California and the Future of the US Rx Pricing

Jun 03, 2016

Once again, in this very political year of 2016, California, America’s most populous state, is in the process of potentially establishing a new, disruptive healthcare policy that is proving to be very concerning to the American Rx industry. It’s called The California Drug Price Relief Act and to no one’s surprise, it’s the Golden State that is the first to actively consider the idea.

California’s historical healthcare heritage

California has a long tradition of adopting cutting edge healthcare concepts. Specifically, its citizens seem to delight in thrashing out major healthcare controversies in the midst of public elections. For example, during the 2012 general election, Californians were asked to consider a significant healthcare proposition that would have increased cigarette taxes to facilitate further research on cancer. This year, it’s Rx drug pricing.

To this point, according to a recent report from the USC Price School of Public Policy, entitled, The Many States of California, the issue of healthcare, even considering the incredible cultural and economic differences that exist within the state, is consistently ranked statewide as one of the top three public concerns of Californians.

As you review the healthcare policies that have been adopted in California over the last 50 years, all of this makes sense. Repeatedly, California has been on the frontlines of American healthcare, addressing issues such as creation of some of America’s first HMOs, the public response to AIDS, creation of the world’s first biotechnology company, the first human heart transplant in the US, and on and on…Overall, California is a consistent leader in the area of healthcare policy innovation.

And the prescription drug business in California? If you discuss the state’s ever changing healthcare environment with any pharmaceutical executive, I am confident that manager will tell you that dealing with California’s Rx policies can be a wild ride. Historical examples of California’s Rx “disorder” include the State of California “mini FDA” concept of 1987 which effectively proposed bypassing FDA’s authority to approve new drugs, the California Medicaid rebate plan of 1989 that turned out to be the template for the 1990 federal Medicaid drug rebate program, as well as several attempts to reduce the “price of drugs” in the state such as former Gov. Schwarzenegger’s 2005 “Cal Rx Prescription Drug Discount Program”.

In short, if a policy is at the forefront of American healthcare, California is very likely to be among the first adopters to put that concept on line.

The California Drug Price Relief Act

Which brings us to this “California Drug Price Relief Act”… As you may recall, I previously wrote about this pricing development late last year. However, with about five months to go until the election, reviewing this proposal once again may be in order. And here’s why – It’s pretty clear that if this California pricing proposition passes, all hell may break loose for the American pharmaceutical industry.

First of all, what does the California proposition mandate?

“The California Drug Price Relief Act” states that any prescription drug obtained by the State of California shall be purchased at the same “fixed price” that is accorded to the U.S. Veterans Administration, i.e., at about a 42% of average wholesale price. This is a really low price that is accorded to the VA as gesture of drug industry support for the armed services. It was never meant to be a market price point, but that is exactly what may happen if this California initiative passes on Nov. 8th.

Will the initiative actually pass?

This is difficult to gauge. However, a lot of anecdotal evidence suggests that tremendous public support for the proposition exists. First, look at the numbers of signatures gathered for the petition (nearly twice the number needed for inclusion on the ballot). Second, consider the rapid manner in which this was accomplished (in about half the time allotted for gathering proposition signatures). Third, the measure is receiving strong endorsement from major healthcare players like the AARP; and fourth, political support from politicians like the Democratic presidential candidate, Bernie Sanders is building.

Additionally, the “California Drug Price Relief Act” effort is being run by a very Sacramento-savvy public affairs organization, The AIDS Healthcare Foundation. The group is a seasoned lobbying operation, aware of what needs to be done to pass a proposition in the State of California.

What is PhRMA doing to defeat the Measure?

From the start, PhRMA has coolly stated this measure is “inappropriate public policy”. The group has stated such a program would “diminish the environment for Rx R&D in California and elsewhere”, and interestingly, the association has stated that if the proposition were imposed, the Rx industry would likely raise the prices it charges to the VA...

