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Head-to-Head Drug Trials at California's Ballot Box

John R. Graham
Medical Progress Today
November 3, 2005

On November 8, Californians will enjoy a rare opportunity to influence the price of prescription drugs in the Golden State. Both Propositions 78 and 79 aim to lower prescription prices for needy Californians. The measures offer starkly different visions of the appropriate relationships between patients, the state, and drug makers. One of them is a step forward, and the other is a step back.

Prop. 79 assumes that patients’ natural advocate is the state, and that a hostile posture to the pharmaceutical industry is necessary to get better prices. The measure mandates deep discounts not only for the needy, but for up to two-thirds of Californians. This is because it demands that drug companies give discounts at least as great as Medicaid’s to Californians who earn less than four times the federal poverty level – about $77,000 for a family of four. This is far greater than the median income, which was about $56,000 in 2002.

Prop. 79 also links drug prices for uninsured patients to prices for Medicaid beneficiaries. If drug companies refuse to give government-dictated discounts to uninsured patients, Medi-Cal patients will suffer too, because the state will likely not provide those medicines to them. Holding Medicaid beneficiaries hostage in that way violates federal rules. The drug companies would have little choice but to take the state to court, and that would stop the plan in its tracks.

The proponents of Prop. 79 argue that a similar program in Maine gives discounts without federal approval, but neglects to note that taxpayers and pharmacies, not drug makers, bear the costs. Maine tried a punitive approach in 2000 and fought drug makers in court for almost four years.

In 2004, Maine abandoned its attempt to link prices for uninsured patients with Medicaid access, and launched a more limited program, Maine Rx Plus, that continues to generate hostility among drug makers and community pharmacies. Almost half of Maine’s community pharmacies are boycotting Maine Rx Plus, the number of eligible patients actually enrolled has dropped almost 14 percent between March 2004 and July 2005, and less than one fifth of patients enrolled in the program have used it this year.

Prop. 79 will not reduce drug prices, as proponents promise. The measure demands a discount even for many Californians who have private insurance. If these discounts are even greater than those currently enjoyed by Medicaid in California, federal rules would impose them on other states' Medicaid programs, too.

This would cost companies a catastrophic amount of revenue, and they will undoubtedly respond by raising their list prices so that the bigger discounts do not result in lower actual prices. Research by the U.S. Government Accountability Office and Professor Fiona Scott Morton of Yale University describes this effect, which was first observed after the government started interfering in prices in 1990.

Prop. 79 introduces civil liabilities for “profiteering”, which any individual can allege. It fails to define these terms (beyond “unconscionable price” or earning an “unjust or unreasonable profit.”), and leaves unclear whether the discounts it demands would amount to a defense if offered by a drug maker.

Californians might wonder what will happen when everyone can sue every drug maker for the crime of earning money on its products. They might ponder where new drugs will come from if companies go out of business. And they might ask how loading unlimited legal fees onto the cost structure of prescription drugs is going to reduce prices.

Prop. 78, on the other hand, is a workable proposition that avoids most of these pitfalls. Prop. 78 commits the pharmaceutical industry to discounts for uninsured patients who earn less than three times the federal poverty limit (about $58,000 for a family of four). It institutes a state-recognized “gateway” to a number of discount programs that already exist. It prevents the state from interfering with those programs, and keeps Medicaid out of the picture.

Drug makers have launched a number of discount programs for low-income Americans, and the federal government, under the Bush presidency, has exempted them from restrictive rules. Some programs give drugs away at very low prices to qualified patients. Prop. 78 facilitates access to these programs, thus offering a real opportunity to expand enrollment.

No ballot measure is perfect, and Prop. 78 is no exception. It erects a new government bureaucracy and launders rebates through the state instead of simply giving discounts directly to patients. Nevertheless, Prop. 78 is likely to be better than the status quo. It adds another layer of protection from government interference in drug prices, this time at the state level.

Prop. 78 is a big step in the right direction, but there is more to be done to ensure that needy Californians get the medicines they need. The next step will be to reduce further the degree of government intervention by eliminating the state’s role as middleman for the rebates, and giving the discounts directly to the beneficiaries.

John R. Graham is director of health care studies at the Pacific Research Institute, and author of Immediate Discounts or Endless Lawsuits, a briefing paper in PRI’s “Healthy California” series that compares Propositions 78 and 79.

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