California plans to launch own prescription drug label

California wants to become the first state to create its own prescription drug label, Gov. Gavin Newsom (D) announced Thursday morning.

As part of his 2020-2021 budget, Newsom wants to create the first-ever state generic drug label as part of a series of sweeping proposals designed to lower the cost of health care in the Golden State.  He also wants public and private insurers to negotiate drug prices together to leverage lower prices.

According to a summary from Newsom’s office, the labeling proposal would increase competition by allowing select drugmakers to manufacture generic drugs on behalf of the state. It would bring down generic prices, thereby lowering prices for everyone.

“A trip to the doctor’s office, pharmacy or hospital shouldn’t cost a month’s pay,” Newsom said in a statement. “The cost of health care is just too damn high, and California is fighting back.”

Newsom also wants to force drug companies to bid in order to sell their drugs in the state marketplace.

According to the summary, the proposal would enable all purchasers — including public plans, private insurers, self-insured employers and others — to combine their purchasing power. Currently, California’s Medicaid program negotiates prescription drug prices separately from other state agencies.

California would invoke a “most favored nation” clause in the marketplace, which would mean manufacturers will have to sell drugs at the lowest cost offered anywhere else in the world. 

Drug prices in other countries are often lower because governments directly negotiate with manufacturers. Proposals like Newsom’s may be successful if the state has enough leverage to force drugmakers to make concessions.

The federal government has limited authority to negotiate with drug manufacturers — Medicare is prohibited from negotiating, but other government programs like Medicaid and Veterans Affairs are allowed to do so.

State governments do not have those restrictions, but drug companies are likely to launch a serious fight against the proposal. 

Newsom’s proposals come as both states and the federal government are grappling with rising costs. But with Congress bogged down by partisan fights, state proposals could be the only ones that see traction this year.

The idea of tying drug prices to what other countries pay is similar to a policy proposed by the Trump administration that would set drug prices based on an international benchmark. Trump also floated the idea of a “most favored nation” clause, which is typically used in trade deals.

Experts argued that type of policy would not be successful at lowering costs on a national level, but it could work on a smaller scale state level.