Proposition 61 was an interesting attempt to get better pricing for California’s state government for prescription drugs that it buys or directly reimburses for. It failed by eight points this November but I think there is something interesting here.
The measure would essentially prohibit the state from paying more for a drug than the U.S. Department of Veteran Affairs does. The VA typically pays the lowest price for prescription drugs of any public or private entity, because federal law ensures the agency gets a 24% discount off a drug’s list price right off the bat. And officials there often negotiate even steeper discounts on a drug-by-drug basis.
It would apply when the state directly purchases drugs (as it does for prison inmates) and also when the state is the “ultimate payer” for those drugs, such as when it reimburses pharmacies for medicine provided to Californians who are covered under certain state programs. If passed, all state agencies would need to comply by July 1, 2017…
Opponents of the measure say about 12% of Californians, or an estimated 4.4 million people, would be covered. That includes low-income patients covered by Medi-Cal’s Fee for Service program, inmates in state prisons, state employees and retirees, and employees and teachers at UC and CSU campuses. Proponents of the measure have said they believe the figure is higher, around 5 million to 7 million Californians.
The basic thrust of the proposition would be to effectively make the VA the proxy price negotiator for a significant chunk of California’s prescription drug budget. California could probably get away with this because it is a huge market and it has the ability to significantly move stock prices if it shifted all purchases in one category to a single company instead of seven manufacturers. It actually has some market power. That market power is why the Pharma industry opposed the measure. Pharma probably would not have spent $100 million dollars to oppose a similar initiative in Wyoming.
We have to ask ourselves why does the VA get such good pricing on their drugs?
They have decent size although there are several pharmacy benefit managers with much larger patient pools.
They benefit from the federal law that mandates a list price discount but that does not explain their superior pricing to Medicare’s drugs.
The VA gets good drug pricing because they say no. I want to highlight one of my favorite 2011 Incidental Economist pieces (again) as Austin Frakt looked at the savings of a VA like formulary for Medicare Part D:
It’s worth asking, why are Part D formularies so generous? The reason is that a minimum of two drugs in each class must be included on formularies and six classes must include “all or substantially all” drugs on the market. Because of this, providing Medicare the authority to negotiate directly with manufacturers would not lead to price reductions on its own. To achieve savings, Medicare or its participating plans would also need the ability to exclude drugs from its formulary. This ability to tighten formularies would provide the leverage to bargain for lower prices.
Medicare’s inability to negotiate program-wide prices and tighten plan formularies is in stark contrast to the VA, which negotiates directly with drug manufacturers and is not bound by the same formulary rules as Part D plans. That’s why the VA has been able to implement a national formulary more restrictive than those of Medicare plans and obtains lower drug prices. If Medicare plans could implement VA-like formularies and obtain commensurately lower prices, our paper shows that enough could be saved to compensate beneficiaries for the loss of choice, with savings to spare.
To repeat, the key findings are:
The VA pays 40% less than Medicare plans for prescription drugs.
Medicare plans cover about 85% of the most popular 200 drugs on average (ranging from a low of 68% to a high of 93%).
The VA’s national formulary includes 59% of the most popular 200 drugs.
The initiative would have put into place a massive implicit system of NO. That NO would create a significant set of diffused winners (California tax payers), a small set of concentrated winners (California funded beneficiaries who currently take drugs that would be on the narrow formulary at lower prices), a large set of somewhat diffuse losers (beneficiaries who would either have to change drugs or pay higher co-insurance for current drugs) and a narrow set of concentrated losers (Pharma as they won’t extract as much money from California in economic and intellectual property rents). That is a nasty political balance of power that implies a close election which is what we got.
Is this an experiment that other states could push forward on? I think it is. The biggest challenge may be getting the VA to be the lead negotiator for drug classes that their population does not use or does not use in large quantities even as the states’ impacted population uses those drugs in large numbers. I am not a clinician but I would think some pediatric drugs would fit into this category of concern. The VA might be willing to take on this role as it could significantly increase the market power of the VA negoatiators as they would have millions of more covered lives to credibly threaten to move to a different drugmaker unless they get a better deal.
This is something that should be pushed again with any locally relevant tweaks and lessons learned from 2016. I think it could help the drug pricing problem.