Prop. 34: Transparency in Healthcare, or Unconstitutional Manipulation?
Proposition Summary
Proposition 34 would require certain healthcare organizations to spend revenue from the Federal Drug Discount Program on direct patient care and establish penalties for not doing so.
Background
Let’s break this down.
What is the Federal Drug Discount Program?
In 1992, Congress created what would become known as the Drug Pricing Program, or the Drug Discount Program, under Section 340B of the Public Health Service Act. This Program requires manufacturers of prescription drugs to sell them at a discount to specific entities known as covered entities.[1] It then permits these covered entities to sell the discounted drugs at higher price points to generate revenue, which, in turn, should be used to subsidize other health care services. [2] The goal of this program was to make a way for entities that serve “vulnerable patient populations” to earn revenue that would allow them to provide more comprehensive health services to those populations.[3] The Federal 340B Drug Pricing Program has provided prescription drugs to these covered entities at a discount of 20 to 50 percent.[4]
Who qualifies as a covered entity in these programs?
Covered entities fall into two main categories: hospitals and federal grantees.
Hospital covered entities include children’s hospitals, cancer hospitals, and a few other specific types of hospitals.[5] Basically, these hospitals must meet one of three requirements to qualify:
1. They must be owned or operated by government,
2. If they are a public or private non-profit, then they must be granted governmental powers, or
3. They must be a private non-profit that has a contract with the government to serve low-income individuals.[6]
The second category, federal grantee covered entities, consists of ten categories, including AIDS drug assistance programs, tuberculosis clinics, family planning clinics, and a few other specific organizations. Both categories of covered entities apply to the Federal 340B Program and receive discounts on all eligible prescription drugs.[7]
The Interaction of the Federal 340B Drug Pricing Program and State Medi-Cal
How does this Program flow through to low-income individuals? If entities are buying drugs at a discount, but then selling them at higher prices to make a profit, wouldn’t this mean that patients are still paying the higher prices? This is where the state Medi-Cal system interacts with the Federal 340B Drug Pricing Program.
There are essentially two healthcare programs to consider: there is the Federal 340B Program that we just discussed, and then there is the Medi-Cal Prescription Drug Rebate Program, which affects Medi-Cal on the state level. Covered entities purchase prescription drugs under the Federal 340B program, but then when they move to sell those prescriptions to patients within California, they operate under the Medi-Cal Prescription Drug Rebate Program. This program is what covers the patient’s cost of prescription drugs.
When a patient enrolls in Medi-Cal, Medi-Cal covers the cost of their prescription drugs. It does so in one of two ways:
1. Through a Fee for Service Model, or
2. Through a Managed Care Plan.[8]
How each type of program works in terms of interacting with the Federal 340B Drug Pricing Program is different. Under a Fee-For-Service model, a covered entity will buy a prescription drug from a manufacturer at a discounted price, let’s say for $10. Then, a Medi-Cal patient will come to the entity and pick up the prescription drug for no cost. The entity then submits a rebate back to the state, and Medi-Cal pays the discounted price, at $10. Under fee-for-service, covered entities are not earning revenue on Medi-Cal patients.[9]
This is different from a Managed Care Plan. Under a Managed Care Plan, the scenario starts the same way, with an entity buying a prescription drug at a discount, again that $10 price, and then a Medi-Cal patient picks up the drug at no cost to them. However, under this structure, the entity doesn’t submit a rebate to the state, but it bills the Managed Care Organization that the patient is enrolled in. Let’s say this patient was enrolled in Medi-Cal through Blue Cross. The entity would bill Blue Cross for the patient’s prescription, and it is allowed to bill Blue Cross at a higher rate than its discounted price. So now the entity can bill Blue Cross for $60 and keep $50 as revenue. Entities can do this for all patients, regardless of Medi-Cal, which creates a stream of revenue for them.[10]
And this Program has proven very lucrative for covered entities. One study conducted on the outcomes of the Program found that the estimated 340B profits in 2016 were $2.5 million dollars.[11] The increase in profit over the years has risen as the number of covered entities participating in this Program has increased since the Program’s implementation. In 1992, when the Federal 340B Program was established, there were originally around 1,000 covered entities participating; by 2021, that number had risen to over 50,000.[12]
This revenue is precisely the point in the process that Proposition 34 speaks to – so it is really important to understand. To repeat simply, covered entities – as we just defined – have a path to make revenue through managed care programs by buying prescription drugs at a discount under Federal 340B Drug Pricing, and then billing Managed Care Organizations – both for Medi-Cal enrollees and non-Medi-Cal enrollees – for a higher cost than they purchased the drugs for and keeping the difference.
