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You are here: Home / Anderson On Health Insurance / Proposition 61 and drug pricing

Proposition 61 and drug pricing

by David Anderson|  November 29, 20167:17 am| 30 Comments

This post is in: Anderson On Health Insurance, Election 2016

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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.

First, let’s look at how the LA Times described it:

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.

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Reader Interactions

30Comments

  1. 1.

    rikyrah

    November 29, 2016 at 7:22 am

    Will you do a post on the new proposed Secretary of HHS? So that I can get a clear view of the upcoming nightmare.

  2. 2.

    raven

    November 29, 2016 at 7:34 am

    I got my hearing aids from the VA and I assure you they did not cost retail.

  3. 3.

    mai naem mobile

    November 29, 2016 at 7:48 am

    Hey Mayhew heres Shitgibbons CMS head:http://www.indystar.com/story/news/politics/2014/08/25/powerful-state-healthcare-consultant-serves-two-bosses/14468683/
    I don’t think he’s going to appoint one person who isn’t ethically challenged. I am embarraseed she’s Indian American. Probably as competent as Booby Jindal who was also supposed to be some Healthcare wunderkind.

  4. 4.

    rikyrah

    November 29, 2016 at 7:50 am

    @mai naem mobile:
    They don’t know any different other than hiring grifters.

  5. 5.

    sunny raines

    November 29, 2016 at 7:58 am

    but then again if republicans believed in capitalism, all healthcare plans would be able to use lower cost generic drugs from overseas suppliers instead of protecting their Big Pharma USA political donors.

  6. 6.

    MomSense

    November 29, 2016 at 8:33 am

    O/T but Mayhew is our soccer guru too and I can’t believe the news today. The Brazilian soccer team was on the Colombian plane that crashed. 75 members killed. Horrible, horrible news.

    ETA Chapecoense team.

  7. 7.

    Richard Mayhew

    November 29, 2016 at 8:36 am

    @rikyrah: 2015
    https://mobile.twitter.com/bjdickmayhew/status/803439543387090944

  8. 8.

    mai naem mobile

    November 29, 2016 at 8:36 am

    @rikyrah: GrUber got paid pennies to work on a national health care program vs. this woman who got paid millions for working on a relatively small state’s medicaid program, and the GOP couldn’t shut up about it.

  9. 9.

    rikyrah

    November 29, 2016 at 8:48 am

    @Richard Mayhew:
    Thanks . Maybe you should repost to remind people of who he is.

  10. 10.

    WereBear

    November 29, 2016 at 9:01 am

    The situation is a scandal because Big Pharma uses tax money to develop drugs and then turns around and spends money on advertising them, thus making the prices even higher as this gets rolled into their “costs.”

    I have become extremely wary and get into serious depth ever since an urgent care doctor blithely gave me a powerful antibiotic (which explodes tendons) when a cheaper, older, drug would have been much better.

  11. 11.

    dww44

    November 29, 2016 at 9:05 am

    SiubhanDuinne had this to say about Tom Price last night:

    They (he and wife Elizabeth) are both nice, charming people in person but you couldn’t pay me to pull the lever by either of their names on a ballot for anything. I’m horrified at the idea of Tom Price in charge of a Cabinet department. Bye-bye, O-care.

    @SiubhanDuinne:

    Also, Rachel profiled him last night. He’s the legislator who wrote all the bills to kill Obamacare each and every time the House voted to destroy it. I think we can safely expect to see O care go away along with the privatization of Medicare and a complete dismantling of the social safety net that Price, as a physician, apparently so despises.

    Also, too, according to Rachel last evening, the Trump administration will also try to privatize/eliminate the VA. We’re gonna be a country awash with worthless vouchers pdq.

  12. 12.

    dww44

    November 29, 2016 at 9:11 am

    Question to Richard, do you have a pithy response for those like me who want to rebut those Obamacare opponents who talk about its runaway costs and premiums in 2016? What could states and the Congress do to tamp down that upwards price pressure?