PhRMA companies have also amassed a huge war chest to convince Californians NOT to support the measure. At last report, $68 million was in the “Californians Against the Misleading Rx Measure” political account, with industry insiders suggesting that a $100 million ad and ground game “spend” is not out of the question. If that amount is raised, it will approach near record financial support levels versus any previous California proposition vote.

Finally, PhRMA’s Sacramento team has been working hard to attract key California health allies to their cause. On May 27th, it was announced that the California Medical Association and several other medical organization have decided to join PhRMA in opposing the measure. This could be significant come November.

Five key questions

All of this given, there are five key questions that pharmaceutical executives need to be thinking about in this California situation:

1. What’s the Fiscal Impact of this Measure?

For starters, an analyst in the California Legislative Analyst's Office has been quoted as saying that it’s not possible to give an accurate estimate of how this measure might impact state finances if it passes as there are potentially many different responses that the pharmaceutical companies could make in reaction to passage of the proposition. And so, although the AIDS Healthcare Foundation has claimed a $5 billion savings over ten years at this point, there appears to be no way to actually verify any savings claim.

2. Would Passage Invalidate Established Medi-Cal Rx Rebates?

To the analyst’s point, industry spokespersons have stated if the proposition passes, “It would likely invalidate existing contracts the state has negotiated with pharmaceutical manufacturers…increasing state costs for prescription drugs by tens of millions of dollars…and reducing funding for Medi-Cal". If true, the State of California will have to carefully consider the established Medi-Cal savings that it currently enjoys from rebates v. what the “The California Drug Price Relief Act” may or may not actually provide in savings.

3. Would the VA reveal its Pricing to the State of California?

Here’s another big question: Will the VA Rx prices be made “known”? That is, there’s no guarantee that the VA will reveal to the State of California the actual, rock bottom VA pricing it receives from the Rx industry. As noted above, the Rx Industry has already said if those current, drastically discounted VA prices are made known, manufacturers would simply withdraw those “nominal” Rx rates from the VA. At that point, would the VA be forced to pay wholesale, or even retail to cover its annual drug budget?

To add some reality to this theoretical question about industry price hikes to the VA, according to Prof. Jeffrey McCombs, a health economist at the University of Southern California Schaeffer Center for Health Policy and Economics, the Rx industry has actually done this before. The last time was in 1990 when Congress tried to tie the pricing of all Medicaid drugs to the VA rate. 

4. Nationally, why is this California Proposition so Important?

Put in its broadest context, should this measure pass, it would, at the least confuse the pricing of pharmaceuticals sold in the largest state in the Union. How this would play out there is unclear at this moment, but we can safely assume that law suits, popular protests, and, certainly, a lot of political silliness will occur on both sides of this matter. In short, it would be a mess in California.

However, if all the issues raised by this proposition are sorted out and California actually adopts the measure, it would shake the rafters of every single public state drug program in the nation, as well as the federal Medicaid and Medicare programs. Further down the road, adoption of a “VA-like pricing policy” would also have an impact on the private side of Rx reimbursement, just as the so called “halo effect” of Medicaid Rx pricing has effected private pharmaceutical care since 1965.

5. What if the Proposition fails?

The difficult part for the Rx industry is that should the California proposition fail, I really don’t see any respite on this issue of drug pricing in California, or, for that matter, the nation. The fact that both Democratic candidates, as well as the nominated Republican Presidential nominee, have stated repeatedly that the “egregious pricing” policies of the American drug business must be addressed, leads me to predict a difficult road ahead in 2017.

Watch California

So watch California on November 8th. One way or the other, post November 8th, drug pricing in America is going to be actively debated, and perhaps acted on in the near future.

Tom Norton                                                                                                            

NHD Smart Communications of Illinois, Inc.


California and Rx Pricing

It appears that the attempt by pharma to win some points by giving the VA a price break is having unintended consequences. Once again we see the truth in the old line, "No good deed goes unpunished."

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