Christopher
Holt June 27, 2019
EXECUTIVE SUMMARY
·
Policymakers are
considering arbitration as a potential solution to the challenge of high drug
prices, although details remain ambiguous.
·
Arbitration would
represent a stark departure from the federal government’s traditional posture
toward pricing and markets, and it could stifle drug innovation and impede
access to treatment.
·
The potential
application of arbitration to drug pricing raises a host of questions about how
such a program would be implemented; for example, who would select the
arbitrator, and what standards would govern the assessment of a reasonable
price?
INTRODUCTION
In recent months, members of Congress and other
policymakers have proposed arbitration as a solution to multiple policy
challenges—including surprise out-of-network hospital charges. The area where
arbitration could potentially have the largest impact, however, is drug prices.
Proponents of applying arbitration to this area often pair it with changes to
the Medicare statute that would allow the Secretary of Health and Human
Services (HHS) to negotiate directly with drug companies over how much Medicare
pays for pharmaceuticals. Arbitration would be a way of settling these
negotiations if they end in a stalemate.
While the idea of some neutral party swooping in
and settling issues of “out of control” drug spending might be appealing, such
an approach would fundamentally reshape the federal government’s relationship
to the market. Depending on how arbitration is structured, it would either
skirt or completely obliterate the idea that the federal government should not
dictate prices for private sector goods because of either popular opinion or
federal budget constraints. As a result, arbitration would be a significant
departure from the federal government’s approach to date. Indeed, at a very
basic level, the government would determine the terms of any negotiation or
arbitration process by virtue of setting the parameters of the policy and the
standards to be used.
It is also important to recognize that such a
shift would involve tradeoffs. Other countries that employ such approaches do
not have timely access to the breadth of pharmacological breakthroughs that
U.S. patients enjoy.[1] If the federal government were to
take a more directed approach to managing drug spend, it would almost certainly
lead to two types of access issues. The first is simply a question of whether
manufacturers would continue to produce and sell targeted products at the
government-established price. In other countries that dictate prices,
manufactures have answered this question negatively, leading to reduced access
to treatments when compared with the United States. Second, policies aimed
specifically at drugs with particularly high prices, or at restricting initial
list prices, threaten to upend incentives for the most innovative new medical
treatments, which often by their very nature are more expensive to develop and
produce, and increasingly serve small patient populations. Federal policymakers
have historically been reticent actively to limit public program beneficiaries’
access to the medications they and their doctors determine to be best.
In addition to these fundamental issues, there
are myriad questions to be answered about how such a process would work.
BASIC STRUCTURAL QUESTIONS
The American Bar Administration (ABA) defines
arbitration as “a private process where disputing parties agree that one or
several individuals can make a decision about the dispute after receiving
evidence and hearing arguments.”[2] In many
ways, arbitration functions similarly to a civil trial. One key difference,
however, is that arbitration can be either binding or non-binding depending on
the parties’ agreement. In binding arbitration, the parties are compelled to
accept the decision of the arbitrator, whereas in non-binding arbitration
neither party is mandated to agree to the resolution. Though state laws can
vary, an arbitrator is typically chosen mutually by both parties to the
conflict, often from a list provided by the state government, the ABA, or
another similar entity.
While the idea of using arbitration to bring
down federal drug spending is gaining attention, there is a dearth of fully
developed policy proposals to evaluate. Several questions that emerge initially
regard the basic structure and application of arbitration.
What Kind of
Arbitration Would Be Used?
There are two distinct types of arbitration.
Under conventional arbitration, the arbitrator has discretion in determining
the settlement and will typically settle somewhere between the two competing
proposals. It is generally accepted that this type of resolution incentivizes
extreme positions from the parties. Arguably an arbitrator will need greater
information or expertise in the field within which the dispute is occurring as
they have greater discretion in determining the resolution.
In the context of drug pricing, advocates for an
arbitration-based approach to determining prices have focused on final-offer
arbitration—also known as “baseball” arbitration. In Major League Baseball,
players that meet certain criteria are eligible for salary arbitration if they
and their current team cannot agree on a new contract and they are not under
contract for the upcoming season. If both parties are unable to come to terms
by mid-January, each party puts forward what it believes to be a reasonable
final offer, and an arbitration hearing is scheduled for a date in February. What
is distinct about “baseball” or final-offer arbitration is that the arbitrator
is limited to only the two proposals offered. The arbitrator is not free to
determine what they deem an appropriate level of compensation; rather, they
must choose which of the two offers is more appropriate.[3] It is argued that this method of
arbitration both incentivizes the two sides to reach an agreement prior to the
arbitration date and to put forward more reasonable final offers so as to make
their offer more appealing to the arbitrator. It is this kind of arbitration
that would most likely be used, but the decision here would impact the
character of negotiations over drug prices.
