In summary

Taking a play from Elizabeth Warren, Gov. Gavin Newsom wants California to become the first state to establish its own generic drug label, the better to cut health care costs.

In a bold strategy to drive down prescription drug prices, Gov. Gavin Newsom is proposing that California become the first state in the nation to establish its own generic drug label, making those medications available at an affordable price to the state’s 40 million residents.

The proposal, part of the new state budget Newsom is expected to send to the Legislature on Friday, would authorize the state to negotiate contracts with drugmakers to manufacture selected prescriptions on behalf of California. Such a disruption of the pharmaceutical industry, proponents say, would leverage the state’s massive market to increase competition and lower generic drug prices nationally. 

The strategy is one of several the Democratic governor plans to recommend to lower the cost of health care for Californians. The administration released only a summary of the proposal on Thursday without the projected price tag, but indicated it’s part of a multi-prong effort that includes strengthening the state’s public option for health insurance and increasing drug pricing transparency.  

The notion is untested, though it has garnered attention among progressives and Sen. Elizabeth Warren has included it in her presidential platform.

Newsom will also continue last year’s push to establish a single market for drug pricing, direct the state to ask for more rebates from drug manufacturers, and open a new health care affordability office sometime this spring. 

“The cost of health care is just too damn high, and California is fighting back,” Newsom said in a statement. “These nation-leading reforms seek to put consumers back in the driver seat and lower health care costs for every Californian.”

Drug costs have become a persistent and increasing worry, both nationally and in California. Six in 10 Americans take a prescription and 79% say the cost is unreasonable, according to a recent survey by Kaiser Family Foundation

And prices can affect whether people take their pills. The same Kaiser survey found three in 10 Americans reported not taking their medicine as prescribed due to the cost of the prescription.

Governmentally, health care also consumes a sizable portion of the state budget. California’s Medicaid program for the poor, known as Medi-Cal, now tops $100 billion a year in state and federal spending.

One way to contain costs is to encourage the use of generic drugs instead of brand name medications, whose prices are often elevated by patent protections — necessary, drug companies say, to underwrite the high financial risks of pharmaceutical research and innovation. 

The price protections have their own risks, underscored in recent years by high-profile cases of price gouging. In 2015, for instance, Martin Shkreli made national headlines for hiking the price of Daraprim, used to treat parasitic diseases such as malaria, by 5,000%. And in 2017, state attorneys general in New Mexico and Washington opened investigations into whether Eli Lilly conspired with other companies to drive up the price of insulin, a drug that is nearly a century old.

But generic drug prices also have risen, state health officials say — faster than brand name ones in California. According to the Office of Statewide Health Planning and Development, from January 2017 to June 2019, generic drug prices increased 37.6%, while brand name drugs rose by 25.8%.

Those increases in recent years have prompted allegations of price-fixing in the generics industry and federal antitrust lawsuits. Last year, Newsom signed a first-in-the-nation bill deterring “pay-to-delay” agreements in which drug companies pay manufacturers of competing generics to delay the release of less expensive off-brand drugs.

“A trip to the doctor’s office, pharmacy or hospital shouldn’t cost a month’s pay,” Newsom said.

The notion of a government getting into the business of manufacturing drugs is untested, though it has garnered attention among progressive politicians. 

Massachusetts Sen. Elizabeth Warren, a Democratic presidential candidate, has proposed legislation to allow the federal government to manufacture prescription drugs when the market fails or prices become too high. Though Warren incorporated that proposal in her presidential platform, pharmaceutical companies have argued that government shouldn’t be in the complex business of developing, manufacturing and distributing medicine, and free-market advocates have contended that the public sector shouldn’t be competing with private companies. 

In the U.K., Labour Party leader Jeremy Corbyn has proposed creating a publicly owned company to make generic drugs the country’s National Health Service needs but can’t afford. Corbyn’s proposal, however, is only likely to advance if his party returns to power.

Nor is it clear how substantial a dent a state-manufactured generic program would make in health care costs in California. Generic drugs make up 90% of all prescriptions but account for a fraction of drug spending because they’re so much cheaper than brand-name prescriptions.

Six in 10 Americans take a prescription and 79% say the cost is unreasonable, according to a recent survey by Kaiser Family Foundation. 

