Can California Beat The Federal Government In Lowering Drug Prices?

Unwilling to wait for federal action, California Gov. Gavin Newsom says he has a plan that could extract discounts from drugmakers and save the state money — one he hopes other states can join. (Screenshot of Newsom's Facebook Live on Jan. 7)

California Gov. Gavin Newsom says he’s done waiting for the federal government to curtail the rising cost of prescription drugs.

Newsom has his own plan to ease that financial burden — one he hopes other states can join or replicate.

The Democratic governor said he intends to use California’s might as the world’s fifth-largest economy to demand lower prices directly from drug companies for millions of Medicaid enrollees, state government workers and, eventually, Californians in the private sector.

“I recognize deeply the anxiety so many of you feel around the issues related to the cost of prescription drugs,” Newsom said in a Facebook Live video when announcing his initiative. “And I hope California’s efforts here can lead the way to other states to consider the same.”

Newsom said later he’s already “talking to other state governors about how they can participate.”

Whether he can deliver on his ambitious pledge to take on big pharmaceutical companies is far from certain. The plan he introduced his first day in office is based on broad ideas, with few details and start dates that may be years away.

States have taken smaller steps to rein in drug prices and achieved limited savings. But the issue has stymied lawmakers at the federal level, including President Donald Trump, who called for lowering the cost of prescription drugs in his State of the Union address last week.

Lawmakers face an array of challenges that make reform hard, such as secretive drug pricing and the political influence of the pharmaceutical industry, one of the most powerful lobbies in the country, said Rachel Sachs, an associate professor at Washington University in St. Louis who specializes in health law.

“Drug pricing is one of the most complicated areas within a complicated health care system,” Sachs said.

In California, the amount the state government spends on prescription drugs has risen 20 percent per year since 2012, according to Newsom’s executive order.

To stem that rise, he wants the state Department of Health Care Services — which oversees Medi-Cal, the country’s largest Medicaid program, for low-income residents — to negotiate prescription drug prices for all of its roughly 13 million enrollees by 2021.

Currently, the vast majority of Medi-Cal enrollees get their prescription drugs through managed-care plans that contract with the state to provide Medi-Cal coverage — a fragmented system that doesn’t yield the best price for consumers, the Newsom administration argues.

With the state in charge of negotiations, Medi-Cal could save $150 million a year, the administration said, and Medi-Cal enrollees could go to virtually any pharmacy, as opposed to the limited options authorized by their health plans.

Although the concept of bulk purchasing might sound good, health experts say, the state faces barriers.

Federal law requires Medicaid programs to cover most drugs approved by the Food and Drug Administration. That leaves states without one of the biggest bargaining chips available to the private sector: the ability to tell drugmakers they won’t buy their products.

But California can get creative, said Jennifer Kent, the health department’s director. For example, the state can create a preferred drug list that gives drugmakers an incentive to reduce their prices. If a medication is on the list, doctors don’t need to obtain preauthorization from Medi-Cal to prescribe it, making it more accessible and thus more likely to be used by patients, Kent said.

In addition, the sheer size of California’s Medi-Cal program can help drive down prices, Kent said.

“I think of us as the third-largest public purchaser in the nation” behind Medicare and the Department of Veterans Affairs, Kent said. “We cover a very significant number of people.”

But representatives for California health plans and pharmacy benefit managers, the middlemen who negotiate with drugmakers on behalf of health plans and government entities, say their organizations already work to find the best prices for consumers. They haven’t publicly opposed Newsom’s plan but have expressed skepticism.

The Pharmaceutical Care Management Association, which represents pharmacy benefit managers, said in a written statement that its companies are set to save the California Medi-Cal program $8.59 billion in projected costs from 2016 to 2025.

Drugmakers have launched a national campaign that blames insurers for failing to pass along more than $150 billion a year in rebates and discounts to consumers.

In addition to negotiating for Medi-Cal enrollees, Newsom wants to get a better deal for state workers. He has directed his administration to study how agencies could band together in a separate drug-purchasing pool to buy prescription drugs as one entity.

Currently, more than 20 state agencies negotiate drug prices separately.

Newsom said he envisions private purchasers — including small businesses, health plans and self-insured Californians — eventually joining these state agencies at the bargaining table in a bid to “marshal public and private parties” for lower drug prices.

A report last year by the National Academy of Sciences found that spending on biopharmaceuticals accounts for nearly 17 percent of America’s annual health care bill, and that many people have difficulty paying for the drugs they need.

Among the report’s recommendations to lower costs: The federal government should consolidate its purchasing power and directly negotiate prices for all federal health care programs, including Medicare and Department of Veterans Affairs coverage. However, legislation to do that within Medicare has stalled repeatedly over the years and remains controversial.

Trump’s proposal last year to link Medicare spending for certain drugs to what other industrialized countries pay has gone nowhere. Last month, the Trump administration proposed a new prescription drug discount plan that would steer the rebates drug companies now give to insurers directly to consumers.

In the absence of federal action, states have sought to curb drug prices on their own. Among those efforts: a Connecticut law requiring drug companies to justify price increases, a California law requiring them to report price hikes, and a New York cap on drug spending in the state’s Medicaid program.

Twenty-eight states and the District of Columbia belong to multistate purchasing pools, mostly for their Medicaid programs. But data about how much money these pools have saved is scarce, said Edwin Park, a research professor at Georgetown University’s Center for Children and Families.

“I think there are real opportunities and real interest in the states about leveraging their buying power,” said Trish Riley, the executive director of the National Academy for State Health Policy. “The states can’t wait for federal action.”

This KHN story first published on California Healthline, a service of the California Health Care Foundation.

Related Topics

California Cost and Quality Health Care Costs Health Industry Medi-Cal Pharmaceuticals