Could California Lower Drug Prices for Us All?

California may soon drive a hole through Washington’s tolerance for — and protection of — price gouging on drugs. A measure on the November ballot, Proposition 61, would bar state agencies from paying more for prescription drugs than the U.S. Department of Veterans Affairs does.

Congress generally prohibits the U.S. government from negotiating prescription drug prices. The VA is an exception. Federal law ensures that it obtains a discount of at least 24 percent off a drug’s list price.

Other countries don’t let drugmakers abuse their citizenry with rapacious pricing. But the U.S. Congress does the drug industry’s bidding, defending business practices that bilk patients, taxpayers and anyone who buys health coverage.

That’s why Mylan got away with hiking the EpiPen price (for Americans) by 500 percent. It’s how Turing Pharmaceuticals could raise the price of a drug used by AIDS patients by some 5,000 percent.

California seems to be fighting back. As a buyer of drugs for about 4.5 million public workers, university employees and others, the state has market muscle. It can refuse to pay indecent price markups. (Prop 61 would not affect Californians on private plans.)

The pharmaceutical industry has amassed $100 million to defeat the measure. Practiced in the art of extortionate pricing, drug companies know how to wield a threat: They could refuse to sell their products to the state of California, depriving millions of needed medications.

But would that happen? I asked economist Uwe Reinhardt, the Princeton expert on health care. He thinks it unlikely.

As long as drug companies can make a profit on an already developed drug, they’re going to sell it. After all, they still make money on the drugs they sell to Canada and Europe at considerably lower prices. Other countries confront drug companies with take-it-or-leave-it propositions, and the companies relent.

We Americans, Reinhardt says, “seem haunted by the theory that unless we allow drug companies to charge us whatever they wish for a pill, innovation will stop. And we fall for that story.”

If Prop 61 became a reality, other state governments would not sit back and continue paying prices well above those charged California. So we have to consider the other scenario — that the drug companies decline to sell to California at VA prices. They would give up a large chunk of the California market but keep the price game going in the rest of the country.

Reinhardt doubts they would play this kind of hardball. Abandoning an entire market would destroy any goodwill they have with doctors and patients. The value of their company name, an intangible asset, could fall, spilling over into other things they sell. Thus, a drug company board member might think twice before authorizing that level of aggression.

Polls find 66 percent of California voters in favor of Prop 61. AARP and the AIDS Healthcare Foundation support the measure. Opponents include some patient advocate groups, fearing that the state’s refusal to pay up might limit their access to drugs. The industry, of course, is fanning those fears.

America’s drug pricing scandal reflects an odd imbalance in what we expect of fellow citizens. Our soldiers risk life and limb fighting terrorist regimes, but we seem unable to ask drug company executives to trim a few million off their exorbitant compensation for the good of the country.

Reinhardt asks, “Is it really essential to compensate the top five layers of executives of drug companies with boats and planes and villas in Tuscany to get these folks to innovate in drug therapy?” The answer is no.

It may take America’s innovator, California, to put an end to the drug pricing scam. Californians, do your duty.