Issues in Drug Price Negotiation Using Binding Arbitration

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

Key Part D Facts • Part D spend 2017: roughly $100 billion • Prices for single source brand name drugs increased 269% 2006 -2015 (Med. Pac, 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

Reinsurance Share of Part D Spend Source: Med. Pac 2017 March Report to Congress

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 ◦ Med. Pac 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 4

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

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)

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)

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 a third 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

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

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