Proposition 61

Proposition 61: Price Controls For State Purchased Medicine

This proposition is a relatively straightforward government price control on an out-of-control product – medicine. The proposition proposes that the State of California be barred from paying more than is paid by the United States Veteran’s Administration for prescription drugs that the state purchases for all of its uses except for the State’s Medi-Cal program.[1] Medi-Cal accounts for roughly 50% of the State’s annual $3.8 billion dollar expenditure on prescription drugs.[2] The Proposition leaves private prescription costs unregulated.

Let’s see, important medicine for less money. Ok, count us in – what could go wrong? Oh, if only life were that simple. Here is a primer from the Cato Institute on why price controls generally don’t work.[3] Here is our more basic explanation: supply and demand, while far from perfect, and often unfair, still stands as the best pecuniary evaluator of goods. Of course, that reality is problematic when one is dealing with life-saving medicine because, quite literally, there is no cost too high for a dying person with means to pay. One way to address that disturbing reality is by tinkering with the other side of the equation: supply. Reducing entry hurdles to a market or even directly competing with producers can increase supply and drive down costs. But generally speaking just ordering prices to be at a certain level creates disruption in the market.

One could argue that Prop 61’s price controls are not totally arbitrary. They were set by a “market” purchase by the VA. That is true, but if there is a reason that a negotiator can’t reach that low number, legislative action is unlikely to help.

Logically one might ask, if the market price is capped by the prices the VA pays, why would a profit-motivated drug supplier shrug its shoulders and agree to charge California the lower price? Why would it not simply increase the prices it charges to the VA? We are not alone in thinking that is the likely outcome of this ham-fisted effort as nearly “every major veteran’s organization in California is opposing Proposition 61” on that very basis.[4]

We only found one opponent that pulled out the tired argument that high drug prices are needed so that the poor drug producers can recoup their R&D costs.[5] We don’t find that argument convincing for much the same reason – pricing is set by supply and demand, period. We are not fans of efforts to put the thumb on the scale with intellectual property laws any more than we are with price controls; as we hinted above we do favor affecting price by artificially (i.e. through government action) increasing competition or supply. The idea isn’t new; some countries have been doing it for years.[6] But that issue isn’t really before us here.

As many opponents correctly note, nothing in the Proposition requires drug makers to sell to the State at a price they don’t choose.[7] Nor does it require drug manufacturers (who often sell to the VA at prices not publically disclosed) to disclose their otherwise secret pricing information.[8] So, if the State can’t necessarily figure out the cost of medicine, and even if it can figure it out, there is no requirement that the producer sell the drug to the State, how exactly is this mechanism supposed to work?

Curious to see what educated supporters of the Proposition might argue in opposition to basic economics we read every single one of the editorials supporting Proposition 61 – admittedly not too tough a task as we found only three.[9] One offers zero analysis beyond the fact that Bernie Sanders supports it.[10] A second concedes it is a protest vote (complete with an entertaining image of a woman expressing herself with a triumphant extension of the oft-used middle-finger) and the conclusion that the author “doubt[s] Proposition 61 will have the effect it promises.”[11] The third simply urges readers to “fight back against prescription-drug price gauging.”[12] But propositions are not protest mechanisms, they are legislation of the most permanent kind we have in this state. And this particular “protest” could have very real consequences.

This brings us to another critical issue left unaddressed by proponents. As the Legislative Analyst observes:

“In order to maintain similar levels of profits on their products, drug manufacturers would likely take actions that mitigate the impact of the measure. A key reason why drug manufacturers might take actions in response to the measure relates to how federal law regulates state Medicaid programs’ prescription drug prices. (Medi-Cal is California’s Medicaid program.) Federal law entitles all state Medicaid programs to the lowest prescription drug prices available to most public and private payers in the United States (excluding certain payers, such as the VA). If certain California state agencies receive VA prices, as the measure intends, this would set new prescription drug price limits at VA prices for all state Medicaid programs. As a result, the measure could extend the VA’s favorable drug prices to health programs serving tens of millions of additional people nationwide, placing added pressure on drug manufacturers to take actions to protect their profits under the measure.”[13]

In other words, if a provider sells to California at the discounted VA rate, that same reduced rate would apply nationwide to any Federal Medicaid program. We think that gives drug produces a very strong incentive to either not sell medication to the State of California at the reduced rate that Proposition 61 would require or to hike the prices it charges the VA to avoid the same outcome. Neither outcome is good and neither outcome accomplishes the ends Prop. 61 seeks.

Virtually every reasonable analysis of this proposition reaches the same conclusion: While Big Pharma has an annoying hold on medical markets, this proposition is not the answer.[14] The editorial boards are not alone, “respected consumer groups including Consumers Union and Health Access are neutral, despite their support for cost containment. And independent budget analysts can’t say if it would save money for taxpayers. It could drive public and private costs higher.”[15] Moreover numerous civic groups like the NAACP, the Latino Coalition, and the California Senior Advocates League, as well as a nearly endless list of medical advocacy groups (not pharmaceutical companies, we’d expect those), business groups and veterans groups are all opposed to this Proposition.[16] We join them because this Proposition is more than just wishful thinking; it is wishful thinking that probably would result in damaging repercussions.

Recommendation: Moderate NO

[1] http://voterguide.sos.ca.gov/en/propositions/61/analysis.htm

[2] http://voterguide.sos.ca.gov/en/propositions/61/analysis.htm

[3] https://www.cato.org/publications/commentary/problems-price-controls

[4] http://www.latimes.com/opinion/editorials/la-ed-proposition-61-20160926-snap-story.html

[5] http://www.ocregister.com/articles/drugs-714199-drug-prices.html

[6] See e.g. http://www.cnn.com/2015/06/02/opinions/radhakrishnan-drug-prices/

[7] http://sdcitybeat.com/article-17894-2016-VOTER-GUIDE-City-and-countywide-measures.html

[8] http://sdcitybeat.com/article-17894-2016-VOTER-GUIDE-City-and-countywide-measures.html

[9] https://ballotpedia.org/California_Proposition_61,_Drug_Price_Standards_(2016)#Support_3

[10] http://www.sfexaminer.com/examiner-endorsements-statewide-ballot-measures/

[11] http://sandiegofreepress.org/2016/10/prop-61-big-pharma-promises-revenge-passes/

[12] http://m.eastbayexpress.com/oakland/vote-with-us-the-east-bay-express-endorsements-for-election-day-2016/Content?oid=4986340

[13] http://voterguide.sos.ca.gov/en/propositions/61/analysis.htm

[14] http://www.mercurynews.com/2016/09/19/editorial-vote-no-on-prescription-drug-measure/; http://www.montereyherald.com/article/NF/20161003/LOCAL1/161009925l ; http://sdcitybeat.com/article-17894-2016-VOTER-GUIDE-City-and-countywide-measures.html;

[15] http://www.pressdemocrat.com/opinion/6135045-181/pd-editorial-no-on-61

[16] https://ballotpedia.org/California_Proposition_61,_Drug_Price_Standards_(2016)#Opposition

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