In summary

Is the governor’s plan to streamline prescription drug buying a smart way to save the state millions? Maybe, but it will come at the expense of nonprofits that say they’re using that money to boost services for poorer patients. 

Health clinics and hospitals that serve some of California’s poorest patients are warning that they stand to lose millions of dollars a year as a result of Gov. Gavin Newsom’s executive order to consolidate the state’s prescription drug purchases.

Currently, these providers benefit from a federal program that allows them to buy drugs at a lower price yet get reimbursed at a higher price. It works like this: Pharmaceutical companies are required to sell certain drugs at a discount to participating providers that serve low-income patients in the government’s Medicaid program (called Medi-Cal in California). But then the nonprofits can bill the insurer, in some cases Medi-Cal directly, at standard, higher rates.

The nonprofit providers get to keep the difference — extra money they say allows them to operate on-site pharmacies, recruit doctors to rural areas and staff urgent-care clinics.

Newsom’s plan would move all Medi-Cal patients into a fee-for-service system, meaning the state would oversee all of their pharmacy benefits. That would put a stop to nonprofit health providers taking advantage of the federal program that provides the deep drug-buying discounts. 

If it takes effect, St. John’s Well Child and Family Center in Los Angeles could lose 10 percent of its budget, roughly around $10 million, and would have to close three on-site pharmacies and lay off at least 70 people, said president and CEO Jim Mangia.

“Right now patients don’t have to get on three buses to get to a pharmacy,” he said. “We can monitor their medication adherence and do patient education on how to use the medication on site.”

At West Oakland Health, which operates five sites in the East Bay, the pharmacy team hangs in the balance, said pharmacy director James McCabe. Other clinic programs he says are in jeopardy: homeless outreach, pro-bono pharmacy services to undocumented patients, health education, and a food pharmacy where they provide fresh produce in a grocery desert.

“The governor’s order as its written,” he said, “is an existential threat to us.”

“They’ve created a profit margin, which is only driving up the costs of prescription drugs. So the model is faulty.

Gov. Gavin Newsom

In January Newsom issued the order mandating a prescription bulk-buying program across almost all state departments, and a state takeover of pharmacy benefits for all of California’s 13 million Medi-Cal recipients. The governor’s primary goal: Maximize the collective purchasing power of a huge state to negotiate better rates for prescription drugs for state employees and Medi-Cal recipients, thus lowering costs.

“They’ve created a profit margin, which is only driving up the costs of prescription drugs,” Newsom said last week. “So the model is faulty. So we’ve got to address that.”

State Medi-Cal Director Mari Cantwell said the shift from the current “fragmented” Medi-Cal pharmacy system would allow patients to get their prescriptions at a larger network of pharmacies contracting with the state — while saving the state $393 million by 2021.

But the nonprofits contend that the state has exaggerated the amount a shift will save. They counter that any state savings will come at the expense of the real needs of patients, who might be forced to travel farther to get their insulin, high blood pressure pills or blood thinners, and who would lose access to nurses and pharmacists who personally help them manage their medications.

“It’s going to be a net loss for California,” said Louise McCarthy, president and CEO of the Community Clinic Association of Los Angeles County, which represents 65 community clinics and health centers serving more than 1.7 million mostly Medi-Cal patients. “They want to save money and leave us with a gap in our budget for essential services.”

The California Primary Care Association, whose community health clinics and centers serve nearly 6.9 million Californians, most of them Medi-Cal members, estimates that its clinics would lose about $150 million if the state consolidates pharmacy buying for its Medi-Cal recipients.

Currently, the nonprofits decide independently how to use the surplus from the federal government’s buy-lower-get-reimbursed-higher pharmaceutical deal, known in federal parlance as the 340b program.


The program itself is not without controversy. A 2018 report from the White House Council of Economic Advisers raised concerns about a ballooning number of participants in the 340b program, and a lack of oversight about where the money really goes. “An unintended consequence…” it said, “has been that covered entities receive guaranteed profits while low-income patients who are the purported target of the program may receive little to no benefit.”

In August, Democratic state Sen. Ben Hueso of Chula Vista asked California Attorney General Xavier Becerra to investigate the AIDS Healthcare Foundation — a nonprofit based in Los Angeles that has more than $1 billion in pharmacy revenues. The letter cites the foundation’s rapid growth and alleges it could be misusing savings it gets from the 340b program for political efforts. Hueso wrote that he wanted to “to ensure that the charitable donations contributed by Californians are not misapplied and squandered through fraud or other means…”

The foundation is a controversial political player in California, having spent $75 million in recent years funding ballot measure campaigns on topics such as rent control and condom use in adult films. It has long maintained that it uses 340b funds it collects nationwide for patient care and prevention of sexually transmitted diseases, and told Politico it is “legally permitted to spend a certain percentage” of its overall budget on political activities.

The foundation, in a letter of response to the attorney general, said the federal agency that oversees the 340b program audited thousands of its pharmacy transactions and found only one minor $3 billing discrepancy.

It’s not clear how much the governor’s move to consolidate drug-buying would affect the foundation, if at all. Foundation president Michael Weinstein told CalMatters that Newsom’s order is “not a priority” for his organization.

“All of 340b funds are funds that come from drug company discounts, they are not government funding,” he said. “But rather than allow that discount go to the nonprofits, different government agencies have tried to keep it themselves. I don’t think that’s a great direction, but I don’t think this is going to have an adverse effect. 

“At this stage we are not getting additional benefits from the 340b program.”

The state Department of Health Care Services said the foundation receives reimbursement for some patients through the fee-for-service plan, meaning it gets reimbursed only what it spent to buy prescriptions. The agency confirmed that the foundation is not on its list of managed care organizations that are paid reimbursements including the extra 340b dollars.

However, a non-profit not on that list could still benefit indirectly from the 340b program, if it provides prescriptions to Medi-Cal patients and then bills their insurers, who in turn bill the state. Neither the governor’s office nor the department would say whether the AIDS Healthcare Foundation falls into this category.

Seeking bids and feedback

Right now, the state manages pharmacy benefits for around 2 million people on Medi-Cal, and last fiscal year spent $3.5 billion through that fee-for-service program. Separately, the state paid out $6 billion in pharmacy expenses to managed care plans for about 11 million Medi-Cal patients enrolled with them last year.

In order to manage the larger buying pool that would result from consolidation, the state Department of Health Care Services issued a request for proposals from potential pharmacy benefit companies wanting to take over all administration and claims processing. 

Community health providers complain that the state is moving too quickly for such a large shift and has not included them in the process from the beginning.

As for the risk to nonprofits overall, if California consolidates its drug-buying, Cantwell said the state does not have enough information about how much the nonprofits would lose — or what they spend that money on. Last week the state sent out a survey to clinics and health centers seeking more information.

“Then we can have discussions about what these things are, and if we think they are important,  and maybe other ways to pay for those things,” Cantwell said. “The discussion may be, ‘Is this where we want to be spending medical money? And how would we do that in a more direct way?’ ”

CalMatters’ senior editor Dan Morain contributed to this report.

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Elizabeth Aguilera is an award-winning multimedia journalist who covers health and social services for CalMatters. She joined CalMatters in 2016 from Southern California Public Radio/KPCC 89.3 where she...