Digesting Proposition 61: regulating drug prices

Proposition 61, appearing on the ballot November 8, would prohibit the state of California from purchasing prescription drugs from a manufacturer for any price higher than that paid by the US Department of Veteran Affairs, better known as the VA. This would effectively place a drug price cap on what pharmaceutical companies can charge California, limiting them to VA prices.

Prescription drug prices in the United States are the highest in the world, and California state agencies spend an estimated $4.2 billion a year on prescriptions, according to the Legislative Analyst’s Office, a nonpartisan government agency that provides policy advice to the state legislature. The state currently purchases drugs from manufacturers for agencies and programs like Medi-Cal, the Department of Corrections, and CalPERS, which provides health coverage for California state, school, and public agency members. According to the Legislative Analyst’s Office, the potential fiscal impact of the proposition is unknown.

Those in support of Proposition 61 say that the initiative fights back against drug company price-gouging. Roger Salazar, spokesperson for the Yes On 61 campaign, said, “Californians are fed up with high drug prices. This initiative gives the voters an opportunity to send a message to the pharmaceutical industry that they’re not going to take it anymore.”

Opponents, on the other hand, argue that the measure could jeopardize the special pricing that the VA receives from pharmaceutical companies. Kathy Fairbanks, spokesperson for the No On 61 campaign, said that outside experts have “pointed out that nothing in Proposition 61 mandates that the state pay lower drug prices, or that companies give them lower drug prices. And the details matter.”

“I understand where the ‘yes’ side is coming from,” Fairbanks said. “You want to stick it to the industry and vote yes and lower drug prices.” But she called that campaign “long on promises and short on details as to how this is going to work in the real world.”

She said that independent experts like the Legislative Analyst’s Office have evaluated the proposition and “raised red flags.”

A CalPERS report to its Pension and Health Benefits Committee states that the proposition’s intent “is very attractive and might possibly provide cost savings; however, passage and implementation of the Act would drastically change the current drug purchasing landscape and could result in unintended consequences.” Among those potential consequences, the CalPERS report cites “increased drug prices for the VA, instead of decreased prices for CalPERS and other state entities as intended” and “decreased access to certain drugs for CalPERS members.”

The report by the Legislative Analyst’s Office lays out three possible outcomes of the initiative. In scenario one, manufacturers offer the state the lowest VA prescription drug prices, but the state’s savings are offset by price hikes for drugs that manufacturers do not sell to the VA but do sell to the state.

In the second scenario, manufacturers may refuse to sell the state some or all of the prescription drugs purchased by the VA, because the initiative does not include an obligation for pharmaceutical companies to offer all VA drugs at the lowest VA prices.

In the third, drug manufacturers opt to raise VA drug prices in order to maintain their revenues.

The report states that even if drug companies were to reduce prices to VA levels, the savings for the state would be unclear, because the lowest negotiated prices that the VA pays for some drugs are unpublished. The office’s report concluded that “the amount of any savings is highly uncertain,” and that, depending on implementation costs and drug manufacturer’s pricing decisions, “it could range from relatively little effect to significant annual savings.”

Supporters of the initiative contend that drug manufacturers are less concerned about the execution of the initiative and are more concerned about the precedent its approval would set for other state Medicaid programs, and for giving states more bargaining power over the pharmaceutical industry in general.

“First and foremost, most of the predictions you hear from the ‘no’ side aren’t predictions, they’re threats. When they talk about raising drug prices for veterans, those are threats that the pharmaceutical industry is making,” said Salazar of the Yes on 61 campaign. “They’re basically saying that if Californians have the gall to pass this measure, that they’ll punish the veterans that are served by the Department of Veterans Affairs.”

But Salazar argued that pharmaceutical companies cannot arbitrarily raise prices on veterans, and cited a previous effort to do so in the early 1990s, when Congress reacted by codifying the discounts that the VA receives. The Veterans Health Care Act of 1992 states that VA drug prices must be 24 percent lower than what drug companies charge pharmacies.

Charles Idelson, communications director for the California Nurses Association, one of two big donors to the Yes on 61 campaign, echoed Salazar’s sentiment, saying, “A lot of criticism is disingenuous and [they] use it as excuse for inaction.”

