Keenan Blog

SB 852: Potential Savings for Employer-Based Health Plans?

October 06, 2020

Prescription drug expenses to consumers have been a focus of efforts to bend the health care cost curve. The “California Affordable Drug Manufacturing Act of 2020” (SB 852), is a new step toward Governor Gavin Newsom’s policy goal of lowering prescription drug costs in the state through direct participation in the manufacture and distribution of generic drugs.

The new law will require the California Health and Human Services Agency (CHHSA) to enter into partnerships to produce and distribute generic prescription drugs “at a price that results in savings, targets failures in the market for generic drugs, and improves patient access to affordable medications.” These partnerships are intended to make drugs widely available to public and private purchasers, providers and suppliers, and pharmacies.

Under the proposed program, CHHSA will prioritize the selection of generic drugs that have the greatest impact on lowering drug costs to patients, increasing competition and addressing shortages in the prescription drug market, improving public health, or reducing the cost of prescription drugs to public and private purchasers.The targeted pharmaceuticals will be made available to providers, patients, and purchasers at a transparent price and without rebates, other than federally required rebates. The focus will be on drugs for chronic and high-cost conditions, and considerations for those that can be delivered through mail order.

The only specific drug referenced by the law is insulin. CHHSA’s partnerships under SB 852 are to include the production of at least one form of insulin, provided that a viable pathway for manufacturing a more affordable form of insulin exists. However, the agency may also target other generic pharmaceuticals for price competition and availability.

CHHSA must report to the Legislature the status of all drugs targeted under this bill with an analysis of competition, access, and the costs of those drugs by July 1, 2022. By July 1, 2023, CHHSA must assess the feasibility of directly manufacturing generic drugs and selling generic drugs at a fair price, along with the proposed governance structure for the partnerships.

Background

In January 2019, Governor Newsom signed an Executive Order directing the California Department of General Services and the California Pharmaceutical Collaborative to develop a list of prescription drugs for future bulk purchasing initiatives or for potential negotiation with the manufacturer. The order also transitioned Medi-Cal pharmacy services from managed care into a fee-for-service system.

In his proposed 2020-21 Annual Budget, Governor Newsom also announced plans to establish the state's own generic drug label to increase competition in the generic market, resulting in lower prices and steady supplies for all purchasers. However, that plan did not make it into the final budget. SB 852 as passed represents a pared-down version of the original proposal.

Potential Impact

There will be no immediate, short-term price impact from the enactment of SB 852. It appears that any actual benefit from the state’s partnerships will not be realized until after the July 2022 report is made to the Legislature. It is difficult to predict what the long-term impact of SB 852 might be. Both the number of drugs and the specific drugs chosen for contracts with the state will impact how much savings will be possible.

The size of California’s market should work in favor of driving targeted drugs costs down. If California successfully combines the purchasing power of Medi-Cal and all state agencies, it will become the single largest purchaser of prescription drugs after Medicare and the U.S. Department of Veterans Affairs. This will give the state significant leverage in negotiating contracts with manufacturers and distributers.

The focus on generics is also likely to result in savings. The average cost of a brand-name drug was 18.6 times higher than its generic equivalent in 2017. While there are relatively few insulin biosimilars on the market, they are 15-50% less expensive than brand-name products.

Additional details about this new law and the possible impact it may have on prescription costs for employer-sponsored health plans are available in the following white paper: https://www.keenan.com/Portals/15/Documents/WHITEPAPER_20200930_SB852_KA.pdf .


About Amy Donovan
Amy is Keenan's Vice President of Legislative and Regulatory Affairs, authoring the firm's Briefings and position papers on legislation, regulation and litigation that have an impact on the firm and its clients.