Trump’s Not Fighting for Lower Drug Prices. Can the States Take Over?

Published August 28, 2017

As a candidate, Donald Trump railed against drug prices. Pharmaceutical companies, he said, were “getting away with murder” and he planned to take aggressive action. But since taking office, he’s done nothing to fulfill his promise, even though it represents a rare cause that’s broadly popular with the public. Notably, Trump’s budget blueprint, which includes severe cuts to healthcare programs, doesn’t touch drug spending.

With a vacuum in Washington, states are naturally starting to explore whether there’s any meaningful action they can take. When speculating about this topic on the latest #Caretalk videocast, my initial answer was that since states already get the best price on drugs thanks to the Medicaid rebate program, there is really nothing more they can do.

I’m starting to rethink that response.

Individual states are certainly large enough to matter to the drug industry. After all California has more people than Canada, Texas outranks Australia, and New York’s population is double that of Sweden’s. Yet pharma companies make sweet deals with all of those countries, at least compared with what we see in the U.S.

Furthermore, individual states have shown that they can drive national policy. California has long had automobile emissions rules that are stricter than the U.S. standard. Since California has 10 percent of the population and drives trends in the car industry, every manufacturer tunes its vehicles for sale in California. But the influence runs deeper than that. Thirteen other states automatically follow California’s lead on emissions standards, and collectively they represent 30 percent of new vehicle sales. The result? Every vehicle sold throughout all 50 states and D.C. meets the California rules.

Could something similar happen for drug pricing? It will be harder, for two main reasons. (1) California had environmental regulations before the Clean Air Act was enacted in 1963, and obtained a waiver to continue with its own standards. There is no such precedent for drug pricing. (2) Complying with stricter emissions rules means re-engineering vehicles. Manufacturers save costs and complexity by doing the design once instead of twice. For drugs, the only thing that would change is the price, and pharma companies are already experienced selling the same product for different prices.

Nonetheless, the debate this year in New York indicates what is possible. Democratic Governor Andrew Cuomo proposed a state review board to determine the “fair price” of drugs for the Medicaid program. That is already an aggressive approach, but the Cuomo plans goes much further by extending the Medicaid “fair price” to the commercial insurance market. That would produce an earthquake in the drug industry.

It seems unlikely that explicit price controls would pass legal muster, so instead Cuomo proposed a surcharge on drug companies that would essentially confiscate any revenue received by pricing drugs above fair price. Those surcharges would be directed into a fund to reduce insurance premiums. Cuomo also sought to prevent drug companies from implementing clever and creative solutions to get around the restrictions. He did so by targeting the pharmacy benefit managers (PBM) with restrictions and disclosure requirements.

Cuomo’s proposal seems unlikely to become law this year. But the legislature is following the Governor’s lead by seeking to extract additional rebates from the pharmaceutical industry and setting an overall spending cap for the Medicaid market. It seems possible that the Cuomo proposal will be enacted in the future, although that will require public outrage and fiscal necessity to overwhelm pharma industry lobbying. We are not there yet.

If the New York law or something like it passes, other states could certainly use it as a model. Doing so would not automatically flip the whole industry into low price mode across the country, but it could have a major effect if high-population states adopted the plan. The threat might also bring the pharmaceutical industry to the table to negotiate a grand bargain at the federal level.