Is arbitration an answer for high drug prices?

Future prescription drug costs are projected to spike to unsustainable levels. Biologic pharmaceuticals will make up the majority of new drugs, and unfortunately, they are commonly priced at over five figures for a course of treatment. These drugs promise new breakthroughs in treatments for patients with certain targeted conditions, but at prices few can afford.

Medicare in particular needs new tools to better balance the incentives for new drug development with our ability to afford them. Despite recent, negative news coverage many health-care professionals would argue that one of the best solutions is to adopt a tactic that is already in use in other sectors of the economy — binding arbitration.

{mosads}Arbitration is a formal process for a buyer and a seller to resolve a price dispute by making their respective cases to an impartial, third-party arbitrator. The arbitrator chooses which “final offer” proposal to adopt, which creates incentives and encourages both the manufacturer and the purchaser to bargain in good faith to reach a settlement before the arbitrator handles the dispute. Arbitration can thus serve as a middle ground between government setting prices and the current “what the market will bear” practices of manufacturers.

In circumstances where extreme pricing power exists, such as the launch of new therapies protected with market exclusivity, binding arbitration provides a much needed counterbalance to drug manufacturer’s extreme price setting power. Countervailing buying power is necessary to balance the power of sole suppliers. Right now, Medicare and other purchasers have little to no bargaining power for high-cost drugs with few substitutes, but with arbitration, Medicare could use its power in a limited set of circumstances where competition doesn’t exist.

We know that other countries are already utilizing binding arbitration as a method to regulate pharmaceutical prices. More importantly, we know that using arbitration to establish drug prices works. In 2010, Germany passed the Pharmaceutical Market Restructuring Act (AMNOG), mandating the use of binding arbitration to set prices for certain classes of drugs when negotiations fail.

AMNOG established a successful process for assessing the value of new drugs using comparative effectiveness research conducted by a non-governmental institute. The German AMNOG process appears to be working without stifling access, with more than 300 drugs assessed over approximately seven years and less than 30 drugs being withdrawn from the market from May 2018 to March 2019.

If Congress decides to move forward with arbitration as Harvard professor Richard Frank suggests, policymakers will need to specify a number of factors in order for the process to prosper: the type of drugs included, the criteria used by an arbitrator in evaluating price, and the time period for negotiation. Congress also needs to amend the “non-interference clause” in the Medicare Modernization Act to clear a pathway for arbitration over Medicare Part D drugs.

While binding arbitration isn’t the sole remedy for managing unsustainable drug prices, it can serve as an essential element to help rebalance the incentive for medical innovation with the need for meeting affordability demands. In order to ensure that hard working Americans can afford life-saving drugs, Congress members must fulfill their obligations to constituents by considering arbitration as a solution to the monopolization of the most expensive pharmaceuticals in our country.

John Rother is the president and CEO of the National Coalition on Health Care, which represents a number of health care entities.