Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why Minnesota Created a Public Option for Generic Drugs
Transcript
- Lucas: So in May 2026, Minnesota became the first state in the country to launch a state-run generic drug manufacturing program. They picked three drugs where prices have jumped more than 400 percent in the last five years. Luna: Four hundred percent on generics? That's not the stuff you think of as expensive — that's the everyday pills that used to cost ten bucks. Lucas: Exactly. We're talking about medications like diltiazem, a blood pressure drug that went from around fifteen dollars for a ninety-day supply to nearly seventy dollars. The state's argument is simple: when the free market produces price gouging on a product that's off patent, the government can step in as a manufacturer. Luna: And they're actually building a factory? Or contracting out? Lucas: They're leasing an existing facility in the Twin Cities metro area, retrofitting it for sterile manufacturing. The state owns the building and the equipment, but they've licensed the operation to a nonprofit called Civica Rx. You might remember Civica — they're the consortium that hospitals created back in 2018 to make their own generic injectables during shortage crises. Luna: Right, Civica was a response to the EpiPen price scandal and all those hospital shortages of saline and IV bags. So Minnesota is essentially piggybacking on an existing nonprofit model, just scaling it for outpatient oral drugs. Lucas: That's the clever part. The state doesn't have to build a pharmaceutical supply chain from scratch. Civica already knows how to contract with raw material suppliers and navigate FDA approvals. Minnesota puts up the capital — fifty million dollars from the state's budget surplus — and in return, they get guaranteed supply of these three drugs at cost, plus a modest markup that goes back into the program. Luna: So the target price is what, half of retail? Lucas: They're aiming for sixty percent below current retail on a ninety-day supply. That would bring diltiazem back down to about twenty-five dollars instead of seventy. And they've identified the next ten drugs they want to add once the first three are in production, likely within thirty months. Luna: Thirty months feels slow for a crisis that's been building for a decade. But I guess building a sterile manufacturing line and getting FDA approval isn't fast. Lucas: No, and that timeline is actually aggressive for pharma. The bigger question is whether the market will accept a state-manufactured drug. Doctors and patients are used to certain brand names even on generics. But if the price is sixty percent lower, and the drug is chemically identical, insurance companies might start steering patients toward the state option. Luna: Which brings us to the elephant in the room: the pharmacy benefit managers. Because even if Minnesota makes a pill for two dollars, if the PBM doesn't put it on their formulary, patients never see it. Lucas: That's the critical bottleneck. The three largest PBMs — CVS Caremark, Express Scripts, and OptumRx — process nearly eighty percent of all prescriptions in the US. They negotiate rebates from drug companies and keep a cut. Generics with thin margins don't generate big rebates, so PBMs have less incentive to feature them. Minnesota's law actually includes a provision requiring state-regulated insurance plans to cover any drug manufactured by the state program, but that only affects about fifteen percent of prescriptions in the state. Luna: So the real leverage comes from the federal government or large employers. If Medicare or a big self-insured company like Walmart decides to source some generics from the Minnesota project, that's when PBMs have to take notice. Lucas: And that's exactly what the architects of the program are hoping for. The lead legislator on this, state senator Alec Gustafson, told me that they designed the program as a 'public option for drugs.' Not a replacement for the private market, but a benchmark. If the state can prove it can manufacture high-quality generics at a sixty percent discount, it puts pressure on the entire system to justify its prices. Luna: It's reminiscent of what Mark Cuban's Cost Plus Drug Company is doing, but with a government backstop. Cuban's model also sells generic drugs at a flat fifteen percent markup, but he relies on third-party manufacturers. Minnesota is owning the factory. Lucas: Which gives them more control over the supply chain. They can decide to prioritize drugs that are in shortage or that have been subject to sudden price spikes. The three drugs they picked all had the same pattern: a single manufacturer stopped producing, demand stayed steady, and the remaining suppliers jacked up prices. In one case, a company called Sagent Pharmaceuticals controlled eighty percent of the market for a particular injectable after two competitors left. Luna: So it's a classic monopoly problem. But in the pharmaceutical world, the barriers to entry are huge — FDA approval, sterile manufacturing, distribution contracts with wholesalers. Minnesota is using state power to lower those barriers. Lucas: Right. And the pharmaceutical lobby has pushed back hard. The trade group PhRMA called it 'government overreach that will stifle innovation.' But these are off-patent drugs. There's no innovation to stifle. The innovation happened twenty years ago. What's being stifled is the ability to extract monopoly rents from a captive patient population. Luna: I want to stay on this monopoly point for a second because I think listeners might not realize how fragile the generic drug market actually is. We tend to think of generics as this hyper-competitive, low-margin business. And for some drugs it is — there are fifteen companies making amoxicillin. But for thousands of other generics, there are only one or two suppliers. Lucas: The FDA maintains