Why Business Has a Stake in Props 78 & 79

by Jack Stewart
Oct. 17, 2005
On this November’s special election ballot, California’s business community and its employees should support Proposition 78 and oppose Proposition 79 for two simple reasons: One creates a new market, delivering less expensive drugs to five million of the state’s poor and the other imposes price controls and creates new opportunities for litigation.

These measures represent vastly different approaches to how private industry and government would work together. Prop 78 takes a collaborative approach, creating a new market for pharmaceutical manufacturers to work with the state Department of Health Services so that discounted medicines could be made available to about five million uninsured California residents whose family incomes are below 300 percent of the federal poverty level.

Under this plan, pharmaceutical manufacturers would agree to provide drugs to these individuals at the same low price they sell to large commercial purchasers in California, such as health plans and large companies. Combined with a discount provided by California pharmacies, Prop 78 would give uninsured, poor people access to prescription drugs at 40 percent below retail prices.

Because of the voluntary nature of Prop 78, pharmaceutical manufacturers have registered their commitment to participate in the program. A similar collaborative approach is also underway in the state of Ohio, where every major manufacturer is participating in its drug discount program for uninsured residents.

Prop 79, by contrast, is the type of heavy-handed, big government approach that stifles competition and inevitably restricts access by limiting choices for consumers. At its core, Prop 79 imposes price controls on an innovative and highly competitive industry by locking in a single price for as many as 10 million Californians (the ultimate eligibility number is unknown). This measure also declares open season on companies manufacturing or distributing prescription medicines by allowing lawsuits to be filed by any private citizen against them for “profiteering.”

By freezing the free market forces that make California a leader in cutting-edge medical research and development and by opening up a new front for frivolous lawsuits, Prop 79 promises to drive up prices for all purchasers of prescription drugs, including employers.

There is another reason why the business community should oppose Prop 79. One of its provisions authorizes the state Department of Health Services to set up a drug purchasing program to assist small business and labor union healthcare plans, provided employers pay for more than 50 percent of their employees’ health insurance. Sounds good at first blush.

But employers should be wary. A respected economics firm, the Taylor Feldman Group, looked closely at the ramifications of this provision and concluded that employer premiums would likely increase, not decrease, because of the new costs associated with getting such purchasing pools up and running. Their analysis also found that all employer premiums could increase because Prop 79 would wreak havoc on the current prescription drug market in California. Because of the price controls imposed by Prop 79 for millions of Californians, the prices paid by other drug purchasers in this market will increase to make up the difference.

Prop 78 takes an approach with built-in economic incentives that makes it a win-win for uninsured residents, private industry, employers and state government, whereas Prop 79 uses window dressing to entice political support from the business community. Please join with the state and local chambers of commerce, as well as the agricultural, retail, manufacturing and R&D communities, in supporting Prop 78 and opposing Prop 79.

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