A Bipartisan Drug Prescription Best Left Unfilled
President Donald Trump and House Speaker Nancy Pelosi don't agree on much. But they've both made it clear they believe Americans pay too much for prescription drugs. To trim drug spending, one of Pelosi's top aides is working quietly with the White House on a cost-control measure known as "binding arbitration."
This victory for bipartisanship wouldn't be a win for patients, though. The move would restrict access to state-of-the-art medicines and suppress future innovation.
It's hardly surprising that Democrats and Republicans are willing to cooperate on drug costs. Although the overwhelming majority of Americans recognize that prescription drugs have made people's lives "a lot better," most also think that drugs cost too much, according to a recent Kaiser Family Foundation survey. Nearly one in four Americans struggles to afford his medications at the pharmacy.
But binding arbitration isn't a strategy for saving patients money. It's a reform aimed at cutting Medicare spending. And the way it accomplishes this goal is reckless.
Under this reform, a research company that invents a new medicine would need to consult with Medicare officials to determine a satisfactory price. If those two parties can't agree on one, both sides would make their case to an "independent" arbitrator. It would be up to that arbitrator -- likely a panel, although it could be an individual -- to determine the price that Medicare should pay.
In theory, this might seem like a neutral way of settling on a price. In practice, however, it amounts to little more than government price-setting.
Consider, first, that the "independent" arbitrators would be appointed by the government. This is a bit like letting only the defense attorney – and not the prosecutor – select the jurors for a trial. The government could easily appoint an arbitrator with similar political and policy ideologies, thus skewing the process from the get-go.
In making their decisions, meanwhile, these arbitrators will likely rely on crude measures such as "cost-effectiveness" and "quality effectiveness." These kinds of calculations have led governments elsewhere to deny advanced medicines to patients who desperately need them.
Just look at Germany, which adopted an arbitration model for drugs in 2010. In recent years, patients there have had access to only 71 percent of new cancer medicines, compared to 96 percent here in the United States.
Or look at the United Kingdom, where healthcare officials consider a brutal unit of measurement called the "QALY" -- the "quality-adjusted life year" -- to determine if a drug is worth the cost.
A policy of binding arbitration would also have a disastrous effect on medical innovation. Creating even one new medicine is expensive, costing an estimated $2.6 billion and often taking a decade or more.
One reason for these costs is that the vast majority of candidate drugs never reach patients. In the case of Alzheimer's, 123 potential drugs failed to pan out between 1998 and 2014. Only 4 were finally approved by the Food and Drug Administration.
Given these risks, attracting investment for new cures requires a stable, predictable market in which successful drugs have a chance to earn back their upfront research costs. A system of de-facto price controls would make such a market impossible.
If an unaccountable government board can simply dictate a lower price for a new miracle treatment -- denying drug companies any hope of recouping their costs – then the incentive to develop such medicines in the first-place would evaporate. Investors would funnel their money into markets less distorted by government price-controls.
That's a high price to pay for a policy aimed at reducing the government's drug bill – especially one that isn't likely to reduce costs very much. After all, the kinds of drugs that binding arbitration would target account for a mere 7 percent of overall health spending in this country.
Working to save patients money at the pharmacy should be the priority of policymakers, of course. That's why they should instead focus on bringing fairness to the drug supply chain, with a focus on the middlemen that sit between drug manufacturers and insurers.
Sale prices on brand-name drugs grew by just 1.5 percent last year, marking the fourth consecutive year that net prices barely grew. It feels like drug prices are rising because out-of-pocket spending is increasing, thanks mostly to increasing deductibles and more cost-shifting from insurers.
Indeed, drug companies extended about $150 billion in rebates last year, but very little of that money made it to patients at the pharmacy. Ensuring that patients directly benefit from such discounts is the type of reform worth pursuing.
Binding arbitration would erect needless barriers between patients and the cutting-edge treatments that, for many, are their only hope of survival. That's an outcome neither party should welcome.
Ron Klink is a former Democratic congressman from Pennsylvania and is currently senior policy adviser at Nelson Mullins Riley & Scarborough LLP.