McGeorge School of Law

Proposition 79

Proposition 79: Prescription Drug Discounts. State-Negotiated Rebates.

By Jennifer Lucchesi
JD, McGeorge School of Law, University of the Pacific
to be conferred December, 2005
BS, Agricultural Business, California Polytechnic State University San Luis Obispo, 1999

Copyright © 2005 by University of the McGeorge School of Law


Table of Contents

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


I. Executive Summary

There is little question that the rising costs of prescription drugs are having negative impacts on the health of the United States. Americans spent a minimum of $200 more per capita for prescription drugs than any other country in 2001. Donald L. Barlett & James B. Steele, Why We Pay So Much for Drugs, Time, Feb. 2, 2004, at 45-46. In order to address this important issue, Proposition 79 will be presented to California voters on the November Special Election ballot. Additionally, Proposition 78 will also be presented to California voters this November as a competing measure to Proposition 79.

While both Propositions 78 and Proposition 79 have the objective to reduce prices for prescription drugs, Proposition 78 and Proposition 79 offer differing visions on how best to reduce drug prices for low-income and middle-income Californians who are struggling to afford needed prescriptions. The debate on whether Californians should embrace a voluntary or enforced plan is anticipated to be one of the most costly political battles in California history. The Pharmaceutical Research and Manufacturers Association (PhRMA), the industry’s trade association backing Proposition 78, has collected more than $78 million for its pro-78/anti-79 California Initiative Fund. Peter Hecht, Field Poll: Voters Split on Dueling Drug Measures.

Proposition 79 would establish a new drug discount program, Cal Rx Plus, for California residents whose family income is at or below 400 percent of the Federal Poverty Level. Legislative Analyst’s Office, Proposition 79, Prescription Drug Discounts, State-Negotiated Rebates, Initiative Statute. The measure also requires California to negotiate drug rebate agreements with drug manufacturers in order to reduce prescription drug prices for those eligible. Id. Should drug manufacturers choose not to provide discounts the state is authorized to decline to enter into a new Medi-Cal contract or to decline to extend an existing Medi-Cal contract with the drug manufacturer. Id. The state could also subject the manufacturer’s drugs to prior authorization in the Medi-Cal Program. Id. Proposition 79 allows the state to seek additional discounts from pharmacies, requires the state to conduct outreach to raise public awareness, requires participants to pay an annual fee of $10, and creates a Prescription Drug Advisory Board to review prescription drug pricing and access issues. Id. Finally, Proposition 79 makes profiteering in prescription drugs illegal and establishes a civil penalty of at least $100,000 for violating this provision. Id.

II. The Law
A. Existing Law

There are two main federal medical programs to assist Americans with their health care needs. Both Medicare and Medicaid were created as part of the Social Security Act. Missouri Families, Health. Medicare is a federally funded and administered program that provides health insurance for older Americans and those who are disabled. Id. Individuals contribute to Medicare during their working years, similar to contributing to Social Security. Id. Medicare does not cover all health care services, nor does it pay the entire cost of all the services that it does cover. Id. Alternatively, the Medicaid program is financed and run jointly by federal and state governments. Id. The program provides health care for individuals of all ages who have no other means to pay for it. Id. States set the eligibility requirements and benefits, which are generally based on low-income status and medical necessity. Id. Benefits generally include health screenings and services for children, hospital services, care in nursing homes or hospices, and some prescription drugs. Id.

More specifically, the Medicaid program authorizes federal financial assistance to states that choose to reimburse certain costs of medical treatment for needy persons. In order to participate in the Medicaid program, a state must have a plan for medical assistance approved by the Secretary of Health and Human Services. 42 U.S.C. § 1396a(b). A state plan defines the categories of individuals eligible for benefits and the specific kinds of medical services that are covered. 42 U.S.C. § 1396a(a)(10, 17). The plan must provide coverage for the “categorically needy” and, at the state’s option, may also cover the “medically needy.” Id. The Medicaid program “gives the states substantial discretion to choose the proper mix of amount, scope and duration limitations on coverage, as long as care and services are provided in the ‘best interest of the recipients.’” Alexander v. Choate, 469 U.S. 287, 303 (1985) [quoting 42 U.S.C § 1396a(a)(19)]. As part of the Medicaid program, drug makers are required to provide rebates on their drugs to state Medicaid programs so that the net price paid would be lower than that paid by most private purchasers. Legislative Analyst’s Office, Proposition 79, Prescription Drug Discounts, State-Negotiated Rebates, Initiative Statute. In addition, the state negotiates for additional rebates from drug makers in exchange for giving the drugs made by those companies preferred status in the state Medicaid program. Id. Preferred status means that doctors may prescribe a particular drug without receiving advance approval from the state. Id.

