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HealthVote2005: Proposition 78 and Proposition 79

The dueling initiatives Propositions 78 and 79 share the same goal — to establish a prescription drug discount program for low- and moderate-income Californians by negotiating for rebates from drug manufacturers. Under both proposed plans, lower-income residents who lack prescription drug insurance coverage would pay a modest annual fee for a discount card that could be used throughout California. The state would negotiate with drug companies for reduced rates for cardholders. Here are the (proposed) benefits:

  • Proposition 78, backed by the pharmaceutical industry, would offer the discounts to those earning up to three times the federal poverty level ($28,710 for an individual or $58,050 for a family of four), an estimated five million Californians.
  • Proposition 79, supported by union, health care, and consumer groups, would offer the discounts to those earning up to four times the federal poverty level ($38,280 for an individual or $77,000 for a family of four), an estimated 10 million Californians. Proposition 79 also would extend the benefit to some underinsured residents with high medical bills.
Key Differences

Although the benefits of both propositions are fairly similar, there are sharp differences in approach. While Proposition 78 (the pharmaceutical industry program) would rely on the voluntary cooperation of drug manufacturers in negotiating volume discounts, Proposition 79 (the consumer and labor group plan) would punish manufacturers failing to offer sufficient rebates and create a new civil violation for drug company “profiteering.”

The leverage envisioned by Proposition 79 is what some have called the “Medicaid hammer”: If a company does not offer what state negotiators deem a sufficient discount, the state could prevent the usage of that company’s drugs in Medi-Cal, which has an annual drug budget of more than $4 billion. Doctors wanting to prescribe a restricted drug to a Medi-Cal beneficiary would have to receive “prior authorization.”

Proposition 79 also would create a new civil violation for drug company “profiteering,” defined as demanding an “unconscionable price” for a drug or demanding “prices or terms that lead to any unjust or unreasonable profit.” Proposition 79 states: “Profiteering on drugs would be subject to prosecution by the Attorney General or through a lawsuit filed by any person….”

This key difference — whether Californians should embrace a voluntary or enforced approach — is shaping up to be one of the most costly political battles in U.S. history. The pharmaceutical industry, backing the voluntary approach, has collected more than $59 million for its pro-78/anti-79 California Initiative Fund, according to reports filed with the secretary of state. Merck, Pfizer and GlaxoSmithKline each have made contributions of $8.54 million, which may be the largest individual contributions ever made to a California political campaign.

By contrast, the entire pharmaceutical industry spent a total of $9.8 million on all federal election campaigns in 2004, including the presidential race, according to the Center for Responsive Politics, a Washington, D.C.-based watchdog group.

The proponents of Proposition 79, California consumer and labor groups, have so far raised about $10 million to campaign for their version of a drug rebate plan.

Both Plans Exploit California’s Purchasing Clout

Both sides agree that something must be done to make drugs more affordable and that California’s purchasing clout is the key.

“Americans pay more for prescription drugs than virtually anywhere else in the entire world,” says Anthony Wright, executive director of Health Access, an Oakland-based coalition of 200 consumer and labor groups supporting Proposition 79. “Reimporting drugs from Canada to close this gap is ultimately a roundabout approach,” he says. “Why not just use California’s own purchasing clout? In Europe, countries smaller than California negotiate with drug companies to help citizens get the best price for drugs. Why shouldn’t California negotiate on behalf of those who don’t have anyone to negotiate for them?”

California is one of more than two dozen states that already negotiate volume drug discounts for Medicare and Medi-Cal beneficiaries. Medicare beneficiaries also are poised to begin receiving prescription drug benefits next year under federal legislation enacted in 2003.

States have lately begun to attempt to implement discount programs for lower-income residents under age 65.

“Thirteen states have prescription assistance programs for the under-65 population on the books,” points out Richard Cauchi, director of health programs at the Denver office of the National Conference of State Legislatures. He says he uses the phrase “on the books” advisedly, given that programs enacted in Arkansas, Maryland, Montana, New Mexico, Oklahoma and Rhode Island are still in the planning stages.

Cauchi says that states are always eager to share ideas with each other about health policy but warns that comparing state programs can be perilous. Having reviewed all the extant state drug discount programs, Cauchi found “no single cookie-cutter approach” to offering drug rebates.

Lessons From Maine and Ohio

California advocates for both propositions are looking to programs in Maine and Ohio in particular to bolster arguments for their initiative approaches.

Maine’s drug discount program, Maine Rx, went into effect in 2000. Maine was the first to include a “Medicaid hammer” — drug companies not offering sufficient volume discounts would have their access to Maine’s Medicaid program restricted. The pharmaceutical industry filed suit in federal court to stop the Maine program from taking effect.

The lawsuit went before the U.S. Supreme Court, which issued a ruling in May 2003. The Supreme Court sent the case back to the lower courts, and the Maine program was allowed to stand after the state said it had no plans to invoke the “hammer” provision. Maine has continued with an essentially voluntary plan, and the debate regarding whether such a provision could ever be enforced endures.

In Ohio, meanwhile, consumer advocates sought to put a program similar to Maine’s on the ballot in their state in 2003. After the drug industry went to court in all 41 of the state’s counties to block the measure, Ohio consumer advocates and pharmaceutical companies eventually agreed to a compromise voluntary plan, called Ohio’s Best Rx, which went into effect on Jan. 1, 2005.

