The Ohio Drug Price Relief Act:

Making Prescription Drugs More AffordableBy Maxwell J. Mehlman, J.D.

Distinguished University Professor,Arthur E. Petersilge Professor of Law and Director, The Law-Medicine Center,Case Western Reserve University School of Law

1

THE OHIO DRUG PRICE RELIEF ACT:

MAKING PRESCRIPTION DRUGS MORE AFFORDABLE

By

Maxwell J. Mehlman, JD1

EXECUTIVE SUMMARY:

On November 7, 2017, Ohio voters will have the opportunity to take a dramatic step to lower the price of

prescription drugs purchased by nearly two-dozen state health programs. These programs, which include Medicaid, the

Ohio Public Employee Retirement System, and the Ohio Bureau of Workers’ Compensation, now spend more than $3

billion annually to buy drugs for 4 million Ohioans.

A ballot initiative entitled the Ohio Drug Price Relief Act instructs these programs to pay no more for the drugs

they buy than what the U.S. Department of Veterans Affairs pays for the same drugs. Generally speaking, the drug

companies are required to provide the VA with 24 percent discounts. The objective of the Act – called Issue 2 on the

ballot - is to secure the same discounts for Ohio’s programs that the VA now receives.

• An expert analysis estimates the savings from the Act to be as much as $536 million a year.

• Drug prices in the U.S. are unconscionably high. The U.S. spends twice as much per capita on prescription drugs

than the average spent by nineteen other industrialized countries. Forty-three percent of persons in poor or fair

health and thirty-eight percent of those taking four or more drugs a year report problems paying for their

medications.

• The reason for high drug costs is not the costs of researching and developing new drugs or the cost of securing

regulatory approvals as the pharmaceutical industry often asserts, but the enormous profits it reaps. In 2016, drug

companies were the most profitable businesses in the country, earning average profits of between 25.5 and 30

percent. Only public action such as this ballot initiative can hope to bring drug prices under control.

• Elected officials in Washington, D.C. and in the Ohio General Assembly have been unable to enact meaningful

reforms to control drug prices. Pricing reform proposals are introduced and die in committees. The drug industry’s

1 Distinguished University Professor, Arthur E. Petersilge Professor of Law and Director, The Law-Medicine Center, Case Western

Reserve University School of Law, Professor of Bioethics, Case Western Reserve University School of Medicine. The author holds a

JD from Yale and BA’s from Reed College and from Oxford University, which he attended on a Rhodes Scholarship. Prior to joining

the faculty at CWRU, he practiced law in Washington DC, where he represented pharmaceutical manufacturers. Research for this

report was funded with $9,000 from Ohio Taxpayers for Lower Drug Prices.

2

campaign contributions and the army of lobbyists it hires have paralyzed our elected officials.2 In just the first 3

months of 2017, health care companies and trade groups spent $90.3 million on lobbying.3 Pharmaceutical and

health products companies employ 1,296 federally registered lobbyists, more than two lobbyists for every member

of Congress, to make sure the system works to their benefit.4

• Nearly 200,000 Ohioans signed petitions in 2016 to put the Act on the ballot despite intensive efforts by the drug

industry to derail the initiative process.

• The Ohio legislature and administrative agencies must take steps to implement the Act. These steps include

identifying the prescription drugs that the VA dispenses and their prices, and then changing how the state

purchases drugs to lower what it pays to what the VA pays. Claims in a report by Vorys commissioned by the drug

industry trade association PhRMA5 that the state either cannot or will not implement the Act underestimate both

the abilities of state government and the resolve of its citizens:

o The state can identify the vast majority of drugs that the VA dispenses to set the net cost required by the

Act.

o The state can determine how much the VA pays for drugs.

o The state can seek prices from sellers that meet the requirements of the Act.

o The state can adjust what it pays to accommodate drugs purchased by state programs that the VA may

not provide, such as drugs for children, and to take into account that the VA has its own dispensaries

while Ohio programs rely on private pharmacies.

• In the Vorys report, the drug industry also makes a clear threat: if the Act is passed, drug companies simply will

raise their prices to the VA to subvert the Act’s purposes.6 Threatening the people of Ohio in this fashion ignores

the fact that PhRMA’s ability to raise prices to the VA is constrained by federal law, which was enacted the last

time the industry tried this stunt in the early 1990s. PhRMA should expect that another attempt at extortion

would trigger a similar legislative response.

2 Sy Mukherjee, “Inside Big Pharma’s Epic Multimillion Dollar PR Campaign to Save Its Reputation,”

Fortune, Jan 24, 2017 (http://fortune.com/2017/01/24/phrma-go-boldly-pr-campaign/). 3 Bob Herman, Drug Companies Flood Congress with Lobbyists, April 21, 2017 (https://www.axios.com/drug-companies-flood-

congress-with-lobbying-2372148600.html). 4 Center for Responsive Politics, OpenSecrets.org, Summary, 2017 (https://www.opensecrets.org/lobby/indusclient.php?id=h04). 5 Vorys Health Care Advisors, Analysis of Proposed Ohio Initiated Statute to Regulate State Prescription Drug Purchasing, Sept. 22,

2016 (hereinafter “Vorys report”). 6 Id. at 29.

3

I. Introduction.

The Ohio Drug Price Relief Act, which the citizens of Ohio will vote on this coming November, is a ballot

measure to curb the unjustifiably high prices that the pharmaceutical industry charges for prescription drugs purchased

by state programs, including Medicaid. The Act would limit what these state programs pay to what the U.S.

Department of Veterans Affairs (VA) pays for the same drugs. This could save the state millions of dollars, and it sends

a message to the drug industry that it cannot continue to gouge the citizens of Ohio and the nation for their medicines.

Prescription drugs are not optional commodities, but necessities to prevent disease, improve health, and save

lives. Yet one in four Americans report they have difficulty paying for the drugs they need. The reason is drug industry

profits, which are higher than for any other business enterprise in the country. As a result, Americans spend twice as

much on prescription drugs as people in other industrialized nations.