Medi-Cal is California’s medical assistance Medicaid program. California’s Medi-Cal Program, administered by the Department of Health Services, provides prescription drugs for low-income children and adults. Id. The Department of Health Services has the statutory responsibility to formulate policy that conforms to Federal and State requirements. California Department of Health Services. The objective of the Medi-Cal Program is to provide essential medical care and services to preserve health, alleviate sickness, and mitigate handicapping conditions for individuals for families on public assistance, or whose income is not sufficient to meet their individual needs. Id. The covered services are generally recognized as standard medical services required in the treatment or prevention of disease, disability, infirmity or impairment. Id. Pharmaceutical costs account for approximately $4.6 billion of the State’s $35 billion Medi-Cal system. Kate Folmer, Contra Costa Times, More Drug Makers Face Charges, <www.contracostatimes.com/mld/cctimes/news/local/crime_courts/12482430.htm> (accessed Sep. 13, 2005). However, the pharmaceutical cost is closer to $2.8 billion after manufacturer discounts are deducted. Id. In addition, the state’s Healthy Families Program, administered by Managed Risk Medical Insurance Board, provides prescription drugs for children in low-income and moderate-income families who do not qualify for Medi-Cal. Legislative Analyst’s Office, Proposition 79, Prescription Drug Discounts, State-Negotiated Rebates, Initiative Statute, <http://www.lao.ca.gov/ballot/2005/79_11_2005.htm> (accessed Sept. 6, 2005).

Various other programs funded through state and federal funds also help pay for part or all of the cost of prescription drugs for eligible individuals. Id. This includes a new program, beginning January 2006, where the federal government will provide prescription drug coverage to persons also enrolled in Medicare. Id. Additionally, numerous states, including California, private associations and drug makers have established drug discount programs aimed at helping those individuals who are not eligible for those programs already discussed. Id. For example, current California law requires retail pharmacies to sell prescription drugs at a discount to persons enrolled in Medicare as a condition of a pharmacy’s participation in the Medi-Cal Program. Id.

B. The Effects of Proposition 79

The Cheaper Prescription Drugs for California Act, sponsored by health, senior and consumer advocacy groups, proposes to establish a program, which would administer prescription drug discounts for low-income to moderate-income Californians by negotiating rebates from drug manufacturers. Id. Under Proposition 79, California residents in families with an income at or below 400 percent of the federal poverty level would be eligible. Id. This amounts to approximately $38,000 annually for an individual and $77,000 for a family of four. Id. Also eligible are person in families with medical expenses at or above 5 percent of their family’s income. Id. Those eligible consumers could apply for and obtain a discount card, which would qualify them for discounts on their drug purchases. Id. Those individuals who are excluded include persons with outpatient prescription drug coverage through Medi-Cal or Healthy Families, with the exception of Medicare beneficiaries. Id.

The State of California would negotiate with drug makers to obtain discounts on prescription drugs. Id. If a pharmaceutical company refuses to provide significant discounts, the State would be permitted to prevent the usage of that company’s drugs in Medi-Cal, and buy more from other drug manufacturers that do offer discounts. Id. This is accomplished by linking the new drug discount program to the Medi-Cal Program for the purpose of obtaining rebates on drugs. Id. Doctors wanting to prescribe a restricted drug to a Medi-Cal beneficiary would have to receive prior authorization. Id.

Proposition 79 also authorizes the Department of Health Services to establish a drug discount program to assist certain businesses and labor entities that purchase health coverage for employees, creates a Prescription Drug Advisory Board, a new nine-member panel to review the access to and pricing of drugs, and charges $10 per year for application renewal fees. Id.

Finally, Proposition 79 changes state law to make it a civil violation for a drug maker to engage in profiteering from the sale of drugs and establishes a civil penalty of at least $100,000 for drug manufacturers that violate this provision. Id. This provision appears to have significance in light of the state Attorney General filing suit against the pharmaceutical industry charging them with defrauding California by artificially inflating prescription drug prices paid under the Medi-Cal Program. Kate Folmer, Contra Costa Times, More Drug Makers Face Charges <www.contracostatimes.com/mld/cctimes/news/local/crime_courts/12482430.htm> (accessed Sep. 13, 2005).

