California Governor’s Massive Guarantees on Drug Costs Are Gradual to Materialize
SACRAMENTO, Calif. — When Gov. Gavin Newsom took office in 2019, he promised to lower prescription drug costs for all Californians.
But now, as Newsom nears the end of his first term, his ambitious ideas — such as requiring California to make its own insulin and forging drug partnerships across state lines — have failed to get off the ground or haven’t produced the hefty savings he promised.
“There are powerful forces arrayed against us — not just politicians in Washington, but drug companies that gouge Californians with sky-high prices,” Newsom said on his inauguration day in January 2019. “Here in California, we have the power to stand up to them, and we will.”
A few months later, he vowed California would save “hundreds of millions of dollars right away — potentially billions” — by using the state’s massive purchasing power to negotiate lower drug prices for California’s counties, its businesses, and other states. But so far only a few counties are participating in the program, and savings have fallen far short. Another program, which debuted Jan. 1, is intended to save the state hundreds of millions of dollars a year by consolidating drug purchasing for the 14 million low-income Californians enrolled in Medicaid, but how those savings will materialize isn’t clear.
Newsom’s third initiative requires the state to manufacture generic drugs, but it hasn’t gotten off the ground.
Drug spending by public and private health insurers grew 5% in California during Newsom’s first year in office, according to the most recent state data available — and costs are expected to continue rising in California and across the country because of increases in both pharmaceutical prices and prescription drug use.
Yet Newsom, a Democrat who is running for reelection in November, argues that California’s initiatives are leading the nation and that realizing cost savings can take years.
Newsom’s office declined to answer questions about the cost savings shortfalls, but his administration provided written responses to some KHN queries.
Leveraging the Power of Government
When Newsom announced that California would contract with its counties, its businesses, and other states to buy drugs in bulk — and expand existing bulk purchasing agreements across state agencies — he said the initiative would save “hundreds of millions,” if not billions.
Three years later, the state has seen some modest savings — but nothing near what Newsom predicted.
Although it seemed as though Newsom was announcing a new program to partner with California’s counties, its businesses, and other states, he was building on state drug discount agreements that predated his administration.
“The state was already doing it,” said Jane Horvath, a consultant who advises state policymakers on health care costs. “They’ve sort of opened it up to counties to participate.”
California for years has negotiated with drug manufacturers to get discounts on prescription drugs for state-run hospitals, jails, and other entities that buy and dispense drugs. Newsom’s 2019 executive order expanded those agreements to allow other entities to benefit, akin to giving them a coupon code that is applied at checkout. Though Newsom initially said two other states were interested in joining the program, none have.
So far, three populous counties — Los Angeles, Orange, and Sacramento — have joined. County officials and the Newsom administration say the state’s pricing agreements have saved money, but how much is unclear — they have given different figures and time frames.
The state Department of General Services, which oversees the Statewide Pharmaceutical Program, said the three counties saved about $500,000 from January 2021 to September 2021. But Sacramento County in February reported saving nearly $700,000 on drugs for its jails “in a little over a year.”
How many state agencies have banded together to buy cheaper drugs is also unclear. The Newsom administration said the California State University system joined the program and saved $476,000 over five months. The governor’s office also said the state saved $3 million over five months on mental health medications under an August 2021 bulk purchasing arrangement.
Other states have been banding together for years to get discounts.
Oregon Health Authority pharmacy director Trevor Douglass runs a drug purchasing consortium with Washington that has saved both states at least $142 million since 2016. Nevada plans to join the consortium, and Douglass said he is in talks with Delaware and Wisconsin — but hasn’t heard from California.
“I would be happy to hear from California tomorrow,” Douglass said. “I would have been happy to hear from them yesterday.”
Overhauling Medicaid Drug Purchasing
Starting in January, a single company started administering prescription drugs for all of California’s Medicaid patients, most of whom previously got their medications through about two dozen managed-care plans.
But the state contractor, Magellan Health, was woefully understaffed and unprepared when the transfer occurred Jan. 1, and thousands of patients were left without critical medications. The state and Magellan have worked to address some of the shortfalls, but some physicians say problems persist.
Newsom’s administration projects the state will save $414 million in the 2022-23 budget year, mostly by securing rebates from drug companies now forced to deal with the nation’s most populous state at the negotiating table. The state expects to double those savings the following budget year.
However, it’s too soon to tell whether Newsom’s experiment will succeed. Health insurance plans are skeptical, citing industry-backed studies that show high prescription drug costs in the few states that run their own programs.
“We think the assumptions, the savings, are exaggerated,” said John Baackes, CEO of L.A. Care Health Plan, the largest publicly operated health plan in the country. “That would be a polite way to say it.”
Newsom isn’t alone in pushing his state away from managed care as a cost-saving measure.
In July, Ohio will begin using a single health contractor for its Medicaid program, which the state estimates will save the Buckeye State $186 million in fiscal year 2022-23. New York is planning to make the switch in April 2023.
In Missouri, Josh Moore, the state’s Medicaid pharmacy director, said there’s no question that the state’s move in 2009 to buy drugs for Medicaid enrollees has saved taxpayers millions of dollars through rebates alone. Today, he said, the state collects 99% of drug rebates offered by drug companies to state and federal governments, compared with the 90% to 95% that states typically claim through managed-care plans, which don’t always catch or follow up on billing errors.
“Small percentages make large numbers whenever we talk about the kind of money that we’re talking about in Medicaid pharmacy systems,” Moore said.
Diving Into the Generic Drug Market
The law calls on the state to “enter into partnerships” to produce or distribute generic prescription drugs and at least one form of insulin. The Newsom administration is in discussions with drug manufacturers and has made some progress, but no contracts have been inked, according to prepared responses from Rodger Butler, a spokesperson for the state Health and Human Services Agency.
Vishaal Pegany, assistant secretary for the Health and Human Services Agency, told lawmakers at a hearing in January that the state is focusing on developing insulin and other generic drugs that would serve a large population, as well as drugs that are high-cost or in short supply. But the state isn’t sharing details about which other drugs California might produce, the names of the drug companies it’s negotiating with, or how long producing the first CalRx drugs might take.
The state had previously been in talks with Utah-based nonprofit drug company Civica Rx, but Senior Vice President Allan Coukell declined to say whether the company is still working with the state.
State Sen. Richard Pan (D-Sacramento), who authored the 2020 generic drug bill, said California must also eventually develop the ability to manufacture its own generic drugs. “You can’t just stand up a factory overnight and we have a learning curve, so right now we have to find a generic manufacturer that wants to play ball with California,” Pan said. “But I hope in the long run we will stand up our own manufacturing capacity so we’re not constrained by a company willing to work with us.”
Phillip Reese, an assistant professor of journalism at California State University-Sacramento, contributed to this article.
KHN (Kaiser Health News) is a national newsroom that produces in-depth journalism about health issues. Together with Policy Analysis and Polling, KHN is one of the three major operating programs at KFF (Kaiser Family Foundation). KFF is an endowed nonprofit organization providing information on health issues to the nation.
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