Lowering health costs emerged as a major part of Gov. Gavin Newsom’s 2020 agenda earlier this month when he unveiled plans to get state government in the business of selling prescription drugs.
California would be the first state to create its own drug label, which would contract with existing manufacturers to produce lower-cost drugs. Newsom said he’s already in negotiations related to the plan.
He and his office deflected questions about how much it would cost and how it would work, promising a more detailed proposal this spring, but during his budget briefing he gave a clue about which drugs he has in his sights.
“One guarantee of this not working is telling you who we’re negotiating with,” Newsom said. “But I can tell you things like insulin are top of mind.”
Prescription drug market experts say insulin will be particularly difficult for the state to manufacture, compared with other drugs. But if California succeeds, they say the state could reap significant savings.
“If California produced its own insulin, absolutely it could save some money,” said Geoffrey Joyce, who chairs the Department of Pharmaceutical & Health Economics at the University of Southern California.
Insulin costs rising
People with type 1 diabetes, an autoimmune disease that prevents the pancreas from making the blood-sugar regulating hormone insulin, must take insulin daily to survive. Some people with type 2 diabetes, who still produce the hormone but need additional blood sugar regulation, also use synthetic insulin.
About 7.4 million Americans rely on insulin, a medication that has risen dramatically in price, according to the American Diabetes Association. Between 2002 and 2013 the drug’s list price nearly tripled. In 2017, national spending on insulin reached $15 billion.
Scientists discovered insulin in the 1920s and have developed many different formulations to treat diabetes over the last century, meaning some advancements are still protected by patents. Those for which the patent is expired, however, present an opportunity for other drug manufacturers to produce their own versions at a lower cost.
For most drugs, which are manufactured by combining chemical ingredients, imitations of brand-name drugs whose patents have expired are called generics.
But insulin must be produced by living cells, placing it in a different category of pharmaceuticals known as biologics. Biologics are more difficult to manufacture, so the federal government has more stringent regulations for generic versions of those drugs, called “follow-on biologics” or “biosimilars.”
That creates a challenge for manufacturers, who must develop a method for producing insulin and meet higher regulatory standards to bring their version of the drug to market. The increased difficulty and higher costs can deter for-profit companies from attempting their own biosimilars.
That’s where the government might have an advantage, said Michelle Mello, a professor of law and medicine at Stanford University.
“One of the reasons we don’t have more manufacturers of them is it’s really hard,” she said. “It’s plausible that a state entity might be more willing to take those risks on than a private company.”
Drug costs driven by markets, middlemen
Generic drug markets tend to be competitive and profit margins tend to be low, said Joyce, the USC professor. That means there’s not usually much room for prices to come down. But some generics markets are small, giving manufacturers power to keep prices high.
Right now, three companies control the U.S. insulin market: Eli Lilly, Novo Nordisk and Sanofi. That small number makes it the ideal type of market in which a state-owned drug label could come in and lower costs, experts say.
The complex system of prescription drug purchasing is also keeping insulin prices high, experts say. Manufacturers set the initial list prices, but from there the drugs and payments travel through a complicated web that includes wholesalers, pharmacies, pharmacy benefit managers and insurance companies. Secret negotiations throughout the process make it impossible for a patient to know exactly what determines the final price they pay.
“The way that drugs are bought right now is riddled with perversities,” Mello said. “Most of it is done by these private pharmacy benefit managers, and it’s done without a lot of transparency.”
California could save money by cutting out some of those middlemen, she said.
The government’s responsibility to taxpayers also means consumers would also be more likely to see lower drug costs passed down to them, said Trish Riley, executive director of the nonpartisan National Academy for State Health Policy.
“It’s going to be more transparent,” Riley said. “It doesn’t need to satisfy demands of Wall Street for profit.”
Risks for California
Despite the plan’s potential to save money in the future, the California Legislature’s financial analyst has pointed to the plan as one part of the governor’s budget proposal where lawmakers should proceed with caution because of its possibly high price.
“Some of these are really bold and go beyond what other states have done, in the area of prescription drugs, for example,” Legislative Analyst Gabriel Petek told lawmakers Thursday. “Many of these ideas may have merit, and they may be worth considering, but we think there’s the potential that they would increase costs to the state on an ongoing basis over the long term.”
Newsom said he’ll need lawmakers to support the plan, and promised he would unveil a detailed proposal sometime in the spring.
Even if Newsom convinces the Legislature to authorize the plan, his Health and Human Services Secretary Mark Ghaly said the administration would still need to win approval from federal regulators and determine which drugs the state could feasibly produce.
Insulin is an attractive option because of its price and widespread use, Ghaly told reporters earlier this month after the governor’s budget briefing. As prices continue to climb, the lifesaving drug becomes inaccessible to more and more people, a problem Ghaly said the government has a responsibility to fix.
“It’s a prime example as a test case,” Ghaly said. “The state really needs to step in, not just on the affordability issue, but on the access to care.”