Governor Newsom’s troubling first act on medications – Pacific Research Institute

Governor Newsom’s troubling first act on medications


In one of his first acts, Governor Newsom signed an executive order that will change how medicines are purchased in California. With visions of big-box store discounts dancing in his head, Governor Newsom has established a bulk program that will now purchase drugs for the state’s Medicaid program (Medi-Cal).

The Governor believes that his executive order will create significant health care savings for the state, but he will be sorely disappointed. Imposing more government mandates and increasing bureaucratic control of the pharmaceutical market will only make a bad situation worse.

To the extent the executive order successfully reduces expenditures, these “drug savings” will come with a high price. Perhaps the largest price will be paid by those Californians who will lose access to medicines that could benefit them.

While the Governor of California is powerful, even he cannot repeal fundamental economic principles. When the government mandates a maximum price for a good (or what is called a price ceiling), economic shortages arise. In the pharmaceutical market, these shortages manifest themselves as reduced access to drugs.

There is ample evidence that access problems follow when a government becomes the primary negotiator on drug prices. Take the United Kingdom as an example.

In the U.K., the National Institute for Health and Care Excellence, NICE, is the government agency that decides which medications are worth the money and which medicines are not. Thanks to NICE’s negotiations, British patients are unable to obtain many of the newest medications that Americans take for granted. Americans have access to roughly 90 percent of all the medicines that were released worldwide between 2011 and 2017. British patients only had access to two-thirds of those drugs.

California will be no different.

Governor Newsom’s negotiations will not only restrict patients’ access to the medicines of today, by increasing uncertainty and reducing returns, the Governor’s proposal will also reduce the number of new state-of-the-art medicines that will be developed in the future. Future innovations, such as potential cures for Alzheimer’s and cancer, will be jeopardized.

Just as troubling, even if spending on drugs decline, the Governor’s proposal would likely cause overall health care spending to increase. After all, saving money on drugs is not the ultimate goal. The primary goal is to eliminate the excessive costs that proliferate the entire health care system.

Restricting access to medicines that are often better treatments at lower prices relative to other treatment options will not create broader health care savings. In fact, reduced access to drugs will likely increase overall health care costs as patients will have to resort to costlier treatments, including longer, and more frequent, hospitalizations. A lower quality, higher-cost, health care system in California will result.

It is also unclear whether the executive order will be able to successfully reduce expenditures, if history is a guide.  Whether it is California’s $77 billion bullet train to nowhere or the millions of dollars California overpays hospitals, state government continually demonstrates its inability to be an effective long-term price negotiator. Given this history, there is no reason to even assume that the state can effectively negotiate on behalf of Medicaid patients over the longer term.

In contrast to the cost overruns and overpayments that typically plague government-run programs, Medicare Part D provides a better model that Governor Newsom should have followed.

Medicare Part D, which was implemented nationally in 2006, provides 36 million seniors with prescription drug coverage. The program uses an innovative free-market structure instead of empowering the federal government to design the plans and negotiate prices. Specifically, private-sector insurers design Part D plan coverages and set premium levels. These private insurers then compete with one another for seniors’ business.

Thanks to the competitive pressures, Medicare Part D has been a great success. Not only are 90 percent of beneficiaries satisfied with their coverage, drug costs have been cheaper than expected. For example, while the CBO projected 2012 Part D expenditures as high as $126.8 billion, the actual spending was 55 percent lower – only $55.0 billion.

Learning the right lesson from history is imperative. With respect to drug prices, consolidating more power in Sacramento will not make health care more affordable, nor will it improve the quality of health care services Californians receive. Unless it is reversed, Californians may come to regret Governor Newsom’s first official act.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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