United States: All Eyes on California’s Prescription For Rising Drug Costs — Prop. 78 Or Prop. 79?

Action: Two competing prescription drug discount initiatives, Proposition ("Prop."). 78 and Prop. 79, will appear on California’s November 8, 2005 Special Election ballot. Both initiatives establish a prescription drug discount program for low-income Californians by negotiating rebates from drug companies. However, Prop. 78 would establish a voluntary program, while Prop. 79 contains an enforcement provision linked to the availability of drugs manufactured by participating companies under the State’s Medi-Cal program.

Impact: The battle between Prop. 78 and Prop. 79 is being closely watched nationwide. Other states considering measures to control rising prescription drug costs might follow California’s lead.

Effective Date: November 9, 2005 if either Prop. Passes.

On November 8, 2005, in a Special Statewide Election, California voters will decide between two competing prescription drug initiatives, both aimed at reducing the cost of drugs to low and moderate-income uninsured Californians, by authorizing the State to negotiate prescription drug discounts. The rival measures, Proposition ("Prop.") 78 and Prop. 79, are the subject of massive advertising campaigns and are being keenly watched nationwide by legislators and consumer groups eager to rein in the costs of prescription drugs. A victory in California for either proposition would have national implications because states which are considering similar prescription drug programs might follow California’s lead.

Prescription drugs represent one of the fastest growing health care expenditures in the United States. According to a recent AARP survey, over a 12- month period ending March 2005, drug manufacturers raised the prices they charge wholesalers and other direct purchasers for 195 brand name drugs (most commonly used by older Americans), an average of 6.6 percent. The national inflation rate increased an average of 3 percent during the same period — less than half the rate increase for these drugs. In response to rising prescription drug costs and inadequate insurance coverage, many states are now considering measures to reduce their drug expenditures for the elderly, the uninsured and underinsured of all ages. These programs would be funded through price discounts and rebates provided by the drug manufacturers. At least 30 drug discount programs are now under consideration in various state legislatures, and several have already been enacted.

Props. 78 and 79 share the same objective — to establish a prescription drug discount program for the low to moderate income uninsured Californians by negotiating rebates from the manufacturers. The two initiatives differ primarily in terms of their enforcement mechanisms and the scope of eligibility for participants. The major components of the dueling measures are described below, as are the existing drug discount programs in Ohio and Maine upon which Props. 78 and 79, respectively, are based.

Prop. 78 creates a voluntary State drug discount program to reduce costs that eligible residents would pay for prescription drugs purchased at pharmacies, and would cover as many as 5 million uninsured low income Californians. Prop. 78 is sponsored by the Pharmaceutical Research and Manufacturers of America ("PhRMA"), a pharmaceutical industry trade association. Eligible participants would include uninsured Californians with income levels at or below 300 percent of the federal poverty level ($28,710 for an individual or $58,050 for a family of four). Those eligible participants would pay participating pharmacies an annual $15 fee and receive a discount card.

California obtains discounts in two ways. First, it would contract with pharmacies that voluntarily choose to participate in the program to sell prescription drugs to program members at agreed-upon discounts. Second, pharmacies would further discount the retail price to reflect any rebates received by the State, and would be reimbursed for their discounts with the funds collected by the State from the drug companies.

There would be no penalties for drug companies which do not offer rebates or which propose inadequate rebates. The State program can be terminated in the event of insufficient rebates, poor enrollment or if a thirdparty administrator could not be selected to administer the program.

The Prop. 78 program was previously introduced as a Senate bill (SB 19) but was defeated in May 2005 in the Senate Health Committee. It failed because union and consumer groups did not believe that the bill went far enough to achieve prescription drug discounts, and which relied solely on the voluntary participation of the pharmaceutical companies.