Brand-name drugs make up the remaining 10% but account for 70% of all drug spending, according to IQVIA Institute, a health data research firm. So while buying generic drugs can significantly reduce drug costs, Newsom’s approach may not reduce the state’s health spending that dramatically overall. 

Generic drug makers said Wednesday that while Newsom’s approach to create a state label is noble, it’s the wrong strategy. Costs are being driven up by brand name drugs, they said, not generics, which, by their calculation, have saved Californians have saved $26 billion.

“If California enters the market itself,” the Association for Accessible Medicines said in a statement, “it will face the same market dynamics that have led to generic prescription drug price deflation in the past three years, as well as certain cases of patent abuse that have led to longer monopolies by select brand-name drugs.”

Representatives for the broader pharmaceutical industry had no immediate comment, though political pushback would be expected. In 2016, drug companies spent more than $100 million to stop a ballot measure that would have barred the state from paying more for prescription drugs than the U.S. Department of Veterans Affairs, which pays the nation’s lowest prices.

Consumer advocates, meanwhile, welcomed the idea.

“This is a potential game changer,” said Anthony Wright, executive director of Health Access California, a statewide health care consumer advocacy coalition. “California has the capacity and the smarts and the scale to actually do it.”

Wright said patient advocates have for years viewed this type of branding as a way to reduce health care costs and put the pharmaceutical industry on notice that California is paying attention.

Peter Maybarduk, who directs the Global Access to Medicines Program at Public Citizen, a progressive, nonprofit consumer advocacy organization, agreed that California’s powerful economies of scale make the proposal worth trying, even though the federal government’s broad jurisdiction on drug laws might pose a challenge.

“It’s much better than not doing it,” he said. “[The state] can offer a very large market that is an inducement to offer better prices and it can offer this contracting system to both inspire new competition and help select the best offers.”

He noted that the public generic manufacturing idea is one of several policy innovations percolating at the state level. Louisiana, for example, is in the process of setting up a “Netflix model” for pricey Hepatitis C treatments by paying a set sum of money to the drug maker for all the state’s needs, versus paying per prescription.

“Those are states taking matters into their own hands because the federal government has not solved the problem,” Maybarduk said.

Health plans were receptive.

“We share the governor’s concerns about tackling the high cost of prescription drugs,” said Mary Ellen Grant, a spokeswoman for the California Association of Health Plans, a trade group that represents health insurers. “If this idea can address that issue, then there’s a lot of potential there.”

Since taking office a little over a year ago, Newsom has made health care a priority by expanding Medi-Cal to undocumented young adults and continuing to champion Obamacare where the federal government has pulled back by requiring all residents to have health insurance. In the new budget, he’s expected to propose extending Medi-Cal to seniors in the country illegally in another step toward health care for all. 

His first executive order called for creating a bulk drug purchasing program across state departments to maximize purchasing power and negotiate better rates from pharmaceutical companies.

That meant the state Department of Health Care Services would begin negotiating the purchase of prescription drugs for all 13 million Medi-Cal recipients, or one in three Californians. Prior to that, the state only represented 2 million Medi-Cal recipients, while the rest were placed in managed care health plans that negotiate their own drug rates.

State officials have estimated the change will save California taxpayers $393 million by 2021.

But the plan has created tension between the state and nonprofit health care providers who care for California’s poorest patients. The takeover of the pharmacy benefit in Medi-Cal removes a nonprofit clinic’s ability to buy drugs at reduced costs through a separate federal program. 

Undeterred, the Newsom administration is pushing ahead and awarded a contract last month to a firm to manage the new pharmacy benefits.

Jim Mangia, president and CEO of St. John Well Child and Family Center in South Los Angeles, which serves more than 100,000 mostly Med-Cal patients — and which is standing to lose from the pharmacy benefits takeover — called Newsom’s generics idea “interesting and creative,” but cautioned it would be essential to couple it with a proposal to make sure poorer patients can get those low-cost medications.

“The drugs could be cheap,” he said, “but that doesn’t mean there are going to be pharmacies in reach.”

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Judy serves as hub editor of the California Divide project, a five-newsroom collaboration covering economic inequality. Prior to editing, she reported on state finance, workforce and economic issues. Her...

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...