Proposition 79 is modeled on a similar program implemented by the state of Maine. In 2000, Maine lawmakers approved a provision that allowed the state to limit drug companies’ sales to Maine Medicaid patients if they did not participate in the drug discount program. Pharm. Research and Manufacturers of Am. v. Walsh, 538 U.S. 644, 644 (2003) [“Walsh”]. The PhRMA challenged the program in court. Id. A 2003 ruling by the United States Supreme Court, as discussed below, allowed the Maine program to continue but the legality of using Medicaid as leverage was not clearly ruled on by the Court. Id. The Maine Rx Program has been allowed to stand, although the enforcement provision has not been used and Maine has continued with essentially a voluntary plan. Jeff Stryker, HealthVote2005: Proposition 78 and Proposition 79.

The Legislative Analyst Office estimates that Proposition 79 would result in one-time and ongoing state costs. Legislative Analyst’s Office, Proposition 79, Prescription Drug Discounts, State-Negotiated Rebates, Initiative Statute, <http://www.lao.ca.gov/ballot/2005/79_11_2005.htm> (accessed Sept. 6, 2005). These costs could potentially reach the low tens of millions of dollars annually for the establishment of an oversight board, its link to the Medi-Cal Program and the administration and outreach for the new drug discount program. Id. On the other hand, these costs could be partly offset by up to a five percent share of the rebates collected from drug makers, any private donations received for the support of outreach efforts and a portion of the enrollment fees collected for the program. Id. Additionally, there could also be significant cost savings for the state health programs due to the availability of prescription drug discounts and savings from linking drug discount programs to Medi-Cal. Id. The measure also requires the state to reimburse pharmacies for part of the amount that they discounted their drugs. Id. Such a provision could create a recurring gap in funding between when rebate money is collect by the state and when the state has to pay pharmacies. Id. However, the measure also permits the state to enter into agreements with drug makers to collect rebate funds in advance. Id. Any costs that exceed these advance rebate payments would be borne by California’s General Fund. Id. The bottom line is exemplified by the Legislative Analyst’s Office analysis, which states that it appears likely that a significant share of the cost of this program would be borne by California’s General Fund. Id.

C. Comparison with Proposition 78

The California State Pharmacy Assistance Program, Proposition 78, is a measure promoted by the prescription drug industry. While Proposition 79 would punish manufacturers failing to offer significant rebates, Proposition 78 would rely on the voluntary cooperation of drug manufacturers in negotiating volume discounts. Id.

General eligibility requirements under the competing measure, Proposition 78, include California residents in families with an income at or below 300 percent of the federal poverty level. Id. This is about $29,000 annually for an individual and $58,000 for a family of four. Id. Those individuals who are excluded include persons with outpatient prescription drug coverage through Medi-Cal, Healthy Families, a third-party payer, or a health plan or drug discount program supported with state of federal funds, excluding Medicare beneficiaries. Id. Certain persons with drug coverage, during the three-month period prior to the month the person applied for a drug discount card are also excluded from coverage under Proposition 78. Id. The State negotiates with drug makers with the objective that drug manufacturers voluntarily offer discounts. In addition, application renewal fees are $15 per year. Id.

As stated previously, the key difference between Proposition 78 and Proposition 79 is the approach each initiative takes in persuading pharmaceutical companies to participate in the discount program. Proposition 78 relies on drug companies voluntary participation in the program, providing no incentives to participate. Id. A similar program currently operates in the state of Ohio. Id. Another key difference is that more Californians would be eligible for the discount program under Proposition 79. Id. Under Proposition 78, those eligible for the discount program include individuals who make up to three times the Federal Poverty Level, while under Proposition 79, those eligible for the discount program include individuals who make up to four times the Federal Poverty Level. Id.

III. Drafting Issues
A. Ambiguity

Section 1.5 of Proposition 79 proposes to add Division 112.5 to the Health and Safety Code, which states that it is a civil violation if a prescription drug manufacturer, distributor or labeler engages in illegal prescription drug profiteering. The added section attempts to define what it means to engage in illegal profiteering. To do so the drafters used words such as “unconscionable price” and “unjust or unreasonable profit.” California Official Voter Information Guide, Text of Proposed Laws, Proposition 79 , § 1.5, 130600(a-d). Such words are not defined in any other portion of the Proposition, nor are they defined in any portion of the Health and Safety Code. Therefore, on the face of the initiative the words are not defined and ambiguity is created. A court would resolve an ambiguity by looking to standard canons of statutory construction, first examining the plain language of the statute, then looking to the common meaning of the terms used, then inspecting any outside evidence of the intended meaning of the provision.