Would Arbitration
Be Used for Medicare Part B Drugs?
While most prescription drugs are covered
through the Medicare Part D program, drugs that are administered directly by a
physician in an outpatient setting are covered by Medicare Part B. Under Part
B, providers purchase drugs directly from the manufacturer, and—with a few
exceptions—Medicare reimburses them for the drugs they administer to
beneficiaries at the average sale price of the drug plus a 6 percent add-on
payment (ASP+6) intended to cover the provider’s services and any overhead.[4]
The Medicare Payment Advisory Commission
(MedPAC) has considered the idea of arbitration for high-cost Medicare Part B
drugs, most recently in their June 2019 report to Congress.[5] MedPAC also discussed arbitration
previously as a part of their 2017 recommendation to establish a “Drug Value
Program” (DVP) as an alternative to ASP+6.[6] In both 2017 and 2019, MedPAC
discussed arbitration as a way of addressing increasingly high launch prices.
Specifically, MedPAC considered targeting a final-offer style mandatory
arbitration arrangement for products with limited competition that launch at a
price exceeding some (as-yet undetermined) threshold.
MedPAC did not, in either report, define
“limited competition,” nor make specific recommendations for where the price
threshold should be set. MedPAC did, however, comment on criteria that an
arbitrator would use in choosing between the manufacturer- and
government-recommended prices, suggesting comparative clinical effectiveness,
prices of existing treatments, the prevalence of the condition being treated,
production costs, and affordability.
Would Arbitration
Be Used for Medicare Part D?
While many of the high-cost treatments currently
roiling the health policy debate are covered by the Part B program, arbitration
also comes up in the context of government price negotiation within the Part D
program.
Medicare Part D was established as part of the
Medicare Modernization Act of 2003 and extended Medicare coverage to
prescription drugs dispensed by a pharmacy. Often proponents of government
negotiation will lament the lack of negotiation in the Part D program, and
progressives have long chaffed under the law’s “noninterference” provision. The
claim that there is no negotiation in Part D is inaccurate, however.
Negotiations between drug plan sponsors, drug manufacturers, and pharmacy
benefit managers (PBMs) are a hallmark of the program and have been one driver
of the program’s low premiums. The noninterference provision simply blocks the
Secretary of HHS from interfering in those negotiations.
Nevertheless, many policy experts and lawmakers
on the left have advocated for the federal government to negotiate drug prices
directly with manufacturers on behalf of all Medicare beneficiaries. For the
HHS Secretary to drive steep discounts on behalf of all beneficiaries, one of
two things would have to occur. Either the secretary would have to implement a
single program-wide formulary—in effect eliminating all the choice
beneficiaries currently have between different plans, thereby restricting their
access to some medications—or the secretary would simply be using the power of
the government to set prices for a privately produced good. In the former
instance every coverage decision would become a political problem to be
appealed directly to Congress, ultimately undermining the secretary’s ability
to negotiate. In the later, the government would be abandoning any pretense of
market capitalism.
Proponents of government negotiation recognize
that, in the absence of either approach, the secretary would lack leverage to
drive down prices, and that’s where arbitration comes in. Under this scenario,
the secretary would seek to negotiate discounts on drugs for the Part D
program, but if manufactures were unwilling to negotiate or if the government
and manufacturers could not come to terms, the government could initiate a
final-offer style arbitration process similar to what MedPAC has outlined for
Part B.
Many proponents, including health economist
Richard Frank of Harvard Medical School, recognize that negotiations and
arbitration would be administratively complex.[7] Therefore, most proposals suggest
focusing on a subset of drugs. Like in the Part B case, the exact criteria are
typically not spelled out, but a combination of price and competition are most
commonly suggested as triggers. Some policymakers have floated an arbitrary
number of drugs that HHS would be required to negotiate prices for each year,
establishing a floor, though not a ceiling, with which HHS would need to
comply.[8]
IMPLEMENTATION QUESTIONS
Within these scenarios there remain myriad
questions with dramatic implications for the ultimate outcome.
How Would the
Arbitrator Be Chosen?
