Tuesday is Election Day in many states, and voters will decide many important races and issues. One state to watch is Ohio. On this week’s ballot is the contentious Issue 2, the Drug Price Relief Act, which if passed, has the potential to have negative consequences for the state and for the nation.
The measure, similar to last year’s rejected California Proposition 61, would require state entities, such as the Department of Health, Ohio State University Medical Center, and the Department of Medicaid, to purchase prescription drugs from manufacturers at a net price at or below the price paid by the U.S. Department of Veteran Affairs (VA).
Currently, the VA pays a price approximately 24 percent less than the average price paid by wholesalers and direct purchasers, or the price paid by the federal government, which is the lowest price charged in the private sector. The VA pays the lower of the two prices. Additionally, the VA is entitled to negotiate supplemental discounts from drug manufacturers for purchasing a large volume of drugs.
Supporters of Issue 2 argue that prescription drug costs are too expensive. Michael Weinstein, President of AIDS Healthcare Foundation, stated, “Astronomical prescription drug prices hurt everyone—except the drug makers’ bottom lines.” Supporters believe that decreasing the cost of prescription drugs would end the need for people to decide between basic life necessities and medications.
Additionally, those in favor contend that the new rule would save the state and taxpayers money. Supporters estimate that a savings of 24 percent on drug prices would result in an annual savings of $400 million for Ohio, which could be used to fund other government initiatives such as education and the police.
Although these arguments sound appealing, they are flawed. According to the Ohio Office of Budget and Management (OBM), a savings of 24 percent annually is unlikely. In its report, the OBM does not attempt to calculate the projected savings of the referendum because relying on VA prices results in unavailable and insufficient information.
The VA benefits from a large amount of confidentiality when it comes to their agreements with drug manufacturers. As a result, the VA may not share the final costs of its agreements, which would require the state of Ohio to rely on estimates from available data. This could result in utilizing higher prices, which would overestimate the costs, reducing the anticipated savings.
Additionally, the clientele of the VA and Ohio programs are quite different. Ohio’s programs provide prescription drugs for a great number of children and women. VA enrollment is comprised of only 8 percent women, and 80 percent of enrollees are over the age of 45. These differences in demographics suggest that enrollees in VA programs and Ohio programs would require different drugs, making estimating prices of drugs difficult.
In addition to probable overstated savings, proponents of Issue 2 ignore the unintended consequences of placing a price cap on a large quantity of drugs. This Act would substantially increase the number of people receiving VA-level benefits by about 60 percent, potentially affecting the national market. The discount from the implementation of Issue 2 for Medicaid enrollees over and above the current discounts supplied by the Medicaid Drug Rebate Program is unknown given the confidentiality of the supplemental discounts the VA receives from drug manufacturers. However, even excluding Medicaid participants, 300,000 more people would be permitted to receive these lower prices.
Previously, drug manufacturers have responded to legislation that discounts the prices at which they can sell, e.g. the 1990 Medicaid Prescription Drug Rebate Program. Therefore, it is realistic to expect manufacturers to react in response to Ohio’s Issue 2.
Ohio’s OBM anticipates three potential responses, none of which are mutually exclusive:
1) Drug manufacturers will lower prices for drugs in which the VA and the state of Ohio overlap, but raise prices on drugs which are not bought by the VA;
2) Drug manufacturers may not offer to sell to the state at a lower price because there is no restriction on the manufacturers, leading the state to purchase different or fewer drugs; and
3) Manufacturers could raise the price of VA drugs by raising the price of drugs sold to the private sector.
If Scenario 3 were to occur, people with private insurance, who are already bearing the burden of increasing premiums and deductibles, would face higher prices. Since VA prices can only rise to the lower bound of the prices paid by the federal government, manufacturers would have to raise prices in the private sector in order to raise the price of VA drugs.
Although it would be ideal for the price of prescription drugs to be lower so that all income levels can easily afford them, implementing Issue 2 is unlikely to have its intended results. Instead, it is more likely for prices to rise and for availability to be reduced, especially for those who are supposed to benefit from these laws. On Tuesday, keep an eye on Ohio Issue 2, because, as the saying goes, “As Ohio goes, so goes the nation.”
Emily Top is a research associate at Economics21.
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