Your staff requested on September 8 that our office review and comment upon the administration proposal, presented to the Legislature in August, to establish a drug purchase discount program for individuals with family incomes below 300 percent of the federal poverty level (FPL). Given the limited time available for our review of these issues before your upcoming hearing on this subject by your committee, our comments below should be considered preliminary in nature and subject to revision as more information about the proposal becomes available to us.

Background

“California Rx” Program. As you know, the administration is proposing to establish a so-called “California Rx” program that would aim at reducing the costs certain California consumers would have to pay for drugs purchased at pharmacies. The administration plan, which was initially offered in the form of amendments to several pending legislative measures but not adopted in the recent legislative session, proposes the enrollment of eligible individuals into a prescription drug purchase discount card program. The new program would be generally similar in nature to the discount cards now available from various public and private programs including, most recently, the Medicare Program.

Under the administration proposal, individuals could voluntarily choose to enroll in the program, and to receive a discount card that would enable them to purchase their prescription medicines from retail pharmacists at a below-retail price, upon paying a $10 enrollment fee at a participating pharmacy. The state would contract with a private entity, probably a pharmaceutical benefits manager (PBM), that would be responsible for establishing a network of participating pharmacies who would sell cardholders drugs at agreed-upon discounts. The state would also establish a mechanism by which it would secure rebates on a voluntary basis from prescription drug manufacturers that would be intended to further lower drug purchase costs for cardholders.

Medi-Cal Alternative Being Studied. In addition to the statutory language it has already presented lawmakers, the administration has further indicated its interest in the development of a modified version of its California Rx plan that would directly connect the drug discount program to the state’s existing Medi-Cal health care program for the poor as a means to secure sizable rebates. While the administration has begun to explore this alternative approach with federal authorities, who would have to approve it, the administration is not prepared at this time to present such a plan to the Legislature or to recommend its adoption.

Major Issues the Legislature May Wish to Consider

As you consider the administration proposal presented in August, you may wish to review recent academic research which sheds light on the nature and effectiveness of drug discount programs across the country. A recently published study conducted for The Commonwealth Fund by the Rutgers (University) Center for State Health Policy takes a broad look at the existing and recently enacted legislation in this subject area in other states and examines the court rulings that are determining what types of programs are likely to survive legal scrutiny. A copy of the Rutgers study is attached linked. 

Based upon our review of the Rutgers report, and our own understanding of how a drug discount program might fit with California’s existing health care system, we would call your attention to the following major issues and concerns.

Magnitude of Drug Discounts. Based on the track record of drug card discount programs in other states, it is not certain at this point that the new program being proposed by the administration would be able to secure consumer discounts on prescription drugs of a magnitude much greater than those already available from various other existing public and private drug purchase discount programs.

The administration has indicated it is currently in discussions with various major drug manufacturers to secure their cooperation in providing rebates that would potentially increase the magnitude of the discounts that would be available to cardholders. While the administration has suggested it is making progress in these discussions, the outcome of the negotiations is not yet known. At least one comparable state program (in Iowa) involving voluntary rebates was deemed by that state’s Governor to be a failure after only three of the country’s 20 major drug companies were willing to cooperate.

The Rutgers study and the experiences of other states suggest that savings of up to 25 percent off the usual and customary prices charged to customers might be possible if an effective means of obtaining rebates were in place, but that savings of half of that might be achieved if significant rebates could not be secured. If the Legislature is interested in creating a new drug discount program, it may wish to consider whether it wishes to modify the administration proposal to include either incentives to entice drug manufacturers to participate or penalties for those manufacturers which chose not to do so. We further discuss some alternatives involving this approach later in this analysis.

Access to Drug Discounts. Given that most drug discounts are targeted at the elderly and disabled, it is possible that the administration proposal would result in greater access to drug discounts for middle-income and low-income individuals who may not now be eligible for participation under various other existing discount programs. Most existing discount programs operating in California focus on the elderly and disabled. The administration plan would generally enroll persons in families earning less than 300 percent of the FPL who do not have health coverage. (One exception is that persons enrolled in Medicare would be permitted to participate and obtain discounts on any prescription drugs not covered under the new Medicare drug benefit that begins in January 2006.)

However, we would note that the administration program, by its nature, would focus on providing pharmaceutical assistance for families and children who, in general, are less likely to need prescription drugs or to be prescribed the most expensive prescription drugs. For these reasons, the level of participation by consumers in such a program, and the frequency of usage of discount cards by those who do enroll, may not be high.

Rebate Mechanism. As noted earlier, the administration proposal contemplates that the state would obtain voluntary rebates from drug manufacturers to lower the cost of the drugs purchased by individuals participating in the pharmacy assistance program. The assumption is that, while some drug companies may be unwilling to reduce the price of their drugs outright, they may nonetheless be willing instead to pay the state rebates that would effectively lower the cost of their products. Rebates thus could, in theory, add to the pool of savings enjoyed by consumers participating in the discount program.