  13. 13.

    Scout211

    November 29, 2016 at 9:15 am

    The people that I know who voted against Prop 61 were swayed by the massive amount of television ads that claimed that the proposition would hurt Veterans.

    IIRC, Big Pharma funded those ads, so they were at best confusing. It made it seem as though it would give the pharmaceutical industry free rein to raise prices on VA drugs.

    It was a very confusing, yet very effective ad campaign.

  14. 14.

    Hoodie

    November 29, 2016 at 9:17 am

    We’re gonna be a country awash with worthless vouchers pdq.

    Worthless to the patients, but a goldmine for faith healers, quacks and assorted other scam artists who will no doubt be given license to receive them.

  15. 15.

    D58826

    November 29, 2016 at 9:18 am

    Richard get out your crystal ball for a couple of questions on the pending demise of Obamacare:
    1. would you expect the cost curve to bend back upward and approach levels seen before Obamacare was passed
    2. would you expect more employers, esp. smaller ones, to dump the private plans that they had in place before Obamacare went into effect?

  16. 16.

    WereBear

    November 29, 2016 at 9:30 am

    @D58826: What I expect to happen (not an expert) is that premiums will rise and then the insurance company will dump you if your illness is expensive, trolling through as many doctor’s reports as they can to find a “pre-existing condition.”

    One woman was rejected for breast cancer coverage because she had acne and did not disclose this.

  17. 17.

    liberal

    November 29, 2016 at 9:48 am

    Somewhat but not entirely off topic:

    One big demon on the horizon is Lyin’ Ryan’s plan to “privatize” Medicare.

    What I don’t understand is this: supposedly, at the beginning, you’ll get a voucher that has the same actuarial value as current Medicare.

    But that raises all sorts of other issues that anyone trying to construct an insurance market needs to wrestle with: what about preexisting conditions? What kind of risk pooling will there be? Etc etc.

    I don’t understand this idea of an “actuarially equivalent” value. Without a group to spread risk, no one is going to sell you an insurance policy (or if they do, the deductibles and limits would make it of limited value).

    The only way to try to make it work would be to do some kind of 65+ equivalent of…Obamacare! Which I thought these shitstains hated. (Except that in this case Uncle Sam would supposedly be giving you some kind of voucher for a basic policy, even if you weren’t poor.)

  18. 18.

    liberal

    November 29, 2016 at 9:49 am

    …adding, I was debating the merits of single payer with someone who wasn’t entirely unreasonable, in an online forum, and some idiot Trumptard jumped in and challenged my claim that Trump and the Granny Starver would try to privatize Medicare. You could make an argument that Trump won’t. I don’t buy it at all, but since he’s on all 17 sides of any issue, you could try to find supporting quotes. The Granny Starver? Not so much.

  19. 19.

    Jinchi

    November 29, 2016 at 9:57 am

    I don’t believe these propositions fail because of campaign advertising. They fail because they are too complicated and the default vote on any of them is “No”. The full text of Prop 61 is more than 1600 words long, or about 700 words longer than Richard’s post, including the embedded LA Times text.

    In other words, it’s a legislative bill and it should be passed by the legislature, not put on a ballot in summary form, along with 16 other state propositions, plus county and city initiatives. I spent hours going through my ballot at home before I mailed it in. Most people spend minutes at a polling booth to do the same thing. That is not enough time to weigh the consequences of major legislation.

  20. 20.

    MomSense

    November 29, 2016 at 10:08 am

    @dww44:

    I’m trying to imagine some of the people with whom I work trying to figure out a voucher system. They have enough trouble because they don’t have internet and have cell phones on pay as you go plans with limited minutes. As it is I drive them to meet with navigators at the hospital when they do free ACA sign up clinics.

  21. 21.

    WereBear

    November 29, 2016 at 10:32 am

    @liberal: As I have been saying since this began, a Republican voucher is a piece of paper that says, “Pretend this works and go away.”