Drug companies are understandably worried about this ballot initiative. They spent almost $110 million in

2016 to defeat Proposition 61, a California measure similar to the Act, and they can be expected to spend a comparable

amount to defeat the Act in Ohio. In their filings with the Securities and Exchange Commission, for example, two drug

companies, Amgen and Depomed Pharmaceutical, have warned investors that passage of the measure would hurt

their profits.7 Yet, oddly, the drug industry has argued that the Ohio Act would do “little to nothing” to reduce the

prices the drug companies charge Ohio’s health care programs.8 It defies common sense that the drug industry would

spend tens of millions of dollars to defeat reforms that would have no impact on their bottom-line.

The drug industry claims that the program established by the Act is unworkable, and that it would simply lead

drug companies to increase their prices to the VA. They also contend that it would reduce spending on drug research

and development.

These claims are erroneous.

Contrary to the drug industry, the government of Ohio can identify the vast majority of drugs that the VA

purchases. It also can determine how much the VA pays for these drugs, and compare those prices with what state

programs pay. The state then can limit what it pays as provided for by the Act. Adjustments can be made to

accommodate drugs purchased by state programs that the VA may not provide, such as drugs for children, and to take

into account that the VA has its own dispensaries while Ohio programs rely on private pharmacies.

7 Amgen Inc. Form 10-Q (Quarterly Report), March 31, 2017, at 33 (https://seekingalpha.com/filing/3516483); Depomed Inc. Form

10-Q, March 31, 2-17, at 48 (http://investor.depomedinc.com/phoenix.zhtml?c=97276&p=irol-sec). 8 Vorys report at 37.

4

As for the claim that the drug industry would simply raise prices to the VA to increase the reference price for

what Ohio state programs would pay, the industry tried that once before and failed. In 1990, Congress sought to

control the price of drugs purchased by various government programs by limiting them to the lowest price paid by any

government program, which happened to be what the VA paid. To protect their profits, the drug companies responded

by raising the prices they charged the VA. But that move backfired. Congress called the industry’s price war against the

VA “unpatriotic” and promptly passed the Veterans Health Care Act, the legislation that now requires the drug

companies to give the VA a sizeable discount. It is unlikely that the drug companies will risk antagonizing the powerful

veterans lobby, a public naturally disposed in favor of veterans, and Congress by trying again to hike the prices it

charges the VA.

Finally, as the authors of a recent article in the Journal of the American Medical Association point out, “there

is little evidence of an association between research and development costs and drug prices; rather, prescription drugs

are priced in the United States primarily on the basis of what the market will bear.”9

The drug industry is fond of saying that drug costs should be limited by market forces and competition. As all

other industrialized nations understand, however, the only way to control prices is by implementing measures such as

this Act. Surveys show that an overwhelming percentage of the public wants the government to take action. Ohio

voters should not be dissuaded by misleading industry assertions.

II. Why the Act is Necessary.

1. The Unconscionably High Prices of Prescription Drugs in the U.S. Drug prices and drug company profits

are unconscionable. Retail drugs accounted for 10 percent of national health spending in 2014 and 21 percent of

employer health insurance spending.10 The U.S. spends twice as much per capita on prescription drugs than the

average spent by 19 other industrialized countries.11

Older Americans are hit particularly hard. AARP reports that, although inflation rose only 0.1 percent in 2016,

retail prices for 268 brand name drugs widely used by older Americans rose by 15.1 percent, and when inflation rose 19.4

percent between 2006 and 2015, the prices for 113 drugs to treat chronic conditions rose 188.7 percent.12 AARP also

reported that “the average annual cost for one brand name drug used on a chronic basis now exceeds $5,800. For the

average older American taking 4.5 prescription drugs per month, this translates into an average annual cost of therapy

of $26,000. This amount exceeds the median income of $24,150 for Medicare beneficiaries.”13

9 Aaron S. Kesselheim, Jerry Avorn, and Armeet Sarpatwari, The High Cost of Prescription Drugs in the United States: Origins and

Prospects for Reform, 316 JAMA 858-871 (2016) (“Kesselheim”) at 863. 10 (http://www.healthsystemtracker.org/chart-collection/recent-forecasted-trends-prescription-drug-

spending/?_sf_s=recent+trends#item-drugs-count-for-a-bigger-share) 11 Kesselheim at 859. 12 Leigh Purvis and Stephen Schondelmeyer, “Rx Price Watch Report: Trends in Retail Prices of Brand Name Prescription Drugs

Widely Used by Older Americans: 2006 to 2015” (AARP Public Policy Institute), Dec. 14, 2016 (http://www.aarp.org/ppi/info-

2015/trends-in-retail-prices-of-specialty-drugs.html). 13 Id.

5

Older Americans are not the only population being squeezed by high drug prices. One in four

Americans reports difficulty affording prescription drugs.14 Forty-three percent of persons in poor or fair

health and thirty-eight percent of those taking four or more drugs a year report problems paying for their

medications, and the same percentage stated that they did not fill a prescription, cut pills in half, or skipped

doses because of the cost.15

Drug prices are particularly high for specialty drugs.16 The Kaiser Family Foundation reports that

specialty drugs are among the most expensive for state Medicaid programs, with the top five being Abilify to

treat schizophrenia and bipolar disorder, Sovaldi and Harvoni for Hepatitis C, Vyvanse for ADHD, and Truvada

for HIV.17 The public is well-aware of the controversies surrounding Martin Shkreli of Turing Laboratories, who

raised the price of a single dose of a drug to treat parasitic infections from $13.50 to $750,18 and EpiPens, the

price of which increased 500 percent between 2009 and 2016.19

The reason for high drug costs is not the costs of researching and developing new drugs, or the cost

of securing regulatory approvals, as drug companies often assert. It is the enormous profits reaped by the

pharmaceutical industry. Forbes reports that, in 2016, drug companies were the most profitable businesses in

the country, earning average profits of between 25.5 percent for prescription drugs and 30 percent for

generics.20 The twenty largest drug companies made $125 billion in profits in 2015 (up from $101 billion a year

earlier).21

The drug industry argument that it has to charge high prices in order to conduct research and

development is belied by the fact that much of drug R&D costs are borne by the government. Half of the

twenty-six most important drugs of the last twenty-five years were developed with public funding.22 Drug