However, as the administration measure proposal is currently drafted, the exact mechanisms for billing, recovering, and passing along rebates from drug companies is not specified. The administration has indicated to us that it deliberately drafted the language in a way that would provide it with the flexibility to work out the best approach to this issue.

As a result, it is not clear from the proposed statutory language how or to what extent individuals purchasing prescription drugs in the discount program would actually end up benefiting from rebate payments. The administration language specifies that the state would pass along rebates in the form of payments to pharmacies, but does not now outline any specific process by which pharmacies would in turn pass along the benefits to the individuals participating in the state program.

Other key questions relate to how such a rebate system would be administered—including the question as to how the drug purchases of individuals participating in the program would be tracked to ensure that rebates were passed along to the appropriate parties in the appropriate amounts. In addition, the state’s efforts to collect drug manufacturer rebates relating to the Medi-Cal Program have been complicated, difficult, and time-consuming.

Potential for Litigation. It is possible that a new state discount law could be challenged in court by the drug manufacturing industry. Other states, such as Maine, have faced litigation, with mixed results in the courts, on various grounds, including claims that some features of discount programs violated federal Medicaid laws or unconstitutionally interfered with interstate commerce. The Rutgers study cited above suggests that the general model proposed by the administration, involving a state contract with a PBM, seems to have no legal barriers to implementation. However, that does not mean the specific legislation proposed by the administration would not be subject to legal challenge. For these reasons, you may wish to consult with the Office of Legislative Counsel and the Department of Justice to ensure that any program adopted by the state minimizes this litigation risk, or at least places the state in a strongest possible position to defend its proposal if necessary in the courts.

Other Pharmacy Assistance Models. Before adopting the model of pharmacy assistance proposed by the administration, the Legislature may wish to compare the Governor’s proposal to alternative models for providing such help.

One such alternative is the so-called “direct benefit” approach, now in existence in many other states, in which the state directly purchases pharmaceuticals for a targeted group of persons deemed eligible for assistance. (The state’s existing AIDS Drug Assistance Program is one such example.) However, because of the potentially significant state costs inherent in providing such subsidies, most states have not undertaken this approach. Ongoing budget problems make this a problematic approach in California as well.

The Rutgers study outlines several alternative models being considered in other states, including the approach the administration itself is now exploring—tying drug assistance directly to the Medi-Cal Program in order to compel drug manufacturers to provide substantial rebates on drug purchases for individuals enrolled in pharmacy assistance. One alternative would be for the state to seek a federal waiver that would permit the state to obtain the same “best prices” for non-Medi-Cal beneficiaries that are guaranteed for Medi-Cal participants.

A full comparison of the pros and cons of these different models is beyond the scope of this memo, but among the factors that could be compared are: (1) the relative savings on drug costs that could be provided to California consumers; (2) the cost to the state and administrative complexity for implementing the program; (3) the potential for litigation that would delay or nullify efforts to obtain drug discounts for consumers; (4) the prospects for participation in the program by pharmacies, PBMs, and drug manufacturers; (5) the probable rate of participation by eligible consumers; and (6) how the new program serves those most in need of pharmacy assistance.

Existing State Discount Laws. The Legislature should consider the relationship of the proposed new law with California’s existing laws to provide discounted drugs for certain consumers. Senate Bill 393 (Speier), enacted in 1999 as Chapter 946, required retail pharmacies to sell prescription drugs to persons enrolled in the Medicare Program at a discount—just above Medicaid prices. Senate Bill 696 (also by Speier), enacted in 2001 as Chapter 693 and known as the Golden Bear State Pharmacy Assistance Program, was intended to further cut prices by making drug manufacturer rebates available to Medicare beneficiaries.

The proposed administration language does not repeal either prior law. However, the administration advised Senator Speier by letter in March 2004 that it was no longer proceeding to move forward with a SB 696 program because of various implementation problems it had encountered and the enactment of the federal law to create a Medicare drug benefit. One question the Legislature may wish to explore is why the administration believes a new voluntary rebate program will succeed in obtaining the cooperation of drug manufacturers that resisted the Golden Bear rebate program.

 The Legislature should examine, among other policy considerations, (1) whether any new pharmacy assistance program that is adopted should replace the existing laws, (2) whether the existing laws should be modified in lieu of creating a new statutory scheme for pharmacy assistance, or (3) whether any form of coordination among programs is needed if a new program is established without abolishing the existing discount programs.

New Medicare Drug Benefit. Coordination and interaction of the proposed new drug discount program with the recently enacted federal Medicare drug benefit is another important issue that the Legislature may wish to consider.

For example, the ability of a PBM to bargain for discounts with drug manufacturers may be undercut significantly by the fact that many Medicare recipients—a pool of individuals with very large drug purchases—will, as of January 2006, obtain most if not all of their prescription drugs through Medicare at prices established by the federal government, and thus would not make effective use of the discount card. The PBM thus may not be able to achieve discounts on consumer drug purchases as large as those that might be possible if it were bargaining on behalf of a larger pool of drug purchasing costs.

