CA Proposes Single Market for Drug Pricing, Manufacturing Hub

January 13, 2020 - The state of California is set to propose, as early as this spring, two initiatives to establish a single market for drug pricing within the state and a new contracting program for generic drugs. 

Governor Gavin Newsom unveiled the state's $222.2 billion budget at a press conference Friday afternoon on the state’s 2020-21 budget. “A trip to the doctor’s office, pharmacy or hospital shouldn’t cost a month’s pay,” Newsom argued in a statement. “The cost of health care is just too damn high, and California is fighting back,” Newsom added. “These nation-leading reforms seek to put consumers back in the driver seat and lower health care costs for every Californian.”

Under the generic contracting program, the Newsom administration will look to negotiate partnerships to manufacture certain generic drugs. California would become the first state in the country to establish its own generic drug label with the program. The move aims to increase competition in the generics market, which is ultimately intended to lower prices on generics.

The proposal to establish a single market is focused on controlling drug pricing within California through the use of a new state drug pricing schedule for all purchasers. The idea is to subject drug manufacturers to a most-favored-nation clause in drug price bids, which would require offering a price that is at or below those offered to any other state, nation, or global purchaser. 

Newsom plans on releasing strategies to carry out the specifics of both proposals by spring. He pointed to the high costs on insulin as an example of areas where the state plans to lower costs. 

It remains to be seen, however, how much of a difference a state manufacturing program for generics would make as they account for just a fraction of drug spending compared to brand name drugs. Presidential candidate Elizabeth Warren (D-MA) incorporated her proposal for the federal government to manufacture prescription drugs, including insulin, in her platform, also. 

Former Food and Drug Administration commissioner, Scott Gottlieb, reacted to the proposal for California to launch its own label for prescription drugs on Twitter. “Details scant but this sounds like a white label formulation of sort of bulk purchase contracts many states already enter into,” he said on Thursday. This “doesn’t seem too novel. Nor does it seem like something drug makers would oppose. Distributors already fo similar arrangements for large pharmacy chains.”

The budget set forth on Friday allocates $167.9 billion for all health and human services programs, including $12.8 million for the health insurance program Medi-Cal. Additional proposals also target high drug costs via reforms to Medi-Cal. The budget “transforms Medi-Cal to a more consistent and seamless system by reducing complexity and increasing flexibility...”  

One proposes to expand on the current authority of the Department of Health of Human Services to allow for consideration of best prices offered by manufacturers worldwide when negotiating state supplement rebates. Another proposes to negotiate supplement rebates of targeted populations that fall outside of the Medi-Cal program to leverage its purchasing power.

By expanding partnerships with local purchasers and breaking down barriers as part of another proposal under the new budget, the state’s pharmaceutical purchasing program will see growth. 

The proposals come as the nation’s battle against soaring drug prices continues, with prices on hundreds of brand name and generics drugs having already increased this year as they do each year. “High prescription drug costs are a national problem that impacts all patients and drives up the cost of health care for everyone,” the 353-page budget summary document reads. “Absent federal action to address these rising costs the state will use its market power to secure better prices from pharmaceutical manufacturers for taxpayers, employers, and consumers." But Newsom’s administration is not starting from scratch. Some building blocks were set up in 2019.

HHS began transitioning pharmacy services from Medi-Cal managed care to a fee-for-service system under an executive order Newsom issued last January. The transition is for statewide standardization of Medi-Cal pharmacy benefit, improving the availability of pharmacy services within a network and strengthen the state’s ability to negotiate state supplemental drug rebates with manufacturers. It is estimated to create annual general fund savings by fiscal year 2022-23.