Column: Industry spending to beat a pharmaceutical initiative could set a new standard for ‘drug money’

Due to California’s penchant for legislating at the ballot box, the state has reigned as the top destination for industry campaign spending since even before the Supreme Court widened the door to corporate political donations with its 2010 Citizens United decision.

But one measure on this November’s California ballot appears poised to set a new standard for corporate spending. The so-called California Drug Price Relief Act would cap the price any state agency or healthcare program could spend on prescription drugs at the level paid by the U.S. Dept. of Veterans Affairs, which customarily receives the largest discounts of any government agency. Turning the VA’s prices into a benchmark for California could cost Big Pharma billions of dollars a year in profits, especially if the discounts were later demanded by other states or even private insurers.

“The drug companies see this as an existential issue,” says Garry South, the veteran political operative heading the pro-initiative campaign. “The industry itself has said that California is ground zero” in the battle over high drug prices.

That’s a fair assessment. The initiative has attracted nationwide attention. On Tuesday, Democratic presidential candidate Bernie Sanders took the opportunity at a Sacramento appearance to endorse it and flay the drug industry, a favorite target: “Their greed has no end,” he said. “Drug companies shouldn’t be allowed to make billions of dollars in profits off of people with cancer and AIDS who are in desperate need of lifesaving drugs.”

California state agencies spend an estimated $4.2 billion a year on prescriptions, according to the Legislative Analyst’s Office. Medi-Cal, the state’s Medicaid program, and CalPERS, its health insurance and retirement program, lead the way at about $1.8 billion each. That may not sound like much compared with the nationwide retail prescription bill of $298 billion, but it’s enough to give the state potentially massive influence on drug pricing.

So it’s hardly surprising that drug manufacturers have ponied up, big time, to beat the measure. As of April 29, the latest official disclosure, the opposition fund topped $68 million — six months before the election. Experts expect the industry to spend at least $100 million.

That would put the campaign in the running for the most money ever spent on a ballot measure. Almost certainly the spending will swamp that of the initiative’s backers, chiefly the Los Angeles-based AIDS Healthcare Foundation, which provides HIV and AIDS treatment worldwide. It has put up $4.3 million so far.

The donations suggest that the industry is feeling abject terror at the measure’s potential consequences, but industry spokespersons officially scoff at the savings backers project — and say it might even drive costs higher. That’s because it could interfere with the delicate negotiations by which state agencies extract special deals from manufacturers, says Kathy Fairbanks, the industry’s campaign spokesman. Some drug companies might refuse to sell to California agencies at all.

“This could drive the state into litigation and undo the contracts that are already in place,” Fairbanks says. “It could be a mess.”

Initiatives dealing with healthcare always tend to attract heavy spending, thanks to the ability of the pharmaceutical and insurance industries to assemble bulging war chests. In 2014, insurers were prominent among donors who contributed $60 million to defeat a measure that would have raised the cap on damage awards in medical malpractice lawsuits. In 2005, pharmaceutical companies spent more than $118 million to defeat Proposition 79, which would have established a drug discount program funded by manufacturer rebates, and pass its own Proposition 78, a watered-down version. Both were defeated.

Two features of the American healthcare and political landscape are driving the campaign. One is the stratospheric pricing set by manufacturers for a host of new drugs, especially for cancer and hepatitis C. These include Gilead Science’s Harvoni, which cures the liver disease, but lists at nearly $100,000 for a 12-week treatment. Harvoni and its sister drug, Sovaldi, are so widely prescribed they’ve been blamed for breaking the budgets of state and federal healthcare programs.

Gilead’s $4-million contribution to the industry’s war chest is among the biggest so far. Merck ($5.9 million) and AbbVie ($4.15 million), which also market high-priced hepatitis C drugs, are also near the top of the list.

The impression that drug makers are profiteering from patients by charging far more for their products than is warranted by the cost of research, development and manufacture has created a nationwide uproar. But that has failed to produce government action — the second motivating factor.

Congress and state legislatures have steered clear of doing anything to address rising prices, beyond holding hearings and issuing angry news releases. “We know how difficult it is to go up against Big Pharma,” says Michael Weinstein, president of the AIDS Healthcare Foundation and the initiative’s creator. “We’ve never been able to get a single bill out of committee. They always win.”

Industry spokespersons say the initiative is unworkable because drug pricing is a complex and opaque process in which government agencies and private insurers negotiate individual deals, often on terms everyone agrees to keep secret.

That’s true. On the other hand, one goal of the initiative is to shed light on the system. The VA’s prices aren’t widely published, which could make it hard for state agencies to verify that they’re getting the VA price, but the initiative’s backers say they should be accessible through freedom-of-information demands or, if necessary, litigation.

What is known is that the VA extracts the best discounts by purchasing only a limited selection of key drugs. The VA’s drug roster, or formulary, included as few as one-third of the more than 4,000 drugs available to Medicare patients in 2006, according to a study at that time. Manufacturers who want access to the VA’s more than 6.6 million patients have to pare their prices accordingly. As a result, the VA’s price averages 42% of manufacturers’ suggested list prices.

State and other federal programs don’t have the luxury of a limited formulary; Medicaid, for instance, isn’t permitted to exclude prescriptions for drugs deemed safe and effective except in limited circumstances. Drugs left off the VA’s formulary wouldn’t be subject to the initiative.

But that still leaves the fear that drug companies could respond by refusing to supply drugs to state programs at the VA rate, or even by raising their prices to the VA. According to some experts, drug companies are willing to meet the VA’s terms in part because they’re confident the agency’s price schedule won’t be used more widely. As the legislative analyst observes, the measure doesn’t require drug companies to sell to state agencies at any price.

Such doubts about unanticipated consequences have kept some patient advocates on the fence about the measure.

“We’re completely aligned with its intent,” says Anne Donnelly, director of healthcare policy for Project Inform, a San Francisco HIV and hepatitis C advocacy group. But she’s concerned that it could prompt drug companies to charge more or limit access to some drugs needed by HIV and hepatitis patients.

Still, the suggestion that such an outcome is possible underscores the difficulties manufacturers may face in fighting a measure that offers Californians “drug price relief.” A threat to raise prices or cut off supplies would only further sully the image of an industry with an already sinking reputation. Spending heavily to defeat the initiative will give its supporters the chance to ask where those millions of campaign dollars came from.

“They’ll be spending big money to convince people to vote against their own interests,” Weinstein says. “We intend to make a big issue out of that.”

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