Lots of important stuff this week, most notably the Trump tax bill got passed and signed into law. I’ll be writing about that bill for a very long time, since there are a lot of different provisions in it that will largely consolidate economic and political power. There are some initial thoughts on the bill, and some of the odd provisions I’ve noticed, after the paywall.

What I want to focus on today is a different trend, which is how states, led by Ohio and Kentucky, are actually nationalizing a key mechanism to organize pharmaceutical prices. Yes, nationalizing, aka having the state take over a private business and run it. And it’s working fantastically well.

Here’s the story.

Every state runs a health insurance program for low income residents, known as Medicaid, and it buys a lot of pharmaceuticals. Like a lot of state services, Medicaid drug purchases are contracted out, usually to the big conglomerates. Ohio used to use pharmaceutical benefit managers CVS Caremark and UnitedHealth Group’s OptumRx to run its Medicaid program, but these firms were high-priced and gave bad reimbursements to local pharmacies. They also imposed “gag orders” so that those pharmacists weren’t allowed to tell customers when they could get a lower price for medicine. In 2018, the Columbus Dispatch conducted an investigation and found that they were also ripping off the state, charging Ohio “a lot more for drugs than they were paying the pharmacies that had bought and dispensed them.” Ruh-roh.

In 2019, the Ohio General Assembly passed House Bill 166, which instructed the Ohio Department of Medicaid to form a Single Pharmacy Benefit Manager (SPBM), which it launched in October of 2022. Unlike the big PBMs, which were owned by insurance companies and chain pharmacies, Ohio’s public PBM had no conflicts of interest. Pharmacies got paid a standard price for dispensing drugs and there was no steering or “spread pricing” whereby the corporate middlemen secretly kept fees meant to lower the price of drugs. The big PBMs predicated doom, naturally.

Operationally, it wasn’t all done via state employees; some services were done in-house, some were done through vendors, the main one being Gainwell Technologies. But ultimately the Department of Medicaid took over the entire pharmaceutical middleman service for Medicaid. It set reimbursement amounts and payment rates for pharmacy services, managed a preferred drug list and prior authorization, processed rebates and payments, managed the clinical pharmacy program, as well as managed call centers for beneficiaries, doctors, and pharmacists, and maintained a network of pharmacies.

So what happened? Well after two years, a well-respected consulting firm was retained to study the results. And they were good. Very good. There was substantially less bureaucracy, and the state saved $140 million over two years, even as dispensing fees to pharmacies increased by 1200% on average. Caremark and OptumRx had paid pharmacies on average 73 cents to dispense medication, which was driving them out of business. By contrast, the Ohio SPBM paid them on average $9. As a result, 99% of pharmacies across the state joined, so medicine was available to most Medicaid patients, who often have trouble traveling. And no one was forced to use any particular pharmacy, because the state doesn’t have conflicts of interest, unlike CVS or UnitedHealth Group.

At roughly the same time, in 2021, Kentucky also nationalized its Medicaid PBM, saving $283 million in just one year, $56.6 million of that being state money and the rest being Federal outlays, which pays for much of Medicaid. They heard the same scare story.

The elimination of outside PBMs brought dire warnings of soaring costs from companies that previously managed Medicaid’s prescription drug business and claimed to keep down expenses. But a state analysis found the opposite, state Medicaid officials Veronica Judy-Cecil and Steve Bechtel told the legislative Health Services Committee on Sept. 27.

As a result, the state has been able to plow some of its savings back into this year’s expansion of Medicaid dental, vision and hearing benefits for adults, Cecil said…

Benjamin Mudd, executive director of the Kentucky Pharmacists Association, said the changes have been enormously popular with the state’s pharmacists.

“I think it’s been a phenomenal experience for everyone involved except maybe the PBMs,” Mudd said. “I would say Senate Bill 50 has undoubtedly kept some pharmacies from closing in our state.”

As you can see, Kentucky pharmacists were ecstatic, as they finally got paid to dispense medication, instead of being squeezed and gouged in increasingly opaque ways. The third state to do it was Mississippi, which implemented the state-run single PBM last year. And now Virginia, Minnesota, and Nevada have all passed legislation to implement state-run single PBMs.