Idelson mentioned two bills that pharmaceutical companies successfully lobbied against this year: SB 1010 would have required drug makers to provide notice of future drug price hikes to state agencies and insurance companies. After being watered down in by amendments in the state Assembly, the bill was retracted by its author, state Senator Ed Hernandez. An earlier bill by Assemblyman David Chiu, AB 463, would have required drug companies to report operational costs and profits for ultra-high-priced specialty drugs. Chiu pulled his bill from an Assembly Health Committee agenda, saying he didn’t have the necessary votes to move forward.

“All they were going to do was show more disclosure of drug price increases. Did they thank people by lowering prices or did they raise prices, keeping affordable drugs out of reach for millions of people?” Idelson asked. So, when it comes to Prop 61, he continued, “Do you think that if people vote no that pharmaceutical companies are going to thank everyone by lowering prices?”

Stateside polling shows that many voters are undecided on this initiative. The most recent poll, Hoover Institution/YouGov’s Golden State Poll completed in mid-October, puts voter support at 51 percent and opposition at 24 percent, with undecided voters at 25 percent. The September Field Poll/IGS Poll demonstrated voter support from 50 percent of voters and opposition from only 16 percent of voters, but 24 percent of voters from across the political spectrum declared themselves undecided.

Yet Proposition 61 has drawn tremendous ballot measure spending. According to the CA Secretary of State’s Cal-Access website, as of November 3 the Yes On 61 campaign has raised $17,784,517 and spent $14,172,181. Donations have come mainly from the AIDS Healthcare Foundation and the California Nurses Association, along with thousands of individual donors.

Cal-Access data shows that the No On 61 campaign has raised $109,033,854, primarily from out-of-state pharmaceutical giants, including Merck, Johnson & Johnson and Pfizer. The “no” campaign’s 2016 expenditures have totaled $105,549,887, based on the latest available filing data.

When asked about the campaign’s heavy expenditures, Fairbanks noted both the crowded advertising market and the complexity of the campaign’s message. “The yes side has a very simple message: ‘Trust us, Prop. 61 will lower drug prices.’ They’re bashing the industry and it’s a fat target,” she said. “We have to spell out why Prop. 61 won’t work. It’s not enough to say, ‘Trust us, it’s not going to work.’ It’s a much more complicated message.”

The intricacies of the proposition have left many feeling unsure of the intentions behind and potential outcomes of the proposition. Fairbanks called into question the intentions of the AIDS Healthcare Foundation, the author and largest fiscal supporter of the initiative, saying, “The AIDS Healthcare Foundation, which paid to get Prop. 61 on the ballot, drafted Prop. 61 so that their own organization is exempt from having to comply with the proposition. It seems suspicious. They’ve exempted themselves. If it’s about benefiting the state of California, why did [AIDS Healthcare Foundation] exempt the single largest Medi-Cal organization, Medi-Cal managed care?”

But Salazar disputed that claim as “nonsense.” He said, “Medi-Cal managed care drug prices are based on Medi-Cal fee-for-service drug prices. And those are covered by the initiative. So Medi-Cal managed care, while explicitly excluded, was only excluded because they didn’t want to have to negotiate twice for the same discount. So because Medi-Cal fee-for-service is included in Proposition 61, that’ll have the impact of lowering drug prices for Medi-Cal managed care.”

Ged Kenslea, the communications director for the AIDS Healthcare Foundation, responded to the No on 61 campaign’s allegations by saying, “That’s horseshit.” He said that the state does not negotiate for Medi-Cal managed care providers directly, which is why it would be exempt from the proposed process.

Kenslea reiterated that those managed care prices are still modeled after fee-for-service prices. “Kathy Fairbanks and the No side are throwing anything and everything they can at the wall to try and confuse the issues. But voters are smart enough and have been abused by the drug industry long enough,” he said.

Kenslea expressed optimism about recent polling results. “Legislators in Sacramento and in Washington, D.C. have been unable and unwilling to do anything meaningful to reign in drug pricing. We see Prop. 61 as a first step,” he said.