B. Severability

Proposition 79 contains a severability clause. The severability clause states that: “If any provision of this act or the application thereof to any person or circumstance is held invalid, that invalidity shall not affect other provisions or applications of the act that can be given effect in the absence of the invalid provision or application.” California Official Voter Information Guide , Text of Proposed Laws, Proposition 79 , § 2(c). This type of clause is a common provision in many initiatives, used to prevent the invalidation of the entire proposition if one portion is determined to be invalid or unconstitutional. Gerken v. FPPC, 6 Cal.4th 707, 714 (1993) [“Gerken”].

Regardless of existence of the severability clause, Proposition 79 may be subjected to a three-part test established in Gerken. Id. at 715. 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 714. A provision is grammatically and functionally separable if the words of the provision are distinct, and the provision to be severed is capable of independent action. People’s Advoc., Inc. v. Super. Ct., 181 Cal. App. 3d 316, 331 (3rd Dist. 1986). Proposition 79 appears to have seven distinct sections, dealing with prescription drug discounts, the Cal RX Plus program application, enrollment, and outreach, pharmaceutical manufacturer patient assistance programs, employer-paid health insurance prescription drug discounts, administration, enforcement, and illegal profiteering. Each could be severed grammatically without affecting the understanding of the other provisions and functionally without impeding the functions of the other provisions, but Proposition 79 appears unable to be severed volitionally. A provision is volitionally separable if severing the provision would not change the initiative so dramatically that it would no longer be likely that the electorate would have passed the initiative lacking the severed provision. Gerken, 6 Cal.4th at 715-716. The California Supreme Court articulate the volitional test as whether or not “the framers and voters undoubtedly would have adopted the remaining provisions had they foreseen the success of the petitioners’ challenge.” Legis. v. Eu, 54 Cal. 3d 492, 535 (1991) [“Eu”]. The severability clause of Proposition 79 is strong evidence that if any part of the initiative were held invalid the framers would want the remaining provisions to be adopted. Determining the intent of the voters is a more challenging task. Based on television advertisements and written materials, it appears that Californians are being asked to vote for a mechanism, which would help lower prescription drug prices. Therefore, if Section 1.5 or Section 2 of Proposition 79 were to be held invalid, it is likely that Section 1 could be volitionally separable. However, if Section 1 was to be determined invalid, it does not appear that the other two sections, Section 1.5 and Section 2, would be volitionally severable.

C. Competing Measures

Article II, Section 10(b) of the California Constitution states, “If provisions of 2 or more measures approved at the same election conflict, those of the measure receiving the highest affirmative vote shall prevail.” Cal. Const. art. II, § 10. Basically, the California Constitution provides that if a particular provision of a proposition that has been approved by the voters is in conflict with a particular provision of another proposition approved by the voters, only the provision in the measure with the high number of yes votes would take effect. This calls for a determination of whether or not Proposition 79 and Proposition 78 are competing measures. If determined to be supplementary or complimentary measures rather than competing then the provision of the proposition receiving fewer votes that do not conflict with the proposition receiving a greater number of votes would be merged with the proposition receiving a greater number of votes. Gerken, 6 Cal.4th at 720. In Gerken, the California Supreme Court stated that a determination as to whether ballot measures addressing the same subject matter are complimentary, supplementary, or competing depends on how the propositions are presented to the public. Id.

Proposition 78 and Proposition 79 appear to be competing initiatives. First, Proposition 78 explicitly specifies that its provisions would go into effect in their entirety, and that none of the provisions of a competing measure, such as Proposition 79 would take effect, if Proposition 78 received the higher number of yes votes. Legislative Analyst’s Office, Proposition 79, Prescription Drug Discounts, State-Negotiated Rebates, Initiative Statute <http://www.lao.ca.gov/ballot/2005/79_11_2005.htm> (accessed Sept. 6, 2005). In addition, official supporters of Proposition 79 urge voters to vote no on Proposition 78 and official supports of Proposition 78 urge voters to vote no on Proposition 79. It appears that the two propositions are being presented to the public as necessitating that voters choose one or the other. Therefore, appearing as competing measures, if Proposition 78 were to receive more votes than Proposition 79, it would likely completely supercede Proposition 79 even if both receive enough votes to be adopted.