Proposition 34 directly looks to regulate how THIS revenue is spent by certain covered entities.
Details of Proposition 34
With that background, why is Proposition 34 proposing to regulate this revenue?
According to a study conducted on the Outcomes of the 340B Drug Pricing Program, currently, “Covered entities are not required to report how they use 340B revenue as a condition of participation, creating challenges in studying this spending... Study findings conflicted as to whether the revenue is primarily directed toward charity care and low-income populations.”[13] Some of the findings reported that this revenue was spent on expanding health care services, opening more clinics to serve low-income populations, and subsidizing the cost of medication to patients. However, some hospitals were found to have used this revenue for initiatives that weren’t related to patient care – a couple examples of this were opening clinics in higher-income areas and purchasing outpatient practices. So, while the Federal 340B Program could have the intentions or purpose of helping covered entities to expand healthcare services for vulnerable populations, if or how entities go about doing that is not monitored, reported, or enforced in any way.[14] That’s where Proposition 34 comes in.
Proposition 34 creates a new rule that certain healthcare entities have to spend 98% of their revenue from the 340B Program on direct patient care.[15] The proposition doesn’t define “direct patient care,” but the CDC defines it as “hands-on, face-to-face contact with patients for the purpose of diagnosis, treatment, and monitoring.” These activities apply to both inpatient care and outpatient care.[16] These entities would have to report their total revenue from the 340B Program annually and how that revenue was spent. If they didn’t spend at least 98% of revenue on direct patient care, then Prop. 34 establishes penalties that would be incurred by the entity. Additionally, if they do not report their earnings and spending on time, or if the information they report is found to be inaccurate, then the penalties would apply as well.
What entities would Proposition 34 apply to?
But this doesn’t apply to every covered entity. There are four conditions that define which entities are subjected to Proposition 34’s requirements.
1. The health care entity must be participating in the Federal 340B Drug Pricing Program,
2. The health care entity must be licensed in the state to operate as a health plan, pharmacy, or clinic,
3. The health care entity must have spent over $100 million dollars on expenditures outside of direct patient care within a period of ten years, and
4. “The health care entity must own and operate multifamily housing units with at least 500 violations with a severity level of ‘high.’”[17]
These are very specific requirements, especially the last requirement about operating housing units with violations. Are there any organizations that fit all of these requirements? The answer is yes, there is just one entity that fits all four of these requirements: the AIDS Healthcare Foundation.[18] But I want to circle back to this point in a moment, after getting through all the details of Prop. 34. For now, just keep in mind, these are specific and stringent attributes and would most likely apply to a small group of entities.
What penalties would organizations incur for noncompliance? If the entities that do qualify fail to either report timely and accurately or fail to meet the 98% threshold for spending on direct patient care, then what penalties does Prop. 34 impose?
There are four penalties that would be enforced against noncompliant entities. The entity’s tax-exempt status in California would be revoked, it would lose its license, it would no longer be eligible to receive any contracts or grants from state or local governments, and the leaders of the entity would not be able to serve in leadership positions for any other California health plans, pharmacies, or clinics.[19] These are pretty serious effects. For an entity that is used to operating tax-free, and that needs a license to even be able to operate in the state in the first place, it’s a huge deal to revoke both the tax-free status and the licensing of the entity. Needless to say, if this passed, it would be critical for any qualifying entity to make sure they are compliant with the new regulations.
What is the goal of Proposition 34, and will it improve healthcare outcomes?
