Gov. Newsom makes a big move on drug pricing

Gov. Gavin Newson wants to deliver lower drug prices by harnessing the full weight of the state against the pharmaceutical industry, but it’s unclear whether his team can get a better deal without giving up something Californians want.

In his first act as governor, Newsom issued an executive order creating the largest single purchaser of prescription drugs in the country.

It combines negotiations for some 13 million people in government-administered plans like Medi-Cal and eventually invites other organizations to join. His argument centers on the idea that a bigger organization can extract a better price from pharmaceutical companies.

“We believe this will significantly reduce costs,” he said at a press conference last week, adding that he’d ask other governors if they want to participate.

Health policy experts said there’s no guarantee the ambitious plan will work.

Size has its limits, experts said, and the downside could be Californians losing access to certain drugs.

“To some extent, scale counts. (But) I am skeptical that just aggregating by itself gives much more bargaining leverage,” said James Robinson, who directs the UC Berkeley Center for Health Technology.

"At the end of the day, what gives bargaining leverage for a purchaser is you say ‘if you don’t give me a discount I will not buy your product,’” he said.

That means getting better prices could put politicians in the position of denying certain pricey drugs to beneficiaries, Robinson said.

Already a big player

Jennifer Kent, director of the California Department of Health Care Services, says federal protections ensure that necessary drugs will be covered. Federal law requires that Medi-Cal cover drugs that a doctor says a patient needs, and that won’t change under Newsom’s executive order, she said.

The state directly oversees the health plans for some 2 million MediCal beneficiaries but the vast majority of Medi-Cal enrollees obtain coverage through insurers like Blue Cross and Blue Shield.

Those companies, which provide coverage for thousands of other Californians in the private market, negotiate for themselves. Newsom wants to take that power away from them and give it to the state. The transition, according to the executive order, should be complete by January 2021.

The lingering question, said Democratic Assemblyman Joaquin Arambula, is whether California will be able to make out better as one entity than commercial insurers who have more inside knowledge and incentives to get deeper discounts.

“It’s unclear whether or not this will yield significant savings,” said Arambula, a Fresno doctor. “By harnessing all of those covered lives into one rebate (discount) negotiation, California may be able to extract additional rebates but also will not have the benefit of knowing what rebates are given to other insurance plans.”

A 2013 report by the California Health Foundation concluded the state already possesses considerable market power. Since 1995 at least 14 states, including Massachusetts, New York and Georgia have tried to coordinate drug purchasing through block negotiations, the report said.

The Assembly recently commissioned a study on health care options from a group of University of California researchers. It concluded states have had trouble creating and sustaining such large negotiating agencies.

“The real flaw here I think is an understanding flaw that just bigger means being able to negotiate more,” said Ian Spatz, a senior adviser with the law firm Manatt, Phelps & Phillips and an adjunct professor at the University of Southern California. “In the drug world, the better prices have come from your ability to favor one drug over another by using formularies.”

$1,000 pills

Health policy leaders in the California assembly say the current system, where numerous health plans negotiate separately, is the problem.

“The challenge around drug pricing is that we haven’t been able to understand why pills cost $1,000 a piece, why treatments are six figures or why there are widely different prices depending on what country you’re in,” said Democratic Assemblyman David Chiu.

Chiu, who twice introduced legislation designed to combine pharmaceutical negotiations, said the result has been “myriad agencies that are all purchasing the same drugs” but at different prices. Chiu said his bill was largely “non-controversial in the legislative process” but did not have support from former Gov. Jerry Brown’s administration.

“There is potential for significant savings to the state in the hundreds of millions of dollars, potentially,” said Democratic Assemblyman Jim Wood, who will chair the Assembly’s health committee. “The bigger the book of business, the more people are going to want it because if you don’t get it you have a

problem.”

The pharmaceutical industry, for its part, is keeping quiet until more specifics emerge. The state’s drug price transparency law SB 17 was challenged in court by the Pharmaceutical Research and Manufacturers of America, although the organization did not prevail.

“We welcome the opportunity to work with the governor and his administration on comprehensive solutions to the problems patients are facing accessing and affording their medicines,” Priscilla VanderVeer, a PhRMA spokesperson, said in an email.