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The Pathway to Public Rx Price Controls in 2016


The issue of drug price controls in public prescription programs has long been a point of contention. But today, writes Tom Norton, as several historical and contemporary factors continue to line up, we may be on a pathway to changing that.

Since I started my first position in the pharmaceutical industry in 1979, the issue of drug price controls in public prescription programs has been a constant point of contention. The issue has waxed and waned over the years, but to date, full-on price controls of Rx’s in public pharmaceutical programs has never taken hold.

Tom Norton

Today, however, as several historical and contemporary factors continue to line up, I think we may be on a pathway to change all that. In fact, we may take major steps towards Rx price controls for all public drug programs as early as 2016.

Consider these historic public Rx price control progressions…


The Rx industry has always paid close attention to the prescription drug policies that are adopted by the State of California. Why? Simple. It’s the largest state in the nation, and has a long history of being the first to adopt Rx public policy that the rest of the county is frequently not quite ready to accept, but often ends up following.

1988 was one of those “California policy moments”. It occurred when the California MediCal (Medicaid) program, then and now, among the largest in the nation, began discussing the idea of “controlling the price of Medicaid drugs through rebates.”

The “rebate” would be achieved by extracting “discounts” from the manufacturers who wanted to sell their Rx’s on the MediCal formulary. If they didn’t rebate, they didn’t sell. Needless to say, the industry didn’t care for this idea.

However, in 1989 one Rx manufacturer determined they could make the “rebate” scheme work for them. The firm calculated that if they were first to offer MediCal a “rebate” for one of their leading Rx’s, they could essentially “corner” the market for that important indication.

And so it happened. The company was Merck -- and the product “cornered” on the MediCal formulary via MediCal’s first “rebate” was the highly successful anti-cholesterol Rx, Mevacor. The rest is history.

Merck’s decision caused a rush by other manufacturers to sign up for MediCal’s “rebate”, even though there was considerable concern expressed within the industry that California’s “rebate” deal set a “very bad public sector precedent”.

Omnibus Budget Reconciliation Act 1990

Very quickly, the idea of price controlling all Medicaid drugs, based largely on the successful California “rebate” program, was adopted and passed by Congress in OBRA ‘90. The new law mandated that the industry sell Rx products to every state Medicaid program in the nation “at the very best price available to any purchaser” (See p. 15). Although the industry was ultimately able to avoid the V.A.’s “fixed pricing” as the new “best price”, eventually the OBRA ’90 discount did end up at a significant 15% off versus retail prices.

Today, Medicaid rebates driven by both federal and state laws have gone way beyond that 15% level. Collectively, the average is now running at about a 40% rebate (See p. 7).  

So, by 1990, all Medicaid Rx’s were basically in a “price controlled” realm.

Medicare Part D

10 years later, the cry for price controls rose again, this time over the price of drugs prescribed for senior citizens. Seniors loudly claimed that “prescription drugs were cheaper in Canada” and demanded US access to the Canadian Rx’s. In response, several states and cities set up Rx importation schemes with Canadian generic firms.

More dramatically, it was often stated during this period that retirees were “eating cat food in order to afford their Rx drugs”. 

President George W. Bush, who faced the “seniors’ prescription drug issue” during his 2000 presidential campaign, decided to put the matter rest. Bush felt if the Republicans went into the 2004 campaign with reasonably priced Rx’s available for all Medicare seniors, it would net out as a positive for Republicans in 2004.

So Medicare Part D, designed to provide low cost drugs to all Medicare patients, was born. It was a grand theory, but one that was certainly controversial. Again, Rx manufacturers voiced serious concerns about this new entitlement and what it would ultimately do to pricing. However, as was the case in California in 1989, the industry caved on Part D.

Soon after enactment, however, the drug manufacturers came face-to-face with a new acronym closely associated with the new Part D program. That acronym was “PBM”…pharmaceutical benefit manager…a term industry product managers soon came to associate with deep discounts on Part D drugs.   


