A High-Stakes Game of Chicken on Drug Prices

California’s state government spends about $4 billion a year on prescription drugs – for low-income people in the Medi-Cal program, as well as state employees, retirees and prison inmates.

Shouldn’t taxpayers be getting the best deal possible for their money?

That’s the simple question presented byProposition 61 on the Nov. 8 ballot. But like almost every measure on which Californians are asked to vote, this one is anything but simple.

The basic premise behind the initiative is that state government should pay no more for prescription drugs than the pharmaceutical companies charge the U.S. Department of Veterans Affairs, which is widely believed to get the lowest prices.

Currently, California negotiates with manufacturers to try to reduce the “sticker price” on the drugs it buys. But while the state does not disclose the prices it pays for individual drugs, it is likely that different state agencies sometimes pay different prices for the same drugs, and that California overall is not getting as good a deal as the VA does.

Federal law mandates that the VA gets a discount below what private parties pay, and most of those prices are published by the government. But the VA also gets deeper, unpublished discounts on some drugs, often in exchange for making it easier for its doctors to prescribe them.

The drug companies strongly oppose Proposition 61. You’ve probably seen their ads and billboards. The industry fears that if California demands and gets the same prices as the VA, other states will seek the same deal. In fact, federal law might even require the drug companies to offer the same prices to other state programs. That could prompt a downward spiral in prices that would cut into or even wipe out their profits on some drugs.

But few voters care about drug company profits. So the industry is warning about other effects that might be more alarming.

The biggest is access to drugs. Rather than accept lower prices from California, the drug companies might simply decline to offer some of their products to state programs. That would deprive patients of the drugs they want and force the state to pay higher prices for substitute drugs that the VA doesn’t use.

The pharmaceutical companies could also change the way they deal with the VA. They could offer fewer discounts, since raising the price the VA pays would mean higher prices for California agencies, too. Or they could offer the VA fewer drugs in order to limit California’s ability to piggyback on those cut-rate deals. That prospect might mean worse care for veterans, which is why some veterans groups have joined the drug companies in opposing the measure.

Finally, even if the measure did work as intended, forcing down the prices paid by the government, that might prompt drug companies to increase prices for private patients to make up for lost revenue.

But supporters of Proposition 61 say none of those ill effects are likely to come to pass. Instead, they envision savings for the state in the tens of millions of dollars per year, perhaps more.

It’s a high-stakes game of chicken. No one really knows if Big Pharma is bluffing or would really stick it to some of its biggest customers.

If Californians approve Proposition 61, though, we will soon find out.