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Sunday, July 14, 2024 | Back issues
Courthouse News Service Courthouse News Service

Drug-Price Initiative Reaches Past California

SAN FRANCISCO (CN) - A small but ardent group chanted "Stop pharma greed!" in front of San Francisco City Hall this past week, as the Yes on 61 bus tour urged California voters to rein in expensive prescription drug prices they say are killing patients - even though health care providers could profit if the initiative passes in November.

One of those providers is Los Angeles-based AIDS Healthcare Foundation, the nation's largest provider of HIV and AIDS medical services. It wrote Proposition 61, also called the California Drug Price Relief Act, and has spent $15 million to get it passed.

According to the state legislative analyst, California spent $3.8 billion on prescription drugs in the 2014-15 fiscal year. Backers of the measure say this and recent drug pricing scandals like the one over Mylan's EpiPen make their case that people are dying because they can't afford the exorbitant prices pharmaceutical companies are charging, and prices must be brought under control.

Proposition 61 will do that, they say, by extending the deep discounts the U.S. Department of Veterans Affairs gets from drug makers to more Californians. The VA gets the biggest drug discounts of any government agency in the nation, and the measure would prohibit state agencies like the one that runs Medi-Cal from paying more for a prescription drug than the VA pays.

Although its discount rates are confidential, a 2005 Congressional Budget Office report estimates the VA pays 42 percent of a drug's list price, 9 percent less than the federal Medicaid program.

"You ask a nurse, you ask a doctor, you ask a social worker, they will tell you patients suffer, patients die," Erich Koch, a nurse at Alta Bates Summit Medical Center in Berkeley, California, told Courthouse News at the Yes on 61 rally.

But the measure exempts Medi-Cal's managed care program, which serves 75 percent of beneficiaries, from its provisions, and only targets its smaller fee-for-service program serving just 25 percent of beneficiaries.

Kathy Fairbanks, a spokeswoman for the No on 61 campaign, questioned AIDS Healthcare Foundation's motive for excluding Medi-Cal's larger managed care program from the measure. The group, she noted, serves Medi-Cal patients through the managed care system and has essentially exempted itself from the pricing provisions of its own initiative.

Meanwhile, Proposition 61 doesn't exempt the managed care programs operated by the state's public employee retirement system CalPERS.

"Why is managed care exempt when [Proposition 61] is supposed to be an initiative to benefit all state health care programs?" Fairbanks said. "The managed care exemption makes zero sense. We look at that and find it very suspicious."

A lawsuit filed by the AIDS Healthcare Foundation in 2009 may provide a clue. In the suit, the group accused California of attempting to balance its flailing budget "on the backs of safety net providers" like the foundation after the state scrapped reimbursements to them paid by Medi-Cal's fee-for-service program.

Safety net providers that participate in the federal 340B drug pricing program are eligible for upfront discounts from drug companies, but until 2009, they could choose to be reimbursed for drugs through the fee-for-service program instead, which pays more than the 340B program.


But 340B safety net providers are supposed to receive discounts through just one of the programs, not both. When the state discovered that many 340B groups were submitting reimbursement claims to the fee-for-service program for drugs they had already bought at a 340B discount, it eliminated their fee-for-service reimbursement option.

Although it earned $1 billion in 2015, the foundation said in a 2012 petition that the 340B program discounts, which range between 20 percent and 60 percent off a drug's list price, are too low to cover its dispensing costs.

The suit has made it all the way to the Ninth Circuit, where Circuit Judge Stephen Reinhardt asked foundation attorney Jordan Keville at a hearing earlier this month if Proposition 61 will moot its case. Keville told Reinhardt he "couldn't answer whether it relates to it directly.

But if drug companies pull the prescription drug rebates they give the state and drug prices rise, something the Legislative Analyst's Office said could happen as manufacturers attempt to protect their profits under the measure, California will end up paying larger reimbursements to health care providers that buy drugs through the Medi-Cal fee-for-service program. That means they'll make more money, and so will 340B providers if AIDS Healthcare Foundation wins its case.

Right now, California gets a federal mandatory rebate on prescription drugs from pharmaceutical companies, and negotiates additional voluntary state rebates with them to cut prices further. If the state attempts to renegotiate those rebates to get them to VA levels and drug makers refuse, the Legislative Analyst's Office says the state could lose them entirely

Michael Weinstein, AIDS Healthcare Foundation's president, acknowledged in an interview that higher drug prices would pad his group's bottom line.

"Every time the price of a drug goes up, our margin goes up, and if prices don't go up as fast, we earn less money," Weinstein said. "The list price of a drug determines net income, so the higher that is, the better off we are. We make more money on a $1,000 drug than on a $500 drug."

But Weinstein said the proposition's opponents contention that AIDS Healthcare Foundation exempted itself from its own measure is "just not true." He said the organization earns enough money that it can afford to make less on prescription drugs once Proposition 61 passes.

"We're required through moral obligation to bring those prices down," Weinstein said. "We're not dependent on getting our share of big price increases."

Regardless of whether any group will profit under the measure, drug prices have increased to levels many Californians can't pay. According to the American Hospital Association, average annual drug spending at community hospitals in the United States increased by 23 percent between 2013 and 2015, and by nearly 39 percent per patient admission.

"These people suffer," said Alta Bates' Koch. Koch said a quarter of his patients land in the hospital because they can't afford their medications, and drug makers almost always refuse to give discounts when hospital staff request them on a patient's behalf.

When asked whether the measure could raise the VA's prescription prices - a possibility several prominent veterans groups opposed to the initiative have raised - Koch, a veteran of the Iraq War, was emphatic that it won't. He said the pharmaceutical industry is "subsidizing" the groups to scare fellow veterans.

"The idea that Prop. 61 will harm vets is the big lie of the campaign," he said.

However, the VA estimates it could lose $3.8 billion in discounts per year from drug makers if the measure passes.

Citing a 1990 federal law similar to Proposition 61 that saw drug companies raise their prices on government buyers to make up for lost revenues, pharmacy benefits consultant Michael Valentino warned in an undated VA memo that drug companies could react to Proposition 61 the same way they did to the 1990 statute and abolish the VA's discounts.

"The concern over the potential negative financial impact on VA is real," Valentino wrote in the memo.

The pharmaceutical industry is nonetheless scrambling to defeat the measure. It has poured $85 million into the No campaign so far and is expected to spend another $15 million by Election Day, dwarfing the amount AIDS Healthcare Foundation has spent on the campaign.

And because federal law entitles all states' Medicaid programs to the lowest prescription drug prices, if Proposition 61 passes price limits at VA levels would extend nationwide.

In a July report, the Legislative Analyst's Office said that scenario would push drug makers to "take actions to protect their profits under the measure." But Roger Salazar, a spokesman for the Yes on 61 campaign, said the industry's reaction to the initiative indicates drug prices won't increase.

"There's no way the pharmaceutical industry is going to spend $100 million to defeat this measure if they thought prices would go up," he said. "If they thought they would make more money, they'd make more profit. In fact, they'd probably put money on our side."

Despite its potential flaws, the initiative is popular with voters fed up with overpriced drugs. A joint Field/IGS poll conducted in late September found that 50 percent of likely voters support the initiative, while only 16 percent said they would vote against it. With 34 percent of voters still undecided and outrage at the pharmaceutical industry growing every day, there's a good chance Californians will approve the measure.

"We as humans do not need to be preyed on," Iraq War veteran Emily Yates said of the drug industry's conduct during the Yes on 61 rally. "We need to be cared for."

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