McGeorge School of Law

Proposition 78

Proposition 78:
Discounts on Prescription Drugs.


Tanisha Worthy
JD, McGeorge School of Law, University of the Pacific
to be conferred May, 2006
B.S., Criminal Justice, California State University Sacramento, 1995

Copyright © 2005 by University of the McGeorge School of Law

Table of Contents

I. Executive Summary
II. Legal Issues
III. Drafting Issues
IV. Constitutional Issues
V. Public Policy Considerations
VI. Conclusion

I. Executive Summary

Proposition 78, known as Cal Rx, is an attempt to offer discount prescription drugs to a large segment of California residents to whom prescription drug coverage has become increasingly out of reach. It is estimated that more than six million Californians lack health insurance. Dan Carson, Evaluating the Administration’s California Rx Proposal.II. Legal Issues

Proposition 78 would seek the voluntary participation of pharmacies to sell prescription drugs at agreed upon discounts for plan participants. The state would seek further discounts by negotiating a per unit rebate from drug manufacturers that would be passed on entirely to the consumer. The program would utilize a drug discount card to be presented to participating pharmacies to receive discounts.

The state would require prompt determination of participant eligibility, based on certain criteria and those otherwise eligible for existing programs will be immediately forwarded to the appropriate entity. There would be a small annual application fee to offset cost. There would be public outreach to increase public awareness and participation. The main goal of the initiative is to create a process that will identify and process more eligible residents quickly.

A. Current Law

Currently, several state and federal programs provide prescription drug coverage to eligible individuals. California offers the Medi-Cal and Healthy Families Programs to low income children and families, nursing home residents and disabled persons. The federal government offers the Medicare program for elderly and disabled persons. California law requires retail pharmacies to sell prescription drugs at a discount to elderly and disabled persons enrolled in Medicare as a condition of a pharmacy’s participation in the Medi-Cal program. There are various other state, federal and privately funded programs that offer cost assistance with prescription drugs to specific individuals. Additionally, many California residents receive prescription drug coverage through private insurance that is purchased by the individual or provided by their employer or employer of a family member. California Official Voter Information Guide, Analysis of Proposition 78 ( Secretary of State, 2005).

Beginning January 2006, Medicare will offer a federal prescription drug benefit; Medicare Part D. Private insurers will provide coverage and drug plans. Medicare Part D will allow for deeper discounts and higher annual expenses for drug coverage for the elderly and disabled. William G. Hamm, Elizabeth Wang & Mary Wickens, An Economic Analysis of Two Prescription Drug Discount Programs Proposed for California, (accessed August 21, 2005).

Those receiving prescription coverage under the Medi-Cal, Healthy Families, Medicare programs and the various privately funded patient assistance programs are generally families and individuals whose annual income falls below 250 percent of the federal poverty level (FPL). Id. Currently there is no federal or state law providing prescription drug coverage or assistance to California residents whose income falls above 250 percent of the FPL, and who are not qualified as a result of disability or age for any other programs and coverage.

B. Previous Attempts at Change

In 2001, legislation authored by Senator Jackie Speier, Senate Bill 696, known as Golden Bear Pharmacy Assistance Program was enacted to provide deeper discounts to qualified Medicare recipients through negotiated voluntary rebates from drug companies. Dan Carson, Evaluating the Administration’s California Rx Proposal. Although there was bipartisan support of the legislation, there remained concerns of enforcement, implementation, and fiscal issues. Primarily there were concerns with the lack of sanctions against drug manufacturers who did not submit timely rebates, lack of specific mechanisms for estimating and evaluating the effectiveness of the program and lack of specifications of budget requirements to implement and maintain the program. Dan Carson, Evaluating the Administration’s California Rx Proposal. By April 18, 2005, Senate Bill19 had been amended to create a voluntary program similar to Proposition 78. On May 4, 2005, its hearing was postponed indefinitely as support diminished. Soon thereafter, Propositions 78 qualified for the ballot. Id.III. Drafting Issues

However, in 2004 Department of Health Services ended its efforts to implement the program because of administrative problems in passing rebates along to consumers and because few manufacturers had been willing to provide these rebates. Id. In the interim, other programs were proposed providing similar discounts, such as the federal Medicare Part D prescription discount plan.

