In a bold strategy to drive down prescription drug prices, Gov. Gavin Newsom is proposing that California become the first state in the nation to establish its own generic drug label, making those medications available at an affordable price to the state’s 40 million residents.
The proposal, part of the new state budget Newsom is expected to send to the Legislature on Friday, would authorize the state to negotiate contracts with drugmakers to manufacture selected prescriptions on behalf of California. Such a disruption of the pharmaceutical industry, proponents say, would leverage the state’s massive market to increase competition and lower generic drug prices nationally.
The strategy is one of several the Democratic governor plans to recommend to lower the cost of health care for Californians. The administration released only a summary of the proposal on Thursday without the projected price tag, but indicated it’s part of a multi-prong effort that includes strengthening the state’s public option for health insurance and increasing drug pricing transparency.
The notion is untested, though it has garnered attention among progressives and Sen. Elizabeth Warren has included it in her presidential platform.
Newsom will also continue last year’s push to establish a single market for drug pricing, direct the state to ask for more rebates from drug manufacturers, and open a new health care affordability office sometime this spring.
“The cost of health care is just too damn high, and California is fighting back,” Newsom said in a statement. “These nation-leading reforms seek to put consumers back in the driver seat and lower health care costs for every Californian.”
Drug costs have become a persistent and increasing worry, both nationally and in California. Six in 10 Americans take a prescription and 79% say the cost is unreasonable, according to a recent survey by Kaiser Family Foundation.
And prices can affect whether people take their pills. The same Kaiser survey found three in 10 Americans reported not taking their medicine as prescribed due to the cost of the prescription.
Governmentally, health care also consumes a sizable portion of the state budget. California’s Medicaid program for the poor, known as Medi-Cal, now tops $100 billion a year in state and federal spending.
One way to contain costs is to encourage the use of generic drugs instead of brand name medications, whose prices are often elevated by patent protections — necessary, drug companies say, to underwrite the high financial risks of pharmaceutical research and innovation.
The price protections have their own risks, underscored in recent years by high-profile cases of price gouging. In 2015, for instance, Martin Shkreli made national headlines for hiking the price of the lifesaving HIV drug Daraprim by 5,000%. And in 2017, state attorneys general in New Mexico and Washington opened investigations into whether Eli Lilly conspired with other companies to drive up the price of insulin, a drug that is nearly a century old.
But generic drug prices also have risen, state health officials say — faster than brand name ones in California. According to the Office of Statewide Health Planning and Development, from January 2017 to June 2019, generic drug prices increased 37.6%, while brand name drugs rose by 25.8%.
Those increases in recent years have prompted allegations of price-fixing in the generics industry and federal antitrust lawsuits.
“A trip to the doctor’s office, pharmacy or hospital shouldn’t cost a month’s pay,” Newsom said.
The notion of a government getting into the business of manufacturing drugs is untested, though it has garnered attention among progressive politicians.
Massachusetts Sen. Elizabeth Warren, a Democratic presidential candidate, has proposed legislation to allow the federal government to manufacture prescription drugs when the market fails or prices become too high. Though Warren incorporated that proposal in her presidential platform, pharmaceutical companies have argued that government shouldn’t be in the complex business of developing, manufacturing and distributing medicine, and free-market advocates have contended that the public sector shouldn’t be competing with private companies.
In the U.K., Labour Party leader Jeremy Corbyn has proposed creating a publicly owned company to make generic drugs the country’s National Health Service needs but can’t afford. Corbyn’s proposal, however, is only likely to advance if his party returns to power.
Nor is it clear how substantial a dent a state-manufactured generic program would make in health care costs in California. Generic drugs make up 90% of all prescriptions but account for a fraction of drug spending because they’re so much cheaper than brand-name prescriptions.
Six in 10 Americans take a prescription and 79% say the cost is unreasonable, according to a recent survey by Kaiser Family Foundation.
Brand-name drugs make up the remaining 10% but account for 70% of all drug spending, according to IQVIA Institute, a health data research firm. So while buying generic drugs can significantly reduce drug costs, Newsom’s approach may not reduce the state’s health spending that dramatically overall.
Since taking office a little over a year ago, Newsom has made health care a priority by expanding Medi-Cal to undocumented young adults and continuing to champion Obamacare where the federal government has pulled back by requiring all residents to have health insurance. In the new budget, he’s expected to propose extending Medi-Cal to seniors in the country illegally in another step toward health care for all.
His first executive order called for creating a bulk drug purchasing program across state departments to maximize purchasing power and negotiate better rates from pharmaceutical companies.
That meant the state Department of Health Care Services would begin negotiating the purchase of prescription drugs for all 13 million Medi-Cal recipients, or one in three Californians. Prior to that, the state only represented 2 million Medi-Cal recipients, while the rest were placed in managed care health plans that negotiate their own drug rates.
State officials have estimated the change will save California taxpayers $393 million by 2021.
But the plan has created tension between the state and nonprofit health care providers who care for California’s poorest patients. The takeover of the pharmacy benefit in Medi-Cal removes a nonprofit clinic’s ability to buy drugs at reduced costs through a separate federal program.
Undeterred, the Newsom administration is pushing ahead and awarded a contract last month to a firm to manage the new pharmacy benefits.
CalMatters health reporter Elizabeth Aguilera contributed to this report. CALmatters.org is a nonprofit, nonpartisan media venture explaining California policies and politics.