With recent headlines and congressional inquiries into prescription drug price gouging, many people are concerned about the continually rising cost of medications and whether pharmaceutical companies can keep prices within a reasonable range.

This past election, California voters had the chance to decide whether or not drug prices should be regulated so that state agencies would pay prescription costs equal to the cost the U.S. Department of Veterans Affairs pays for its prescriptions.

The proposition failed, meaning California’s public sector will not receive the same discount of prescription drugs as that of the VA. However, there is similar legislation on the ballot in Ohio for next year, which is virtually identical to California’s prop 61, with the exclusion of the exemption to Medicaid managed care plans from drug price regulation, which California would have allowed.

In both initiatives, the propositions plan to restrict the amount that any state agency could pay for drugs, tying it to the price paid by the U.S. Department of Veterans Affairs — an organization that falls under certain state laws regarding drug price negotiations.

This means that the initiatives would forbid state agencies from entering into any purchasing agreement with drug manufacturers unless the net cost of the drug is the same or less than that paid by the VA.

Ed Kaplan, national health practice leader at Segal, says a yes vote for Ohio’s upcoming drug initiative would come with a fight with pharmaceutical companies due to less revenue from the public sector.

“Those companies are going to make up that lost money on the private sector and reduce the discounts they gave to privately insured employees and their dependents and might actually increase plan costs,” Kaplan says. “Unless the private sector could piggy back on what the public sector gets, but I doubt that’s the way it would be.”

Susan Hayes, AHFI principal for Pharmacy Outcomes Specialists, agrees with Kaplan on this prediction and says pharmaceutical manufacturers have a long tradition of passing on price increases to those willing to pay for them, which is why the United States pays its unfair share of the world’s drug costs.

“A major criticism of Medicare Part D was that it was passed without the requirement of a standardized formulary which would require manufacturers to petition to be on that formulary, as is done in many of the Provincial Canadian programs,” Hayes says. “The United States, for whatever reason, has not been willing to negotiate prices with pharmaceutical manufacturers and as a result we have born the burden of staggering cost increases.”

Too many unknowns
From a fiscal standpoint, the Legislative Analyst’s Office says the potential for state savings if the Ohio initiative passes would be unknown, as it based on how the measure’s implementation challenges would be addressed and the responses of the drug manufacturers.

The measure generally requires that the prescription drug prices paid by the state not exceed the lowest prices paid by the VA on a drug-by-drug basis.

However, the VA’s public database information on the prices of the prescription drugs it purchases does not always identify the lowest prices the VA pays. This is because, at least for some drugs, the VA has negotiated a lower price than what is shown in the public database, keeping that pricing information confidential. It is uncertain whether the VA could be nonetheless required to disclose these lower prices to an entity — such as DHCS — requesting such information under the federal Freedom of Information Act.

A FOIA exemption covering trade secrets and financial information may apply to prevent the VA from having to disclose these currently confidential prices to the state.

How the pharmaceutical industry could react to potential change
The LAO did list three possible fiscal scenarios that could result from the proposal’s passing. Although the California’s proposal did not pass, these scenarios could affect Ohio and its initiative vote in 2017, should it pass.

1) Drug manufacturers offer lowest VA prices to the state

If manufacturers choose to offer the lowest VA prescription drug prices to the state, this measure may achieve state savings to the extent that the lowest price paid by the VA is lower than that paid by state entities.
These savings could be at least partially offset if manufactures respond by raising the prices of other drugs paid for by the state but not purchased by the VA.

2) Drug manufacturers decline to offer lowest VA prices to the state

The measure places no obligations on drug manufacturers to offer prescription drugs to the state at the lowest VA price. Therefore, drug manufacturers may decline to offer the state some or all of the drugs purchased by the VA at the lowest price paid by the VA.

This manufacturer response could result in various state responses, each of which generates further uncertainty around the fiscal effects of the measure, which could include:

  • State programs could modify formularies
  • DHCS may have to disregard measure’s price ceiling

3) Drug manufacturers raise VA drug prices given their new pricing benchmark role

To continue to be able to offer prescription drugs to state entities and minimize reductions in their revenues, drug manufacturers may elect to raise VA drug prices. The fiscal effect of the measure would vary under this scenario depending on the extent to which manufacturers raise VA prices and tie state prices to the higher VA prices.

When VA drug prices were previously extended to Medicaid nationally, drug manufacturers responded by raising VA drug prices before the U.S. Congress subsequently removed the linkage between VA and Medicaid pricing.

The battle continues
Even if proposition 61 in California had passed, Hayes says this win for California — or an upcoming one for Ohio — would not be a win for the rest of the country when it comes to the cost American citizens are paying for their prescription drugs.

“It is time that employers and unions take up similar legislation and follow the example of the Veteran’s Administration, which negotiates prices with pharmaceutical manufacturers,” Hayes says. “… California does have the right idea because legislation is the only way we will be able to reign in the greed of drug manufacturers, who have clearly not been able to self-regulate.”

Andrew Witty, CEO of GlaxoSmithKline, counters Hayes’s comment, saying drug prices would drop regardless. “A lot of people fixate on the political dimension and what might happen,” Witty said in a Bloomberg Television interview. “It’s also important to remember that the marketplace has itself put in tremendous mechanisms to ensure it gets good value for money.”

Witty added that drug makers could see the introduction of more cost-reduction projects in the U.S., like the Medicare one. “They’re going to be key features in the future,” Witty says. “It’s going to become even more important for companies to demonstrate that they have innovation.”

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