On December 6, 2004, Senate Bill 19, designed to offer a drug discount program to California residents was introduced as part of the governor’s reform agenda. Initially, the bill demanded drug manufacturer offer drugs at government rates to residents at 400 percent of the FPL. Idan Ivri, Banned Aid,

C. Effects of Proposition 78

Proposition 78, known as Cal Rx, would establish a prescription drug program for low-income and moderate-income California residents, excluding those eligible for state, federal and private drug coverage, allowing the purchase of prescription drugs at a reduced prices. Those eligible for Cal Rx would have a family income not exceeding 300 percent of the FPL, as revised annually by the United States Department of Health and Human Services. California Official Voter Guide, Text of Proposed Laws, Proposition 78, § 130605(a)(2).

This requirement would include individuals earning about $29,000 annually and families of four earning about $58,000 annually. Analysis of Proposition 78. Those receiving out-patient drug coverage paid in whole or part by a third-party payer, Medi-Cal, a children’s health insurance program, disability medical assistance program or another state or federally funded health or pharmacy program (except Medicare beneficiaries) would be excluded from eligibility. Proposition 78, § 130605(a)(3). In certain circumstances, persons with drug coverage, during the three month period prior to application for Cal Rx would be excluded as well. Id. § 130605(a)(4). Exceptions would include bankrupted insurers, individuals no longer eligible for coverage through an Employee Retirement Income Security Act protected plan or those no longer eligible for Medi-Cal, a children’s insurance program or disability medical insurance plan. Id.

The Department of Health Services would administer the plan. The department would contract with participating pharmacies for discounts and negotiate with participating drug manufacturers for rebates. Id. § 130602(b). Participation is voluntary and there is no restriction on the participation of pharmacies and manufacturers.

The plan recipient would pay no more than the negotiated pharmacy discounted price, less the applicable manufacturer rebate. Id. § 130618(a). The rebate agreement would be detailed and permit the department to remove disputed drugs and limit the number of drugs available within Cal Rx. The rebates would be required to be paid at least quarterly. The negotiated rebate would be paid to the state and reimbursed to the pharmacies to offset deeper discounts provided. Analysis of Proposition 78.

Cal Rx would create a state fund for deposit of drug manufacturer rebate payments. The rebate would be used to reimburse pharmacies that offered deeper discounts. Any additional funding required to cover cost of discounts would be annually appropriated by the legislature. Proposition 78, § 130618(d). Additional cost would include a “float” between monthly rebate reimbursement payments to pharmacies and quarterly rebate payments from manufacturers, as well as public awareness outreach and administration cost. The cost is currently unknown. Analysis of Proposition 78.

The Department of Heath Services would be responsible for creating a method to promptly determine eligibility of applicants. The plan would require that applications be accepted in a number of locations and by a variety of methods (i.e. through website, call center, at any pharmacy, clinic or physician office participating in the plan). A $15 application and renewal fee would be required to offset the cost of processing. The department would be required to determine eligibility within four hours of receiving the completed application during normal business hours and an identification card would be mailed to eligible applicants within four days. Proposition 78, § 130606 (d)-(f).

The plan allows the department to seek a third party vendor to implement and administer Cal Rx, while maintaining oversight. Id. § 130602(b). In the event that the department is unable to secure a third party vendor to help run the program, or if the department determines there are insufficient discounts to make the program work, or if too few persons are enrolled in the program, the program could be terminated. Analysis of Proposition 78.

A. Conflicting Ballot Measures

The California Constitution provides that if two or more measures approved in the same election conflict, the measure receiving the highest affirmative votes shall prevail. Cal. Const., art II, § 10(b). Proposition 79 appears to be a conflicting measure that if approved by a greater number of voters would take effect instead of Proposition 78. Anticipating such a possibility, Proposition 78 contains a provision asserting that if this measure is approved by voters but superseded by law or another conflicting measure approved on the same ballot that is later held invalid, this measure shall be self executing and given full force of the law. Proposition 78, § 3(a)(2).

B. Severability

Proposition 78 contains a severability clause stating: “If any provision of this chapter … is held invalid, that invalidity shall not affect the other provisions … that can be given effect without the invalid provision.” Id. § 3(b). This is a common clause used in many initiatives to prevent the invalidation of the initiative in its entirety if one portion is determined to be invalid. Gerken v. Fair Pol. Practices Commn., 6 Cal. 4th 707, 714 (1993) [“Gerken”].