14 Kaiser Family Foundation, KFF, Visualizing Health Policy: Recent Trends in Prescription Drug Costs (2016)

(http://www.kff.org/infographic/visualizing-health-policy-recent-trends-in-prescription-drug-costs/) . 15 Drew Altman, “How High Drug Prices Weigh on the Sickest Americans,” Wall St. Journal ThinkTank column, Dec. 28, 2015

(http://www.kff.org/health-costs/perspective/how-high-drug-prices-weigh-on-the-sickest-americans/). 16 America’s Health Insurance Plans, High-Priced Drugs, Estimates of Annual Per-Patient Expenditures for 150 Specialty

Medications (April 2016) (https://www.ahip.org/wp-content/uploads/2016/04/HighPriceDrugsReport.pdf). 17 Kaiser Family Foundation, Analysis Finds Specialty Drugs Rank High Among Medicaid’s Most Costly Outpatient Drugs, Jul 15,

2016 (http://www.kff.org/health-costs/press-release/analysis-finds-specialty-drugs-rank-high-among-medicaids-most-costly-

outpatient-drugs/). 18 Andrew Pollack, “Drug Goes From $13.50 a Tablet to $750, Overnight,” N. Y. Times, Sept. 20, 2015

(https://www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html). 19 Lydia Ramsey, The Price of an EpiPen Has Skyrocketed More Than 500% Since 2009 — and Senators Are Asking for Answers,

Business Insider, Aug. 22, 2016 (http://www.businessinsider.com/epipen-price-increases-about-500-percent-2016-8). 20 Liyan Chen, The Most Profitable Industries in 2016 (https://www.forbes.com/sites/liyanchen/2015/12/21/the-most-

profitable-industries-in-2016/#9943dd85716f). 21 Rick Claypool, Pharmaceutical Industry Profits Exceed Industry’s Self-Reported R&D Costs (2017)

(https://www.citizen.org/sites/default/files/pharma-profits-and-r-and-d-report.pdf) 22 Kessleheim at 863.

6

companies spend only between 10 and 20 percent of their revenues on R&D.23 In fact, the major drug

companies on the S&P 500 index spend 11 percent more on share buybacks and paying dividends than on

R&D.24 As a recent publication in the Journal of the American Medical Association stated, “there is little

evidence of an association between research and development costs and drug prices; rather, prescription

drugs are priced in the United States primarily on the basis of what the market will bear.”25

2. Market forces cannot control drug prices. Economists know that market forces and competition

cannot rein in drug prices. The National Academy for State Health Policy (NASHP) has observed that, contrary

to how competition is supposed to work, “competitors with drugs in the same class tend to raise prices by

similar amounts as they mirror each other’s pricing practices. Instead of competition holding down prices,

competitors match each other’s price increases.”26

That drug companies can get away with relentlessly boosting their drug prices is not surprising.

Health care purchasing does not follow the normal laws of supply and demand, in part because there is no

correlation between the need for health care and the ability to pay for it. Assuring drug safety and efficacy,

which the market cannot accomplish itself, introduces additional constraints. Brand name manufacturers also

manipulate the market and the regulatory process to forestall competition, such as by paying generic

manufacturers to delay introducing generic competitors, and by making minor, clinically irrelevant alterations

in drug formulations to secure additional market exclusivity, the practice known as “evergreening.”

The failure of markets to control prices is evident from Medicare’s Part D prescription drug program. Rather

than being protected by statutory price limits like Medicaid and the VA, Part D relies on private health insurers to

negotiate drug prices in the marketplace; the result is that Part D plans pay on average 73 percent more than Medicaid

and 80 percent more than the VA for brand-name drugs.27

3. The only hope of controlling drug prices is public action like the Act. The main reason that Medicaid

and the VA pay less for drugs than Medicare Part D is laws that limit how much they can be charged. Medicaid pays

23.1 percent less than the average price paid for brand-name drugs by other purchasers, or the lowest price that the

drug is sold to other buyers, whichever is lower, and gets a rebate if the price of the drug increases faster than general

23 Id. 24 Gretchen Morgenson, When Big Pharma Spends, Research Isn’t No. 1, NY Times, July 16, 2017, at 3. 25 Kessleheim at 863. 26 National Academy for State Health Policy, States and the Rising Cost of Pharmaceuticals: A Call to Action (Oct. 2016) at 4

(http://nashp.org/wp-content/uploads/2016/10/Rx-Paper.pdf). 27 Marc-André Gagnon and Sidney Wolfe, “Mirror, Mirror on the Wall: Medicare Part D Pays Needlessly High Brand-Name Drug

Prices Compared With Other OECD Countries and With U.S. Government Programs,” Public Citizen Policy Brief, July 23, 2015, at 2.

(https://www.citizen.org/sites/default/files/2269a.pdf).