The goal of all of these programs in the first place is to try to make a way for healthcare entities to earn revenue for the purpose of pouring that revenue back into serving low-income individuals and the vulnerable populations of California communities. The challenge, as stated earlier from the study on the Outcomes of the 340B Drug Pricing Program, has become that without regulations in place requiring transparency and reporting on how the revenue from the 340B program is spent, it is impossible to ensure that the goal of the program is being achieved. That same study proposes that a solution to this challenge would be to pass legislation that would require all covered entities to value transparency through reporting requirements and service provided. Quoting from the study, “At a minimum, all covered entities should be required to report on 340B revenue and their spending to expand health care service offerings and programming. Additional requirements could be set for the proportion of 340B revenue that must be put toward community benefit spending. These rules will promote trust and accountability in the 340B program and support future evaluations of its successes and effectiveness.”[20]
Proponents of the proposition make this argument. They say that taxpayers deserve to know where money given by the federal government to healthcare entities is going, and if it is actually achieving its goal of serving those patients most in need. Proposition 34, according to supporters, is a way to enforce this transparency, and also to root out abuse of the Federal Drug Discount Program.[21]
Support & Opposition
This brings us to another common question that we ask with every proposition: Who is supporting the proposition and why, and who is opposing it and why? And while we’ve discussed some of the intentions behind what Prop. 34 is trying to do, when you start to look further into the groups behind the proposition, you’ll find there is much more to the story than just good reporting practices. This proposition has a whole lot of tea to spill, so buckle up.
To fully understand who is involved, we have to go back a few weeks to Episode 4, where we looked at rent control together. Do you remember who wrote Proposition 33 on rent control, and what group was mostly funding the ballot initiative? Let me remind you. Proposition 33 was written by Harvey Weinstein, and it was funded by his organization – the AIDS Healthcare Foundation. Sound familiar?
The AIDS Healthcare Foundation is, so far, the only entity that has been identified as fitting the four criteria outlined in Prop. 34 for which entities the new regulations would apply to. The Foundation is the largest AIDS organization in the United States and has more than 730 clinics across 45 countries. It also collects approximately $2 billion dollars in revenue annually from its clinics and pharmacies.[22] However, while the organization claims to serve vulnerable groups affected by HIV AIDS, it has also been engaged in several political battles, mostly revolving around rent control. It isn’t just Weinstein who is putting forward ballot initiatives on the side of his work as President of the Foundation; he consistently uses money from the Foundation to fund these initiatives or to oppose other ballot initiatives that are against his own. Since 2012, the Foundation has been involved in 8 ballot initiatives, and that is not including this year’s Proposition 33, which brings the total number up to 9. For just two of those initiatives in 2018 and 2020, the Foundation contributed over $63 million dollars in support.[23]
Proponents of Proposition 34 argue that entities like the AIDS Healthcare Foundation are abusing the Drug Discount Program by pouring so much of the revenue from the Program into efforts that do not support patient care. But, do the intentions of the supporters of this proposition end there? One of the main groups supporting Proposition 34 is the California Apartment Association – an outspoken opponent of Harvey Weinstein and his past and present ballot initiatives supporting rent control. The California Apartment Association is the largest donor to Prop. 34, funding it by $44.1 million dollars out of the total $44.6 million dollars of all donors combined.[24] This calls into question if Proposition 34 is really aimed at regulating how revenues from the Federal Drug Discount Program are spent, and if patients will actually be helped, or if it’s just a “revenge initiative” meant to keep Weinstein from supporting rent control legislation.
The number one indicator that Prop. 34 is vindictive according to opposing groups are the specific requirements that must be met to qualify as an entity that must abide by the regulations – especially the fourth requirement concerning owning and operating multifamily housing units that also have over 500 severe violations. Most health care entities will not qualify under this very niche requirement, thus singling out the AIDS Foundation and applying new regulations only to their operations. The motives become obvious when you learn that Weinstein and his foundation own real estate properties meant to serve low-income communities through affordable housing. Since 2017, the organization has obtained 16 buildings with around 1,500 total units in the Skid Row area of Los Angeles. However, Weinstein has been accused on several occasions of operating as a slum lord. The Los Angeles Times found that, “...foundation buildings have had heating, plumbing and electricity failures, vermin infestations and, in some cases, a surge in tenant complaints and crime after the foundation took them over.”[25] Due to these conditions, even state officials sought to prevent the AIDS Foundation from buying more housing earlier this year. It starts to make sense then as to why a condition in Prop. 34 is that an entity must have over 500 severe violations related to operating housing units – it perfectly fits the description of Weinstein’s Foundation.
