Arnie versus the drug companies

In the Golden State, Gov. Arnold Schwarzenegger announced on July 22 his new discount drug plan, described as a “voluntary” agreement between pharmaceutical companies and the state of California. But it’s more like a raw deal. What he is really selling is price controls on pharmaceuticals.

The California Prescription Drug Initiative calls upon drug manufacturers to offer 5 million low-income Californians major discounts on prescription medications — up to 40 percent on brand-name drugs and a whopping 60 percent on generics.

Presumably, drug companies should offer these discounts out of the goodness in their hearts. But if they don’t comply? Well, then they’ll be coerced by the Terminator.

Companies failing to sell drugs at the government-imposed discount prices within five years can be kicked out of Medi-Cal, the multibillion-dollar health coverage system for low-income Californians.

Specifically, the discounted drugs would be available to uninsured Californians with incomes below 300 percent of the federal poverty level. That’s $60,000 for a family of four. Certain Californians — like a family earning less than $68,310 — with significant unreimbursed medical expenses would also qualify.

“Our hope is the hammer won’t be necessary,” California Secretary of Health and Human Services Kim Belshe says.

And the governor’s plan is just a variation on Democratic Assembly Speaker Fabian Núñez’s, AB 2911. In the Núñez bill, the income level for a family of four being eligible for the discount plan is $66,000 and the number of years that the drug companies have to offer the discounts is three rather than five.

There are good reasons to resist Gov. Schwarzenegger’s drug deal.

For starters, most drug companies already have programs offering discounted — or even free — medicines for those in need.

Gov. Schwarzenegger might argue that beneficiaries of these existing discount programs must apply individually with every pharmaceutical company whose drugs they require.

But that’s because drug companies aren’t legally allowed to combine their individual plans into one simple-to-join program. Anti-trust laws prohibit them from doing so. It’s illegal for private companies to work together to set prices — even discount prices.

In other words, Gov. Schwarzenegger wants the Golden State to do what is illegal for pharmaceutical companies to do — fix prices. His plan might make sense if government price controls actually worked. But in reality, they almost always have the exact opposite effect of what is intended.

In the case of the Prescription Drug Initiative, pharmaceutical companies would need to compensate for the forced discounts by raising prices on people who don’t qualify.

A family of four with a household income of $70,000 and a child with cancer might see its drug bills increase to offset discounts on hyperactivity medicines available to a family making $68,000.

In the long term, Gov. Schwarzenegger’s price controls would have an even more perverse effect. They would lead to fewer new medicines being developed, particularly if other states follow California’s example.

Today, it costs between $800 million and $1 billion to bring a new drug to market. Cancer patients have hope precisely because companies are willing to risk that money in developing drugs like Avastin, Erbitux, Gleevec, Herceptin, Nexavar, Sutent, and many others.

Ironically, if Gov. Schwarzenegger’s plan had been implemented across the country 25 years ago, very few of these drugs would have been invented in the first place. There would be no life-saving medicines to discount.

If state governments make breakthrough drugs unprofitable, companies will simply stop trying to invent them. Researchers at the University of Connecticut’s Center for Healthcare and Insurance Studies found that, since 1960, government interference in drug pricing caused $188 billion in lost spending on research and development. The “lost” medicines that might have been developed with that money could have saved 140 million life years.

There is a better way.

The market economy remains the best supplier of human needs —including health needs. It has made theUnited States the world leader in the research and development of new medications and in health care overall.

Rather than pushing for socialist price controls, Gov. Schwarzenegger should pursue free market ideas. He should support the federal legislation proposed by Rep. John Shadegg, R-Ariz., which would allow people to shop for insurance across state lines. He could make health insurance premiums tax deductible. And he could promote again changing the tax code in California so that contributions to health savings accounts are not subject to state income tax, something he does support.

Such policies would help people afford the drugs they need without creating economic distortions. And there would be no strong-arm tactics required. Of all people, the Terminator should know better than to give the citizens of California a raw deal.

Sally C. Pipes is president & CEO of the Pacific Research Institute and author of “Miracle Cure: How to Solve America’s Health-Care Crisis and Why Canada Isn’t the Answer.” A version of this op-ed appeared in The Wall Street Journal’s OpinionJournal.General OpinionOpinion

If you find our journalism valuable and relevant, please consider joining our Examiner membership program.
Find out more at

Just Posted

Giants second baseman Donovan Solano scores on a double in the seventh inning against the Dodgers at Oracle Park on July 29. (Chris Victorio/Special to The Examiner)
Will the Giants make the playoffs? Kris Bryant may be the answer

By Chris Haft Special to The Examiner You’d be hard-pressed to find… Continue reading

Tiffany Carter, owner of Boug Cali West Coast Creole Shack in San Francisco’s La Cocina Marketplace, was dismayed by gentrification she found when she returned to her hometown to start a business. (Kevin N. Hume/The Examiner)
SF Black Wallstreet: Helping residents build wealth, reclaim spaces they’ve had to leave

Tiffany Carter moved back to her hometown of San Francisco five years… Continue reading

A prescribed fire at Sequoia and Kings Canyon National Parks was conducted in June 2016 to reduce hazardous fuel loading, increase watershed health, and restore the natural fire cycle in the Redwood Canyon area ecosystem. (Photo courtesy Rebecca Paterson/National Park Service)
Experts, UC scientists discuss wildfires in the state’s riskiest regions

Wildfires are nothing new in California’s history, but the magnitude and frequencies… Continue reading

Fourth-grade students at Lucerne Valley Elementary School don masks and Western wear for a “Walk Through California” history day during in-person instruction. (Courtesy of Krystal Nelson)
Confusion over mask mandate for California schools sparks tension between districts and parents

By Diana Lambert EdSource Shifting rules around mask mandates at schools are… Continue reading

In his extensive filming of The City during the pandemic, Eric Goodfield said he has been “observing how the environment affects the behavior of people.” (Kevin N. Hume/The Examiner)
Filmmaker Eric Goodfield fixes lens on SF’s COVID days

140 days of shooting in The City made for ‘greatest adventure’

Most Read