Would the arbitrator be mutually agreed upon by
both the manufacturer and the government, or would the government be able to
appoint any arbitrator it chooses? Frank has suggested that arbitrators be
selected in consultation between industry, HHS, and the American Arbitration
Association.[9] News reports have indicated that the
Part D arbitration proposal being developed by Speaker of the House Nancy
Pelosi would designate the Government Accountability Office (GAO) as the
arbitrator, after progressive members of the House Democratic Caucus objected
to a neutral third party being selected.[10] Under such a scenario, the
government and a drug manufacturer would go to arbitration after failed price
negotiations—with the government also serving as arbitrator. If it is the
government deciding between the government-proposed price and the
industry-proposed price, that scenario begins to look like thinly veiled
government price setting. In both its 2017 recommendation and 2019 report, MedPAC
argues that neutrality on the part of the arbitrator would be crucial. MedPAC
did suggest a possible role for GAO in recommending a slate of potential
arbitrators and giving both the secretary and the manufacturer the ability to
strike a limited number of candidates, not unlike the process of jury selection
in a trial.
What Drugs Would
Be Eligible for Arbitration, and How Would It Be Triggered?
As briefly discussed above, there seems to be
some consensus that the negotiation and arbitration route might be best
utilized for a subset of drugs, as opposed to all medications (though any such
limitation certainly has not been decided). The question then becomes, which
drugs? Most focus has been on specialty drugs with limited competition, notably
high prices, and a limited target patient population. Ultimately, however, it
matters how these eligibility criteria are spelled out. What constitutes a high
price? Would it be an arbitrary dollar amount for all drugs, or would clinical
effectiveness, cost-benefit, and other factors be taken into account, leading
to a more nuanced but also non-uniform trigger? Similarly, what would
constitute limited competition for a particular drug? How many competitors is
enough? How similar do the competitor products need to be? What if there are a
number of competitors, but they are not all approved for exactly the same
indications?
Assuming agreement on a set of criteria for
making a drug eligible for arbitration, what would trigger the arbitration
process? In MedPAC’s 2017 proposal, arbitration would be triggered after a
failure of negotiations between MedPAC’s proposed Part B DVP vendors and a
manufacturer. In its broader 2019 consideration of arbitration, MedPAC
discussed empowering the HHS Secretary to initiate arbitration for drugs
exceeding a certain price threshold and explored the possibility of bypassing
direct negotiation altogether and simply moving directly to arbitration.
In the Part D program, arbitration would likely
follow a stalemated negotiation between the secretary and a manufacturer. What
would constitute a reasonable period for negotiation to be attempted prior to
arbitration? Would either the government, the manufacturer, or both parties
have to demonstrate a good faith effort was made at negotiation before moving
to arbitration?
What About
Proprietary Data?
A huge consideration—one not fully analyzed at
this juncture of the debate—relates to manufacturers’ proprietary data. What
types of data would the government and manufacturer be required to submit to
the arbitrator with their proposed payment rate? Would manufacturers be
required to turn over proprietary data about manufacturing, R&D,
advertising, and even compensation costs? What about internal documents
surrounding decisions about the delivery mechanism for a drug and implications
thereof for coverage under Part B or D, patent applications, or failure rates?
What about pricing concessions and other private contract details of
arrangements with other independent parties such as PBMs, employer-sponsored
insurance plans, or other private market insurance plans? Would there be any
restrictions on what the arbitrator can require from the manufacturer?
Further, once the data and documentation
required is determined, who will have access to it before, during, and after
the arbitration process? Will the government (in the form of HHS) be allowed
access to this information, and will the government be able to modify its own
bid based on this data? Will the arbitrator be allowed to bring in third-party
experts, and will such experts have access to proprietary data? What
limitations will be placed on future use of the data after the arbitration
process is over? Will there be penalties associated with unallowed release of
the data? And what if the arbitrator is, in fact, a government entity like GAO?
What restrictions would there be on sharing of information between government
entities? The issue of data and private contracts, and the degree to which
those details would have to be shared with the government, is particularly problematic
and could represent a concerning shift in the government’s approach to private
companies.
How Broadly Will
the Arbitrated Price Be Applied?
So far, we’ve considered arbitration in the
context of Medicare Parts B and D, but MedPAC has raised the possibility of
arbitration-determined prices being applied in Part A, and it has even
considered its possible implications for private insurance. In fact, some
policymakers have suggested that government-negotiated Part D prices should be
applied to the entire U.S. health care system—in effect implementing government
price setting for private insurance as well as federal programs.[11] Any policy implementing arbitration
would need to explicitly state how broadly the arbitrated price applies.