In Ohio and Maine, eligible citizens who have taken advantage of the programs are receiving discounts on some popular drugs from about two dozen manufacturers with rebates estimated at between 15% and 30%.

Maine has enrolled 100,000 of an estimated 225,000 eligible residents for Maine Rx. Ohio’s Best Rx has signed up only about 25,000 of a pool of 1.2 million eligible statewide, says Jennifer J. Lopez of Ohio’s health department. She predicts many more eligible Ohioans will enroll and says the 31% rebates so far translate into a savings of $15.50 per prescription for enrollees.

Proposition 78 Arguments

Proponents of both Proposition 78 and Proposition 79 point to the precedents in Ohio and Maine in making arguments for their programs — although their perspectives differ markedly.

Proposition 78, also known as Cal Rx, is the pharmaceutical-backed plan. “Cal Rx is a workable program that will provide a meaningful drug benefit where it is needed,” says Denise Davis, a spokesperson for Californians for Affordable Prescriptions, the organization set up by the pharmaceutical industry to run its pro-78/anti-79 campaign. “Cal Rx will reach 5 million Californians and cut their prescription drug bills by 40%” maintains Davis. She derives her estimates from predictions made in hearings on SB 19, upon which Proposition 78 is based, and on the reductions achieved so far by the program in Ohio. SB 19 was voted down in committee in May.

Davis points out that Proposition 78 will complement the Rx Help for California program, launched with considerable fanfare — and $10 million from pharmaceutical companies — at the beginning of this year. Rx Help for California assists consumers in connecting with drug giveaway programs offered by individual drug companies. However, even the companies acknowledge that such programs, while helpful to many indigent consumers, have proven to be of limited usefulness because of their daunting complexity.

Like Rx Help for California, Davis argues, Proposition 78 speaks to the pharmaceutical industry’s commitment to help consumers get the prescription drugs they need. She believes that Proposition 79, the union and consumer group plan, is wrong for California for a number of reasons.

First, “Proposition 79 will never be approved by the federal government,” Davis maintains. “Proposition 79 is based on a model from Maine that never went into effect and never provided a single [mandated] discount,” she says, alluding to the legal uncertainties over the enforcement provisions that have dogged the Maine program.

Further, Davis predicts that if Proposition 79 were to go into effect, the consequences would be disastrous. “Without any clear definition of ‘unreasonable profit,’ trial lawyers could go into court, without a client, and challenge each and every one of the 210 million prescriptions written each year in California,” Davis says. She warns this scenario would result in an “environment of unbridled litigation.”

What’s more, Davis maintains, “You could say goodbye to the biotech industry in California if such a climate is created” because any efforts to compel the drug industry to reduce prices also risk stifling investment in research.

Such an argument may be why it is so difficult to parse “profits” from “profiteering.” Proposition 79’s reference to “unreasonable profit” may be in the eye of the beholder.

Referring to the large war chest the Proposition 78 side has put together, Davis says, “We’d rather not have to spend this money; this should have been resolved in the Legislature.”

Propositions 78 and 79 both had their origin in legislative proposals. But now that the bills have morphed into ballot initiatives, the task is not merely to convince a hearing room full of legislators, but to persuade a state full of voters.

“California is an expensive media market, and this will be complicated and confusing for the voters. This money is for a policy-based media campaign to help people understand what is at stake,” Davis says.

Proposition 79 Arguments

The Proposition 79 side (or Cal Rx Plus) has another point of view. “The huge amount of money the drug companies are spending will be a good investment for them if it preserves their ability to continue to price gouge American consumers,” says Wright of Health Access, the coalition of consumer and union groups.

Wright invokes Proposition 78 itself in defending his charge of price gouging. “The prescription drug companies have, by offering their own initiative on discounts, admitted that their drug prices are far too high,” he says. But he claims that Proposition 78 is a “cynical dodge,” because “they can just walk away at any time.” He points to features in Proposition 78 that provide for the termination of the Cal Rx program if not enough residents sign up, if not enough drug companies offer discounts or if a third-party contractor cannot be found to administer the program.

Referring to the Ohio program, Wright also cautions that a substantial portion of the initial rebates realized seems to have come from pharmacy, not drug industry, discounts.

Wright is not the only observer skeptical of the ability of a voluntary program to deliver meaningful rebates. The Legislative Analyst’s Office also has expressed doubts about voluntary approaches. In a review of the Cal Rx legislative proposal — the predecessor to Proposition 78 — released in February, LAO recommended that the legislation “be amended to require the director of the [Department of Health Services] DHS to phase out the voluntary approach, and to commence the implementation of a Medi-Cal leveraging strategy for California Rx, in the event that drug makers fail to make good on their promises to the administration to offer significant price concessions on an extensive list of prescription drug products.”

Wright argues that Proposition 79 is preferable to the drug industry’s initiative (Proposition 78) for several reasons. He says Proposition 79 would reach more Californians, not only because of its more generous eligibility limits, but also because of a provision in the initiative that would permit the health department to establish a prescription drug purchasing program for small businesses and small employer purchasing pools. He also believes its enforcement provisions make it more likely for it to succeed. Proposition 79 advocates maintain that their opponents’ predictions of a litigation explosion are overwrought.

Advocates on both sides are honing their talking points in the calm before what is sure to be a media storm. In June a statewide Field poll revealed Californians to be positively inclined toward the prescription drug discount initiatives, with 64 percent favoring the industry approach and 54 percent supporting the consumer and labor-backed measure.

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