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California's path to lower drug prices


Hardly a day goes by without someone in the Trump administration touting their plans to lower drug prices.

No more patent games with generic drugs? Check. An easier path to biosimilars entering the market? Check. Pegging prices for office-administered drugs to international standards? Check.

Actually getting something done? Check back later with us.

The newly installed Democratic Party-controlled House is lining up its own list of big plans.

The government should negotiate on behalf of Medicare beneficiaries. The government should manufacture generic drugs that are being sold at exorbitant prices. The government should cap what patients pay out of pocket for drugs.

The likelihood any of that will pass a Republican-controlled Senate? Next to none.

That’s why state officials, drug plan administrators, hospital officials and consumer and patient advocates should take a close look at the executive order signed Monday by California Gov. Gavin Newsom. As his first order of business, the new governor authorized a state agency to act as a single purchaser of all high-cost drugs for all public agencies except Medicare, which remains under federal control.

Newsom also invited the state’s local governments, private payers, small businesses and self-insured employers to join the collaborative, which will directly negotiate with drug manufacturers. “The state can marshal public and private parties to counterbalance corporate bargaining power,” the executive order declared.

The strength of this proposal lies in its targeting the root cause of the national angst over drugs – the unconscionably high prices set on the latest patented and specialty medicines, which are used to treat people with rare, difficult and life-threatening conditions. In California, 25 drugs account for nearly half of all prescription drug spending.

Newsom gave his Department of General Services until mid-May to come up with its priority list of 25 drugs the agency will purchase in bulk for members of the collaborative starting in 2021. If a high-cost drug is left off the list, the agency must explain why.

This may sound like the state is doing nothing more than getting into the pharmacy benefit management business. After all, a PBM’s job is to negotiate lower prices on behalf of their plan members.

Sadly, private-sector PBMs have failed to put a dent in the upward spiral on drug prices. Why? PBMs are to drug costs as insurers who act as third-party administrators for self-insured employers are to health care costs. They have a structural conflict of interest that stops them from aggressively negotiating lower rates since their fees are a percentage of topline costs.

A non-profit, public-sector PBM, on the other hand, has the opposite incentive. Every dollar in negotiated savings directly benefits taxpayers and other health care payers belonging to the consortium.

This doesn’t put traditional PBMs out of business in California. The new state agency will only cover the most expensive drugs. In that sense, it’s more like a reinsurance scheme where every payer grappling with high-cost drugs benefits by throwing those patients into a statewide pool.

The question California will immediately face is whether its pool can achieve significantly lower prices through direct negotiations with drug manufacturers. In its favor, the state is larger than many of the European countries that have successfully negotiated acceptable pricing.

But those countries have been willing to walk away from the latest drugs if they deem their prices, even after negotiations, are still too high given their medical value. California will have to decide how it plans to respond to a company that simply refuses to negotiate, especially if it makes the only drug for a life-threatening condition.

The agency will also have to figure out whether and how it will respond to patients, who, depending on their insurer, face a hodge-podge of utilization rules, co-pays and deductibles. It could leave all the current PBM and managed care arrangements in place and simply pass along its negotiated savings to the various payers.

But that wouldn’t solve the problems faced by many low- and moderate-income patients hit with exorbitant out-of-pocket costs for the priciest new medicines. Cutting the price of a $10,000-a-month drug in half may save patients with a 20% co-pay $1,000 a month, but they’d still face a $1,000 a month bill, which most Americans can’t afford.

Capping out-of-pocket expenses is one solution to that problem. It’s a way of ensuring that the first dollars of any savings negotiated with manufacturers gets passed along to patients.

It’s almost guaranteed that the paralysis in Washington in dealing with high drug prices will continue over the next two years. More and more states are looking for ways to cut one of the fastest growing items in their health care budgets.

Other populous states should take a close look at what California is doing. Smaller states may want to form compacts with their neighbors to pursue something similar. Gov. Newsom has offered a practical approach to achieving more reasonable drug pricing.