Issues in Drug Price Negotiation Using Binding Arbitration

1. Issues in Drug Price Negotiation Using Binding Arbitration Richard G Frank Harvard University

2. Key Part D Facts • Part D spend 2017: roughly $100 billion • Prices for single source brand name drugs increased 269% 2006-2015 (MedPac, 2017) • Part D spend projected to grow at 4.6% per year through 2027 (OACT) • Reinsurance benefit: When consumer has spent $5000 out of pocket on Part D drugs they pay 5% after that; plans pay 15%; Medicare pays 80% • Spending in reinsurance segment is highly concentrated : 10 drugs account for about 1/3 of spending in reinsurance segment

3. Reinsurance Share of Part D Spend Source: MedPac 2017 March Report to Congress

4. Patent Monopoly + Near Complete Insurance • Unique Drugs + Strong Exclusivity+ Generous Insurance (e.g. reinsurance in Part D) results in high prices and high levels of spending • MedPac estimates that 96% of the growth in reinsurance spending came from price growth • Prescription drug plans have little bargaining power with companies especially if drugs offer real benefits • Rebates that offset 15% liability and PBM market power dampen the incentives to bargain for low prices

5. Why Negotiation? • Market power plus nearly complete insurance creates extreme pricing power • PDPs in Part D do a reasonable job of bargaining when there are substitutes • Part D plans have little or no bargaining power for high costs drugs with few substitutes • Concentrated purchasing power can provide some counter balance to monopoly supply

6. Why binding arbitration? • Negotiated solutions are preferred to administered ones • Negotiations require a mechanism that keeps people at the bargaining table and neutralizes weakened bargaining power • Binding arbitration is used by public union-- government contracting for police and fire labor • Has been shown to increase negotiated settlements • Major league baseball uses the approach successfully (80% settle w/o arbitration) • Germany uses it in determining some drug prices • Adds a neutral party to the development of a solution (not price controls)

7. Mechanics: Negotiation with Binding Arbitration • Step 1: Repeal non-interference clause in Part D and allow for negotiation • Administratively complex—workability demands focus on a small number of drugs Step 2: Set criteria for drugs subject to negotiation (e.g. high cost drugs/no competition) • Step 3: Allow industry and HHS two months to negotiate price • Step 4: If negotiation fails to agree on a price submit to binding arbitration (Final Offer Arbitration (FOA) or Conventional Arbitration)

8. Mechanics II: Final Offer Arbitration • Step 5: Arbitrators would be selected in consultation with the American Arbitration Association (with input from industry and HHS) • Step 6: Scoring consideration: define a range within which bids must fall • Step 7: In FOA the arbitrator would be given final bids from HHS and the manufacturer • An independent fact finder might offer arbitrator a third opinion • Bids would include data underpinning rationale for price • Step 8: The arbitrator in FOA would be required to choose one of the bids (could only choose athird fact finder price that falls between the bids by HHS and the manufacturer) • In conventional arbitration the arbitrator can pick any price they think is fair • FOA typically results in higher likelihood of settlement prior to arbitration

9. Summing Up • Negotiation provides a counter balance to monopoly supply • Binding arbitration encourages parties to stay at the table and to reach negotiated agreements • Arbitration is administratively complex and should focus on relatively small number of drugs • In Medicare a modest number of drugs in the reinsurance segment account for a high percentage of spend—suggesting significant potential savings • Price setting returns to market when there is competition

10. Extra Slide