their unique circumstances and figure out how best to implement their particular contracting requirements.

And not try to compare what CalPERs is doing against what DHCS is doing against what GornS is doing.

Gorn: So, if the ballot measure does pass, how would you see this looking in five years?

Martin: Well, the expectation and certainly the hope is that we will have an impact in terms of what the state is paying for drugs.

Five years may be too soon, but we’d like to see that impact not stop at the borders of California and move into other states. This is a problem that’s national. I mean, all you have to do is listen to people as far afield as Hillary Clinton and Marco Rubio about how we need to get these issues under control.

And everybody at different levels of government has different ways of dealing with it, and obviously Hillary Clinton’s solution is to allow Medicare to negotiate. That’s not an issue in California because we don’t do the negotiating for the federal government – so we have to look at what we can do to get better control of these drug prices, and to work within those constraints.

Gorn: Let me ask you about something else, about how to get this measure passed. The measure is pretty new. You don’t have a lot of consumer groups signing onto this measure. A lot of them seem to be taking a wait-and-see approach. So why hasn’t everyone jumped on this train so far?

Martin: I certainly can’t speak for other groups, we have begun only in the last month talking to the groups. Maybe a little more than a month: the first or second week in December we had our first sit-down with those groups.

And yes, questions do come up, and they had some of the questions that even Kathy has raised. And we’ll continue to meet with them and hope that they join in.

This is the vehicle for doing something about drug pricing this year. As we’ve seen just over the last 12 months, the Legislature is incapable of passing even the most modest transparency measures. They effectively defeated twice AB 463 by Assemblyman Chiu.

Gorn: So if no one climbs on board, would you consider withdrawing that measure?

Martin: There is no way that AHF would withdraw this measure. Even facing $100 million against us by the pharmaceutical industry, which we fully expect. They are committed.

But I want to make it clear. We do not anticipate going down this path alone. We have had some productive conversations and ultimately we believe the consumer organizations will recognize that if we want to collectively accomplish something relative to controlling drug prices, this is the vehicle to do it.

Is 2017 going to have this much attention paid to drug prices? Well, we hope not – we hope there won’t be more cases like Turing and Gilead. But the reality is, there is a critical mass forming in 2016 that we need to take advantage of.

Gorn: So Kathy Fairbanks, what would you say are the main questions you think need to be answered between now and November?

Fairbanks: Certainly, I want to echo what Rand said, in that we are doing the same thing and we are beginning our outreach and education process to many of the same groups they are – patient groups, physician groups, anyone who will be impacted by the measure.

And the way it works is, we sit down with them and they look at the policy, they look at how this impacts them and their members. And they’ll weigh in and decide, “does this help us or does this hurt us?”

We think, given the negative consequences for patient groups, for physicians, for our state taxpayers and many other people, that we’ll have a sizable coalition on our side that objects to this measure and works with its membership between now and November to defeat the measure.

But it’s a very complicated … it’s complicated. We all of us sitting around this table understand that. And it’s going to take a long time for everyone to fully get their arms around the provisions in here.

And because of the way it’s drafted, there will be significant problems. One of the things we didn’t get to yet is the fact that the state could lose about $100 million in supplemental state rebates that are given to the Medi-Cal fee-for-service program. If those rebates are lost, the state will pay higher cost for drugs — the regular price without rebates.

But some of those drugs may require what’s called prior authorization, going forward. That’s going to concern a lot of patient groups because they will have to wait to get authorization to take certain drugs, depending on whether they’re on a list or not. And doctors will have to fill out a bunch of paperwork. You know, if you want to get prescribed a medication, you don’t want to have to hear your doctor say, “Oh, the one that’s best for you isn’t on the list, so you’re going to have to get prior authorization, that could take a couple of weeks, a couple of months, who knows? We’ll give you this other one instead.” We’ve got all kinds of problems there.

Martin: And if these things do happen, it’ll be in large part because the pharmaceutical industry, after this becomes law, has simply said, “We’re not going to contract, we’re going to turn our back on the state of California. And we’re going to make a lot more profits because we’re going to force you to buy these at even more exorbitant prices than you’re paying now.”

Gorn: Before we wrap up, I do want to get back to a question I asked earlier, which is that the pharmaceutical industry [with help from others] in 2005 spent $70 million on a campaign, and has raised $39 million so far for this campaign. That’s a big question on people’s minds. Why is it worth so much money to go against it?

Fairbanks: California is a big state. Campaigns are expensive here in California, number one. Number two, this is a year-long process.

It’s worth it to point out to the people how [the initiative is] going to impact them and their bottom lines. That’s what we intend to do between now and November.

Gorn: There are so many arguments for and against this measure. I’m going to ask you both to wrap up: What would you say is the take-home message for voters?

Martin: Because people are tired of the prices they are paying for drugs. They’re tired of the increases that have just gone up by huge percentages over the last decade.

And if people want to get control of those, so they’re not facing $70 or $100 co-pays on branded drugs, the way to achieve that is to get the pharmaceutical industry to be more fair and responsible in its pricing.

Fairbanks: I think the number one reason is to understand the policy, understand how it works and to figure out: Does it benefit me, or does it not benefit me?

Again, we keep going back to what does the initiative say, and I think that’s where we have to land. It’s the implementation, it’s the language in the initiative. The way it’s drafted, the end result I don’t think is what the proponents say they want.

And so people will not benefit, people could pay higher prices, people could lose access to certain medications, or delayed access. Veterans could pay higher prices and we hope, we think, based on past history with ballot measures in California, people will look at the fine print. They weigh ballot measures based on that calculation. How is it going to impact me? Am I better off or worse off?