If the severability of the Proposition 78 were to be of issue, the court would use the test established in Gerken to determine severability. The California Supreme Court has said that a provision of an initiative is severable if it is grammatically, functionally, and volitionally separable from the rest of the initiative. Id. at 715. The court has defined an initiative to be grammatically severable if a part of the provision can be “removed as a whole without affecting the wording of any other provision.” Calfarm Ins. Co. v. Deukmejian, 48 Cal.3d 805, 822 (1989). Functionally severable requires that the proposition operate normally, meeting the propositions goal, without the severed clause. Id. Volitionally severable requires a determination that the voters would have adopted the proposition even if they had foreseen the partial invalidation. People’s Advocate, Inc. v. Cal. Super. Ct., 181 Cal. App. 3d 331, 332 (1986).

It appears that many provisions of Proposition 78 are severable from one another, as the language is distinct to each provision and not necessarily dependent on another. Each can be easily understood and enacted to meet the goal of offering discounted prescription drugs to low and moderate income Californians. It is possible, for example, that if the provision directing the state to negotiate for lower prices with drug manufacturers were declared invalid, the provisions creating a drug discount card and encouraging the voluntary participation of pharmacies in the program may be implemented as they are grammatically, functionally and volitionally separable from the provisions relating to discount negotiations with manufacturers. Id. at 329-333.

IV. Constitutional Issues
A. Federal Law

Congress created the federal Medicaid program in 1965 by adding Title XIX to the Social Security Act. The program authorizes federal assistance to States that choose to reimburse certain cost of medical treatment for needy persons. In 1990, Congress passed the Omnibus Budget Reconciliation Act (OBRA 1990) that requires drug manufacturers to enter into agreements to provide rebates on their Medicaid sales of outpatient prescription drugs. Additionally, once the drug manufacturer enters into the agreement, the law requires that the state offer the drug under its plan unless the state qualifies for exemption. Pharm. Research and Manufacturers of Am. v. Walsh, 123 S.Ct. 1855, 1862 (2003).

Generally OBRA 1990 requires drug manufacturers to offer the lowest prices to certain federally supported health programs. If Cal Rx would negotiate a significant discount on a drug with the manufacturer, federal law would require that the company cut its price further for all of its same product offered to federal and hybrid federal/state health programs, such as Medicare and Medi-Cal. Dan Carson, Evaluating the Administration’s California Rx Proposal, > (accessed September 14, 2005). This restraint, referred to as “best price” rule, has generally kept manufacturers from offering deep discounts to other public and private entities. Id. The “best price” rule can be avoided if the state obtains the federal designation of a State Pharmacy Assistance Program (SPAP). Cal Rx could qualify for this designation as long as no federal funds are used to support the program and program has set income limits on eligibility. Id. The income limits are not specified in the federal rules. Id. The proposition is designed to meet the qualifications of SPAP designation.V. Public Policy Considerations

Title XIX of the Social Security Act also requires that any state program that effects or interferes with Medicaid benefits must serve a Medicaid purpose. A court challenge could be made against any program that appears to be a detriment to Medicaid participant benefits. Challenges have been made against programs that used the manufacturers participation in the Medicaid programs as leverage to procure additional drug discounts for non-Medicaid participants. Proposition 78 relies on voluntary participation by drug manufacturers and does not appear to interfere with benefits of Medicaid participants. Id.

Therefore, Proposition 78 does not appear to raise any issues with the federal statutory law. Consequently, no federal preemption concern is triggered under the United States Constitution.

B. State Constitution

Proposition 78 does not appear to raise any issues with the California Constitution.

A. Proponents

Proponents of Proposition 78 declare that Cal Rx will offer the best prescription discount program in the country. Why You Should Vote Yes on Prop 78, <> (accessed August 21, 2005). Proposition 78 is reported to be designed after the Ohio Best Rx program which to date has delivered discounts averaging 31percent to consumers and participation of every major prescription drug manufacturer. Id.

The Ohio Best Rx program went into effect on January 1, 2005. As of August 30, 2005, there were more than 34,000 persons enrolled and provided over $1.6 million dollars in savings to participants. Ohio’s Best Rx Monthly Report, (accessed October 5, 2005). The Ohio’s Best program status report warns that the full fiscal effects of Ohio Best Rx are still unknown and data should be reviewed with caution in terms of predictive value. Ohio’s Best Status Report, (accessed August 21, 2005). The early data is promising as the number of participating pharmacies and manufacturers continue to grow despite the short length of time the programs has been in effect.