Prop. 79 also establishes a prescription drug discount program to be funded by rebates negotiated by the State from participating drug manufacturers. It is sponsored by Health Access, a statewide health advocacy coalition. Eligible participants include uninsured Californians with income levels at or below 400 percent of the federal poverty level ($39,280 for individuals or $77,400 for a family of four), and could reach as many as 10 million people. In addition, persons whose annual medical expenses exceed 5 percent of their annual household income would also be eligible. The annual fee for the discount card would be $10.

As in Prop. 78, the State would seek discounts by contracting with participating pharmacies to sell prescription drugs at agreed upon discounts, and pharmacies would further discount the price to reflect any rebates the State received from the drug companies. The State would then reimburse pharmacies from the rebates collected. Prop. 79 would also establish a drug discount program to assist certain businesses and labor organizations that purchase health coverage for their employees and members, and, as well, their dependents.

Prop. 79 would penalize drug manufacturers if they do not offer discounts by eliminating their drugs from a list that permits physicians to prescribe drugs for Medicaid beneficiaries (Medi-Cal in California). If a drug is removed from that list, physicians must receive prior authorization from the State to prescribe such a drug for a Medi-Cal beneficiary.

In addition, Prop. 79 makes it a civil violation for pharmaceutical companies, and others, to engage in "profiteering" from the sale of prescription drugs. "Profiteering" is defined as demanding an "unconscionable price" for a drug or demanding "prices or terms that lead to any unjust or unreasonable profit." "Profiteering" on drugs is subject to prosecution by the State’s Attorney General, or through a lawsuit filed by any "person" on behalf of itself, its members or the general public. Violators are subject to civil penalties of $100,000 or triple damages, whichever is greater, plus legal costs. Injunctive relief is also available, in addition to other remedies.

Voters can vote "yes" or "no" on either or both of the initiatives. If both initiatives pass, the one with more votes becomes law. (Under the California Constitution, an initiative approved by a majority of those who vote takes effect the day after the election unless the measure provides otherwise.) Of course, there is the possibility that neither initiative will receive at least 51% of the vote, and will thus be defeated.

Several State and federal programs currently provide prescription drug coverage for eligible persons. The Medi-Cal program provides prescription drugs for eligible low-income individuals. And California’s Healthy Families program provides prescription drug coverage for children in low to moderate-income families who do not qualify for Medi-Cal. Beginning January 1, 2006, the federal government will provide prescription drug coverage to Medicare beneficiaries who enroll in the Medicare Part D program.

Under Prop. 78, California residents who already have outpatient prescription drug coverage from private health insurance, Medi-Cal, Healthy Families, or other public programs supported with State or federal funding (excluding Medicare beneficiaries) will not be eligible to participate. Also, coverage will not be available until at least three months after the lapse of coverage from either private or public sources.

Under Prop. 79, persons with outpatient prescription drug coverage through Medi-Cal or Healthy Families (excluding Medicare beneficiaries) will be excluded from coverage, but both initiatives allow Medicare enrollees to obtain discount cards for drugs not covered by Medicare.

It is unclear what effect a state prescription drug discount program might have on enrollment in Medicare’s Part D prescription drug benefit plan. On October 1, 2005, Part D plans began marketing to encourage Medicare beneficiaries to enroll in the Part D program and to select their plan. A Maine-based consumer group believes that some beneficiaries may feel overwhelmed or confused by promotions touting both state and federal programs, with the net result being poor participation in either one. A similar confusion might result if California adds an additional drug option that includes California’s Medicare beneficiaries.

As of September 29, proponents of Prop. 78 had collected more than $80 million to support their measure and/or to oppose Prop. 79. The top ten contributors are pharmaceutical companies which have, to date, contributed in excess of $75.8 million. Prop. 78 was also endorsed by Governor Arnold Schwarzenegger.

Prop. 79 proponents have collected an estimated $1.8 million as of September 29. The major contributors in support of Prop. 79 are unions and teachers. associations.

AARP has endorsed Prop. 79 and opposes Prop. 78, and is fearful that if Prop. 78 passes Californians will see little or no benefit because participation by drug manufacturers is strictly voluntary. Concerns about possible legal challenges to Prop. 79 have prompted some advocates of drug price reform to remain neutral.

