Activists in Ohio and California are calling for all citizens to get Veterans Administration (VA) prices on prescription drugs. With California set to vote on the issue in November, Morgan Stanley analyst David Risinger set out to answer a pair of key questions about the issue.
First, Risinger wanted to determine how much of a discount the VA gets compared to Medicaid. The most recent data that Morgan Stanley could track down was from a 2005 study that revealed that Medicaid’s net drug price was roughly 51 percent of manufacturer list price, whereas VA average price was about 42 percent of list price.
Second, Risinger wanted to determin what percentage of the overall U.S. drug spend comes from Medicaid. According to CMS’s 2014 National Health Expenditures report, Medicaid represents about 11 percent of total U.S. drug spend.
What does it all mean?
“If all states instituted VA pricing for drugs, we estimate it would only result in a 2% decline in US drug spend, or approximately $6B,” Risinger explains.
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The real risk to these state pricing initiatives could be to the multiples of big pharma stocks if the market overestimates the impact VA pricing would have on their bottom lines.
So far this year, fears over drug pricing regulations have driven down the SPDR S&P Pharmaceuticals (ETF) XPH by 13.9 percent.
Disclosure: the author holds no position in the stocks mentioned.
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