7

inflation. The VA cannot be charged more than 76 percent of the average price of the drug or the lowest price paid by

non-federal purchasers, whichever is lower, and also gets an inflation rebate.28

The pharmaceutical industry is well-aware of the effectiveness of government mandates such as these, which

is why it spends so much on government lobbyists and public relations firms to block similar legislation and to further

its interests. An example is the almost $110 million PhRMA spent to defeat a measure similar to this Act in California in

2016.29

4. The Act Will Produce Significant Savings. By paying what the VA pays for prescription drugs,

Ohio health programs stand to secure significant savings. An expert analysis calculates that the savings for

state programs could be as high as $536 million per year.30

The state is required to refund to the federal government a portion of the savings that the Ohio

Medicaid program obtains under the Act.31 Nevertheless, the savings to Ohio programs because of the Act will

still be significant, and all of the savings that ODPRA produces benefit the citizens of Ohio as federal and

state taxpayers. The requirement that a portion of Medicaid discounts be returned to the federal government

is worth noting, however, because the Vorys report fails to mention it. Therefore, Vorys’ claim that “there

would be little to nothing to be gained for Medicaid under the Proposed Statute except for the significant

administrative cost of demonstrating compliance” because “it is reasonable to assume that Medicaid and the

VA are approximately equivalent in terms of the net discounts/rebates realized from manufacturers”32 is

misleading: even assuming that the programs receive similar discounts, if under the Act the Ohio Medicaid

program pays what the VA pays, that would be the net price after the federal pass-through, which would be

lower than what it now pays.33

28 David Blumenthal and David Squires, “Drug Price Control: How Some Government Programs Do It,” Commonwealth Fund, May

10, 2016 (http://www.commonwealthfund.org/publications/blog/2016/may/drug-price-control-how-some-government-

programs-do-it). 29 Sy Mukherjee, “Inside Big Pharma’s Epic Multimillion Dollar PR Campaign to Save Its Reputation,”

Fortune, Jan 24, 2017 (http://fortune.com/2017/01/24/phrma-go-boldly-pr-campaign/). 30 The analysis was conducted by Patrick Murray, MD, MS, Senior Scholar, Center for Health Care Research and Policy, MetroHealth

Medical Center. 31 The refund is the amount of the mandatory Medicaid discounts required by federal law that corresponds to the percentage of

federal funding of the state Medicaid budget. The mandatory Medicaid discounts are 23.1 percent of the lower of the average

manufacturer’s price (AMP) or the AMP minus “best price,” plus the inflation rebate if applicable. 32 Vorys report at 29. 33 The amount of the pass-on varies by state, but a report by the Medicaid and CHIP Payment and Access Commission (MACPAC)

gives a representative calculation in which the state keeps only $15.55 of a $39.10 rebate per unit of brand name drug and has to

transfer the remaining $23.55 to the federal government. MACPAC, Medicaid Payment for Outpatient Prescription Drugs, Issue

Brief, March 2017, at 9 (https://www.macpac.gov/wp-content/uploads/2015/09/Medicaid-Payment-for-Outpatient-

Prescription-Drugs.pdf) (“MACPAC”). As the issue brief notes, Medicaid programs are not required to transfer to the federal

government a portion of non-statutorily-mandated discounts, known as “supplemental rebates.” Id. at 10.

8

5. The Act is a start on signaling to the drug industry that the days of price gouging and

profiteering must come to an end. Americans are fed up with high drug prices. An AARP poll in 2016 found

that 81 percent of people over 50 think prices are too high, and 76 percent want the government to take more

action to control them.34 AARP executive vice-president Nancy LeaMond stated that “the public is making it

increasingly clear that profiteering by drug companies at the expense of Americans is unacceptable.”35

III. How the Act Works.

The Act limits what Ohio state programs, including Medicaid, the Ohio Public Employee Retirement System,

and the Ohio Bureau of Workers’ Compensation, pay for prescription drugs to no more than what the VA pays for the

same drugs. As noted above, the prices charged to the VA are limited by federal law. The objective of the Act is to

secure the same savings for Ohio programs.

The Act is a type of citizens’ ballot initiative called an “initiated statute,” which adds statutory provisions to

the Ohio State Code. Initiated statutes typically require additional legislation and administrative rule-making to be

implemented, and this initiative is no exception. The last initiated statute, adopted in 2006 to ban indoor smoking in

public buildings and places of employment, similarly required further state action to carry out a number of its

provisions, among them “specify[ing] the duties of the department of health to enforce smoking restrictions.”36

The Act requires the state to (1) determine what prescription drugs are purchased by the VA and how much it

pays; (2) determine how much the affected state programs pay for the same drugs; and (3) take steps to conform what

state programs pay to what the VA pays. The systems used to purchase and derive the prices of prescription drugs

purchased by government programs are absurdly complicated, in no small part because of drug industry efforts to

maintain high prices, which is why the Act therefore leaves certain aspects of how it will be put into effect to be

resolved after it is adopted. What is important to understand is that the objectives of the Act, to lower prices for the

state and send a strong signal to the pharmaceutical industry, are attainable.

The Vorys report commissioned by PhRMA criticizes the Act and makes a number of claims about its

workability. Some can be dismissed out of hand. For example, Vorys complains that the Act lacks definitions of terms

and cross-references to other laws.37 As explained above, however, the Act is a statute initiated by ballot, not a detailed

legislative enactment, and Vorys itself concedes that “as is normally required, we would expect most of the affected

state departments or other entities would develop rules to specify how implementation would occur.”38

Other criticisms in the PhRMA report by Vorys are discussed below.

34 Candy Sagon, “Prescription Drug Prices Are Skyrocketing, And Older Americans Want Politicians to Do Something About It,”

AARP, April 19, 2016 (http://www.aarp.org/health/drugs-supplements/info-2016/prescription-cost-worry-older-adults.html). 35 Id. 36 Ohio Smoking Ban, Initiative 5 (2006) (https://ballotpedia.org/Ohio_Smoking_Ban,_Initiative_5_(2006)),

http://codes.ohio.gov/orc/3794 (ORC 3794.06 (B)) 37 Vorys report at 3. 38 Id., emphasis added.

9

A. The State Can Identify the Vast Majority of Drugs That the VA Dispenses to Set the Net Cost

Required by the Act.

Since the Act requires Ohio state programs to pay no more than what the VA pays for its prescription drugs,

the Ohio programs must know what prescription drugs the VA purchases. Vorys claims that this is not possible

because, while the drugs that the VA purchases on its formulary are known in advance, it purchases additional drugs on

an as-needed basis, and these are not known in advance.39 This criticism is unpersuasive.

