What Will California Gov. Gavin Newsom Give Up by Cutting Ties with Walgreens?
This Bulletin is brought to you by AHLA’s Life Sciences Practice Group.
- March 16, 2023
- Virginia B. Evans , The Law Firm of Virginia B. Evans, PLC
On March 8, 2023, California Governor Gavin Newsom withdrew a $54 million state contract with pharmacy giant Walgreens over the company’s policy disallowing distribution of mifepristone by mail in 21 states led by conservative attorneys general.
Newsom ordered state officials not to renew a contract with Walgreens to supply specialty pharmacy drugs for California’s state prison system, including antiviral and antifungal drugs, and drugs used for congestive heart failure. The contract expires April 30.
More importantly, Newsom stated that this was the first step in an “exhaustive review” of all the state’s ties with Walgreens and pledged “California will not stand by as corporations cave to extremists and cut off critical access to reproductive care and freedom.” Newsom vowed to “leverage our market power to defend the right to choose.”
This raises questions: What exactly did Newsom vow to give up by cutting the state’s ties with Walgreens? And who will be affected by California severing ties with the pharmacy giant?
Mifepristone is a medication that when combined with another drug, will end a pregnancy. It is commonly used and recommended as a treatment for early-pregnancy miscarriages. It is also used as part of a two-drug regimen for medication abortions. The Food and Drug Administration approved it in 2000 for use up to the 10th week of pregnancy.
After the Supreme Court’s decision in Dobbs v. Jackson Women’s Health Org., 142 S. Ct. 2228 (June 2022), more than a dozen states restricted the use of abortion pills. Many of these laws are being challenged in court.
At the same time, attorneys general in 21 states warned Walgreens and CVS that they could face legal consequences if they sell abortion pills in their states. In four of these states where the attorneys general have threatened Walgreens, mifepristone is still legal. Walgreens nonetheless sent a response to the 21 attorneys general stating that it would not dispense mifepristone in their states.
Walgreens faces criticism for taking the position that it would not dispense mifepristone even in states where it is currently legal after receiving threats of legal action by state officials.
In his statement, Newsom noted that California has a population that is the size of the 21 restrictive states’ populations combined and that California is on track to be the fourth largest economy in the world. Newsom expressed an intention to use California’s economic clout to solidify the state’s role as a leader for “reproductive freedom.”
What Does It Mean to Cut California’s Ties to Walgreens?
Newsom’s promise to review all of California’s ties to Walgreens raises issues on a number of levels well beyond the $54 million contract with Walgreens to provide specialty pharmacy services for the state’s prison systems. Under that contract, the California Department of Corrections and Rehabilitation used Walgreens for prescription drugs to treat cancers like leukemia and lung cancer, and for vaccines to prevent smallpox, anthrax, and typhoid. California will have to seek a new source of supply for these drugs and vaccines.
California uses AmerisourceBergen Drug Corp., a pharmaceutical wholesaler, to supply some of the state’s drugs for the Department of Corrections, public health agencies, and state hospitals. California spent about $52 million last year with AmerisourceBergen. However, Walgreens owns about 17% of AmerisourceBergen and AmerisourceBergen purchased Walgreens’ European wholesale arm in 2021. It remains to be seen how California will view this corporate entanglement during fulfillment of the Governor’s pledge “not to do business” with Walgreens.
Retail customers would be affected as well. Under the Medi-Cal system, which is administered by the state and federal government, enrollees can fill their prescriptions at several drugstores including Walgreens. Medi-Cal is the public insurance option for low-income Californians and people with disabilities.
Walgreens operates nearly 600 pharmacies in California and accounts for about 10% of the state’s pharmacy market. Medi-Cal includes Walgreens by location in its pharmacy directory for Medi-Cal enrollees. Nearly 80% of the state’s population lives within five miles of a Walgreens. What does cutting off ties with Walgreens mean in terms of access to care?
Blue Shield of California is a Medi-Cal provider that has contracted with Walgreens for pharmaceutical benefits. Blue Shield and Anthem Blue Cross recently received multi-million dollar contracts from the California Department of Health Care Services to provide Medi-Cal benefits to residents in areas where access to health care is already limited by geography. A question being raised by pharmacists across California, is what does Newsom’s pledge mean for Medi-Cal patients who fill their prescriptions at Walgreens?
Other questions arise from Newsom’s statements. For example, will Walgreens be excluded from distributing California’s generic insulin?
Will Walgreens be able to continue the research into health outcomes that is being conducted in conjunction with the University of California, San Francisco School of Pharmacy? These studies involve HIV and specialty pharmacy services, vaccinations, access to care and the patient experience, adherence and clinical outcomes, digital health and member engagement, health care costs, and other areas. Walgreens has collaborations with other academic medical institutions (for example, the Scripps Translational Science Institute) that also may be affected by Newsom’s pledge to cut ties with Walgreens.
What effect is Newsom’s statement having on Walgreens’ bottom line? The fall-out from the Governor’s pledge to review ties to Walgreens is still being analyzed but since more than 13 million Californians rely on the state’s Medicaid program, fulfillment of the pledge could cause Walgreens significant financial harm. For example, if the state cuts Walgreens out of state employee insurance plans, the company would likely see a big financial impact because the state insures more than 200,000 full time employees. CalPERS, the state’s retirement insurance program, covers another 1.5 million, including dependents up to the age of 26.
Newsom expressed no timetable for implementation of his plans. Time will tell whether California’s reduction or elimination of ties to Walgreens will significantly impact its earnings.
 See Governor Newsom: California Pulls Back Renewal of Walgreens Contract, Mar. 8, 2023; https://www.gov.ca.gov/2023/03/08/governor-newsom-california-pulls-back-renewal-of-walgreens-contract/; and California Governor Halts $54M Contract with Walgreens: ‘We’re done’; The Guardian, Mar. 8, 2023; https://www.theguardian.com/world/2023/mar/08/california-halts-54m-contract-walgreens-abortion-drug.
 Meg Duff, Wait, What Was California Buying at Walgreens? Slate, Mar. 10, 2023; https://slate.com/business/2023/03/newsom-california-walgreens-abortion-access-boycott.html; Kristen Hwang and Ana B. Ibarra, Newsom’s Begun Cutting California’s Ties With Walgreens Over Abortion Pill – How Far Will He Go? CalMatters, Mar. 7, 2023; https://calmatters.org/abortion-rights/2023/03/newsom-wants-to-cut-ties-with-walgreens-over-abortion-pill-access-so-now-what/.