Prop. 78 is adapted from a similar voluntary drug discount program in effect in Ohio, while Prop. 79 is based on a program in Maine that uses the Medicaid leveraging approach to encourage participation by drug manufacturers, i.e., prior authorization of drugs manufactured by non-participating companies. Both sides point to the programs in Ohio and Maine to bolster arguments for their respective initiatives.

Many groups fear that if Prop. 79 passes, the drug companies will challenge it legally, delaying its implementation. PhRMA sued the State of Maine after it enacted a similar mandatory drug discount program on theories that it violated the Commerce Clause of the U.S. Constitution or was preempted by federal law governing the Medicaid program. Under the original Maine prescription drug discount program (Maine Rx), the drugs of non-participating manufacturers would have been on a list of drugs requiring prior authorization before they could be approved for Medicaid reimbursement. Although Maine Rx was enacted in 2000, due to lengthy litigation which reached the U. S. Supreme Court, the program did not become operational until January 2004.

Maine subsequently revised its legislation in response to concerns raised by the U.S. Supreme Court, renaming the plan "Maine Rx Plus." Under the revised law, Maine softened the prior authorization requirements, somewhat, by removing the mandatory requirement; and requiring prior authorization only when it is "appropriate" to encourage participation in Maine Rx and when it is "consistent."with federal Medicaid rules.

Maine Rx Plus was reviewed by the U.S. District Court in light of the Supreme Court decision, and on January 27, 2005, the District Court dismissed PhRMA's latest challenge. The Court found that the drug plan was "too embryonic" to determine how it will be implemented, and ruled that it was premature to challenge the permissive "prior authorization" provisions until they were, in fact, imposed. To date, Maine has not used its authority to penalize drug companies that do not participate in the program.

In 2003, Ohio consumer groups, initially, tried to adopt the Maine model, but PhRMA challenged it in court. The United Healthcare Action Network of Ohio, the bill's sponsor, and PhRMA eventually agreed to a compromise voluntary plan, named Ohio Best Rx, that went into effect on January 11, 2005.

In late September, the campaigns for both Prop. 78 and Prop. 79 released survey reports analyzing the competing approaches, each claiming that their model achieved superior results.

Californians for Affordable Prescriptions, a group backed by PhRMA, issued a report concluding that the Ohio Best Rx savings were generally superior to those which could be expected in the Maine Rx Plus program. The report stated that among 12 generic drugs surveyed, Ohio Best Rx showed an average savings of 46 percent as compared to the Maine average.

The report issued by the Mainebased group, Prescription Policy Choices, found Maine Rx Plus to be more effective than the Ohio program, based on the price discounts and the number of eligible residents enrolled. The report concluded that the average price advantage for Maine Rx Plus was almost 11 percent for all drugs, and that generic drugs purchased in pharmacies were 30 percent cheaper than the same drugs purchased through the Ohio program.

To date, the discounts under the Maine and Ohio programs have come from pharmacies, not the drug companies. The surveys fail to show whether mandatory or voluntary participation is more effective. The results are conflicting, in part, because each survey included different drugs and different dosages. The Prescription Policy Choices Report noted that it has been very difficult to determine if either program is effective, as well as to identify the advantages and disadvantages of each. Similarly, the California Legislative Analyst’s office has been unable to quantify the costs, and benefits, of either Prop. 78 or 79 due to the number of variables.

Notwithstanding Medicare Part D for the elderly and disabled, states are continuing their efforts to seek relief for low income individuals from rising prescription drug costs. In California, proponents of both Prop. 78 and Prop. 79 agree that a state prescription drug program, using purchasing clout to negotiate volume drug discounts, is a viable approach to make prescription drugs more affordable.

However, neither Maine’s voluntary program nor Ohio’s Medicaid leveraging are clear models for the competing California initiatives. The outcome of this high stakes battle is likely to have far reaching implications as California may be the bellwether for states seeking lower prescription drug costs.

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