Responses
To recap, we have looked at what the Federal Drug Pricing Program is, how it interacts with Medi-Cal to support low-income patients, how covered entities are able to earn revenue through the 340B Program, and how Prop. 34 would then apply to some of those entities to require transparent reporting and stringent spending on patient care. We’ve also uncovered that there appear to be deeper motives behind both supporting and opposing groups, and that there seems to be a greater battle over rent control behind the scenes. What do we do with all of this information? How are we to think about, and vote on, Proposition 34?
It’s a bit messy to unpack, but my take on it boils down to two components:
1. First, I agree with the idea that there should be transparency and enforcement for how revenue is spent by entities who receive revenue through this governmental program, but second,
2. The way you go about achieving your goals legislatively matters, and should set helpful, not harmful, precedents.
Let me break each component down.
First, I completely agree with the idea that covered entities who enroll in the Federal 340B Program and thus earn revenue through discounts on drugs should have to spend that revenue in ways that the Program originally intended. The 340B Program was not designed to make these entities wealthy for their own sake, it was designed to help serve underserved communities by making quality healthcare accessible to low-income and vulnerable populations. I’m honestly surprised that there aren’t reporting standards in place already for enrolled entities to be held accountable for how the money is spent. The idea of putting in place some regulation to reach the goals of the Program, and establishing serious penalties to enforce that regulation, seems very reasonable to me. Especially because the revenue that these organizations are earning each year and then spending on programs is a direct result of both taxpayer dollars and patient dollars.
Think about it, the federal government is only able to fund Medicare and Medicaid through taxpayer dollars, and the state government funds Medi-Cal the same way. While the discounts on drugs come from the drug manufacturers, the rebates and payments for the drugs through the Medi-Cal and Medi-Care systems are pulling from your tax dollars. Additionally, these entities also make further revenue through charging higher prices for prescription drugs than the price they pay the manufacturers. Who are they charging those higher prices to? You! Obviously, it’s a little more complicated than that because you have insurance and so it goes through the Managed Care Organizations, but you pay the monthly rates to have that insurance, and the more insurance covers, the higher your rate will be. At the end of the day, there’s no such thing as a free lunch, and when one entity makes money, it has to come from somewhere. It always somehow circles back around to the average taxpayer.
That means that you and I should have some window and say into how that money is being spent. I don’t like the idea of entities using the funding they are receiving from governmental programs, and through charging higher prices on prescription drugs, to go out and campaign for ballot initiatives that go against my values. I would rather than money be poured back into the organization to improve patient care, as well as have to be reported to the public regularly.
These are just common-sense ideas. If you as a parent give your child $50 dollars to pay for school supplies, and they don’t come home with any school supplies, you would be justified to wonder what they did with the money, and you should confront them about why they didn’t spend it on the purposes you expressly stated. Entities shouldn’t be able to take money that is meant to improve patient care, and then spend it on fancy outpatient care clinics in rich neighborhoods – not because those clinics are bad, but because that wasn’t the purpose of the funds they were given in the first place. Hear me clearly: I am a free market loving, low regulations, small government kind of girl; but IF you take part in a specific governmental program, with clear purposes, then I believe you should have to spend the money the way the program intends for it to be spent. Otherwise, don’t participate in the program at all, and spend your money however you want. In that way, Proposition 34 is a very good idea.