Even if the arbitrated price is not imposed on
the rest of the health care system, it would be important to consider what
implications it would have on other agreements. Would prices rise elsewhere, in
response to lower prices for the government? What spillover effects might occur
in the private market? Further, for how long would the negotiated or arbitrated
price apply? One year? In perpetuity? If it is the latter, would it be
inflation adjusted? What about competing drugs? Would the price be applied to all
drugs with similar indications? What about new competitors that enter the
market after the price has been set? Finally, would the manufacturer be
required to continue producing the drug for the price that had been set, or
could it choose to discontinue the product if the price was too low?
THE IMPLICATIONS OF ARBITRATION
While the specifics of arbitration for Medicare
drugs remain undetermined, a few implications are clear. First, it’s important
to recognize that countries that are aggressively prescriptive in their
approaches to drug prices often lack access to many innovative therapies.
Second, this policy would reshape the federal
government’s relationship to the market and to its citizens. Depending on how
arbitration is structured, it would either skirt or completely obliterate the
idea that the federal government should not capriciously set prices for private
sector goods because of either popular opinion or federal budget constraints.
Some argue that the U.S. health care market is not much of a free market to
begin with, and certainly that federal health programs operate outside of a
traditional market dynamic. These assertions are to some degree true, but this
policy would set a trajectory for other policies that is largely at odds with
how the government understands and relates to markets. Do we believe that
markets work generally, and that market forces lead to better outcomes? Or,
aware of the flaws of markets, do we seek a command economy directed by
government bureaucrats? The fact that the health care market is not a
completely free market does not mean we should actively erode market forces.
Government-directed arbitration would involve bureaucrats essentially making
decisions about what the value of a prescription drug is for an entire class of
patients, an approach that the United States has avoided to date.
Third, this policy would likely reduce revenue
for pharmaceutical companies, which could impact the future development of
life-saving drugs. Though it is out of style to mention it, drug development is
a costly and risky proposition. The United States leads the world in the
development of new therapies in part because we do not restrict prices based on
government priorities. MedPAC argues in its June 2019 report that arbitration
could have a positive effect on innovation by ensuring a process that rewards “products
likely to have substantial added benefits over those with smaller added
benefits.”[12] Of course the recipients of the
benefit, who determines the value, and which metrics will be used remain open
questions. Policymakers should consider how even moderate changes to Medicare
payment policies may change the incentives for research into various therapies.
If high launch prices are targeted indiscriminately, policymakers risk
discouraging research into orphan diseases and curative treatments for diseases
impacting small populations. Do we want new, life-altering therapies, or
slightly improved versions of existing maintenance drugs?
THE CURRENT SITUATION
The current state of play on arbitration is
unclear. While the idea has been gaining attention among some segments of the
left, other progressives have derided arbitration as being insufficient to the
challenge of high drug costs. Some policymakers would prefer more aggressive
approaches, such as compulsory licensure, when direct government negotiations
fail. These divisions have delayed the expected legislation that Speaker Pelosi
is developing. At the same time, negotiations between the White House and House
Democrats over a potential agreement on drug prices are either ongoing, close
to an agreement, or completely collapsed depending on the day of the week.
Amid this flux and uncertainty, policymakers
would do well to remember several things. An arbitration approach would bring
many uncertainties to the drug market, as outlined here. Further, the
private-market competition within the Part D program has worked quite well for
over a decade, and repealing noninterference could undo Part D’s success.
Arbitration is being framed as a middle ground at the moment, but it is in fact
a stark departure from the government’s policy approach to pharmaceuticals to
date. As such, it merits cautious and thorough consideration.
[1] https://www.americanactionforum.org/comments-for-record/comments-to-cms-on-proposed-international-pricing-index-for-medicare-part-b-drugs/
[2] https://www.americanbar.org/groups/dispute_resolution/resources/DisputeResolutionProcesses/arbitration/
[5] http://www.medpac.gov/docs/default-source/reports/jun19_medpac_reporttocongress_sec.pdf?sfvrsn=0
[12] http://www.medpac.gov/docs/default-source/reports/jun19_medpac_reporttocongress_sec.pdf?sfvrsn=0
https://www.americanactionforum.org/insight/baseball-arbitration-drug-prices/#ixzz5s9XopgkF
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