Eight months ago, Gov. Gavin Newsom released a plan to lower the state’s prescription drug costs. The central idea: By consolidating the market power of state agencies into one statewide pool, California could gain greater leverage to negotiate with drugmakers.
In late August, the administration took a first step toward making the proposal a reality.
Under the plan, which was outlined in an executive order announced shortly after Newsom took office, the state — rather than individual managed care insurance plans — will take on the role of negotiating drug costs on behalf of all 13 million Californians on Medi-Cal, the state’s Medicaid insurance plan for low-income residents.
The Department of Health Care Services, which administers Medi-Cal, began soliciting proposals Aug. 22 from companies to help the state manage pharmacy benefits. This transition is to be completed by January 2021.
“It’s a step in the right direction,” said Ramon Castellblanch, a professor emeritus at San Francisco State University who has studied drug pricing.
The administration estimates the transition will save the state $393 million by 2023. The nonpartisan Legislative Analyst’s Office in April said the move could potentially save the state hundreds of millions of dollars each year, but that it lacks details about how it will be implemented and how it will affect Medi-Cal enrollees, pharmacies, health care providers and managed care plans. Community hospitals that benefit from a federal drug discount program might also take a financial hit under the proposal because they would receive less money from the state than they would under the current system for drugs.
Experts say the downside of such a proposal is that it could limit the types of drugs available for patients, or make some drugs more expensive. This is because purchasing pools can get a discount on a drug only if they guarantee the drugmaker that a lot of people will use it — essentially leveraging market power to obtain a discount. If a certain drug is less commonly used, the drugmaker is less likely to offer a discount on it, potentially making the medicine more expensive.
The counties of San Francisco, Los Angeles, Alameda and Santa Clara, which buy drugs for county hospitals and inmates, recently said they will join the statewide pool.
The executive order does not directly address, at least not right away, the problem of high out-of-pocket prescription drug costs for the millions of Californians on private health insurance plans — such as consumers stuck paying several hundred dollars for a single dose of lifesaving medication like insulin or EpiPens. That’s because the order seeks to first change the way state agencies work together to purchase drugs. Private insurance companies are encouraged but not required to join the pool.
California is not the first state to attempt a state-managed bulk purchasing pool. Since 1999, when Massachusetts authorized a statewide bulk prescription plan, a growing number of state agencies have implemented or explored bulk purchasing, according to the National Conference of State Legislatures.
Perhaps of greatest interest to California is Washington state, which in 2005 created a pool to determine how much it will pay pharmacies for prescription drugs for state employees. Called the Northwest Prescription Drug Consortium, it has been joined by some Oregon Medicaid beneficiaries, public employees and residents on workers’ compensation, and Washington’s Department of Corrections (which buys drugs for offenders in state prisons) — for a pool of more than 500,000 people.
Some date indicate states and consumers save money on prescription drugs when the state takes on the role of negotiating costs. For the roughly 284,000 Washington residents on the Uniform Medical Plan — the health plan for Washington public employees and retirees, which is part of the Northwest Prescription Drug Consortium — many drugs are available with no co-pay or a co-pay of $10.
One 2018 study found that the Uniform Medical Plan spent 35% less than the California Public Employees’ Retirement System plan on prescription drugs for state employees and retirees ($58 per month compared with $89 per month) in 2016, according to a report co-written by Castellblanch. But those differences also could be attributed to different co-pays and whether employees were sicker or older in one pool than the other.
California has tried to create a statewide drug purchasing pool in the past. The California Pharmaceutical Collaborative was created by legislation nearly 20 years ago with similar goals. The collaborative, housed within the Department of General Services — which purchases drugs for state hospitals and prisons — was supposed to bring together other state agencies for drug purchasing. But because of fragmented bureaucracy and a lack of political appetite in previous administrations, it hasn’t done so, said Assemblyman David Chiu, D-San Francisco.
Chiu wrote a 2017 bill that would have created a statewide drug purchasing pool by getting state departments under one system; parts of the governor’s executive order are similar to that bill, which passed the Assembly but not the Senate.
New York recently explored the idea of getting the state, rather than pharmacy benefit managers, to determine which drugs will be covered for Medicaid beneficiaries and how much they will cost. West Virginia, which did so in 2017, recently said it saved $55 million in its first year.
“This is a hot topic in the U.S.,” Castellblanch said. “California is part of a national movement.”
And 28 states are part of various multistate drug purchasing pools — where states’ Medicaid programs or agencies within states partner with agencies in other states for, in theory, more market power.
It is a model that Chiu wants California to explore with Oregon and Washington. The idea is in its infancy. Chiu has introduced a nonbinding resolution in the Legislature, encouraging the three states to work together. The resolution faces a mid-September deadline to pass the Legislature. A similar resolution was passed by Washington lawmakers and was attempted but not approved in Oregon. If the three states pool their Medicaid beneficiaries alone, it would represent more than 14 million people.
“As six-figure drug prices have permeated the market, we need to do more to control skyrocketing drug prices,” Chiu said. “The failure of Washington, D.C., to tackle this issue is compelling states to be innovative in their approaches.”
Combining Washington state’s existing operations with California’s large population and market power could create a powerful body.
“With our muscle and their brain, we’d have the Terminator,” said Castellblanch, who advised Chiu on the 2017 bill and testified in favor of it. “We’d have the the drug price killing machine.”