Binding Arbitration Would Keep Bubble Boy in the Bubble
By Kenneth E. Thorpe
Scientists just found a cure for “bubble boy” disease, the rare genetic condition that severely weakens babies’ immune systems. The therapy uses a modified virus to replace an infant’s mutated genes with normal, functioning ones.
Unfortunately, a new proposal could hamper innovation like this.
The policy, called binding arbitration, would allow government-appointed officials to dictate what Medicare pays for certain drugs.
Proponents of the plan say it will reduce government healthcare spending. But the savings would come at a great cost to patients, by stifling pharmaceutical research.
Medicare covers almost every FDA-approved drug. Medicare Part D covers medicines available at the pharmacy, while Medicare Part B covers specialty drugs administered by doctors. In both cases, prices are set through negotiations between drug companies and private parties, like hospital systems or insurers.
Binding arbitration could supersede these negotiations. If officials don’t like the price that negotiators suggest, they could bring in a third-party arbitrator. After hearing both sides, the arbitrator would choose a final, legally binding price.
In such a system, Medicare officials could cherry-pick arbitrators who agree with them. These unelected arbitrators could slash prices, and drug companies would have no recourse to appeal the decisions.
In practice, binding arbitration would allow the government to institute price controls on drugs, while maintaining a facade of fairness.
Drug development is difficult. On average it costs $2.6 billion to develop one new drug.
Price controls would make it harder for companies to earn back their investments, discouraging companies from investing in future research.
By preventing the development of breakthrough cures, arbitration could actually raise healthcare spending in the long run. Inventing new treatments that delay the onset of Alzheimer’s and bolster cancer survival could save the country nearly $420 billion a year, according to a study by my organization, the Partnership to Fight Chronic Disease. That’s why focusing on policy interventions aimed at improving outcomes is important.
Washington can reduce patient costs without stifling drug development. Recently, the administration proposed a rule affecting insurers and pharmacy benefit managers who administer Part D drug plans. The measure would effectively require middlemen to pass along drug-company rebates to patients at the pharmacy counter.
Currently, drug companies pay these middlemen upwards of $150 billion a year in rebates and discounts. Insurers and PBMs use these savings to decrease premiums, but not copays or coinsurance. So patients often pay the full list price for drugs.
If the rule takes effect, Medicare beneficiaries could save up to $28 billion over a decade.
Lawmakers understandably want to control Medicare’s spending. But binding arbitration isn’t a solution. It’d discourage medical innovation, thereby depriving patients of cures and increasing long-term costs.
Kenneth E. Thorpe is a professor of health policy at Emory University and chairman of the Partnership to Fight Chronic Disease