To control drug prices, pursue fraud, not manufacturers

A Los Angeles-based nonprofit has gathered enough signatures to get two initiatives on the November ballot. The one of greater interest to ordinary Californians would legislate that any prescription drug paid for with state money cost no more than the amount paid by the Veterans Administration. The California Drug Price Relief Act would have little, if any, short-term effect. There is a better way to control Medi-Cal’s escalating costs.

Proponents claim this measure would help at least 5 million Californians get drugs at a lower price. The largest number of beneficiaries would be the 2.7 million people dependent on Medi-Cal (the health care program for low-income people) who are not already in managed-care plans.

President Obama infamously promised to reduce the average family’s health costs by $2,500, which obviously has not happened. The Kaiser Family Foundation reports premiums for employer-based family coverage have increased $3,775 from 2010-15. So, politicians and activists have turned again on their favorite whipping boy – the research-based pharmaceutical industry.

Never mind that some of this industry’s greatest recent achievements were researched and developed in California. Sovaldi and Harvoni, produced by Foster City’s Gilead Sciences Inc., effectively cure strains of the Hepatitis C virus. These drugs eliminate decades of future health spending on expensive procedures, including liver transplantation, for the patients they treat. It is very likely they reduce health spending, but only if costs over a patient’s entire life are taken into account. Unfortunately, our politicized health system is unable to make that kind of rational calculation.

As far back as 1994, Congress considered allowing states and other authorities to piggy back on the system that allows the VA to buy discounted medicines from drug companies. The VA itself repudiated the proposal, indicating it would result in higher drug prices for everyone. The reason is not hard to figure out. If the government demands a discount for a government program, prices for other consumers must rise to cover costs. If the government then expands the population that gets discounted prices, manufacturers will increase list prices again.

Further, discounted prices come at a cost for veterans. The formulary (list of covered drugs) maintained by the VA covers 59 percent of the 200 most-popular drugs, according to a 2011 study by Austin Frakt.

California for years has demanded increasingly high Medi-Cal discounts, even though the gross cost of prescriptions dispensed to Medi-Cal dependents who are not enrolled in managed-care plans has barely increased in almost a decade.

The state’s Department of Health Care Services says the gross cost of prescriptions was $2.8 billion in fiscal year 2013-14, barely up from $2.7 billion in 2006-07. Back in 2006-07, total rebates to the federal and state government were about $1 billion, 41 percent of the gross cost. In 2014-15, rebates amounted to $2.1 billion, 76 percent of the gross cost.

Besides the gargantuan rebates, much of the savings is due to the shift of millions of Medi-Cal dependents into managed-care plans, where drug prices are privately negotiated.

It is not even clear that the state would save money by paying VA prices for drugs dispensed to the shrinking number of Medi-Cal dependents not in managed care. If we combine two federal Government Accountability Office studies, conducted in 2010 and 2012, it looks like VA drug prices are often significantly higher than Medicaid drug prices.

The California Drug Price Relief Act is a distraction from a more important way to control Medi-Cal’s costs: anti-fraud measures. In the past five years, the state attorney general recovered an average of more than $232 million a year in criminal and civil penalties for Medi-Cal fraud. According to the Attorney General’s Office, Medi-Cal fraud could total “billions of dollars annually.”

Improving the state’s already successful efforts to defeat fraud in Medi-Cal is a more promising way to control costs than attacking the research-based pharmaceutical industry.

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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