A few years later in 2008, Obamacare was passed. Although most of the pharmaceutical industry viewed the new law as an existential threat to its continued existence, the business nevertheless decided to “deal” with the Administration. In the end, it was agreed that in exchange for big pharma’s broad support of Obamacare, the Administration would “guarantee” that no Medicaid, or V.A.-like price controls would be placed on Medicare prescriptions. 

Following passage, however, it became quickly became clear the industry faced challenges with the new law. For example, the legislation contained several mandates such as the use of “evidence based medicine”, as well as an entire “PCORI” bureaucracy, both dedicated to lowering Rx costs. 

Additionally, there was soon evidence that Obama, or some future president, would eventually renege on the Rx Obamacare Rx “deal” and go after price controls on Medicare prescriptions.  

California, (Again)

Meanwhile, back in California, following the extreme disruption of the 2015 MediCal drug budget by the very expensive “specialty drug”, Sovaldi, a little noticed bill was introduced in California by an obscure, freshman California Assemblyman named David Chiu. The bill, AB 463, “required drug manufacturers to file annual reports for their most expensive products that reveal all their costs, from research to development to marketing, as well as profits and price increases.”

It all sounds innocuous enough, but it clearly was not. Specifically, the California Office of Statewide Health Planning and Development (OSHPD) was directed to gather the following from all Rx companies selling drugs in California:

  • Total research and development costs paid by the manufacturer or any predecessor manufacturer in the development of the qualifying drug

  • Total marketing and advertising costs

  • Total cost for materials and manufacturing

  • Total costs paid by government sources in the development of the drug, including subsidies and grants

  • Cumulative history of the Average Wholesale Price and Wholesale Acquisition Costs for the drug

  • Total profit attributable to the drug

Presumably, following analysis of all this data, OSHPD will present the manufacturer with a “recommended” price for the Rx, as determined by the State of California.

AB 463 was pulled by Assemblyman Chiu in May, but the assemblyman says given the current “Rx pricing environment”, he will reintroduce his measure next session.  

Probably of more concern, however, is another California price control action known as the “The California Drug Price Relief Act”. It was introduced through California’s vibrant ballot proposition process and calls for the State of California not to purchase any drugs for any state Rx program that are not provided at the V.A. “fixed price” rate.

Note: As of Aug. 19th, the needed number of California signatures to get the issue on the ballot (366,000) had been obtained. On Nov. 8, 2016, the measure will be voted on by all California voters. Remember, in California initiatives are binding.


Popular Sentiment

Finally, and thinking in particular about these California developments, a recent nationwide poll published by the Kaiser Family Foundation found that the greatest “healthcare” concern of American’s today is not the emergence of Obamacare, but rather the “pricing of Rx pharmaceuticals”. The results are not only surprising, they are compelling. Check out the general convergence of both Republican and Democratic sentiment on many “drug price control” options, including public transparency on setting prices, and Medicare price controls.

The 2016 Pathway to Public Rx Price Controls

So how does the pathway to public Rx price controls lay out for 2016?  Here’s my best bet:

• The U.S. drug industry will continue to price its new “specialty drugs” at whatever the market will bear. These pricing policies will foster continued, general outrage by American public towards the Rx industry.

• As a direct result, somewhere, likely California, the public’s outcry will play out in civic action. It will either take the form of a pricing transparency bill, or perhaps a mandate that a state pay only V.A. fixed rate pricing for publicly purchased Rx’s. Given the intensity of the August KFF findings, and how the industry is currently responding, I believe it’s actually possible that both actions could succeed in California in 2016.

• Assuming I am correct on this last point, it will only be a matter of time before similar concepts are introduced in Congress - just as the California rebate idea was in 1990. In Congress, the Rx price control target will be…Medicare Rx’s.

• If Medicare Rx price controls are created, it will only be a short while until every private payer in the country is using the new “Medicare prescription drug reimbursement rate” as the floor for what they will pay for Rx’s in private healthcare settings.

At that point, the U.S. pharmaceutical industry, in both its public and private markets, will essentially be operating in a price-controlled environment. And with that, the era of “free market pricing” for the American Rx industry will quietly pass into history.

Tom Norton, NHD Smart Communications of Illinois, Inc.        

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