Current Events Pharmaceuticals Public Policy

Why Gavin Newson’s plan to negotiate with drug companies will not lower prices

In one of his first acts as California Governor, Gavin Newson has proposed a way to reduce drug price: let California use its size to negotiate directly with pharmaceutical firms. As the N.Y. Times reports:

[O]n Monday, Mr. Newsom signed an executive order proposing a plan that would allow California to directly negotiate with drug manufacturers. The state would bring to the bargaining table not just the 13 million beneficiaries of Medi-Cal (California’s version of Medicaid), but also other state agencies that purchase drugs, including coverage for state workers and prisoners. Down the road, the plan could possibly allow private insurers and employers to join in the savings.

This sounds like a great idea at first. By using California’s size, it will have tremendous negotiating powers with drug companies, right? In Modern Healthcare, Merill Goozner writes:

This may sound like the state is doing nothing more than getting into the pharmacy benefit management business. After all, a PBM’s job is to negotiate lower prices on behalf of their plan members. Sadly, private-sector PBMs have failed to put a dent in the upward spiral on drug prices. Why? PBMs are to drug costs as insurers who act as third-party administrators for self-insured employers are to healthcare costs. They have a structural conflict of interest that stops them from aggressively negotiating lower rates since their fees are a percentage of top-line costs.

Goozner argues that a non-profit or government PBM may be more successful. But will it?

“Lowering drug prices requires some kind of negotiated leverage over drug manufacturers, and generally the way you get that leverage is through the ability to say no to a particular drug,” said Larry Levitt, the senior vice president for health reform at the Kaiser Family Foundation. But Medicaid is required to cover nearly every drug, he said, so “that’s very difficult to do.”

Levitt’s argument is a legislative one…California may not have legislative authority to exclude drugs from Medicaid formularies. Even if this was not the case, Americans are typically loath to have insurers exclude drugs completely from formularies. Private health plans address this through formulary tiers with higher cost sharing for higher tiers. For Medicaid, however, most patients pay few copayments due to their low-income status. Thus, even without legislative constraints, California would still be left with the difficult decision of: (i) excluding drugs from formularies and denying access to low-income residents, (ii) applying prior authorization or step edits restrictions to limit access, (iii) instituting drug tiers and imposing higher cost sharing on low-income beneficiaries, or (iv) failing to do (i), (ii) or (iii) and thus losing their limited leverage they might have in negotiating with drug companies.

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