IV. Constitutional Issues
A. Federal Constitution

Proposition 79 may raise federal constitutionality issues. Specifically of concern is whether Proposition 79 violates the Commerce Clause and the Supremacy Clause. The leading case regarding both the Commerce Clause and Supremacy Clause issues revolves around the Maine Rx Program, which Proposition 79 was modeled after.

In 2000, the Maine Legislature enacted a statute that established a program to reduce prescription drug prices for Maine residents. Walsh, 538 U.S. at 644. Similar to Proposition 79, under the Maine Rx Program, the state would attempt to negotiate rebates with drug manufacturers to fund reduced prices for drugs offered to program participants. Id. If a manufacturer refused to enter into such a rebate agreement, then the state would generally subject the manufacturer’s Medicaid sales to a “prior authorization” procedure that required state approval to qualify a prescription for reimbursement. Id. The Pharmaceutical Research and Manufacturers of America (PhRMA) sued to prevent Maine from implementing its Maine Rx Program. PhRMA contended that the program imposed a significant burden on Medicaid recipients by requiring recipients to go through the inconvenience and cost of prior authorization without providing any valid Medicaid purpose, and that the statute regulated out of state commerce. Id. at 650. The Supreme Court, in a plurality decision, affirmed the First Circuit’s rejection of the motion for preliminary injunction, seemingly clearing the way for the state of Maine to implement the Maine Rx Program. Id. at 670.

1. Commerce Clause

Under Section 1, Chapter 2, Section 130512(b), Proposition 79 states, “To the extent permitted by federal law, the department may require prior authorization in the Medi-Cal program for any drug of a manufacturer that fails to agree to a price comparable to or lower than the Medi-Cal best price for prescription drugs purchased under this division.” Similar to the Maine Rx Program, this section may be challenged as a violation of the Commerce Clause. U.S. Const. Art. I, Section 8.

In determining whether Proposition 79 may violate the Commerce Clause, it is helpful to look to the Supreme Court’s decision on the constitutionality of the Maine Rx Program. On certiorari, in a plurality decision, the Supreme Court affirmed the United States Court of Appeals for the First Circuit decision, finding that the Maine statutes did not violate the Commerce Clause. Walsh, 538 U.S. at 670. The Court began with the provision of the Medicaid Act, which generally allowed states to subject to prior authorization any covered outpatient drug. 42 U.S.C. § 1396r-8(d)(1)(A). The Court held that as to the effects of the rebate agreements that would follow manufacturers compliance with the statutory program, the alleged harm to interstate commerce would be the same regardless of whether compliance was completely voluntary or the product of coercion. Walsh, 538 U.S. at 669. Further, the program did not regulate the price of any out of state transaction, since the state did not insist that manufacturers sell their drugs to a wholesaler for a certain price or tie the price of its in-state products to out-of-state prices. Id. Finally, the program did not impose a disparate burden on any competitors, since a manufacturer could not avoid its rebate obligation by opening production facilities in the state and would receive no benefit from the rebates even if it did so and the payments to local pharmacists under the program would provide no special benefit to competitors of rebate-paying manufacturers. Id. at 670. Due to its similarity to the Maine Rx Program, Proposition 79 is unlikely to be in violation of the Commerce Clause as it does not attempt to regulate out-of-state transactions, impose price controls, or create unequal burdens for out-of-state drug manufacturers. Id. at 669-670.

2. Supremacy Clause

The question is whether the prior authorization review requirement of Proposition 79 conflicts with the purposes of the Medicaid program such that the requirement is invalid under the Supremacy Clause. Under the Supremacy Clause, a federal law may expressly or impliedly preempt state law. U.S. Const. art. VI, cl.2. The test then becomes whether compliance with both state and federal regulations is impossible or if state law interposes an obstacle to the achievement of Congress’s discernable objectives. Grant’s Dairy-Me, LLC v. Comm’r of Me. Dept. of Agric., 232 F.3d 8, 15 (1st Cir. 2000).

