Opinion

Binding Arbitration Is Government Price Controls Hiding in Plain Sight

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Posted: Jul 03, 2019 12:01 AM
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Binding Arbitration Is Government Price Controls Hiding in Plain Sight

Source: AP Photo/Mark Lennihan

Prescription drug affordability might just be the last truly bipartisan issue in Washington.

“The next major priority for me, and for all of us, should be to lower the cost of healthcare and prescription drugs,” said President Donald Trump in this year’s State of the Union address.

Similarly, Democratic Speaker of the House Nancy Pelosi has called for “real, tough legislation … to actually drive down the price of prescription drugs for seniors and families across America.”

But lawmakers differ on the details.

Some in Congress are championing a plan to empower third-party bureaucrats and lawyers to dictate the price that Medicare pays for new drugs. Politicians call this approach “binding arbitration.” Wary consumers recognize it as a slick label for government price controls – and price controls are a bad idea no matter what you call them.

If lawmakers succeed in this goal, American patients will lose access to countless cutting-edge therapies.

Binding arbitration would impact Medicare, the federal health insurance program for the elderly and people with disabilities. Medicare drug coverage is broken into two parts. Medicare Part B covers chemotherapy and other advanced medicines administered at a doctor's office or hospital. Medicare Part D, meanwhile, covers drugs dispensed at local pharmacies.

Right now, the price Medicare patients pay for these drugs is determined by negotiations between drug companies on the one hand, and private insurers or healthcare providers on the other. While not perfect, this formula has resulted in discounts to consumers of about 35 percent.

With binding arbitration, Medicare officials would effectively remove and replace the private sector Part D plans that have successfully negotiated lower prices with a third party who would weigh arguments from both sides before setting a final, legally binding price.

At this point, it's unclear whether arbitrators would choose between the two parties' suggested prices or simply make up their own. It's also unclear what type of training and qualifications arbitrators would have, and whether they'd work individually or as part of a small committee.

What is clear is that the entire process would skew in favor of the government. After all, Medicare officials will handpick these supposedly neutral arbitrators. No doubt, these officials will only select arbitrators who would do their bidding.

In other words, binding arbitration is just a way to outsource government price controls. It’s a swampy shell game that allows bureaucrats to get the result they want – just without their fingerprints on the transaction.

To some Americans, price controls may seem like a reasonable way to reduce drug prices. But letting shadowy and unaccountable government-appointed arbitrators – instead of markets – determine drug costs comes with major drawbacks to patients' health. Set the rate too low, and capital will flow to other efforts, meaning fewer cures are found. Set the rate too high, and costs for consumers go up.  Getting it right for hundreds – maybe even thousands of products – is unlikely and maybe impossible.

Here’s the truth: pharmaceutical companies are businesses that seek to recover their costs and earn a profit. On the other side are insurers who seek to negotiate lower prices. Markets work to find a comfortable medium where both sides feel they’ve won.

We should demand careful oversight of these transactions, and more should be done to take on anti-competitive practices so that markets work well. Indeed, the Council for Affordable Health Coverage, where I serve as president, supports legislation making it easier for generic drug developers to sue brand-name manufacturers who deploy unfair stalling tactics to block their entry to market. At the end of the day, however, businesses have to turn a profit.

Consider that it can take up to 15 years and billions of dollars to create a new medicine. We are working on ways to drive those figures down but, in the meantime, the investments that drive new therapies would plummet if bureaucrats in Washington take away the hope of a cure or treatment that also rewards investors for their risk and capital.

For all our drug cost challenges, the U.S. is a world leader in drug research and development specifically because we reject price controls. Over the past seven years, nearly 90 percent of all new drugs released worldwide were made available in America first.

Binding arbitration would change that. When officials cap drug costs, they also cap revenue for investors. Without the ability to recoup expenses, investors would stop pouring money into biopharmaceutical research altogether.

Patients cannot afford for this research funding to dry up, especially now. There are thousands of medicines in the drug development pipeline today – each one offers a chance to relieve or cure diseases like cancer and Alzheimer's.  

Binding arbitration may generate short-term savings, but it would jeopardize patients' health in the process. Americans deserve real affordability solutions that won’t claim their access to treatment as collateral damage.

It’s time for binding arbitration supporters to leave their price control schemes behind and come back to the table on policies that leverage competition – not government strong-arming – to lower drug costs.