These programs are a big deal, but I don’t want to overstate the scale of the achievement. Medicaid isn’t all of health care, it’s just the part for low-income residents. But it’s clear there’s no logistical reason why we couldn’t replace corporate PBMs for commercial insurance or Medicare, and see similar savings and better service. And that’s likely what will happen.

So why focus on these successful nationalization attempts? I’m writing about this trend of state socialization of PBMs because of the fall-out from the New York mayoral election, where Democratic socialist Zohran Mandami is being attacked as a Communist for seeking to offer free buses, sparking a debate over the role of the state. There’s a lot of hot air around what the state should and shouldn’t do, but mostly that’s borne of people being familiar with the grooves of a conversation with well-understood insults, instead of the details of government. It’s far easier to throw around the term “Communism!” than to actually learn that Ohio and Kentucky just nationalized their Medicaid PBMs. “That’s boring! That requires homework!”

Communism or socialism or capitalism are words that mean a lot less than they seem. The state does a bunch of stuff, private entities chartered by the state do a bunch of stuff, and it’s often arbitrary and path dependent who does what. Alexander Hamilton wanted a narrow post office instead of the broad one that we have, but he lost the political debate in the early days of our nation. So the Post Office, a state-entity, structured much of our infrastructure and stagecoach regulations via the “post roads” provision in our Constitution, which led to much of the U.S. regulatory state. If Hamilton had won, we’d have gone in a totally different direction.

Similarly, Samuel Morse, the inventor of the telegraph, wanted to sell his patent to the U.S. Post Office. But Congress decided instead to regulate telegraphs with the anti-monopoly legislation called the Telegraph Act of 1866, giving the government certain rights and restricting monopolization. This law led to the creation of the National Weather Service, and also Western Union. If Congress had taken up Morse on his offer, again, America looks very different.

Fire services, flood insurance, policing, old person’s medical payments, weather forecasting, sending mail, and global positioning are done by the state. I don’t hear a lot of “Marxism!” when people open up Google Maps and find driving directions. Joe Weisenthal, who I like very much, similarly characterized state-run liquor store monopolies as a form of Communism, even though they are entirely about selling privately made products. That’s just very silly. At the same time, Donald Trump slashed the National Weather Service earlier this year, and this week’s tragedies in Texas due to poor weather forecasting suggest we likely need more state capacity. We all know the state is necessary, which is why even conservatives get very angry when it fails. As Thomas Hobbes noted in the 17th century, without government and some sort of order, the “life of man” is “solitary, poor, nasty, brutish, and short.” (And I’m not even getting to public utility regulation, which is another form of public control or influence over property, with roots that go back to the Middle Ages.)

We have to move beyond the ‘Communist!’ name-calling nonsense. Communism wasn’t bad because the USSR had a government, it was bad because the USSR used coercion to kill tens of millions of people and impose a draconian police state on its people. Centralization of economic power is dangerous, as it was under Communism, but that can be done through public or private means. JP Morgan’s George Perkins, a key backer of Teddy Roosevelt, believed he was a socialist because he was consolidating many of the great American railroads and enterprises. As FDR’s Attorney General Robert Jackson once said, “What the extreme socialist favors, because of his creed, the extreme capitalist favors, because of greed.”

On July 4th, I wrote about land reformer Henry George, who inspired both libertarians and social liberals, with his vision of how social activity creates collective value that should not be monopolized by a few. At the time, it was common for cities and states to undertake great public projects, and no one saw some sort of ideological crisis if/when they did so. I mean, the first U.S. railroad, the Baltimore & Ohio, which really was the origin of American industrialization, had as its key investors both the state of Maryland and the city of Baltimore. It’s time to recognize that we’re no longer in a Cold War with the USSR, and the same old tired slogans about an overweening government are dumb.

In other words, leave Ohio, Kentucky, and Mississippi alone. Their state PBMs are working great. And after the paywall, there’s the news of the week, including the South Park guys getting mad at Paramount for corruption during its merger attempt, Trump openly saying he can nullify laws he doesn’t like, and Tony Blair and the Boston Consulting Group being caught pitching a “Trump Riviera” and an “Elon Musk Smart Manufacturing Zone” in Gaza. And more!...