In Walsh, PhRMA contended that the program imposed a significant burden on Medicaid recipients by requiring recipients to go through the inconvenience and cost of prior authorization without providing any valid Medicaid purpose, thus violating the Supremacy Clause. Walsh, 538 U.S. at 650. The district court upheld these contentions and issued a preliminary injunction against Maine, holding that the state statute conflicted with the purpose of the federal Medicaid program. Luke Cleland, Comment: Modern Bootlegging and the Prohibition on Fair Prices: Last Call for the “Repeal” of Pharmaceutical Price Gouging,” 15 Alb. L.J. Sci. & Tech. 183, 194 (2004). However, the First Circuit perceived no conflict between the Maine Act and Medicaid’s structure and purpose, holding that the Maine Act does not conflict with Medicaid’s requirement that state Medicaid plans assure that care will be provided in a manner consistent with the recipients’ best interest, Pharm. Research and Manufacturers of Am. v. Concannon, 249 F.3d 66, 78 (1st Cir. 2001).

The United States Supreme Court affirmed the First Circuit Court of Appeals in a plurality decision. Walsh, 538 U.S. at 668. In its opinion, the Court limited its analysis to the lifting of the injunction and declined to resolve any factual disputes. Id. at 660. The Court held that Maine’s interest in promoting the health of its uninsured citizens was a valid justification for implementing its prior authorization requirement. Id. at 663. Further, the Court found that, absent evidence to the contrary, Maine’s prior authorization measures did not negatively affect the Medicaid patients’ medical needs. Id. at 667-68. Moreover, the Court found that any impact on the profit margins of the pharmaceutical manufacturers was merely incidental to the cost savings enjoyed by the state in serving the medical needs of its uninsured population. Id. at 668. Thus, federal law did not preempt the Maine statute. Id. Additionally, the Court also noted that the Maine Rx Program may still be invalidated by the Secretary of Health and Human Services should that Secretary decide that the program is in fact an amendment to the State of Maine’s Medicaid scheme and thus be subject to the Secretary’s review. Id. at 660-61.

Proposition 79 contains the same provisions as the Maine Rx Program which were challenged by the PhRMA as violating the Supremacy Clause. Therefore, Proposition 79 would be subject to the same constitutional arguments as described above. While it appears that Proposition 79 may not violate the Supremacy Clause, it continues to be unclear whether a plan requiring prior authorization for those drugs made by manufacturers who do not negotiate with the state of California requires approval from the federal government.

B. State Constitution

1. Single Subject Rule

The single subject rule applies to all initiatives. The California Constitution states that “an initiative measure embracing more than one subject may not be submitted to the electors or have any effect.” Cal. Const. art. II, § 8. This rule is meant to “protect against multifaceted measures of undue scope.” Senate v. Jones, 21 Cal.4th 1142, 1158 (1999) (referring to Brosnahan v. Brown , 32 Cal.3d 236, 253.) [“Jones”] . The California Supreme Court has interpreted this section of the state Constitution broadly, holding that the provisions of an initiative reasonably related to a common theme or purpose does not violate the single subject rule. Eu at 512. The test is whether all of the parts of the initiative are “reasonably germane to each other,” and to the Act’s general purpose. Jones, 21 Cal.4th at 1157. Section 1.5 of Proposition 79 seeks to make prescription drug profiteering unlawful. It is arguable as to whether this civil penalty for unlawful profiteering is reasonably germane to development a prescription drug cost containment program associated with Medi-Cal. However, Section 1.5 may be reasonably germane to Proposition 79’s general purpose of providing cheaper prescription drugs to low-income Californians in that there is a real financial risk for pharmaceutical manufacturers in increasing profits. Therefore, it is unlikely that there is a single subject rule issue with Proposition 79.

2. Article II, Section 12

A segment of Proposition 79 may also violate the California Constitution, which says no initiative can be submitted to voters if it “names or identifies any private corporation to perform any function or have a power or duty.” Cal. Const. art. II, § 12. The purpose of this section is aimed “at preventing the initiative from being used to confer a special privilege or benefit.” Merrill Jacobs v. Secretary of State, et al., No. 05AS01682, Pl.’s Compl. at ¶ 19 ( Cal. Sup. Ct. Sacramento, June 14, 2004). Section 150544 of Proposition 79 states that, the state “shall work with the California Chamber of Commerce and the California Labor Federation AFL-CIO” to set up a prescription drug purchasing program for small employers. The PhRMA filed a complaint, requesting a preliminary injunction, in California Superior Court in April 2005 challenging the constitutionality of Proposition 79. Merrill Jacobs, Pl’s Compl. at ¶ 1; Jordan Rau, Drug Industry Sues to Block Ballot Initiative, Los Angeles Times, B-6, May 13, 2005.

