Summary: A YES vote is a vote for an honest, but a narrow-minded Tony Soprano style of bargaining. A NO vote is for a dishonest, but open-minded Tony Soprano style bargaining.
California Proposition 61 — a.k.a. The Drug Price Initiative — forces managers of government employee prescription drug plans to get more rebates from drug manufacturers. YES ads feature Bernie Sanders and his anti-big business mantra. NO ads feature Veterans lamenting the possibility that this measure will increase their prescription drug costs.
No one has analyzed this proposition starting with the idea that there are two sides to any deal. You have to ask the question: Rebates in return for what?
You have to start with bargaining styles to understand the problem Proposition 61 seeks to fix. Lowering prescription drug prices is all about changing the bargaining style of plan managers.
A YES vote says you want the style used by the Veterans Administration (VA). A NO vote say you want to maintain the status quo and keep the bargaining style used by contracted pharmacy benefits managers (PBMs) such as CVS Caremark, UnitedHealthcare’s OptumRx, and Express Scripts.
To better understand the implications of California Proposition 61, we need only look to the pilot episode of the HBO hit series The Sopranos. In that episode, Tony complains to his therapist Dr. Melfi about the stresses of being a “waste management consultant.”
His job, for which he and his supporting crew are paid handsomely, is to manage the competing interests of various sanitation companies wishing to win lucrative garbage contracts put out to bid by suburban New Jersey municipalities.
Tony has no real insights into the complexities of bid submission. Tony’s sells himself as an effective gatekeeper, creating value by limiting access to lucrative markets. He collects a tariff from those whom are allowed in and sends his nephew Christopher to exclude the rest.
No wonder Tony is stressed. Sanitation companies put Tony in a schizophrenic double bind “damn if you do, damn if you don’t” situation. If Tony does limit competition to a single sanitation company, the favored earns excess profits while the excluded curse Tony. If Tony does nothing, all the sanitation companies bid so aggressively against each other that no one profits and they all curse Tony. Either way, someone is cursing Tony.
The Tony Sopranos of Prop 61 are VA administrators and PBMs. These gatekeepers receive rebates from drug manufacturers in return for insuring limited competition from other patented brand drugs that are “therapeutic equivalents.”
For example, there is fierce competition today among manufacturers of patented, but substitutable, combo drug therapies used to treat the Hepatitis C virus. This includes pills from AbbieVie (Viekira Pak and Technivie), Merck (Zepatier). and the more expensive, but more effective, treatments from Gilead Sciences (Solvadi and Harvoni).
Indeed, Harvoni is one of the most expensive drug therapies in the world with the list price of each pill at $1,125 and a total list price of $84,000 for a 12 week cure.
Plan administrators are able to slice off an estimated 30% to 60% of the list price in form of rebates in cases where there is competition among a few patented, but substitutable, brand drugs.
Indeed, over the past few years, a vicious cycle has emerged: drug manufacturers raise list prices 15%, PBMs raise rebates demands 10%. Next year there is 20% increase in list prices coupled with a 15% raise in rebate demands, etc. It is not clear who initiates and who responds here. The villains might not be CEOs of drug companies like smirk-faced Martin Shkreli, but rebate-hungry CEOs of pharmacy benefit managers.
Prop 61 is about what version of Tony Soprano you want as a bargaining agent.
The vehicle for limiting competition is a list of drugs covered by the plan called a formulary. The VA formulary is severely limited in terms of total drugs, but there are no copay tiers. This highly restrictive formulary allows the VA to collect the largest rebates and the lowest net drug prices of any plan in the United States.
The PBM formulary lists many more drugs overall, but exerts secondary power over demand via copayment tiers, step therapy, and prior authorization.
Make no mistake. Drug rebates are not volume-related price discounts. If this were the case, then Medicare Part D drug plans with total enrollment of 70 Million enrollees would get higher rebates than the VA drug plan with 9 Million total enrollees.
The VA has a transparent business model. VA employees earn a salary and only seek rebates in order to lower government costs. But, unfortunately, the federal government historically has underfunded the VA. Over the years, VA thinking has become narrowly focused on costs at the expense of quality of care for Veterans.
A YES vote on Prop 61 is a vote for an honest, but a narrow-minded Tony Soprano seeking rebates for rebates sake, with not enough weight given to consumer choice and quality of care.
A NO vote is for a secretive Tony Soprano pocketing rebates on the sly, but willing to pay higher prices for newer, more effective prescription drugs.
We have no strong conviction either way.
A YES vote is not good for Vets in the short run. It will link California plans to VA prices and provide a disincentive for drug manufacturers to give big discounts to the VA. But, ironically, a YES vote might be good for the Vets in the long run as it will call attention to the narrow-mindedness of VA administrators and force them to cover higher cost drugs that deliver better quality of care for Vets.
Our concern with Prop 61 is that it is tries to fix a problem by legislating outcomes rather than by legislating practices. A YES vote legislates an outcome without any limits placed on the practices used to achieve mandated results. A NO vote preserves the status quo of PBMs as managers of state government employee drug plans.
We would have preferred that Proposition 61 mandate changes in the business model of any PBM that manages a state employee drug benefit plan. This would include mandating a transparent fee-for-service business model with 100% pass-through of rebates and no opaque “spread-margins” earned on the resale of mail order generics.
It would also mandate that enrollees have the option of obtaining 90-day prescriptions at local pharmacies as well as PBM-owned mail order operations. Finally, it would include outside review of PBM formulary choices.
Lawrence W. Abrams, Ph.D. has written over 20 papers on pharmacy benefit managers freely available at www.nu-retail.com He lives in N. Monterey County, California and can be contacted at email@example.com