November 07, 2005, 9:00 a.m.
Bad Proposition
Wrong Rx for Californians.

By Paul Howard

Getting more affordable prescription drugs to Californians without health insurance is a laudable idea. But what many people see as Proposition 79's winning virtues are really its damning flaws. Proposition 79 embraces price controls and opens companies to devastating tort liability — two forces that have helped cripple the vaccine industry in the U.S., which has gone from dozens of companies to just four in a few decades.

Proposition 79 envisions a state-run discount-card program that would be open to California residents who earn up to 400 percent of the federal poverty level. That's $38,000 a year for individuals, or $77,000 for a family of four. Companies have very little choice about participating in the program: If they don't offer the program the Medicaid "best price," they will be barred from selling drugs through the state's Medi-Cal program. The proposition also makes "profiteering" by companies illegal. Profiteering is defined as "an unconscionable price" or an "unreasonable profit," terms that are so vague and open-ended that they would expose manufacturers to constant (and very expensive) harassment from plaintiffs' lawyers.

If Proposition 79 passes, it could very well push drug prices to unprecedented lows as other states follow California's lead. But this would be a Pyrrhic victory. Price controls would send a clear signal to investors and companies that they should spend their money somewhere else. Without a steady flow of capital, drug R&D would suffer and fewer new drugs would come on the market.

The U.S. has, at least until now, largely resisted the temptation to strong-arm pharmaceutical companies with price controls. As a result, the U.S. is the global leader in both biotech and pharmaceutical innovation. This translates into tremendous value for the American economy and for patients struggling with the life-threatening illnesses.

Fabbio Pammoli, a researcher at the University of Florence, has found that from 1996-2002, the U.S. was responsible for 70 percent of global pharmaceutical R&D vs. 25 percent in Europe. More new drugs were also launched in the U.S. first — 70 percent of "new chemical entities" debuted here — about 1-2 years before European patients gained access to them. Further, he found that the U.S. dominated global patent registrations (over 50 percent) and grabbed the lion's share of academic citations (70 percent).

California, of course, is home to many of the nation's leading biotech companies, which generate (directly and indirectly) hundreds of thousands of jobs and billions of dollars in tax revenues. Proposition 79 would threaten the profitability of those companies, particularly smaller biotech start-ups.

U.S. patients also benefit from America's commitment to market-driven medical innovation. Cancer mortality rates, for instance, have declined in each of the past nine years, thanks in no small measure to powerful new medicines like Herceptin (breast cancer) and Gleevec (leukemia). Columbia University health economist Frank Lichtenberg has noted that "cancers for which the stock of drugs increased more rapidly tended to have greater increases in survival rates." Mortality rates for many types of cancer are lower in the U.S. than in Europe, in part because U.S. patients get faster access to the best new medicines.

This isn't to say that new medicines are always better than old medicines, or that we shouldn't have a reasonable debate about health-care quality, spending, and affordability.

There are, however, better alternatives than price controls. First of all, Proposition 78, a voluntary discount program for individuals earning up to $29,0000 a year or $58,000 for a family of four, is a good complement to other drug-discount programs currently available to Californians, and to the Medicare drug benefit starting in January.

Aside from voter initiatives, California legislators should focus on making health insurance more affordable. They should repeal state health-care mandates that drive up the cost of health insurance, and lift the state tax on health savings accounts. (The Galen Institute has pointed out that California is one of only seven states that tax contributions to HSAs.) Both of these reforms would help make health-care insurance more affordable for all Californians.

Proposition 79 is the wrong solution for a real problem. Focusing voter ire on drug prices is a convenient way to attack an unpopular industry. The power to produce real reform rests largely with Sacramento policymakers. In the meantime, Proposition 78, along with other existing programs, is a good stop-gap method for expanding access to critical medicines without threatening the pace of medical innovation.

— Paul Howard is the managing editor of the Manhattan Institute's web magazine Medical Progress Today.

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