California could become the first state to make its own prescription drugs under a proposal announced Thursday by Governor Gavin Newsom. The effort could "take the power out of the hands of greedy pharmaceutical companies," Newsom said.

The Democratic governor wants the nation's most populous state to contract with generic drug companies to make medications on its behalf so it could sell them to its nearly 40 million residents. The goal is to lower prices by increasing competition in the generic drug market, Newsom said.

Pharmaceutical costs continue to rise, with prices on 411 drugs increasing an average of 5% at year start, according to GoodRx, which tracks the cost of more than 3,500 drugs. Of the drugs that have seen rising prices, 407 were brand-name products and four were generic. As pharmaceutical costs have risen in recent years, more Americans are struggling to pay for medications, with 1 in 10 skipping doses because of cost.

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Newsom's proposal would create a single market for drug pricing in California, with companies having to bid to sell their medicine at a uniform price. One expert said that piece would have the bigger impact.

"Other countries control or negotiate the price of drugs, and if there is one state that could do it, it's California, which is the size of a country," said Larry Levitt, executive vice president of health policy for the Kaiser Family Foundation. "A drug company could walk away from Rhode Island. It's much harder to walk away from California."

Lawmakers would have to approve the proposal before they could become law. A legislative leader in charge of reviewing the plan gave a tentative endorsement Thursday.

"If Costco can have a Kirkland brand, why can't California have our own generic brand?" said Democratic Assemblyman Joaquin Arambula, an emergency room doctor from Fresno who chairs the House Budget Subcommittee on Health and Human Services. "I really do think there is quite a bit of merit in having us produce the medications."

Priscilla VanderVeer, vice president of the Pharmaceutical Research and Manufacturers of America, which represents brand-name drug companies, said she's waiting for more details from Newsom before commenting.

A representative from the Association for Accessible Medicines, which represents generic drug manufacturers, did not respond to a request for comment.

Budget proposal

The drug plan is part of Newsom's budget proposal, which he must present to lawmakers by Friday. The state could have as much as a $7 billion surplus this year, according to the nonpartisan Legislative Analyst's Office.

Newsom's office did not say how much the drug proposal would cost, prompting criticism from some Republican lawmakers who said the state should not compete with private companies.

"When the state runs it, it costs more money," said Republican Assemblyman Devon Mathis, who's also on the health subcommittee. "The money is coming out of families' pockets paying all those crazy taxes."

California law requires drug companies to report any price increases to the state. Generic drugs saw a three-year median increase of 37.6%, according to a report from the Office of Statewide Health Planning and Development. That analysis was based on the list prices of the drugs and did not include discounts or rebates.

But the report doesn't include generic drugs that decreased in price because companies are not required to report that. Nationally, generic drug prices have been decreasing overall, according to a report that AARP produced with the University of Minnesota.

Insulin prices

Supporters say California's generic drug label could help lower the cost of a common drug that has steadily increased in price — insulin for diabetes patients. Three drug companies control most of the market for insulin.

"Consumers would directly benefit if California contracted on its own to manufacture much-needed generic medications like insulin — a drug that has been around for a century yet the price has gone up over tenfold in the last few decades," said Anthony Wright, executive director of Health Access California.

Prescription drug prices are too high. I’m proposing that California become the first state in the nation to establish its own generic drug label. It’s time to take the power out of the hands of greedy pharmaceutical companies. https://t.co/XphJz4iukQ — Gavin Newsom (@GavinNewsom) January 9, 2020

Jon Roth, CEO of the California Pharmacists Association, said the state might be surprised, however, at how much it ends up charging for its own generic drugs because of factors beyond its control, including raw material shortages and disruptions in the supply chain.

"There are other factors in the actual manufacturing that the state may not be able to escape," he said.

While most Americans get generic prescriptions, they only account for a small part of the total drug spending in the U.S. That's because unlike the name-brand drug market, generics are very competitive, said Jeff Joyce, chairman of the Department of Pharmaceutical and Health Economics at USC's School of Pharmacy.

"What he is proposing to do would help in specific cases, but it's not a panacea by any means," Joyce said.

The proposal is another step in Newsom's effort to overhaul California's prescription drug market. Last year, in one of his first acts in office, Newsom ordered the state to take over the Medicaid program's prescription drug benefits, which affects 13 million people.