California Businesses, Government Would Join in Drug Buying Pact

(Bloomberg) -- California’s newly sworn-in Democratic governor has proposed using the state’s substantial buying power to drive down pharmaceutical costs, allowing government programs, health insurers and private businesses to join forces to negotiate against drugmakers.

Under an executive order signed by Governor Gavin Newsom as one of his first acts hours after being sworn in Monday, drug benefits for the about 13 million Californians in the state’s Medicaid program would be shifted into a direct purchase system. The state would then target some drugs for bulk purchasing, and private businesses and insurers would then be able to join the buying pool.

“No state has more at stake on the issue of health care,” Newsom said in a statement announcing the order. “We will use our market power and our moral power to demand fairer prices for prescription drugs.”

Newsom governs the U.S.’s largest state, which if it was its own country would be the world’s fifth-largest economy. His executive order came along with a series of health-care proposals, including expanding health care coverage to many more people. Those moves, unlike the drug-pricing order, would require legislative action or approval of the federal government.

For Newsom, the California proposal is a state-level version of what many Democrats in Washington have argued for, but never been able to put into law. Long fought by the pharmaceutical industry, Newsom’s order bears some resemblance to the threats of President Donald Trump, a Republican, to use the federal government’s purchasing power to get a better deal on prescription drugs. Current law bars the federal government from directly negotiating drug prices.

“Employers and their employees are desperate to find a way to reduce drug costs,” said Bill Kramer, executive director of the Pacific Business Group on Health, a nonprofit whose members include large employers. “We do think there’s a great potential for public and private sector purchasers to work together on drug costs and other health care costs.”

Political Pressure

For drugmakers, already facing a push by the Trump administration to lower their prices, and a Democratic House of Representatives keen to join the administration in the effort, the move by California is an added headache.

“I can’t imagine pharma being ecstatic about this proposal and if the idea catches on, it would be difficult to contain the enthusiasm in other states," said Jim Yocum, senior vice president at Connecture, a health-care information company that helps manage price-transparency tools for Medicare, the federal health program for seniors.

Such programs have been tried before by hospitals and other groups, who have banded together so they’re not “atomized into insignificance when negotiating rates,” Yocum said. “What is different here is the scale of what he’s proposing. It has numbers that would be able to drive more negotiating leverage.”

Drugmakers said they were studying the order, which will require many subsequent actions by state agencies before any effects are felt.

“We welcome the opportunity to work with the Governor and his administration on comprehensive solutions to the problems patients are facing accessing and affording their medicines,” said Priscilla VanderVeer, a spokeswoman for the drug industry lobbying group Pharmaceutical Research and Manufacturers of America, or PhRMA.

Rising Costs

Spending on prescription drugs in the U.S. in 2017 was $333.4 billion, about 10 percent of the roughly $10,000 a year in per-person health-care spending. Drug spending, like other health-care costs, has crept higher thanks to a combination of aging demographics, innovative but costly new therapies, and regular hikes on drug prices by manufacturers.

How much leverage California can gain over manufacturers may depend on how willing it is to exclude some drugs, blocking access to treatments to win price concessions.

“Negotiations are all about leverage and so the larger the purchaser the more concessions one can extract,” said Spencer Perlman, director of health care research at Veda Partners, which analyzes government policy for investors. “It’s not clear to me how far the state can push biopharma companies before the companies push back.”

Private insurers and some governments outside the U.S. make frequent use of such tools.

“This would mean denying state employees access to certain drugs, which is politically tricky,” Perlman said. “Is the state really willing to play hardball in the way that’s necessary?”

--With assistance from Riley Ray Griffin.

To contact the reporters on this story: Drew Armstrong in New York at darmstrong17@bloomberg.net;John Tozzi in New York at jtozzi2@bloomberg.net;Riley Ray Griffin in New York at rgriffin42@bloomberg.net

To contact the editors responsible for this story: Drew Armstrong at darmstrong17@bloomberg.net, Jeff Sutherland

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