Legislation & Regulation

Proposal To Use VA Price As a Benchmark Is off the Mark

But demise of Proposition 61 in California may not be the last word on efforts to rein in drug spending.


Richard Mark Kirkner
Contributing Editor

Pharma executives were beaming as their stock prices soared in the days after Donald Trump’s polls-defying victory, and the ballot question in California that would have instituted price controls on state-purchased drugs went down to defeat.

Source: California Secretary of State
Map of California with Counties - Single Color by FreeVectorMaps.com

But they might have been getting ahead of themselves. California’s failed Proposition 61 is a battle; the war on drug prices is not over.

So say observers who have watched much of the country fume and shake its head at pharmaceutical price tags. Feelings went hot when former Turing Pharmaceuticals CEO Martin Shkreli and Mylan CEO Heather Bresch got tongue lashings on Capitol Hill for their company’s respective price hikes—he for jacking up the per-pill price of Daraprim from $13.50 to $750, she for escalating EpiPen’s price from $100 to $600.

A Clinton administration might have made reining in drug prices and expenditures a priority. In contrast, after last month’s election, a variety of pundits and Wall Street analysts said that the Trump administration and the GOP Congress aren’t likely to make such a big deal out of them (although that remains to be seen; the chattering class has been more wrong than right about predicting matters Trump).

While tapping into anger about high drug prices would seem to have made Proposition 61 an easy sell, the initiative had a lot going against it. For instance, drug companies spent $100 million to defeat it.

Even so, there are those laboratories of democracy, the states, and initiatives like California’s, which would have mandated that California pay no more for drugs for its various state-funded programs than the Department of Veterans Affairs. Next November, Ohioans will take up a ballot measure similar to California’s—tying prices the state pays for medications to the VA drug list. Five other states have drug price-transparency or price-control bills pending. Earlier this year, Vermont passed a bill that requires drugmakers to justify price increases for medications that the state buys. A host of other states took up similar legislation this year before voting it down.

Flawed model

While the politics of tapping into anger about high drug prices would seem to have made Proposition 61 an easy sell, the initiative actually had a lot going against it. The pharmaceutical industry didn’t take it lightly, raising over $100 million to defeat it. And sure, Bernie Sanders campaigned for the proposition but California Democrats stayed neutral or sided with the pharmaceutical companies. The editorial pages of the state’s mainstream newspapers acknowledged that drug prices were a problem but said Proposition 61 was the wrong way to go about fixing it.

David Gortler

Heavy-handed price controls of any sort is a bad idea, says David Gortler, of Georgetown University.

Indeed, what may have really done in California’s ballot question wasn’t so much an aversion to cost controls as the particular problems of tying drug prices to VA pricing. As the Los Angeles Times explained, federal law requires drug companies give the VA a 24% up-front discount off a drug’s list price before VA officials negotiate even steeper discounts for specific drugs. David Gortler, PharmD, PhD, a professor of pharmacology at Georgetown University and a former FDA senior medical officer, notes that the federal government has managed to strike an especially good deal for veterans, a group that most Americans would agree are deserving of one. “You can’t apply that low-margin deal to everybody complaining about the cost of drugs,” says Gortler, who was a health care policy adviser to Texas Sen. Ted Cruz’s presidential campaign.

Walid Gellad, MD, an associate professor at the University of Pittsburgh, takes an even deeper dive into the complexities of using VA prices as a benchmark and the California proposition in particular. “There was no mechanism by which California could have ensured that it only pays as much as the VA would pay,” he says. “The VA does a lot of things to get those payments.”

Drug companies are willing to negotiate with the VA knowing that the formulary guarantees a certain volume, Gellad says. “That’s how the VA in part gets those prices, so why should a company offer the same prices to another organization that’s not going to guarantee the market share?”

VA benchmark

Tying the payment to the VA is not a good idea for future ballot measures because of the complexities and the unintended consequences it’s going to have on the VA and potentially veterans, argues Gellad, who points out that one of the reasons the pharmaceutical companies were successful in defeating Proposition 61 was because of the case they made that it would be bad for the VA and veterans. If more states and other volume purchasers of drugs start using the VA as their benchmark, the incentive for drug companies to negotiate with the VA could disappear, says Gellad. Moreover, pegging a state’s payment to what the VA pays now ignores the possibility that those prices would go up if the measure was passed, he says. And if that were to happen, asks Gortler, who is going pay the higher prices? “The taxpayer, so that solves nothing,” he answers.

Gortler sees heavy-handed price controls of any sort as a bad idea. “If very significant price controls are forced upon drug companies, then it’s basically going to run them out of business,” he says. He calls the drug-development process “a very wasteful business model,” akin to a car company crashing 99 out of 100 cars it makes for safety testing. “That’s basically what drug development is: The one car you’re going to sell at the end has to reflect all or most of the price of all the other cars that you had to wreck.”

It’s ain’t over till….

The question now is whether price controls will find another vehicle. A Kaiser Health Tracking poll in September found that 77% of Americans think prescription drug costs are unreasonable. Bernie Sanders stoked the flames in his own campaign, and Trump even took aim at high drug prices during his, saying at one point that Medicare should be allowed to negotiate with drug companies. Senators from both parties extracted their fair share of flesh at hearings with pharma executives in the past year.

R. Adams Dudley, MD

Deeply flawed Proposition 61 lost by a relatively small margin, says R. Adams Dudley, MD, of the University of California–San Francisco. The authors could fix it and try again, he says.

R. Adams Dudley, MD, a professor at the University of California–San Francisco, doesn’t think drug companies should get too complacent. What he says should be concerning to the industry is that a deeply flawed proposition lost by a relatively narrow margin: “It wouldn’t be that hard for the authors to see what they did wrong, do another one, and fix it.”

“We don’t know what will happen next,” Dudley adds. “You could probably put the exact same proposition up in a year or two, and if drug prices continue to rise and more and more stories come out about cancer patients who can’t afford their chemotherapy and EpiPens now cost $900, then the public willingness to wait for the perfect solution will go down.”

One model Gortler suggests for addressing drug prices would be the U.K.’s National Institute for Health and Clinical Excellence, otherwise known as NICE, which has a panel that reviews the evidence for the clinical effectiveness of drugs. He describes it as a “small think tank of people, a small group of seasoned drug experts who look over the clinical data and evaluate which drugs have the best safety and efficacy profiles.”

As Dudley sees it, the pressure is on Republicans in Congress to do something about drug prices. “If this problem persists, they can’t point their fingers at anyone else,” he says. “It’s possible something could happen at the national level.”

And if it doesn’t, proponents of drug price controls now know how not to battle high drug prices thanks to California’s lesson.