Proposition 61, or the California Drug Price Relief Act, is a ballot initiative promoted as a tool for reducing state spending on prescription drugs. If approved by voters in November, it would prohibit state government agencies (excluding managed-care plans in Medi-Cal) from paying more for drugs than the lowest price negotiated for the same drug by the U.S. Department of Veterans Affairs.
“If Prop. 61 were to become law, not only would California taxpayers likely wind up paying more... but beneficiaries and doctors working with CalPERs and other state programs could find themselves with far fewer treatment choices.”
Advocates believe it would safeguard California taxpayers, whom they argue are ruthlessly victimized by drug industry "price-gouging." Alas, prescription-drug pricing is much more complicated.
If Proposition 61 were to become law, not only would California taxpayers likely wind up paying more for at least some medicines, but beneficiaries and doctors working with CalPERs and other state programs could find themselves with far fewer treatment choices. It would also restrict the options of state negotiators who decide what drugs to cover.
These problems arise because the VA is held to much different standards than state programs: Federal regulations encourage steep discounts from manufacturers, and the VA also maintains much narrower drug coverage than most other public and private plans. California programs like Medi-Cal, however, operate under different rules.
Federal regulations require that Medi-Cal, unlike the VA, cover all medically necessary drugs for enrollees. If manufacturers chose not to offer VA prices — Proposition 61 has no way of making them — federal law would still require fee-for-service Medi-Cal to purchase medicines for patients who needed them. And while Medi-Cal currently enjoys significant discounts on the drugs it offers, Proposition 61 would end up voiding those deals because they do not quite match VA prices.
The result? Medi-Cal facing higher prices from manufacturers.
Now consider California's non-Medi-Cal programs.
The VA formulary covers just 46% of the brand-name drugs and 61% of the generic drugs available to CalPERS beneficiaries. If, under Prop 61, CalPERS and other non-Medi-Cal programs couldn't secure VA discounts for VA-covered drugs, they couldn't buy them. Dozens of drugs could drop off of CalPERS coverage.
The remaining medicines might be more expensive than the ones that CalPERS would be prohibited from buying because they didn't meet the VA price.
Instead of giving the state more buying leverage, Proposition 61 could undermine it. That's because federal Medicaid regulations, called "best price," require drugmakers to give the same drug price to every state Medicaid program — 60 million beneficiaries — it offers to programs like CalPERS. That gives manufacturers a big incentive to say no to CalPERS, rather than take a much bigger hit to their bottom line elsewhere.
The other likely outcome is that manufacturers would just raise drug prices for the VA. They have done so before. In 1990, Congress aimed to tackle rising Medicaid drug prices through the Omnibus Reconciliation Act of 1990 (OBRA), which linked Medicaid drug prices to the best deals offered to any payer, including the VA.
Just a year later, in 1991, the VA experienced significant drug price increases. Prices for a dozen drugs rose by more than 300%. In the wake of these price increases, Congress passed the Veterans Health Care Act of 1992, which excluded the VA, Department of Defense, and several other federal programs from Medicaid's best-price requirement.
Rather than playing drug price whack-a-mole, states and payers should pay for health outcomes. This approach, called value-based contracting, forces doctors, hospitals and drug companies to coordinate (and compete) in delivering better health for every patient at the lowest possible price.
This approach works better than focusing on cost silos because the biggest costs in the health care system stem from chronic illness: The CDC reports that 86% of U.S. health care costs are driven by patients with one or more chronic illness, which afflicts 40% of California residents.
Curing patients with hepatitis C is cheaper than waiting for them to develop liver failure or liver cancer. Reducing hospital readmissions for patients with congestive heart failure, keeping diabetics taking their meds and on a healthy diet, and ensuring that children receive effective vaccinations can all help prevent much more costly and dangerous complications down the road.
California is, in many ways, America's medicine chest. Researchers working across the state's cutting-edge labs and startup companies are developing new ways to edit out unhealthy genes and replace them with working versions, regenerate organs for patients with diabetes, and harness the body's immune system to fight cancer.
Rather than strangle innovative technologies with price controls, policymakers should embrace reforms that encourage better ways to utilize medicines (both old and new) and slow runaway health care inflation.
That's a far better prescription for a healthy California than Proposition 61's well intended, but misapplied, crusade against drug prices.
This piece originally appeared in Investor's Business Daily
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Paul Howard is a senior fellow and director of health policy at the Manhattan Institute. Follow him on Twitter here.
This piece originally appeared in Investor's Business Daily