Politics & Policy

“Medi-Cal Hammer” Won’t Swing

Schwarzenegger goes to the controls.

The plan gives Medi-Cal the power to stop buying drugs for its beneficiaries from drug makers that resist the governor’s state-dictated discounts for uninsured Californians. This “Medi-Cal hammer” is a dangerous proposal from a governor who previously understood the harmful consequences of government control of pharmaceutical prices. In January, he rejected them because “they will have a chilling effect on the research and development of lifesaving medicines and harm California’s critical biotech industry,” according to a letter he wrote to congressional leaders.

The relationship between such government interference and investors’ willingness to risk their capital in pharmaceutical development is not a mystery. Professor Philip J. Romero, former chief economist to Governor Pete Wilson, has examined similar price-control scenarios. He estimates that lost biotech investment would result in between 23,900 and 105,600 jobs disappearing from our state, and a reduction in economic activity by around one month’s growth per year. Of course, the drug plan’s chilling effects are only relevant if the Medi-Cal hammer swings, which is questionable. 

Maine tried one in 2000, litigated the pharmaceutical industry to a standstill in 2004, and finally launched a watered-down program without ever swinging the hammer. Half a decade of fruitless conflict means that drug makers are not cooperating, leaving the state to take the discounts out of taxpayers and pharmacies. Unsurprisingly, about half of Maine’s pharmacies, including large chains such as Rite Aid and CVS have chosen not to participate.

California is a lot bigger than Maine with more muscle behind the hammer. Perhaps, after years of litigation, the state will finally pummel the pharmaceutical industry into defeat. But there can be no doubt the drug plan is poorly designed.

First, Californians earning less than 300 percent of the federal poverty level are eligible. However, the term “Federal Poverty Level” is “ambiguous, and should be avoided, especially in situations (e.g. legislative or administrative) where precision is important,” according to the U.S. Department of Health and Human Services. 

Second, discounts are calculated from a list price, and scholarly economists have already discovered that when the government first demanded discounts for Medicaid in 1990, it led to higher list prices, which caused private buyers to pay more.

I estimate that the plan would bring discounts to about two million Californians — if it ever took off. That may not be a big shock for a state with 36 million people, but if the courts do let the Medicaid hammer swing, what will stop the legislators from increasing the income cut-off, or even making it a universal discount (as Maine originally proposed)? The result would be a “death spiral” of counter-balancing increases to list prices, lost investment in our biotech industry, and Medi-Cal patients losing access to medicines that reduce Medi-Cal’s costs by keeping them out of hospital — collateral damage in an unnecessary war between the state and the pharmaceutical industry.

Last November, when self-styled “consumer groups” put another version of this plan to the people via Proposition 79, both Governor Schwarzenegger and the voters decisively rejected it. The governor’s flip-flop is symbolic of an ineffective health care agenda. Although the governor claims that he wants to decrease health costs, he measures his self-proclaimed accomplishments by how much taxpayers’ money he spends — from stem cell research to clinics in public schools to roping more of our children into government-run health care — rather than promoting competition and individual choice.

Meanwhile, it takes a remarkable effort to anger both the poor and disabled and big business simultaneously. Although the uninsured are the target of this drug plan, neither Governor Schwarzenegger nor the Democratic legislators have done anything to reduce their numbers. A good first step would be to legislate state tax deductibility of health-savings account contributions and earnings, which the federal government did as of January 2004. Health-savings accounts are necessary to increase individuals’ choice of health plans.

Last year, the governor endorsed a voluntary plan that would have given drug makers and pharmacies confidence that offering discounts to the uninsured would not invite arbitrary and limitless government power over their businesses. He needs to revisit that proposal.

 – John R. Graham is director of health-care studies at the San Francisco-based Pacific Research Institute.

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