In Merrill Jacobs, the plaintiffs argued that requiring the California Department of Health Services to work with the California Chamber of Commerce and California Labor Federation AFL-CIO, and other organizations to “develop and implement” the proposed legislation, the ballot measure directly and unlawfully violates article II, section 12 of the California Constitution. Pl.’s Compl. at ¶ 20. Defendants replied, arguing that Proposition 79 does not confer a power or duty on the named organizations or asks them to perform any function, but rather the California Chamber of Commerce and the California Labor Federation would act merely as a consultant, without any power or duty. Merrill Jacobs, Def.’s Resp. at pg. 8.

Moreover, in the event that the section is determined to be invalid due to a violation of the California Constitution, that section is severable and therefore, Proposition 79 could still be placed on the ballot sans the subject provision. Id.

The presiding judge, Judge Cecil, found that the plaintiff had not shown a probability of success on the merits, as the initiative was not invalid on its face. Merrill Jacobs, Tentative Ruling, Item 12. Judge Cecil further found that the provision in issue could be severed. Id. Under these circumstances, Judge Cecil determined that the balance of the hardships weighed in favor of the defendants, thus denying the motion for a preliminary injunction to prevent Proposition 79 from being placed on the ballot. Id.

It is unclear at this time whether the plaintiffs will pursue this claim after the November Special Election. However, in the event that Proposition 79 is passed by California voters, it is possible that this constitutional issue may be raised again. In that event, it is likely plaintiffs and the defendants will raise the same arguments, respectively, as described above.

V. Public Policy
A. Proponents

Proponents of Proposition 79, including health, senior and consumer advocacy groups, advocate that as prescription drug prices soar, more and more Californians are forced to choose between vital medicines and other necessities. California Secretary of State, California Official Voter Information Guide, Argument in Favor, Rebuttal to Argument in Favor, Proposition 79, Prescription Drug Discounts, State-Negotiated Rebates, Initiative Statute, http://www.ss.ca.gov/elections/bp_nov05/voter_info_pdf/favor79.pdf (accessed Oct. 3, 2005). Proponents argue that Proposition 79 provides enforceable, not voluntary, discounts by drug companies by shifting business away from the drug company that refuses to provide discounts. Id.

Proponents also argue that California can use its purchasing power to obtain the best price. Id. Proponents advocate that while the federal government does something similar through Medi-Cal, negotiating discounts of 50 percent and more, Proposition 79 will build on this success using the same mechanism to negotiate these discounts for eligible Californians. Id.

Proposition 79 will allow discounts to be offered to 8-10 million Californians, twice as many Californians as currently are eligible for discounted prescriptions. Id. These Californians include those who spend at least five percent of their income on medical expenses, the uninsured who earn up to 400 percent of the Federal Poverty Level, those on Medicare for drug costs not fully covered by Medicare and seniors, the chronically ill and others with inadequate drug coverage through private insurers or their employer. Id.

Finally, proponents advocate that Proposition 79 would save patients, taxpayers and employers. Proponents explain that by making affordable drugs more accessible to more people, fewer people would fall onto Medi-Cal or other public programs, and need to use taxpayer-funded emergency rooms. Id. Proposition 79 can also reduce employer’s health premiums by authorizing a new purchasing pool to reduce drug prices for employer-paid coverage. Id.

On the subject of Proposition 78, Anthony Wright, executive director of Health Access, the coalition of consumer and union groups states, “The huge amount of money the drug companies are spending will be a good investment for them if it preserves their ability to continue to price gouge American consumers.” Jeff Stryker, HealthVote2005: Proposition 78 and Proposition 7. Wright further states, “The prescription drug companies have, by offering their own initiative on discounts, admitted that their drug prices are far too high.” Id.

