Prop 61 would prohibit all state agencies from paying for any prescription drug for a price higher than the price negotiated by the U.S. Department of Veterans Affairs, with some exceptions already in federal law. It applies to any program where a state agency is the ultimate payer for the drug, even if not the direct buyer. MediCal managed care programs are exempt from this requirement.

Fiscal Impact:

The fiscal impact of Prop 61 is very uncertain. The Legislative Analyst and the State Treasurer say it depends on how the measure’s implementation challenges are addressed and the responses of drug manufacturers regarding the provision and pricing of their drugs.

Proponents’ Arguments For:

Proponents of Prop 61 argue that drug companies make enormous profits off of people’s illnesses. Drug prices are skyrocketing and many crucial drugs are too expensive for the people who need them to afford. They say Prop 61 fights back against high drug prices.

The VA buys a lot of prescription drugs and negotiates prices with the drug companies that are 20% to 24% lower than prices for other government agencies. Prop 61 requires all state agencies to pay no more than the low price the VA negotiates. This will lower drug prices for everyone who gets drug benefits through California state agencies and will spill over to lower prices for all consumers.

Opponents’ Arguments Against:

Prop 61 opponents argue that by tying the prices California agencies pay for drugs to the price the VA pays, drug manufacturers will naturally just raise VA prices to keep the prices overall up where they want. It will not bring drug prices down for California agencies but will raise them for veterans.

Moreover, Prop 61 will reduce patients’ access to drugs. Drug manufacturers may simply stop offering drugs that they sell to the VA to agencies and individuals in California. They will continue to sell them to the VA and in other states at higher prices.

Prop 61 only applies to 12% of Californians, exempting most Medi-cal patients, privately insured patients, and Medicare patients. So there is not enough clout by that small number of patients to force drug prices down, increasing the chance those drugs just won’t be offered to those patients any more.

Finally, Prop 61 creates more bureaucracy, red tape and lawsuits. It will costs California millions just to implement and may well lead to higher, rather than lower, drug prices for state agencies.

Discussion:

Prop 61 fails to understands how markets and pricing work and so will most likely lead to fewer drug options and higher prices for Californians—the very opposite of what proponents want to achieve.

If Prop 61 were put into place, a few things could happen.

The most likely outcome is that drug companies would raise the prices they charge the VA, since that would be the new price ceiling. This is what happened when Congress mandated that Medicaid pay no more than the VA negotiated prices, and soon thereafter Congress repealed the mandate. In other words, Congress tried the approach of Prop 61, it failed, and was eliminated. There is no reason to expect any different outcome from Prop 61.

Another scenario is that all state agencies could buy drugs at the lowest VA prices and save a lot of money. But, to make up for their shortfall, drug companies could raise prices on other drugs paid for by state agencies but not purchased by the VA. The end result might be no savings for California at all. Even worse, right now drug companies voluntarily give rebates to state agencies for drug purchases as part of negotiated prices, and such arrangements might violate Prop 61, again raising drug prices for Californians.

Finally, drug companies may not be willing to sell to all California agencies at the low prices negotiated by the VA. In which case state agencies might only be able to offer drugs from a few companies that agree to VA prices, or from companies that don’t sell to the VA. But federal law requires MediCal to offer most approved drugs and so state agencies may have to ignore Prop 61 to comply with federal law.

All of these possible outcomes show the uncertain effects of Prop 61. State agencies and the VA do not buy drugs in a real market with traditional price negotiations, but are fraught with all manner of government rules and special dealing that would likely warp the intended effects of the Prop 61 mandate. Prop 61 proponents are optimistic that no negative outcomes will occur and the drug companies will meekly lower their prices. That is actually the least likely outcome.