Keep the government out of pharmaceutical drug manufacturing


Earlier this month, the California legislature passed a bill that would make the Golden State the first in the nation to establish its own line of generic drugs. Gov. Gavin Newsom is expected to sign the bill into law by the end of the month.

The measure’s architects argue that a state-run generics firm would provide additional competition in the drug market and lead to lower prices. But that promise is empty. Generic drugs can’t get much cheaper. Setting up a new state generics manufacturer would cost millions and deliver miniscule savings.

Injecting more transparency into the prescription drug supply chain is a far more effective way to reduce costs for patients.

The bill in question, Senate Bill 852, would direct the California Health and Human Services Agency to partner with existing drug manufacturers to begin developing and distributing a wide range of pharmaceuticals — including generic drugs, biosimilars, and at least one form of insulin.

But by and large, people are not struggling to gain access to affordable generics. Ninety percent of prescriptions filled in the United States are generics; 95 percent of such prescriptions cost $20 or less.

The average generic copay is under $6. There’s not much more room for prices to go down.

If government-sponsored manufacturers entered the market, they’d likely have minimal impact. They could even lose money. California taxpayers are surely unenthused about seeding a new state-run drug company with $1 million to $2 million start-up capital and hundreds of thousands of dollars in operating funds, only to see their “investment” go up in smoke.

It’s true that some people struggle to afford name-brand medicines. But by focusing on generics, SB-852 wouldn’t do anything to help them.

Reducing the cost of name-brand medicines requires taking on the many middlemen between the drug maker and the patient, each of whom take a cut of a drug’s list price.

Consider pharmacy benefit managers, or PBMs. Insurers hire PBMs to design and administer their formularies, or lists of drugs a plan covers.

Because PBMs serve as gatekeepers to multiple insurance plans, they have a lot of negotiating clout. They use this power to secure massive discounts from drug manufacturers in exchange for formulary placement. In 2018, PBMs secured $166 billion in rebates and discounts.

These discounts don’t usually translate into savings for patients. PBMs keep a small portion of rebates as profit and pass the rest along to insurers, who in theory use these savings to lower premiums across the board.

That doesn’t help people at the pharmacy counter. Here’s why. Imagine a man who needs a $150 hypertension drug. His health plan may have negotiated that list price down to $75 — and may require him to cover 20 percent of the drug’s cost as coinsurance.

But most insurance plans compute coinsurance based on the list price of the drug, not the lower price they’ve negotiated. So our hypothetical man has to shell out $30 rather than the $15 he’d pay if the PBM shared its savings with him. In essence, the PBM is picking his pocket.

This patient isn’t the only one who’d benefit if PBMs shared their savings. According to one estimate, if 100 percent of rebates were shared at the point of sale, patients could save around $57 billion over a decade.

California’s legislators have plenty of issues that deserve their attention. Launching a new state-run generic drug company should not be one of them. It’s a shameful waste of taxpayer money and will deliver no benefit to patients.

Sally C. Pipes is president, CEO, and the Thomas W. Smith fellow in healthcare policy at the Pacific Research Institute. Her latest book is False Premise, False Promise: The Disastrous Reality of Medicare for All (Encounter 2020). Follow her on Twitter @sallypipes.

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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