Dueling discount initiatives: Prop. 79 is a nightmare; Prop. 78 actually might do some good

Propositions 78 and 79, on the Nov. 8 ballot, present competing visions for reducing prescription drug prices in our state. Californians should carefully consider which measure might actually achieve that goal.

Prop. 79 is the hardball option. Its goal is to get deeply discounted drug prices not only for the needy, but for about two-thirds of Californians. It attempts to establish such stringent pricing restrictions that it would become, in essence, illegal to operate a business that manufactures prescription medicines for sale in California. It also contains a provision that allows any citizen to sue a drug maker for charging an "unconscionable price" or earning an "unjust or unreasonable profit."

Prop. 79 fails to define these terms, and leaves unclear whether the discounts it demands would amount to a defense if offered by a drug maker. This clause opens the door to an endless chain of frivolous lawsuits that threaten to put drug makers out of business.

Californians might wonder what will happen when everyone can sue every drug maker for the crime of earning money on its products. They might ponder where new drugs will come from if companies go out of business. And they might ask how loading unlimited legal fees onto the cost structure of prescription drugs is going to reduce prices.

Prop. 79 links drug prices for uninsured patients to prices for Medicaid beneficiaries. If drug companies refuse to give government-dictated discounts to uninsured patients, Medi-Cal patients will suffer too, because the state will likely not provide those medicines to them.

Holding Medicaid beneficiaries hostage in that way violates federal rules. The drug companies would have little choice but to take the state to court, and that would stop the plan in its tracks.

Prop. 79's proponents argue that a similar program in Maine gives discounts without federal approval, but neglects to note that these are financed by taxpayers. Maine tried a punitive approach in 2000 and fought the drug makers in court for three years before accepting that a plan that did not include their co-operation was never going to work. Maine gave up its original plan in 2003, replacing it with state-subsidized discounts for qualified patients while signaling a willingness to negotiate further discounts with manufacturers.

Prop. 79 will not reduce drug prices, as proponents promise. This is because it demands that drug companies give discounts at least as great as Medi-Cal's to every Californian who earns less than four times the federal poverty level: about $77,000 for a family of four. This is far greater than the median income, which was about $56,000 in 2002.

Prop. 79 demands a discount even for those with private insurance and would cover about two-thirds of the population. If these discounts are even greater than those currently enjoyed by Medi-Cal, federal rules would impose them on other states' Medicaid programs, too. This would cost companies a catastrophic amount of revenue, and they will undoubtedly respond by raising their list prices so that the bigger discounts do not result in lower actual prices. Research by the U.S. Government Accountability Office and Professor Fiona Scott Morton of Yale University describes this effect, which was first observed after the government started interfering in prices in 1990.

Prop. 79 amounts to a wild pitch that fails to come near the plate. It makes prices even more opaque and will not reduce costs for needy patients.

Prop. 78 is a better, more sound and workable proposition that avoids most of the pitfalls inherent in Prop. 79. It commits the pharmaceutical industry to discounts for uninsured patients who earn less than three times the federal poverty limit (about $58,000 for a family of four). It institutes a state-recognized "gateway" to a number of discount programs that already exist, while it prevents the state from interfering with those programs and keeps Medi-Cal out of the picture.

Of course, Prop 78. is sponsored by the drug companies, but choosing this option is not like asking the fox to guard the hen house. Drug makers lose money when uninsured patients choose not to fill prescriptions because of cost. In fact, current government rules generally prevent drug makers from reducing prices to vulnerable populations.

In a free market, drug makers would maximize their profits by charging low prices to low-income patients and higher prices to high-income patients. However, when governments demand the biggest discounts for their ever-growing programs, they narrow the drug makers' freedom of movement.

Drug makers have launched a number of discount programs for low-income Americans, and the federal government, under the Bush presidency, has exempted them from the rules discussed here. Some programs give drugs away at very low prices to qualified patients. By facilitating access to these programs, Prop. 78 offers a real opportunity to expand enrollment in them. Dr. William Hamm, former head of the nonpartisan California Legislative Analyst's Office, figures Prop. 78 will cover between 8 million and 9 million Californians.

No ballot measure is perfect and Prop. 78 is no exception. It erects a new government administrative bureaucracy and launders rebates through the state instead of simply giving discounts directly to patients. Nevertheless, its benefits outweigh these drawbacks. Though a softball approach, it hits the center of the plate by actually achieving lower prices.

Many Californians understand this. According to a recent Field Poll, 49 percent of voters said they would approve Prop. 78. However, when informed that the pharmaceutical industry was backing it, almost one third of the voters who had indicated "yes" switched to "no." Much of the media attention has focused on the industry's $94 million advertising campaign of "shock and awe," which disturbs many people. But Californians should not lose sight of the key issue.

In American health care, government influence is so pervasive that prices, either directly or indirectly, are determined by legislation and regulation. Patients can only express their values through political action, and on Nov. 8, they will have their chance.

To make the right decision requires voters to look past an emotional response to an often-unpopular industry and make the choice that will actually lower prescription drug prices, and thus benefit the most Californians.