The participation of pharmacies and manufactures are essential to the success of the Cal Rx program as proposed by Proposition 78. Although participation in Cal Rx is voluntary, proponents assert that many major drug manufacturers have made commitments to participate as evidenced by the strong financial backing of Proposition 78. Why You Should Vote Yes on Prop 78, <> (accessed August 21, 2005). As of September 24, 2005, pharmaceutical contributions have exceeded $80 million towards campaigning for Proposition 78. California Secretary of State – Cal Access –Campaign Finance, (accessed October 5, 2005). PhRMA, a leading plaintiff in legal challenges against many state drug discount programs has indicated that it would not mount a legal challenge to Cal Rx and has been in the forefront of support for the Proposition. Dan Carson, Evaluating the Administration’s California Rx Proposal, > (accessed September 14, 2005). > (accessed September 14, 2005).> (accessed August 21, 2005). Opponents describe Cal Rx as being intentionally designed by the drug industry to fail, as provisions allow for the termination of the program if there is low voluntary participation by drug manufacturers.VI. Conclusion

Proponents believe because the program is voluntary, does not jeopardize Medicaid benefits and targets only low-income and elderly residents, no federal approval will be needed or challenge upheld against it that could prevent or delay full implementation. Avoiding a court battle would allow Cal Rx to be implemented promptly and the state could avoid the potential unknown cost of litigation. Id.

The full fiscal effect of Proposition 78 is still unknown. Analysis of Proposition 78. Proponents are optimistic that enrollment fees, private donations and rebates will offset much of the cost of implementation and maintenance of the Cal Rx program over time. They also hope that the measure will reduce Medi-Cal expenses by making discounts available to an increased number of healthier persons, who are now otherwise uninsured. In other words, preventative medicine will diminish the number of people using the Medi-Cal system in the future, because their healthcare needs will be met before they succumb to a cycle of illness and increased dependency on public services. Further, providing fiscally sound access to life sustaining drugs would decreased fiscal impact on emergency and clinic services used by the uninsured and increased sales of prescription drugs would led to increased rebates received by the state. Dan Carson, Evaluating the Administration’s California Rx Proposal,

B. Opponents

Opponents focus on what they perceive as the weaknesses of Proposition 78: the lack of sustaining structure and enforcement, outreach to a decreased number of uninsured residents and shallow discounts.

Opponents of Proposition 78 argue that Cal Rx is nothing more than a self-destructing smokescreen for real reform and lowered drug cost for Californians. Proposition 78 vs. Proposition 79: A Smokescreen vs. A Genuine Prescription Drug Discount Card,

Without a mechanism of enforcement, opponents argue that drug manufacturers will have no incentive to participate in a discount drug program that is adversarial to their profits. Opponents analogize Proposition 78 to the failed California Golden Bear Pharmacy Assistance Program in 2001 blaming its failed implementation on lack of voluntary participation by drug manufacturers. Id.

Opponents argue that Cal Rx ignores many uninsured and under insured Californians by extending the program only to those not exceeding 300 percent of the FPL. Many of California’s working poor earning more than the program’s threshold ($29,000 for individuals and $58,000 for a family of four) cannot afford prescription drugs needed for chronic illness such as asthma, diabetes and cancer. Cal Rx would reach only four to five million Californians, leaving millions more without coverage. Id. Additionally, the implementation of Medicare’s Part D prescription drug coverage will greatly reduce the number of Californians 65 years of age and older without drug coverage further decreasing the number of participants. Ohio’s Best Status Report, (accessed August 21, 2005).

The discounts sought under Cal Rx are based on the lowest commercial price set by the drug manufacturers, which is subject to change at any time. Opponents argue that government discounts such as those used by Medi-Cal are lower than the commercial price and cannot be changed without notice and approval of a governmental entity. Id. Although proponents for Proposition 78 believe the programs will qualify for SPAP designation, until that designation is secured manufacturers will not offer the deep discounts procured by federal programs.

Opponents see that without accountability and enforcement the Cal Rx will fail.


The prices of prescription drugs are soaring and all Californians are feeling the impact. The uninsured and working poor are most vulnerable as the ability to sustain health with the use of prescription drugs becomes further out of reach for many. Many options have been explored, the solution is difficult and requires a commitment by all players: drug industry, healthcare industry, government, private business and labor unions. Proposition 78 attempts to take the path of least resistance to address an immediate need to offer discount prescriptions to a segment of Californians who otherwise are without.