Share |





In Pursuit of Fewer Medicines and More Lawsuits

Benjamin Zycher, Ph.D.
Medical Progress Today
July 29, 2005

That politics is the art of wealth redistribution is a truth both eternal and adverse, in that it provides a vehicle for the "public interest" political class to demonstrate its compassion by spending Other People's Money. In the latest manifestation of this process, those Other People are the shareholders of pharmaceutical firms: An initiative (Proposition 79) on the forthcoming ballot in California this November, ostensibly intended to help ordinary citizens of the Golden State with their prescription drug bills, would mandate discounts both steep and, perhaps ironically, unobtainable, for about half (or more) of the state's population.

An accurate short summary of this initiative is straightforward: Take from the needy and give to the lawyers. That is the central reality attendant upon this proposal because it will deliver not one pharmaceutical price discount to Californians even as it engenders a flood of lawsuits over "profiteering," as a review of the provisions of Proposition 79 reveals clearly. Pharmaceutical producers would be pressured to offer the state rebates yielding drug prices equal to or lower than the nationwide Medicaid "best price" and/or the Federal Supply Schedule (FSS) price (paid by such large federal purchasers as the Defense Department and the Veterans Administration). These discounted prices then would be available to all Californians meeting certain criteria, the most expansive of which is an income lower than 400 percent (!) of the federal poverty line (FPL). For a family of four, that is an annual income of $77,400; the respective median for California is about $68,000.

This means in effect that the California discounted price would be both a ceiling and a floor for the entire Medicaid program nationwide, particularly because other states would be confronted with powerful incentives to adopt the same sort of program. (This effectively would be a cartel of state governments.) Pharmaceutical producers choosing not to participate in this discount program could find their drugs excluded from the MediCal (California Medicaid) formulary, and drugs so removed would have to receive prior authorization before they could be prescribed for patients under MediCal. (So much for actual patients and their wellbeing.) More broadly, the state would be proscribed from contracting with producers not paying the rebates required under the initiative, thus putting at risk the $481 million in rebates now paid to the state under current discount programs.

Let us put aside the plain reality that this proposal amounts to a blatant system of pharmaceutical price controls for a substantial part of the population of California. Ignore as well all of the attendant adverse implications for research and development and the future alleviation of human suffering. Because the bureaucratic incentives for the administrators of government health care programs yield an overwhelming bias in favor of "cost" (spending) reductions, such prior authorization would be limited largely to patient groups wielding substantial political power; AIDS sufferers, breast cancer patients, and some others would get their preferred drugs at substantial discounts. Others less favored politically - say, lung cancer patients, those not enjoying a sufficient "quality of life," etc. - would not be allowed the latest (and most expensive) medications, shunted instead toward older generics and "evidence-based" medicines deemed more-or-less effective in the aggregate, but not necessarily so for any given individual patient.

Thus would this initiative yield an even greater politicization of publicly-financed health care services and research and development than already is the case. And notice that MediCal patients in the absence of the required prior approvals would lose access to preferred medicines if the respective manufacturers decide not to participate in the price control ("rebate") system; because the income threshold (400 percent of the FPL) is so high, it is not at all unlikely that the net effect of the program would be to penalize the poor in favor of the middle class, i.e., to transfer wealth upward.

And that is why the program, even if passed by the voters, never will be implemented: The federal government (the Centers for Medicare and Medicaid Services, or CMS) must approve benefit changes affecting the Medicaid population, and as a matter of policy it will not do so in the case of a prior authorization requirement for drugs covered by Medicaid, imposed in pursuit of discounts or other benefits for non-Medicaid populations with incomes above 200 percent of the FPL. In other words, the CMS will not allow the benefits enjoyed by Medicaid patients to be placed at risk by states attempting to obtain drug discounts for non-Medicaid patients not deemed financially needy. And there is no need to speculate about this: Maine attempted to implement a similar program in 2000; the CMS refused to approve it, and it was abandoned after three years of litigation.

What assuredly will happen under this proposal is an avalanche of new litigation: The initiative allows attorneys to bring a cause of action for "profiteering" whenever a prescription is filled at an "unconscionable" price or at a price yielding a profit "unjust" or "unreasonable." None of these terms is defined. An attorney filing such a lawsuit need not represent an actual client - the plaintiff can be any member of the general public - and need not show actual harm. Because one form of "profiteer" noted in the initiative is a seller "discriminating unreasonably" against any person in the sale of prescription drugs, the 400 percent of FPL income threshold arguably would be irrelevant; the litigation threat would force all prices for a given drug to be the same. The civil penalties would be the greater of $100,000 or treble damages for every prescription filled, plus investigative costs, and expert and attorney fees. Because mail-order pharmacies and other such distributors can be located in California, with distribution networks nationwide, it is fair to predict that this initiative would have the long run effect of destroying the U.S. pharmaceutical sector.

Such are the wages of left-wing "compassion." Real charity, of course, is voluntary, and it is voluntary programs that offer the most promise for those less fortunate. This is particularly the case for pharmaceuticals, which for the most part are relatively inexpensive to produce and market once the huge initial research and development costs have been borne, so that help for the needy does not threaten to destroy the industry. This is revealed clearly by the various programs for the needy operated by the pharmaceutical producers themselves, and by the general voluntary program in Ohio, which after only several months has enrolled tens of thousands of participants receiving discounts exceeding 30 percent. Another initiative on the California November ballot - Proposition 78 - would implement a similar voluntary program, and it is to that approach that Californians would be well advised to turn as they seek to obtain the huge medical benefits of pharmaceutical advances for those less fortunate.

Benjamin Zycher is a senior fellow in economics at the Pacific Research Institute. Email:

home   spotlight   commentary   research   events   news   about   contact   links   archives
Copyright Manhattan Institute for Policy Research
52 Vanderbilt Avenue
New York, NY 10017
(212) 599-7000