California: “Ground Zero” for American Rx Price Controls

December 8, 2015

December 08, 2015.

As Turing Pharmaceuticals grandly announced last week that Daraprim’s recent price hike from $13.50 per pill to $750 per pill…is to be “cut 50% for some hospitals”, and numerous Democrat, and now, several Republican lawmakers in Washington, D.C., are publicly calling for measures to “control the costs of drugs”, it’s time to step back from the national piling on that the US drug industry is now experiencing, and reflect… 

The question really is, what are the chances that Rx price controls will actually take hold in the U.S. in the near future? 

I believe the answer to that question can summed up in one word: California – Why?  Because this state is now poised to serve as “ground zero” in a massive battle that ultimately may determine whether or not Rx price controls will be implemented any time soon in America.

“The California Drug Price Relief Act”

Why is California so critical? 

It begins with the fact that the state has a vibrant, century old history of taking important civic issues directly to its citizens for action. These “propositions”, as they are known, are frequently directed at public healthcare concerns, the most recent being a 2012 concept calling for the use of cigarette taxes to pay for cancer research in California.

For the upcoming November 2016 election, another healthcare proposition seems headed for a vote by the citizens of California. This one, known as “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.

And what is the VA “fixed price” rate? Figuring that out is a little bit tricky, as companies do not normally disclose the “nominal” price offerings they provide to the VA. However, according to a

, the average range of discounts from Rx drug manufacturers to the VA is about 42% of average wholesale price. In my experience, however, the VA price may actually be lower…in the 25% of AWP range.

Regardless, here’s the point: If the voters of California approve this proposition it would establish an incredibly deep, mandatory discount – in essence a “price control” -- for the public purchase of prescription drugs in America’s largest state. Such an action would no doubt cause an immediate demand for the same VA discount rate to be made available to other states, the federal government, and likely private entities, as well. In short, adoption of VA pricing by the State of California would be a pricing disaster for the entire U.S. drug industry.

And what’s the likelihood of this California proposition being placed on the 2016 ballot? To qualify, the sponsoring group had to obtain 365,880 signatures of registered California voters by the November 2, 2015. On that date, in part to insure certification, the sponsors submitted a final petition that contained 542,879 signatures. 

Is this submission result significant? Yes, absolutely. According to a report from the AAUW in 2013, over the last decade only about 11% of those California propositions soliciting for certification signatures actually qualified for the ballot. That means that the effort on behalf of “The California Drug Price Relief Act” not only succeeded initially where about 90% of the proposition efforts fail, it also submitted 67% more registered voter names than were required. And what does all this tell us? It means this VA drug pricing proposition, from its inception, is demonstrating widespread public support in California.

What organization is sponsoring this proposition? The primary advocate of the “The California Drug Price Relief Act” is the AIDS Healthcare Foundation (AHF), based in Los Angeles. This is a multifaceted, nationally active AIDS advocacy group, whose director, Michael Weinstein, although somewhat controversial, has put together a strong staff of public policy veterans who have directed many California legislative and ballot proposition efforts in the past. In short, the AHF must be regarded as an effective Sacramento advocate that knows what it is doing in the management of this important California proposition.

California AB 463

In addition to the proposition effort, there is also the high likelihood that a major Rx drug pricing bill will be presented in the California legislature in 2016.

The legislation, AB 463, was originally introduced early in 2015 by Assemblyman David Chiu (D-San Francisco). He reportedly withdrew the measure on April 29th under pressure from the California Rx industry. Today, in the wake of the many recent developments in the drug pricing story, Chiu’s staff is on record as stating that AB 463 will be reintroduced again in 2016. 

We also should note that Assemblyman Chiu does have a history of drug price control activity. Earlier in his political career, while serving as a San Francisco City Supervisor and Council President, Chiu sponsored a 2013 non-binding proposition that called for the city to use all available opportunities to reduce the City’s cost of prescription drugs. Interestingly, Chiu was supported in that campaign by the AIDS Healthcare Foundation, which is the same organization that is now leading the “The California Drug Price Relief Act”.

As to the substance of AB 463, as you review the bill, it doesn’t appear to be a price control matter. It deals instead with “transparency”. Basically, it states that if a course of Rx therapy costs more than $10,000, the manufacturer of the drug will be required to provide pricing information to the State of California on the product’s cost of manufacturing, development, marketing, as well as the total profit attributable to the sale of the drug in the State of California.

Troublesome, to be sure, but in and of itself, not a price control action… 

However, if you continue reading the bill closely, you will learn that all this information is to be turned over to the California Office of Statewide Health Planning and Development, which is directed to review the data, and then “transparently” post the results of its review on the COSHPD’s public website.   

The concern of the Rx industry is that this “transparency” may drive undesirable results. For example, based on the presented data, there could be significant misunderstandings of how the drug industry actually produces, markets, and is paid for the drugs it makes. Or, given the lack of nuance in the presentation of the COSHPD’s statistics, a public outcry demanding that the pharmaceutical industry lower its prices could occur. Finally, once this information is presented online, there is a real fear that the public presentation of this information will quickly chill the environment for future drug R & D investing in California.

PhRMA in California

So what is the industry response to the California developments?

The companies that make up PhRMA understand very well what’s going on in California and what the potential stakes are should one or both of these matters succeed. Given that, look for PhRMA to fully engage its first class, veteran public affairs team that’s in place in Sacramento to respond to both the proposition, as well as the likely reintroduction of AB 463.

As part of that response, a $10 million dollar war chest, specifically dedicated to stopping “The California Drug Price Relief Act” has been raised. Given the importance of this case, I think we can assume many more industry dollars will find their way into this California PhRMA fund.

Among the key points that PhRMA will be making to voters is that California is the home of two of the largest biotechnology “clusters” in the world, one located in The Bay Area and the other, in San Diego. If the two measures pass, they will likely threatened the continued PhRMA business presence and employment numbers in the state, not to mention the loss of tax revenue for the State of California.

Finally, look for PhRMA to state that passage of either the proposition and/or the legislation will result in direct, negative consequences for thousands of patients in California. The industry will point to the cutting edge work being done by the California biotech industry and how that could be lost if either measure passes.

Overall, l would anticipate an all-out response by PhRMA and its member companies in this California situation.

Summary

So, thinking about all of this, will California become “ground zero” in this call for American price controls on Rx drugs?

Clearly, both sides in California have substantial resources. Both sides have established “California public policy expertise”. And both sides are tremendously motivated and more than a little inspired to successfully “carry the day” for their point of view in Sacramento.

Further, it does seem possible that the outcome of this encounter could be absolute. That is, one side may well win it all -- both the proposition, as well as the legislative measure -- while the other side could lose out completely. With stakes like these, the California price control fight stands to only get more intense and more aggressive.

Therefore, as this California battle is fully engaged, and because of the state’s “largest-in-the-nation” size, its importance to the Rx industry, and its history in the general area of healthcare policy, I believe we have to conclude that, yes, California very likely will become “ground zero” in the rapidly developing national debate over drug price controls in America.

Tom Norton, NHD Smart Communications of Illinois, Inc.