As it designs a pharmaceutical assistance program, the Legislature may also wish to consider the forthcoming, critical decisions that will be made by the federal government in regard to which specific prescription drugs it will cover for Medicare beneficiaries. The federal government now is developing regulations that will determine how broad its drug coverage will be and how the benefit will actually be implemented. More information about these federal decisions is expected by the end of this year.

Drafting Issues

In preparing this memorandum, we reviewed the statutory language submitted by the administration to the Legislature in August for enactment of its pharmacy assistance plan. Accordingly, should the Legislature wish to consider the legislative proposal presented by the administration, we would call a number of additional specific drafting and program implementation issues to your attention.

• The administration language (see proposed new Health and Safety Code Section 130602.1) indicates that application forms would contain a warning against committing perjury on program application forms. However, the language of the measure does not contain statutory language actually making it a crime to lie on such an application form or specifying the punishment that would apply for someone convicted of doing so.

• The proposed new Section 130602.1(c) specifies that no additional documentation of the family income of an individual will be required. While such a self-certification approach could simplify administration of the program, it could make it very difficult, if not impossible, to ensure that only qualified individuals receive the discount card and to prevent applicant fraud. The Legislature may wish to consider requiring that some documentation of family income, and proof of other program requirements, such as residency, be part of an application. The cost of implementing any such requirements should be balanced against the advantages of simplification of enrollment.

• The language we have reviewed does not indicate the intended timetable for implementation of the new pharmacy assistance program. The bill language proposes the development of new information technology (IT) systems for the enrollment of individuals in the new program by pharmacies. Given the potential for delays in developing any such IT project, a realistic implementation date that takes such potential delays into account should be considered.

• The measure specifies that an initial application fee of $10 would be established for individuals participating in the drug discount program. The administration has indicated that it is considering the concept of a one-time-only fee payment. However, the measure in its current form is silent regarding what fee, if any, would be charged for renewal of enrollment each year, and who would collect such renewal fees. The Legislature may also wish to obtain information as to the basis for setting the proposed initial application fee at $10, how this amount relates to the actual costs that pharmacists are likely to incur for enrolling individuals in the drug discount program, and the effect, if any, of the proposed fee on program enrollment and pharmacy participation in the program.

• The measure specifies that the Department of Health Services (DHS) would be required to determine the eligibility of an individual in the program within four hours of receipt of an application, and to mail an identification card within four days of determination of eligibility. The Legislature may wish to carefully review whether such strict deadlines for program eligibility are practical and desirable, and to what extent they would increase the risk to the state of fraud. The Legislature may wish to consider providing some mechanism for allowing exceptions to whatever deadlines were adopted, for example, where fraud is suspected.

• The proposed new Section 130604.1 is somewhat unclear regarding the magnitude of rebates that the PBM would seek to obtain for commonly used drugs. The language states that the PBM would seek to contract “for drug rebates lower than the Medicaid price.” This language could be read to mean that consumers would not save as much money on commonly used drugs as rarely prescribed drugs. However, the administration has indicated that its actual intent was just the opposite. The Legislature may wish to consider clarifying this language to remove this ambiguity.

• The measure proposes an initial General Fund appropriation of $3 million to establish the program. It further proposes [in the proposed new Section 130409(a)] to provide the administration with unlimited authority to hire any staff needed to implement and oversee the new program, and would create a continuously appropriated special fund for the receipt and expenditure of rebates received from drug manufacturers. We have not seen or reviewed any administration documentation of this proposed funding level or the staffing needed to carry out the administration discount card program. In any event, the Legislature may wish to carefully consider the implications of adopting any statutory language that would override the usual state budget processes for funding and positions. It may also wish to obtain from the administration detailed documentation and justification for the staffing and funding that the administration proposes to provide for implementation of the new program in the 2004‑05 fiscal year as well as for subsequent fiscal years. Finally, it may also wish to clarify why the administration apparently proposes two different sources of funding for the PBM contract—both the General Fund appropriation and special fund resources received from drug manufacturer rebates.

• The administration language we have reviewed does not appear to contain sufficient language to ensure that all of its key provisions can be enforced by the state. For example, Section 130604.1(b)(6) requires that drug manufacturers make rebate payments on a quarterly basis, but provides no mechanism, such as enforceable financial penalties for late payments, that ensures this would actually occur.

• The measure would permit DHS to cancel the drug discount program if DHS determined that it is not viable. While such a provision may well be appropriate, the Legislature may wish to consider whether the language should be modified to ensure advance notice to the Legislature in such an event.

• The proposed new Section 130604.1(e) provides that the Legislature shall appropriate funding each year “the state’s share of the discount” provided by the measure. This language is vague and its purpose is unclear. The Legislature may wish to obtain more information about this aspect of the funding mechanism, and it may wish to consult with the Office of Legislative Counsel regarding the effectiveness and appropriateness of language that would seemingly be intended to bind the actions of future Legislatures.

Conclusion

Please feel free to contact me if you require any clarification of the preliminary comments in this memorandum or if the committee requires additional assistance in this matter.