B. Opponents

Opponents of Proposition 79, which include the major companies of pharmaceutical industry, are generally proponents of Proposition 78. Opponents believe that Proposition 79 is the wrong prescription for California for a number of reasons. Opponents argue that Proposition 79 is so poorly written it will result in years of legal challenges. California Secretary of State, California Official Voter Information Guide, Argument in Favor, Rebuttal to Argument in Favor, Proposition 79, Prescription Drug Discounts, State-Negotiated Rebates, Initiative Statute, http://www.ss.ca.gov/elections/bp_nov05/voter_info_pdf/favor79.pdf (accessed Oct. 3, 2005). Furthermore, opponents claim that Proposition 79 will never get approval by the Secretary of Health and Human Services. Id. Such approval is required when there is a proposal for change or amendment of the state’s Medicaid scheme. Luke Cleland, Comment: Modern Bootlegging and the Prohibition on Fair Prices: Last Call for the “Repeal” of Pharmaceutical Price Gouging,” 15 Alb. L.J. Sci. & Tech. 183, 195 (2004).

Critics cite to a failed program in Maine, which Proposition 79 is based on. Critics argue that after more than three years of litigation and failing to secure necessary approval from the federal government, during which the program never delivered a single drug discount, Maine changed its program to one that currently does not leverage Medicaid patients and does not require federal approval. Calrxnow, Frequently Asked Questions About Prop 79. Additionally, Proposition 79 threatens the access of Medi-Cal patients to drugs made by companies that do not participate in the discount program, meaning that some Medi-Cal patients could lose access to drugs so that people who make more than $77,000 a year for a family of four can get discounts. Id. Opponents argue that the federal government has consistently refused to approve drug discount programs that threaten the health of low-income people in an effort to garner discounts for higher-income individuals. Id. For example, the federal government has never approved a drug discount program tied to Medicaid with an income requirement of more than 200 percent of the Federal Poverty Level. The eligibility threshold for Proposition 79 is 400 percent the Federal Poverty Level. Id.

Proposition 79 would also allow trial lawyers to file thousands of lawsuits claiming that prices are too high or profits are unreasonable. California Secretary of State, California Official Voter Information Guide, Argument in Favor, Rebuttal to Argument in Favor, Proposition 79, Prescription Drug Discounts, State-Negotiated Rebates, Initiative Statute, http://www.ss.ca.gov/elections/bp_nov05/voter_info_pdf/favor79.pdf (accessed Oct. 3, 2005). Critics cite to Proposition 64, aimed at preventing shakedown lawsuits, passed by Californians last November, stating that Proposition 79 would re-open the door to shakedowns, flood the court system with frivolous litigation, and drive up the cost of prescription drugs. Id.

Opponents advocate that Proposition 79 will set up a big government program costing California millions. Calrxnow, Why You Should Vote No on Prop 79. The State would be required to establish and administer discount drug purchasing programs for up to 1.1 million small businesses and an unknown number of labor unions, fund a nine-member Prescription Drug Advisory Board, and, investigate allegations that drug providers are earning “unjust or unreasonable” profits. Id. Additionally, costs would increase for the state court system to process the frivolous lawsuits lawyers will be allowed to file under Proposition 79. Id. In addition, opponents state that if Proposition 79 is passed, the state could not contract with a manufacturer that does not provide discounts, jeopardizing $481 million in rebates now paid to the state by drug companies. Calrxnow, Prop 78 vs. Prop 79 A Side by Side Comparison.

VI. Conclusion

If California voters adopt Proposition 79 in the upcoming November Special Election, it has the opportunity to significantly facilitate more Californians receiving less expensive prescription drug prices. This is not only because of its more generous eligibility limits, but because it exploits California’s purchasing clout to force drug manufacturers into providing significant prescription drug discounts. Proponents believe that prescription drug manufacturers are gouging Californians and the pharmaceutical industry is one of the world’s most profitable. Alliance for a Better California. As such, proponents believe that the Cheaper Prescription Drugs Act will allow the state to negotiate for the lowest drug prices for millions of Californians while saving taxpayers hundreds of millions of dollar annually, making Proposition 79 the real answer to skyrocketing prescription drugs. Id. Alternatively, opponents believe that Proposition 79 will actually reduce access to necessary prescription drugs made by companies that do not participate in the discount program while costing the state millions of dollars in administering such a program and defending frivolous lawsuits. Calrxnow, Why You Should Vote No on Prop 79. Furthermore, Proposition 79 raises significant federal and state constitutional issues. Therefore, it is possible that should California voters pass Proposition 79, the initiative may eventually be held invalid.

There is no question that Proposition 79 and its competing measure, Proposition 78, can both help eligible Californians afford necessary prescription drugs. By the conclusion of the November Special Election, it will be determined which approach California voters favor in persuading pharmaceutical companies to participate in a discount program.