But, even with all of that being said, I come to my second point, which is that the way in which you pass legislation matters. For example, in the United States, you cannot ban free speech in order to protect the Constitution. That would be cognitively dissonant. The Constitution guarantees the right to free speech, and so if someone was speaking out against the Constitution, and you or our government wanted to restrict that in order to protect our fundamental values, they could not do that by turning around and violating the Constitution itself. That’s a really high-level example, but I give it because I want to emphasize the point that in our country, we cannot pass laws to get to desired outcomes if the very laws we pass are themselves illegal.
How does this apply to Proposition 34? Well, it comes down to a little thing mentioned in the Constitution called a bill of attainder. A bill of attainder is legislation that allow the government to inflict punishment on one person or group of people without a trial for the actions in question, and it is illegal. This means that legislation cannot be crafted to single out one person, or one class of people, as criminal and therefore impose punitive measures on them. That person, or that class of people, have a right to a fair trial for the actions in question, and it can’t be written into legislation as illegal just for the purpose of punishing them. There is a three-part test used by courts to determine if legislation is acting as a bill of attainder. The law is classified as a bill of attainder if it 1) inflicts punishment, 2) targets identifiable individuals or groups, and 3) those individuals or groups would otherwise be protected from judicial punishment.[26] Weinstein and the AIDS Foundation are arguing that Proposition 34 does just this, and are they really that far off? Proposition 34 does inflict punishment on the entities that it pertains to – through revoking their licenses and tax-exempt statuses, it so far only applies to the AIDS Healthcare Foundation – specifically emphasized through the mention of owning multifamily housing AND having severe housing violations, and the targeted groups would have judicial protections otherwise – because currently the political activities and funding by Weinstein and his foundation are not illegal or specifically called out by the 340B Drug Pricing Program.
Weinstein and his lawyers took this before the California Supreme Court, but the court ruled that it would only hear the issue if the ballot initiative was passed – so until we Proposition 34 passes, there is no judicial verdict on the legislation. However, if it is ruled to be a bill of attainder, Prop. 34 will be deemed unconstitutional and will not go into effect, regardless of the fact that voters passed it.[27]
Why does this matter? I think the key here to remember is this: legislation is not only about outcomes, but also about precedent. Every piece of legislation that is passed sets some sort of precedent in our state and in our country for how we go about enacting laws, and how we go about achieving desired outcomes. We cannot blow up the Constitution or the branches of government just to get what we want. Like the example I gave earlier, you cannot advocate for circumventing the systems of government in order to uphold democracy. You cannot claim to protect democracy by acting outside of it. That applies to something even as small as a state ballot proposition on a niche issue.
I hate seeing corrupt actors exploit the system for political gain and hurt vulnerable Americans in the process. I also strongly disagree with Michael Weinstein and much of what he stands for. In no way do I want to defend him or allow him to continue funneling money meant to help patients into buying up real estate that he operates in a shady way and funding ballot propositions that are deeply harmful to our state and the economy. But, regardless of my feelings toward Weinstein, the evidence is overwhelming that Prop. 34 is targeting one specific group – and that is wrong. You cannot target your political opponent through legislation, but that is exactly what is being done here. Voters may feel the same way that I just described – desiring accountability and transparency for how drug discount revenue is spent – and therefore vote yes on a measure that will be brought before the California Supreme Court and potentially deemed unconstitutional. That is manipulation to get voters to approve your measure to then target one person or organization, and that behavior is illegal under our country’s Constitution.
We cannot simply bypass the Constitution or the protections of legislation because we want a certain outcome. That sets a dangerous precedent that might be in your favor today, but certainly won’t be in your favor tomorrow.
What could proponents of Proposition 34 change about the proposed legislation to avoid doing this? It’s pretty simple – they could broaden the requirements of the proposition so that it more fairly applies to a wider group of health care entities. This would not only protect the proposition from being used as a tool for political jockeying, but it would also help MORE patients by requiring MORE health organizations to spend revenues on patient care and report their revenues and expenditures. There’s no reason those requirements have to apply to just one group, they should apply to ALL entities enrolled in the Federal 340B Program! Put that version of the proposition on the ballot, and I can support it in a heartbeat.
But until those revisions are made, I have to recommend one thing: Vote no on proposition 34.
