To Beat High Costs, California Moves to Create Its Own Drug Label

September 30, 2020

If you can’t beat ’em, join ’em, the old saying goes.

California took a step in that direction this week, when Governor Gavin Newsom signed into law the first plan to create a state-sponsored drug label—one that would produce and distribute generic drugs and biosimilars to make them accessible and affordable to patients.

Newsom announced the plan back in January, when he said he would leverage California’s size and its purchasing power to boost generic drug manufacturing in response to soaring prescription drug costs. The plan also calls for switching pharmacy services for Medi-Cal, the state’s Medicaid program, from managed care to direct state payment in 2021, which state officials say will allow California to negotiate better prices with manufacturers.

California’s size makes this latest solution possible. The state has 39.5 million people and an economy worth $3 trillion, larger than all but four other countries. But Newsom has also taken other steps that advocates say are long overdue, such as signing legislation last year to ban pay-for-delay agreements between brand name and generic drug manufacturers.

“California is using our market power and our moral power to demand fairer prices for prescription drugs,” Newsom said in a statement. “I am proud to sign this legislation affirming our ground-breaking leadership in breaking down market barriers to affordable prescription drugs.”

The new law creates Cal Rx, a state-sponsored generic label, and calls on the California Health and Human Services Agency to enter into manufacturing partnerships to produce or distribute generic prescription drugs, which Newsom’s office said would “inject much needed competition into markets that have driven up prices for consumers and help address critical drug shortages.”

According to the Sacramento Bee, one provision of the law specifically requires the agency to form a partnership to develop at least one form of insulin. The hormone used to regulate blood sugar has become particularly costly for those with type 1 diabetes who rely on it to stay alive. Reports of deaths among young adults who reach age 26 and are no longer eligible for their parents’ health plans have caused protests outside the headquarters at Eli Lilly and Co. in Indianapolis.

It is unclear how much Newsom’s plan will save. In January, his administration projected savings of $393 million from his pharmacy proposal. However, data from IQVIA show that while 90% of the drugs purchased are generic, the remaining 10% account for 70% of all spending.

CMS projects that growth in prescription drug spending accelerated from 2.5% in 2018 to 3.2% in 2019, driven largely by increased spending in Medicaid. For 2020, the growth is projected to be 3.7%.

California’s approach could bypass the conflicts of interest that exist in the drug supply chain, which have been source of frustration for state Medicaid officials around the country. According to Antonio Ciaccia, chief strategy officer of 3 Axis Advisors, the current supply chain suffers from misaligned incentives and a lack of transparency that work against consumers.