a list of drugs in shortage, and it's almost always generics. And the reason is exactly what you said: thin margins mean companies leave the market when they can't make a profit, and the remaining players consolidate pricing power. A 2023 study found that drugs with only one or two manufacturers had prices that were, on average, three times higher than drugs with five or more manufacturers. Luna: So Minnesota is essentially creating a public competitor in a market where competition has failed. It's not a huge program — fifty million dollars is a rounding error in the state budget — but it's a proof of concept. Lucas: And the concept is spreading. California passed a law last year to study a similar program. New York is considering it. The federal Inflation Reduction Act had some provisions to lower drug prices, but they focused on Medicare negotiations for brand-name drugs, which is important but doesn't touch the generic price spiral. This is a different approach — state-led, supply-side intervention. Luna: Before we go further, I want to pull back the curtain for a second. We're able to dig into stuff like this — state-level policy experiments that most business coverage ignores — because this show is listener-supported. A few hundred of you chip in each month through buy me a coffee dot com slash fexingo, and that covers our costs. No ads, no underwriters, no pharma money. If you've gotten something out of this conversation, that's the model that keeps it going. Lucas: Yeah, it's honest economics. We don't have to tiptoe around any interests. So back to Minnesota — the other interesting piece is how they're handling distribution. Luna: Right, because the state can't just sell directly to patients. They need to go through wholesalers and pharmacies. Lucas: Exactly. The program will contract with existing wholesalers like McKesson and Cardinal Health, which already distribute to every pharmacy in the state. The state sells the drug to the wholesaler at cost plus a small fee, the wholesaler adds its standard markup, and the pharmacy does the same. But because the state's base price is so low, even with those layers, the final price is well below current market. Luna: What about online pharmacies? Could a patient order directly from the state? Lucas: Not initially. The legislation allows for a direct to patient mail-order option, but that won't be ready until year two. For now, patients will need a prescription from their doctor and a pharmacy that stocks the state drug. The state is working with the largest pharmacy chains in Minnesota — CVS, Walgreens, and regional chains like Thrifty White — to ensure broad access. Luna: So the rollout is gradual, which is smart. Don't try to do everything at once. Get the three drugs right, prove the quality, build trust. Lucas: And then scale. The state health commissioner, Dr. Brooke Cunningham, has said that the goal is to have twenty drugs in production within five years. And if the federal government ever changes the rules to allow states to import drugs from Canada, Minnesota wants to be ready to add that channel too. But that's a longer play. Luna: Let's talk about the politics. This bill passed with bipartisan support — not unanimously, but enough to override a veto threat from the governor, who was initially skeptical. Lucas: The governor, Tim Walz, ultimately signed it after the legislature added a sunset clause — the program expires in 2031 unless renewed. That gave fiscal conservatives a check. And the business community was split. The Chamber of Commerce opposed it, but some large employers supported it because they self-insure and pay for their employees' drugs. If they can source cheaper generics through the state program, their healthcare costs go down. Luna: That's the coalition that might make this sustainable: big employers, patient advocates, and a state government tired of bailing out the uninsured when drug prices spike. It's not a left-right issue at its core — it's a buyer's strike. Lucas: A buyer's strike is exactly the right term. The state is saying, 'We buy a lot of these drugs through Medicaid and state employee plans. We have market power. We're going to use it.' The lawsuit from PhRMA hasn't materialized yet, but legal experts expect a challenge on the grounds that the state is interfering with interstate commerce. But Minnesota's lawyers argue that because the program only sells within the state, it's constitutional. Luna: And if it survives the legal challenge, it could become a template. Other states are watching. I think the most interesting long-term question is whether this model could be applied to other concentrated markets — say, medical devices or even non-health products like hearing aids or insulin pumps. Lucas: That's ambitious, but the generic drug market is uniquely suited because the product is standardized and the regulatory pathway is clear. For medical devices, you'd need FDA clearance, and the variety of products is much wider. Still, the principle is the same: where competition fails, the state can act as a manufacturer of last resort. Luna: Or first resort, depending on your perspective. Minnesota is betting that a small upfront investment — fifty million — can save hundreds of millions over the long run, while also ensuring that patients actually get the drugs they need. That's a compelling fiscal argument, not just a moral one. Lucas: And that's the angle that might win over other states. Not 'government should make pills because capitalism is bad,' but 'government should make pills because it saves taxpayer money and improves health outcomes.' A fiscal policy argument dressed in a public health coat. Luna: I think that's the note to end on. We'll check back in after the first production run and see if the prices hold up to the sixty-percent target. Lucas: We will. For now, Minnesota is the laboratory, and the rest of the country is watching.