References:
[1] 340B Health. “Detailed Overview - 340B Health,” n.d. https://www.340bhealth.org/members/340b-program/overview/.
[2] Knox, Ryan P., Junyi Wang, William B. Feldman, Aaron S. Kesselheim, and Ameet Sarpatwari. “Outcomes of the 340B Drug Pricing Program.” JAMA Health Forum 4, no. 11 (November 22, 2023): e233716. https://doi.org/10.1001/jamahealthforum.2023.3716.
[3] “Detailed Overview - 340B Health.”
[4]Clark, Bobby, and Marlene Sneha Puthiyath. “The Federal 340B Drug Pricing Program: What It Is, and Why It’s Facing Legal Challenges.” The Commonwealth Fund, September 8, 2022. https://doi.org/10.26099/c4z8-pf65.
[5] Knox et al., “Outcomes of the 340B Drug Pricing Program.”
[6] “Detailed Overview - 340B Health.”
[7] Ibid.
[8] Johnson, Ben. “The 2018-19 Budget: Analysis of the Governor’s 340B Medi-Cal Proposal.” Legislative Analyst’s Office, March 21, 2018. https://lao.ca.gov/Publications/Report/3790#:~:text=Covered%20entities%20retain%20340B%20savings,may%20use%20any%20retained%20savings.
[9] Ibid.
[10] Ibid.
[11] Knox et al., “Outcomes of the 340B Drug Pricing Program.”
[12] Ibid.
[13] Ibid.
[14] Ibid.
[15] Legislative Analyst’s Office, “Proposition 34 [Ballot],” 2024, https://lao.ca.gov/BallotAnalysis/Proposition?number=34&year=2024.
[16] CDC. “NHSN Healthcare Personnel Safety Component Key Terms.” NHSN Healthcare Personnel Safety Component, January 1, 2013. https://www.cdc.gov/nhsn/pdfs/hps-manual/exposure/6-hps-key-terms.pdf.
[17] Legislative Analyst’s Office, “Proposition 34 [Ballot].”
[18] La, Lynn. “California Proposition 34: Patient Healthcare Spending.” CalMatters, October 1, 2024. https://calmatters.org/california-voter-guide-2024/propositions/prop-34-patient-spending/.
[19] Legislative Analyst’s Office, “Proposition 34 [Ballot].”
[20] Knox et al., “Outcomes of the 340B Drug Pricing Program.”
[21] La, “California Proposition 34: Patient Healthcare Spending.”
[22] Egelko, Bob. “California Voters Can Decide Ballot Measure Targeting LA Nonprofit, State Supreme Court Rules.” San Francisco Chronicle, July 17, 2024. https://www.sfchronicle.com/politics/article/aids-healthcare-ballot-measure-19578138.php.
[23] Ballotpedia. “California Proposition 34, Require Certain Participants in Medi-Cal Rx Program to Spend 98% of Revenues on Patient Care Initiative (2024) - Ballotpedia,” n.d. https://ballotpedia.org/California_Proposition_34,_Require_Certain_Participants_in_Medi-Cal_Rx_Program_to_Spend_98%25_of_Revenues_on_Patient_Care_Initiative_(2024).
[24] Yu, Elly. “California Proposition 34: Controls Spending of Certain Prescription Drug Revenues.” LAist, September 24, 2024. https://laist.com/news/politics/2024-election-california-general-proposition-34-prescription-drug-spending.
[25] Dillon, Liam. “State Officials Want to Stop AIDS Charity From Buying Skid Row Housing - Los Angeles Times.” Los Angeles Times, April 1, 2024. https://www.latimes.com/homeless-housing/story/2024-03-27/aids-healthcare-foundation-acquire-skid-row-housing-trust-portfolio#:~:text=Currently%2C%20the%20foundation%20is%20facing,Smith%20contributed%20to%20this%20report.
[26] Cornell Law School. “Bill of Attainder.” LII / Legal Information Institute, n.d. https://www.law.cornell.edu/wex/bill_of_attainder.
[27] Egelko, “California Voters Can Decide Ballot Measure Targeting LA Nonprofit, State Supreme Court Rules.”
