Binding Arbitration for Medicare Would Establish Backdoor Price Controls

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Posted by Tom Hebert on Friday, May 17th, 2019, 9:00 AM PERMALINK

Recent media reports indicate that a top aide to Speaker Nancy Pelosi (D-Calif.) wants to impose binding arbitration into the healthcare system as part of drug pricing reform.

This proposal would specifically apply a dispute settlement process to physician-administered drugs under Medicare Part B but could easily be applied to other parts of the healthcare system.

Binding arbitration is a flawed proposal. While there are many unknowns behind how the proposal would work in practice, it should be concerning as it would be another way for Washington bureaucrats to implement backdoor price controls on lifesaving medicine. 

Binding arbitration would be used to settle disputes between two different parties without going through the court system. Each party appeals to a neutral third party that considers the options and chooses one of them as the binding decision.

Under this proposal,  binding arbitration would apply when a subjective value of a drug is exceeded, for new drugs entering the market, and for drugs with no competition. HHS would pick a supposedly neutral third party to arbitrate between the department and the drug manufacturer.

This arrangement creates a critical problem — why would HHS pick panels that routinely rule against the department in arbitration? This would lead to selection bias which would all but ensure that HHS would be able to establish price controls on lifesaving medicine.

Binding arbitration resembles Obamacare’s Independent Payment Advisory Board (IPAB), which instituted price controls and rationing within the Medicare system. Thankfully, Congressional Republicans repealed the IPAB.

Currently, Medicare Part B drugs are calculated based on market prices using a formula which calculates the “Average Sales Price” of U.S. drugs. This formula factors in discounts negotiated between payers, hospitals, and health plans. In recent years, this system led to a 0.8 percent decrease in the cost of Top 50 Medicare Part B drugs. 

Using government power to lower prescription drug costs would have the unfortunate effect of reducing access to lifesaving medicine for American healthcare consumers.

Price controls reduce access to lifesaving medicine for patients. As noted in a recent study by the Galen Institute, roughly 290 new medical substances were launched worldwide between 2011 and 2018. Of these medicines, the U.S. had access to 90 percent. In contrast, foreign countries have access to far fewer. The United Kingdom had 60 percent of medicines, Japan had 50 percent, and Canada had just 44 percent.

The United States is a world leader in research and development of lifesaving medicine because our healthcare system is based around the free market. Rejecting price controls in all forms is essential to maintaining a healthcare system that encourages innovation and near-total access to lifesaving medicine.

While binding arbitration may sound like a reasonable proposal, it would actually put healthcare policy in the hands of faceless Washington bureaucrats and should be rejected by policymakers.

Photo Credit: Flickr

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