The vast majority of the drugs that Ohio programs purchase are on the VA formulary. A 2015 study by Avalere

paid for by PhRMA and cited by Vorys for its contrary position40 shows that the VA National Formulary covers over

85% of the 200 top prescription drugs covered by stand-alone Medicare Part D plans.41

Ohio state programs also can determine the drugs that the VA prescribes that are not on its formulary. Vorys

admits that this is possible, but says only “after the fact” and not “in an operationally feasible timeframe.”42 However,

the Act does not set an operational timeframe for when all prices paid by state programs must conform to the VA net

cost.43 The Ohio legislature and administrative agencies can choose to delay applying the net cost requirement to off-

formulary drugs for a reasonable amount of time until VA off-formulary prescribing information is available. At that

point, they can include these drugs in their pricing programs under the Act retroactively, requiring sellers to rebate the

difference between the VA price and what the programs paid; as noted earlier, both Medicaid and the VA by law are

entitled to retroactive rebates from sellers if their prices increase more than the general rate of inflation. Alternatively,

state programs may exempt off-formulary drugs from the price limit established by the Act. Vorys notes, for example,

that, given its patient population, the VA does not prescribe pediatric drugs44; again, the Act does not require Ohio

programs to meet the VA price for drugs that the VA does not prescribe.

B. The State Can Determine How Much the VA Pays for Drugs.

Information about the prices of prescription drugs for the VA is available on the VA website:

https://www.va.gov/oal/business/fss/pharmprices.asp. As the website states, “the Pharmaceutical [sic] pricing data

39 Id. at 8. 40 Id. at 22. 41 Kelly Brantley, VA National Formulary Covers 16% Fewer Top Prescription Drugs than Medicare Part D Plans, (2015)

(http://avalere.com/expertise/managed-care/insights/a-recent-avalere-analysis-found-that-the-va-national-formulary-

covers-fewer). PhRMA paid for another study by Avalere claiming that the VA formulary covers fewer drugs than Ohio’s largest

Medicaid managed care plan and than the Ohio Medicaid preferred drug list (http://avalere.com/expertise/life-

sciences/insights/va-formulary-coverage-much-more-limited-than-ohio-medicaid (2017)), but this study only looked at eight

therapeutic areas (Antidepressants, Antidiabetic Agents, CNS Stimulants, HIV-AIDS, HMG-CoA Reductase Inhibitors, Insulins,

Mental Health, and Respiratory Pulmonary Asthma). Avalere does not explain why it chose these eight therapeutic areas. Was it

because they skew the results in PhRMA’s favor? 42 Vorys report at 23. 43 The Act only requires state programs to “implement” the Act by a set date. See Ohio Drug Price Relief Act, Section D(3). 44 Vorys report at 23.

10

for all VA National Acquisition Center (NAC) programs, including FSS [the Federal Supply Schedule] and National

Contracts, can be accessed via [a link that follows]. This information is updated on or around the 2nd and 16th of each

month.”45

Vorys objects that Ohio state programs may not be able to determine what the VA pays because some

pricing information, such as discounts and non-mandated rebates, may not be public.46 It is unclear how many drugs

might be affected by non-public price information, but based on the California Legislative Analyst’s Office report on

Proposition 61, it does not seem to be many.47

The California Legislative Analyst’s Office report additionally noted that it might be possible for Ohio state

agencies to obtain non-public VA pricing information under the Federal Freedom of Information Act (FOIA).48 The

Legislative Analyst’s Office also acknowledged that state agencies could “pay for drugs at a price not exceeding the

lowest known price paid by the VA, rather than the actual lowest price, to allow the measure to be implemented.”49

Most importantly, even if it were not possible to know the lowest price paid by the VA for some drugs, and

Ohio state programs therefore had to pay more for them than the VA, the Act would still save the state money. As the

California Legislative Analyst’s Office stated, “the potential confidentiality of at least some of the lowest VA prices …

45 As the website explains, “VA National Contracts are mainly requirement-type contracts that offer additional pricing concessions

in return for commitment to potential vendors. The VA National Contract program results in pricing lower than FSS and is used for

VArsquo;s [sic] standardization efforts. The VA National Contracts program is a separate contract vehicle from the FSS contract

program.” https://www.va.gov/oal/business/fss/pharmprices.asp. 46 Vorys report at 8. 47 The California Legislative Analyst’s Office report states “the VA’s public database information on the prices of the prescription

drugs it purchases does not always [emphasis in original] identify the lowest prices the VA pays. This is because, at least for some

drugs [emphasis added], the VA has negotiated a

lower price than that shown in the public database and is keeping that pricing information confidential.” Legislative Analyst’s

Office, Proposition 61 State Prescription Drug Purchases. Pricing Standards. Initiative Statute. July 18, 2016, at 6-7

(http://www.lao.ca.gov/ballot/2016/Prop61-110816.pdf) (“LAO report”). Additionally, CalPERS (the California Department of

Health Care Services, which runs Medi-Cal, the California Medicaid Program) apparently confirmed that the lowest price for only a

small fraction of drugs purchased by the VA may not be public. (http://www.capradio.org/articles/2016/10/24/proposition-61-

gives-california-mandate-to-lower-drug-prices,-not-tools/). 48 LAO report at 7 (“It is uncertain whether the VA could be nonetheless required to disclose these lower prices to an entity—such

as DHCS—requesting such information under a federal Freedom of Information Act (FOIA) request.”). The mere fact that the VA

regards the information as confidential or tells sellers that it will keep it confidential is not conclusive; courts routinely overturn

agency affirmations and contentions, and often deem pricing information to be disclosable. See, e.g., McDonnell Douglas Corp. v.

