California Attorney General Bill Lockyer has decided that cutting prescription drug prices constitutes "gouging the public." That's what he claimed last week while launching a lawsuit against 39 pharmaceutical companies for defrauding Medi-Cal. This government agency, as Lockyer's findings show, is incapable of controlling costs as well as private buyers could.

When a Medi-Cal patient goes to a pharmacy with a prescription, he usually pays nothing out of his own pocket. Instead, the pharmacy sends a claim to Medi-Cal, based on the price the pharmacy paid the drug maker, plus a markup for the pharmacy's services. Lockyer's allegation is that the price that the pharmacies paid the drug makers was significantly less than the one that pharmacies claimed from Medi-Cal.

Federal law forces drug makers to give their biggest discounts to government programs like Medicaid. The list price, usually called Average Wholesale Price (AWP), has become known in the trade as "Ain't What's Paid" as it has drifted higher to compensate for government interference in drug pricing. If a pharmacy pays a drug maker AWP minus 20 percent, but can charge Medi-Cal AWP minus 15 percent, it earns a nice spread beyond the dispensing fee.

If the allegations are true, it was the pharmacies that made money, but the attorney general is not going after them. As an elected politician, the state's chief lawman has to choose his victims carefully. Pharmacies are often small local businesses and the neighborhood pharmacist is a trusted health professional. Drug makers, however, are Big Business, obviously profitable, disdainful of competition and, best of all, mostly headquartered far from California.

Distorted competition
Of course, there has been no "gouging" going on. There has simply been competition distorted by government policy so that its benefits have not flowed to patients. This is not a problem that litigation is going to solve. Instead, it requires re-organizing the cash flow so that the money goes to Medi-Cal patients, not the pharmacies or the pharmaceutical manufacturers, and allowing them to keep some of the savings from shopping around.

Unlike government bureaucrats, patients won't pay $9.78 for saline solution that they can buy elsewhere for 95 cents. Nor will they pay $804.70 for pills that they can buy elsewhere for $33.85. Attorney General Lockyer helpfully provided both these examples in his press release.

The attorney general should go after the drug companies if they broke the law, but to fix the system will require targeting the government bureaucracy that is driving the problems. This is not a complicated matter.

Hand over the money
Privately insured patients now have more control over their health-care dollars through Health Savings Accounts (HSAs), which the federal government authorized starting in January 2004. Some states, such as South Carolina and Colorado, are starting to give control of Medicaid resources to Medicaid beneficiaries.

It's time for Medi-Cal to move in the same direction. Get health-care dollars out of the hands of the government, and into the hands of the patients. Both patients and taxpayers will win.