In a state where the private sector continues to be marginalized in favor of more government, Gov. Gavin Newsom has plans for California to set up a generic drug label of its own. It would be the first state in the country to go into the pharmaceutical business, and will “take the power out of the hands of greedy pharmaceutical companies,” says the governor.
Despite the promises, it’s likely to be nothing more than an ornamental program subsidized by higher tax bills. It won’t lower overall health care costs and might even drive them higher.
According to CalMatters, Sacramento would “negotiate contracts with drugmakers to manufacture selected prescriptions on behalf of California,” and make those medications “available at an affordable price to the state’s 40 million residents.”
For those wondering why California’s government would go where no other state government has gone before, Democratic Assemblyman Joaquin Arambula of Fresno has the answer.
“If Costco can have a Kirkland brand,” he says, “why can’t California have our own generic brand?”
Arambula is an emergency room doctor who chairs the Assembly Budget Subcommittee No. 1 on Health and Human Services. He should not have to be reminded that there is a vast distance between a for-profit company and government. They exist for entirely different reasons, and when the boundaries separating the two are blurred, and often deleted altogether, the consequences are rarely beneficial to anyone other than bureaucrats; politicians, who consolidate their “elite” power; and the limited private interests those politicians chose to favor over everyone else.
Details are so far murky, but it appears under new pharmaceutical CEO Newsom, drug companies would license generics to California.
No matter the arrangement, the program will be an added burden on taxpayers.
Wayne Winegarden, a Pacific Research Institute senior fellow and director of PRI’s Center for Medical Economics and Innovation, says that if the state enters the market, its generic drugs will either have to be more expensive than the prices manufacturers are getting for their products or the state is “going to be selling at a loss.”
If the state does sell at a loss, “it becomes a huge budget drain.”
“How do you budget for that?” he asks. “There’s no way you can do it cheaper than the company itself. And the company isn’t going to sell it to you at a loss, you’re not producing it, so you’ve got to pay somebody to deliver it, and put the label on.”
The likelihood taxpayers will be required to subsidize the plan concerns PRI President Sally Pipes so much that she believes the result will be “even more leaving the state because of high taxes.”
In a study released this month, Winegarden argues that attacks on prescription drug costs through price controls or international price indexes are misguided. These efforts, including California’s, would have little to no effect on drug costs, he says.
“About 90% of the market is already generic,” Winegarden says, and “95% of those generics sell for $25 or less. So that’s not what the problem is.”
Reform efforts instead should be focused on system-wide modifications to increase transparency and remove inefficiencies driving up overall health care spending.
Don’t fall for Sacramento’s distortion of reality. The only crisis here is purely a manufactured one. Roughly 12% of all medical care spending is made on prescription medications, and drug purchases are a “declining share of health-care spending,” according to Manhattan Institute Senior Fellow Chris Pope.
Even the most expensive drugs, which tend to be the newest medications and are made by those “greedy pharmaceutical companies,” actually lower overall health care costs “by reducing the need for costly hospital and physician services,” Pope says.
The need for those services will increase, however, if policymakers are able to artificially decrease drug prices. Removing the profit motive disincentivizes research and development, and in some instances might make it financially impossible.
This ultimately dries up the pipeline of drugs that improve and save lives. The price indexing and “best-price guarantee” that Newsom claims will make his plan work are nothing more than the adoption of “the price controls from overseas,” Winegarden says, and are sure to produce “shortages of drugs that are approved and lead to a huge reduction in innovation.”
The negative effects would likely trickle down to California’s life sciences sector, disrupting a vital part of the state’s economy and job base.
Newsom is of course receiving some praise for his “bold” plan. But it’s hard to imagine that it will be of any value.
Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.