U.S. Dep't of the Air Force, 215 F. Supp. 2d 200, 205 & n.3 (D.D.C. 2002) (no impairment from release of contract prices when

even submitter itself "at no point represent[ed] that should" the agency disclose them, "it would no longer apply for government

contracts") (reverse FOIA suit), aff'd in part & rev'd in part on other grounds, 375 F.3d 1182 (D.C. Cir. 2004), reh'g en banc denied, No.

02-5342 (D.C. Cir. Dec. 16, 2004). The information released under FOIA might pertain to a past round of VA contracting, in which

case sellers can hardly argue that it prejudices them significantly in future rounds, and Ohio agencies could seek rebates from

sellers based on the prior VA discounts. Moreover, it is unlikely that revealing the information would make manufacturers refuse to

do business with the VA or enable them to charge it more. 49 LAO report at 7.

11

does not eliminate the measure’s potential to generate savings related to state prescription drug spending. Though

pricing information may be unavailable for some of the VA’s lowest-priced prescription drugs, publicly available VA

drug prices have historically been lower than the prices paid by some California state agencies for some drugs. To the

extent that the VA’s publicly available drug prices for particular drugs are lower than those paid by California state

agencies and manufacturers choose to offer these prices to the state, the measure would help the state achieve

prescription drug-related savings.”50 Similar drug-related savings can be expected for Ohio under the Act.

C. The State Can Seek Prices from Sellers That Meet the Requirements of the Act.

Once Ohio state programs know the prices the VA pays for the drugs they wish to purchase, they can adjust

the prices they pay to match them. In some cases, state programs purchase the drugs directly from manufacturers or

wholesalers. According to Vorys, this covers approximately 750,000 individuals or drug doses.51 State programs know

what they pay for these drugs, and can require sellers to match what the VA pays. In other cases, the state uses

pharmacy benefit managers to negotiate prices, and can limit the prices that the benefit managers negotiate.

State programs also purchase drugs indirectly. For example, Medicaid managed care plans, which cover about

80 percent of Ohio Medicaid enrollees,52 charge the state a set or “capitated” fee per enrollee, from which the plans pay

for health care for the enrollees, including prescribed drugs. The capitated fees are established based on cost estimates,

which include estimates of the costs of drugs. If costs are estimated to decrease as a result of the Act, Ohio Medicaid

would be expected to reduce the capitated amounts proportionally. Similar reductions can be built into other drug

purchasing processes.

PhRMA claims that Ohio state programs cannot know what they pay for drugs and cannot change what they

pay as required by the Act.53 It is true that the drug pricing system is ridiculously complicated, largely as a result of

tactics by the drug industry to extract maximum profits, including from government purchasers. The Act gives the state

an opportunity to correct and simplify this system.

Finally, Vorys claims that state programs might have to adopt restrictive formularies similar to the VA’s in

order to obtain the necessary price discounts under the Act.54 The VA formulary is widely accepted as providing first-

rate access to prescription drugs for veterans55; the nation and Congress would hardly accept anything less. The

formulary permits the VA to restrict coverage of certain drugs to reduce costs, but a 2000 study by the Institute of

50 Id. at 7-8 (emphasis added). 51 Vorys report at 9. 52 Ohio Department of Medicaid 2016 Annual Report (http://medicaid.ohio.gov/Portals/0/Resources/Reports/Annual/ODM-

Annual-Report-SFY16.pdf). 53 Vorys report at x, 10, 18. 54 See, e.g., Vorys report at 38. 55 See, e.g. House Committee on Veterans’ Affairs, Subcommittee on Health, September 22, 2009, Statement of Jack Hoadley,

Ph.D., Research Professor, Health Policy Institute, Georgetown University, Washington, DC (“Veterans maintain good access to

prescription drugs through the VA National Formulary.”)

12

Medicine reported that this did not adversely affect the quality of care for veterans.56 A study presented in testimony

before the House Committee on Veterans’ Affairs in 2009 reached a similar conclusion.57 Consequently, if Ohio

programs adopted formularies similar to the VA’s to enable them to obtain VA prices under the Act, the 4 million

Ohioans who obtain health benefits from these programs would have ample access to prescription drugs.

D. The State Can Adjust What It Pays to Accommodate Drugs Purchased by State Programs That The

VA May Not Provide, Such As Drugs for Children, And To Take Into Account That the VA Has Its Own

Dispensaries While Ohio Programs Rely On Private Pharmacies.

The drug industry has falsely insinuated that, if the Act is approved, children in the covered Ohio health

programs would be unable to obtain the prescription drugs they need because the VA does not typically buy drugs for

children.58 The Act does not prevent the state from purchasing any drug. It only requires that Ohio get the VA discount

when it buys a drug that the VA also buys.

While the VA dispenses prescription drugs largely from VA-operated pharmacies, patients covered by Ohio

state programs such as fee-for-service Medicaid may obtain their outpatient medications primarily from retail

pharmacies and mail-order companies. Medicaid pays pharmacies an “ingredient fee” and a “dispensing fee,” which are

calculated based on legally-mandated formulas.59 Medicaid then receives rebates from manufacturers based on the

different formulas mandated by federal law.60

56 Description and analysis of the VA National Formulary. National Academy Press; Washington, DC: Jan, 2000. Veterans

Administration Pharmacy Formulary Analysis Committee, Division of Health Care Services, Institute of Medicine. 57 Testimony of Jack Hoadley before the House Committee on Veterans’ Affairs, Sept. 30, 2009

(http://archives.democrats.veterans.house.gov/hearings/Testimony.aspx?TID=59774)

(“this comparison of Medicare Part D plan formularies to the VA formulary lends support to the conclusion that veterans maintain

good access to prescription drugs through the VA National Formulary”). 58 See Vorys report at 23. 59 See Brian Bruen and Katherine Young, “Paying for Prescribed Drugs in Medicaid: Current Policy and Upcoming Changes,” Kaiser