    The insurance prices will go up and the voucher won’t. It can only be used to buy insurance, and if you cannot afford it, at least you have plenty of tp.

  22. 22.

    liberal

    November 29, 2016 at 11:10 am

    @WereBear: Yeah, that’s what I think…I don’t see why you’d be able to necessarily purchase anything without lots of additional structure, a la Obamacare.

  23. 23.

    TriassicSands

    November 29, 2016 at 11:10 am

    Pharma probably would not have spent $100 million dollars to oppose a similar initiative in Wyoming.

    Pharma would have spent however much was needed to defeat the initiative in Wyoming. Ditto for every other state. With fewer than a million people, Wyoming wouldn’t have needed $100 million to overwhelm the opposition.

  24. 24.

    liberal

    November 29, 2016 at 11:12 am

    @Hoodie:

    Worthless to the patients, but a goldmine for faith healers, quacks and assorted other scam artists who will no doubt be given license to receive them.

    I thought the vouchers were for insurance, not for providers directly.

    We already pay for quacks. For example, AFAICT most plans pay for chiropractors and acupuncture.

  25. 25.

    liberal

    November 29, 2016 at 11:15 am

    @TriassicSands: What I’m waiting to see is what happens when Trump and Lyin’ Ryan slash the NIH budget. What’s pharma going to do when its source for basic research as well as training for biomedical people is on the chopping block?

  26. 26.

    Larkspur

    November 29, 2016 at 11:34 am

    @Jinchi: I totally agree. I also spent a lot of time on the ballot, reading the for-and-against statements, checking with online sources I thought were reliable, and most importantly, taking a good look at who was sponsoring or promoting it. And you’re right: this is legislative work.

    ETA: I disagree about the efficacy of advertising. I think it makes a big difference, especially in areas like mine where we’re not bombarded with as many presidential-election ads as elsewhere.

    Some years ago there was another initiative on the ballot to increase spending on building new prisons. I was talking to an acquaintance about the various initiatives, and she said that sure, she voted Yes, because more prisons means more criminals will be locked away, and that’s a good thing, right? She’s not stupid, she just skimmed the ballot and got back to her daily life, like a lot of regular folks without bad intentions at all. It’s unnerving.

  27. 27.

    Loneoak

    November 29, 2016 at 1:53 pm

    I voted no on 61 because I felt it really missed the point of health reform while creating an unpredictable set of secondary effects. When we worry about who has access to affordable drugs, we are primarily worried about two classes of people: 1) the uninsured who pay out of pocket, and 2) the poorly insured with high deductibles, co-pays and weak prescription list coverage. Prop 61 either did nothing for those folks or made their situation worse through secondary consequences. The *only* group Prop 61 benefited was the California taxpayer because the patients it covered already pay almost nothing for the drugs out of pocket. Reducing drug costs to the state certainly matters, and it might have been interesting as a policy experiment, but why go through so much effort and risk for regulations that do not positively address the biggest problems? It also pulled the classic rich CA Democrat move and empowered the proposition’s advocates to have unique legal powers to enforce the statute, which I effing despise as a “progressive”-plutocrat tactic.

  28. 28.

    Mike in Pasadena

    November 29, 2016 at 2:02 pm

    Thanks for this excellent post. For the first time, I finally have a better understanding of why W’s big sloppy wet kiss to big pharma in Medicare part D costs so much. No wonder we in California saw big pharma pour millions into TV ads against prop 61.

  29. 29.

    goblue72

    November 29, 2016 at 2:52 pm

    @Scout211: This here 1000x. That was the overwhelming message of the (Big Pharma funded) campaign against Prop 61. Every ad I saw or mailer I received against 61 involved some Veteran (or actor pretending to be a Vet) claiming 61 would raise drug prices for Vets. It was a powerful message.

    I still voted for 61 as I can read the fine print, but most voters don’t.

  30. 30.

    goblue72

    November 29, 2016 at 2:54 pm

    @WereBear: That’s a fantastic framing. Wish more national Dems used that kind of straight talk.

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