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Proposition 61: the California ballot initiative that big pharma hates, explained

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California will vote Tuesday night on a ballot initiative that could sharply limit prescription drug prices — and shape the future of health spending in America for years to come.

Proposition 61 would cap how much the state can spend on the prescription drugs it buys through programs like Medicaid or insurance plans for state employees. It would direct the state to pay no more than the Department of Veterans Affairs, which receives a discount on prescription drugs that usually works out to 24 percent less than sticker price.

Proposition 61 has drawn significant national attention. Pharmaceutical companies spent more than $109 million on ads opposing the measure, while Sen. Bernie Sanders endorsed the provision and spent this week campaigning in the state for Proposition 61 to pass.

Proposition 61 would be a huge change to how drug pricing policy works in the United States. Right now, pharmaceutical companies generally get to name their prices. There are hundreds of insurance plans in the United States, and they have little leverage to negotiation that ask.

If Proposition 61 passes, it would introduce a fundamentally different model of drug pricing to the United States: one where the state can only purchase prescription drugs for millions of Californians if they can get a certain price. And this would be a model with trade-offs. It could limit drug spending by reducing the price of prescriptions, but also limit patients’ choices if drugmakers decide not to accept the newly lowered prices.

How drug pricing works in the United States now — and what Proposition 61 would change

The United States is exceptional in that it does not regulate or negotiate the prices of new prescription drugs when they come onto the market. Other countries will task a government agency to meet with pharmaceutical companies and haggle over an appropriate price.

These agencies will typically make decisions about whether these new drugs represent any improvement over the old drugs — whether they’re even worth bringing onto the market in the first place. They’ll pore over reams of evidence about drugs’ risks and benefits.

The United States allows drugmakers to set their own prices for a given product — and allows every drug that's proven to be safe come onto market. This gives drugmakers the ability to raise their prices significantly, and without warning — like Martin Shkreli did with Daraprim or Mylan did with EpiPen.

Proposition 61 would change how things work in California, only allowing the state to purchase prescription drugs if the price were less than what Veterans Affairs pays. This is the language on the California ballot describing what the initiative would do:

Prohibits state from buying any prescription drug from a drug manufacturer at price over lowest price paid for the drug by United States Department of Veterans Affairs. Exempts managed care programs funded through Medi–Cal.

The law mandates California to get lower drug prices. But what if drug companies won’t negotiate?

Proposition 61 is clear on what the state can’t do: If it passes, the state can’t spend more than whatever Veterans Affairs does on prescription drug prices.

But it still leaves a lot of unanswered questions, the biggest being: What can California do if pharma companies don’t want to give it the VA’s discounted prices? Can the state pay more? Or will it simply have to ask those who receive insurance through the state to not have coverage for that particular drug?

This gets to one of the hardest trade-offs in drug price regulation: If California, the United States, or any country wants to negotiate down the sticker price of a drug, it also has to be willing to say no to drug companies that won’t offer affordable prices. If regulators aren’t able to turn down prices they think are too high, then they don’t have much leverage at the bargaining table.

One reason Veterans Affairs has such low prices is that it doesn’t cover every prescription drug. One study found that the VA covers 59 percent of the 200 most popular drugs in the United States. Some of the drugs it doesn’t cover are likely those that it has decided aren’t worth the price.

If Proposition 61 passes, it will be fascinating to see how this trade-off plays out in California. We’ll see whether drug companies are willing to offer the state lower prices — and, if they don’t, whether patients balk at getting fewer covered drugs as a result

California is a key test of whether regulating pharmaceutical prices is possible

2016 has been replete with attacks on too-high drug prices, with Shkreli and EpiPen both driving the issue into the news cycle. Americans have become more exposed to the price of their prescription drugs as deductibles continue to rise. Half of voters now rank prescription drug costs as one of their top health care concerns for the next administration.

But action to regulate drug prices in the United States has so far proved elusive, as the pharmaceutical companies are an especially strong lobby in Washington. When Democrats pursued health reform in 2009, there was never any strong push to include drug price regulation out of worry that the trade group PhRMA would come out against the entire health package.

The pharmaceutical industry has been especially active on Proposition 61, outspending its supporters by a 7-to-1 margin. And the industry is already girding for a fight over drug price regulation in 2017, recently asking its members to contribute an additional $100 million in dues.

So if California is able to take on pharmaceutical prices and win, it could be a harbinger of national action to come.