Family Foundation 2014 (http://www.kff.org/report-section/paying-for-prescribed-drugs-in-medicaid-current-policy-and-

upcoming-changes-current-reimbursement-policy-8593/) (“Kaiser report”) (“federal regulations require Medicaid programs to

reimburse pharmacies based on the lesser of the (1) estimated acquisition cost (EAC) plus a reasonable dispensing fee; or (2) the

pharmacy’s ‘usual and customary charge’ to the public.”) The ingredient fees for some multiple-source drugs are set according to

specific federal or state limits. Id. As of April 2017, the federal Centers for Medicare and Medicaid Services (CMS) requires the

ingredient fee to be calculated using “actual acquisition cost” (AAC) methodology; states determine this cost by surveying

pharmacies or relying on a national cost database such as CMS’ National Average Drug Acquisition Cost (NADAC) survey. Id. 60 Medicaid and CHIP Payment and Access Commission (MACPAC, Medicaid Payment for Outpatient Prescription Drugs, Issue

Brief, March 2017, at 7 (https://www.macpac.gov/wp-content/uploads/2015/09/Medicaid-Payment-for-Outpatient-

Prescription-Drugs.pdf).

13

Vorys contends that limiting Ohio programs to pay the VA net cost is inappropriate because the net cost does

not include the costs of dispensing via a retail pharmacy system.61 Under the Act, however, programs such as fee-for-

service Medicaid can pay the lower of the pharmacy ingredient fee or the VA net cost. If the ingredient fee is higher,

Medicaid can negotiate discounts from sellers and pharmacies to reduce the price to the VA net cost. Medicaid would

then add to what it pays pharmacies the modest dispensing fee, which is $2 or less per prescription.62 If a state

program believes that it would be better able to achieve the VA net cost set by the Act by switching to in-house

pharmacies, so that it purchased the drugs directly and financed the dispensing costs itself, it can do so.

E. An Attempt by Drug Manufacturers to Subvert the Objective of the Act by Increasing Prices to the

VA Would Trigger a Severe Government Response.

PhRMA threatens that, if the Act is implemented, its members simply will raise their prices to the VA.63 The

result, it says, would be to increase the net cost benchmark under the Act, thereby reducing or eliminating any savings

for the state. In addition, this would raise prices for veterans.64 PhRMA issued similar threats against the California

2016 ballot initiative.65

PhRMA tried this extortion tactic once before. Distressed at the drug industry’s price gouging, Congress in

1990 passed an Omnibus Budget Reconciliation Act with a “most-favored nation” provision that required the prices of

all drugs purchased by the government to be no higher than the lowest price paid by any government entity. PhRMA

responded by eliminating all but the highest prices to the government. The public struck back in 1992 when Congress

enacted the Veterans Health Care Act (VHCA),66 which requires manufacturers to provide at least a 24 percent discount

to the VA, along with an inflation rebate. The VHCA was so popular that it was approved by voice votes in the Senate

and House.67

As a result of the VHCA, the only aspect of what the VA pays for drugs that the drug companies can threaten

is non-mandatory discounts. Any other attempt to increase prices faster than general inflation would trigger the VHCA

inflation rebate. According to the U.S. Government Accountability Office (GAO), the main non-mandatory discount is

the vendor contract, which yields an additional discount of approximately 5 percent.68 Only about 5 percent of the

what the VA pays therefore would be vulnerable to drug industry extortion. Nevertheless, if the industry attempts to

61 Vorys report at 8. 62 Kaiser report. 63 Vorys report at ix. Drug companies would raise their prices to the VA by reducing or eliminating non-mandated discounts. Id. 64 Id. 65 Id. Vorys cites a Veterans Administration Issue Brief as “suggesting” that the California measure, which did not pass, “would

result in the elimination of all non-statutorily required and all non-contractually required discounts” causing a loss to the VA of $3.8

billion dollars. 66 PL 102-585. 67 H.R. 5193 (102nd): Veterans Health Care Act of 1992, govtrac (https://www.govtrack.us/congress/bills/102/hr5193). 68 U.S. GAO, Prescription Drugs: An Overview of Approaches to Negotiate Drug Prices Used by Other Countries and U.S. Private

Payers and Federal Programs (2017) (https://www.finance.senate.gov/imo/media/doc/011107jbtest.pdf).

14

eliminate this and other discounts, the government can be expected to retaliate in a manner similar to the passage of

the VHCA.

F. The Act Will Not Adversely Affect Pharmaceutical Research and Development.

An oft-heard refrain from the drug industry, although one that is curiously absent from the Vorys report, is

that reducing drug prices would provide less money for pharmaceutical research and development.69 However, it is

well-known that drug prices bear little relationship to drug R&D. A 2017 Health Affairs report noted, for example, that

“the premiums pharmaceutical companies earn from charging substantially higher prices for their medications in the US

compared to other Western countries generates substantially more than the companies spend globally on their research

and development.”70 Another study by Richard G. Frank at Harvard University found that the introduction of mandatory

Medicaid price rebates did not adversely impact R&D spending on antipsychotics, a class of drugs for which Medicaid

accounted for over seventy percent of sales.71 To repeat a point made earlier, the authors of a recent article in the

Journal of the American Medical Association state that “there is little evidence of an association between research and

development costs and drug prices; rather, prescription drugs are priced in the United States primarily on the basis of

what the market will bear.”72

G. State Government Can Accomplish the Legislative and Administrative Tasks Required to

Implement the Act.

As stated earlier, the Ohio Drug Price Relief Act is a type of ballot measure that requires addition legislative and

regulatory action to be implemented. Upon adoption, the people of Ohio will expect their elected representatives and

government administrators to carry out their will.

