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Will Calif. ballot measure lower drug prices?

Chris Potter via Flickr Creative Commons

In Nov. 2016, California voters will consider an initiative designed to lower drug costs by limiting how much state agencies pay for prescription drugs. Proponents say the measure would save taxpayers money; opponents say it would have the opposite effect. 

Amid growing public anger about the skyrocketing costs of prescription drugs, the AIDS Healthcare Foundation gathered enough signatures to place its California Drug Price Relief Act on the ballot. The measure would require the state to pay no more than the lowest price the U.S. Department of Veterans Affairs is charged for a particular prescription. 

The VA typically buys drugs at about 40 percent below the prices charged to states, the proponents say. They argue that the initiative would save taxpayers approximately $5.7 billion over 10 years.

"California must begin to use our massive bargaining power to negotiate lower drug prices for taxpayers," says initiative spokesman Mike Roth.

The measure would apply to any program in which the state is the ultimate payer for a drug, including Medi-Cal fee-for-service plans and CalPERS, which provides health benefits to current and retired state employees. Adding in prison inmates and people receiving AIDS drugs from the government, the initiative would affect drug prices for programs serving some 5 million people, according to proponents.

An incentive to raise prices?

The Pharmaceutical Research and Manufacturers of America opposes the initiative. It argues that the measure would backfire, causing an increase in drug prices for military personnel and California consumers.

Some health economists agree. The problem with the initiative is that it doesn't base drug prices on what they're worth, but rather on what the VA pays for them, says Stuart Schweitzer, professor of health policy and management at the UCLA Fielding School of Public Health.

As a consequence, "there's a built-in incentive for the manufacturer to raise the price to the VA so that it doesn't have to give such a big discount to Medi-Cal," he says.

Jeff McCombs, a health economist with the Leonard D. Schaeffer Center for Health Policy & Economics at USC, says history suggests that Schweitzer is right. McCombs notes that Congress attempted a similar strategy with a 1991 law that required drug companies to give Medicaid the same deep discounts they gave other big customers. But rather than forcing down Medicaid drug prices, the law spurred pharmaceutical companies toraise prices for their other big customers, including the Department of Veterans Affairs.

AIDS Healthcare Foundation President Michael Weinstein says California voters wouldn't look favorably on the pharmaceutical industry increasing how much it charges for veterans' prescriptions. 

"If the drug companies are going to hold our veterans hostage, shame on them," Weinstein says. 

"We don't know what the VA pays"

The state officials tasked with analyzing the ballot measure's fiscal impact have thus far been unable to predict what effect it would have on state and local government finances.

The Legislative Analyst's Office and the state Department of Finance are required to complete a joint analysis within 50 days of a proposal being submitted. In this case, though, the agencies' leaders sent a letter to the Attorney General’s office stating that they didn't have enough time to gather the information they need to compare the prices paid by the VA and the state. 

The difficulty is that some of the VA's drug pricing data are confidential, as are some state procurement and pricing agreements, explains Felix Su, a senior fiscal and policy analyst in the Legislative Analyst's Office. 

"We don’t know what the VA pays," he says, adding, "we don’t know whether in some cases the state gets a better deal than the VA. That’s completely possible, but we can’t know unless we make that comparison."

Now that the initiative is on the ballot, the agencies will attempt to complete the analysis, but "we don't want to understate how challenging the task ahead of us is," says Su.

The pharmaceutical industry has contributed nearly $38 million to the initiative opponents' coffers. The pro-initiative campaign has raised about $1.3 million, all it from the AIDS Healthcare Foundation.

This story has been updated.