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Projected Pharmaceutical Prices
National Health Expenditure projections currently predict a rise to $564 billion in annual prescription drug expenditures by 2024 with out-of-pocket payments reaching $69.6 billion. (Source: Centers for Medicare & Medicaid Services.)

California Considers Drug Pricing Measures

By M. DANIEL DECILLIS | November 19, 2015

California, like most states, grapples annually with the rising cost of healthcare overall, particularly the cost of pharmaceuticals. The California budget for FY 2015-16 has $200 million marked for the new Hepatitis C drug alone. Consequently it's not surprising that a variety of policy initiatives have been floated to try and stem the rise in costs, and that an initiative has been proposed for the November 2016 ballot to control drug prices.

"Spending on pharmaceuticals as a share of U.S. health care spending has has actually slowed down substantially in recent years," said Mark Duggan, The Trione Director of the Stanford Institute for Economic Policy Research and the Wayne and Jodi Cooperman Professor of Economics at Stanford, in a presentation to the CCST Council on October 26. "In 2013 it represented 9.4% of the total, which was down slightly from 2002. However, pricing remains opaque and varies substantially across payers."

Out-of-pocket costs for consumers depend on what kind of insurance coverage they have. Private insurance pays for 44% of prescription drugs. Medicare pays for 28%, and Medicaid 8%; 17% is paid for out-of-pocket.

"Prescription drug prices depend in part on what's covered by which program," noted Duggan. "Because of the way in which the Medicaid Rebate Program is structured, for example, drugs sold disproportionately to Medicaid beneficiaries are more costly than otherwise similar drugs, because the rebate is based on prices paid for the drugs in the private sector; consequently manufacturers have an incentive to increase private sector prices."

Multiple policy initiatives have been proposed or implemented in California to help address the issues. AB 463 (Chiu), the Pharmaceutical Cost Transparency Act of 2015, which would require the pharmaceutical industry to report costs for development and manufacture of all drugs costing more than $10,000 per course of treatment, died in committee. AB 339 (Gordon), which caps copay costs for drugs, was signed into law on October 8. And the California Drug Price Relief Ballot Initiative, which appears to have enough signatures to make it to the ballot, would prevent state from paying more for a drug than the federal Veterans Affairs Administration. (A similar measure is going on the ballot in Ohio.)

Despite the popularity of moves to limit drug prices, the pharmaceutical industry asserts that capping prices through these initiatives would negatively affect pharmaceutical research and development.

"Pegging the price of drugs to that price that is paid by Veterans Affairs... will limit the resources that are available for innovation by our member companies," said Sara Radcliffe, president and CEO of the California Life Sciences Association (CLSA), in a statement.

California has the largest concentration of biotechnology firms in the United States, and California's biomedical industry, which includes biopharmaceuticals, is the largest segment of California's biotechnology industry. As of 2011, the state had more than 2,300 biomedical companies which employed nearly 153,000 workers. More than 750 companies are members of the CLSA, which is opposing the initiative.

The issue is complex and the long-term trends in drug pricing are far from decided.

"Projections from the Centers for Medicare and Medicaid Services indicate that health care spending on pharmaceuticals will only rise to 10.4% by 2024," said Duggan. "However, there's considerable uncertainty surrounding this estimate."

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