Vorys repeatedly refers to the administrative efforts that would be required to implement the Act.73 In fact, the

entire report can be seen as an attempt to portray the current drug pricing system as so complex and unwieldy that the

goals of the Act cannot be achieved. The current system is indeed unreasonably complicated, largely as a result of

tactics by the drug industry to extract maximum profits, including from government purchasers. The Act gives the state

69 See, e.g., Paul Howard, Higher Prices, Fewer Choices: Why California’s Prop. 61 Will Not Bring Drug-Price Relief, Manhattan

Institute Issue Brief 54 at 4 (reducing US drug prices to the VA level would reduce early-stage drug development R&D 30-60%). 70 Nancy Yu, Zachary Helms, and Peter Bach, R&D Costs For Pharmaceutical Companies Do Not Explain Elevated US Drug Prices,

March 7, 2017 (http://healthaffairs.org/blog/2017/03/07/rd-costs-for-pharmaceutical-companies-do-not-explain-elevated-

us-drug-prices/). The authors state that “there are billions of dollars left over even after worldwide research budgets are covered.

To put the excess revenue in perspective, lowering the magnitude of the US premium to a level where it matches global R&D

expenditures across the 15 companies we assessed would have saved US patients, businesses, and taxpayers approximately $40

billion in 2015, a year for which the Centers for Medicare and Medicaid Services (CMS) reported that total US spending on

pharmaceuticals was $325 billion.” 71 Richard G. Frank, Prescription Drug Procurement and the Federal Budget Medicare Policy (Kaiser Family Foundation Issue Brief,

2012) (https://kaiserfamilyfoundation.files.wordpress.com/2013/01/8307.pdf). 72 Kesselheim at 863. 73 See, e.g., Vorys report at x (“state entities would incur significant administrative costs in attempting to comply”).

15

an opportunity to correct and simplify the system. Once it is implemented, the pricing system Ohio programs adopt

can serve as a model for the rest of the nation.

By repeatedly referring to implementation challenges, Vorys may be implying that, if forces opposed to the

Act control the legislative and executive branches of government, they will refuse to take the necessary legislative and

administrative steps to implement the Act. Ohio voters must not be deterred by such anti-democratic threats. Upon

passage, this ballot initiative will express the will of the people of the state. Elected officials who fail to carry out that

will should expect to face the consequences at the ballot box. In addition, the Act includes a provision, Section G, that

enables proponents of the Act to defend it by intervening in lawsuits brought by opponents of the Act seeking to

challenge its validity.

IV. Conclusion.

Unquestionably, drug prices in the U.S. are out of control. The pharmaceutical industry cannot be expected to

solve this problem; lowering prices would reduce profits, which would be contrary to the interests of shareholders.

Indeed, it is telling that nowhere in the Vorys report does PhRMA suggest any steps it would support that would make

its products more affordable.

The Ohio Drug Price Relief Act seeks to reduce drug prices at the state level. It is a measure based on prior,

successful federal efforts. The state may try to implement the Act across all of the state health programs to which it

applies, or it may initially target one or more of the programs most likely to see significant savings.

An expert analysis calculates that the Act ultimately could save the state as much as $536 million

per year. To put this amount in perspective, it is about what the state budgets in 2018 for highway safety and

for capital projects.74 It is also three times greater than the 2018 increase in state funding for primary and

secondary education, and more than twice as much as the increase in state spending to combat the opioid

epidemic.75 Think what it would mean for any of those programs to receive an additional $536 million in state

support annually.

The drug industry wants mightily to defeat the Act, yet none of the arguments it makes against the Act in the

Vorys report or elsewhere are convincing. The citizens of Ohio owe it to themselves to approve Issue 2 and see that it

succeeds.

74 Ohio Office of Budget and Management, Budget Highlights at 5 (http://www.obm.ohio.gov/budget/operating/doc/fy-18-

19/enacted/FY18-19_Enacted%20Budget%20Highlights%20Book_Final.pdf). 75 McDonald Hopkins, Ohio: Governor Signs Budget Bill But Vetoes a Number of Provisions, July 6, 2017

(https://mcdonaldhopkins.com/Insights/Blog/Tax-and-Benefits-Challenges/2017/07/06/Ohio-Governor-signs-budget-bill-

but-vetoes-a-number-of-provisions).

16

Price of two common drugs in 5 CountriesDrugs: Xarelto, HumiraXarelto is prescribed to prevent or treat blood clots.Humira is prescribed to treat rheumatoid arthritis.

XareltoHumira

$552

$1,253

$1,362

$822

$2,669

$48

$101 $102$126

$292

South Africa Spain

Xarelto, 30 capsules, 20 mg, 30 day supply

Humira, 1 prefilled syringe carton, 2 syringes, 28 day supply

Switzerland United Kingdom United States

$USD

Source: International Federation of Health Plans report, July 2016

2016 Compensations

2016 Compensation for Eight CEOs

Len Schleifer $28.3m Regeneron

Alex Gorsky $21.2m Johnson & Johnson

Richard Gonzalez $17.7m Abbvie

George Scangos $17.5m Biogen

Ian Read $17.0m Pfizer

Robert Bradway $16.9m Amgen

Jean-Jacque Bienaime $16.9m Biomarin Pharmaceuticals

John Millgan $13.9m Gilead Sciences

Source: The Highest Paid C.E.O.s in 2016," New York Times, May 26, 2017

Salaries and ProfitsPROFIT MARGINS FOR TEN DRUG COMPANIES

Drug Spending Per Capita for Ten Industrialized Nations, 2013

1026

United Sta

tes

Japan

750

Canada

713

Germany

678

France

596

Australia

590

Spain

526

Korea

436

Poland

326

Denm

ark

240

USD PPP

1200

1000

800

600

400

200

0

Prescribed medicines Over-the-counter medicines

Source: Organization for Economic Cooperation and Development report, 2013

Industry Net Margin in 2016Pharma: Generic 30%

Investment Managers 29.1%

Tobacco 27.2%

Drug Companies:major 25.5%

Internet Software/Services 25%

Biotechnology 24.6%

Savings Banks 24%

IT Services 23%

Regional Banks 23%

Major Banks 22.9%

Top Ten Most Profitable Industries

Net profit margin in 2016

Source: "The Most Profitable Industries in 2016." Forbes, Dec. 21, 2015