Too often, the most reckless government policies aren’t the ones that sound the most audacious (i.e. Medicare for All). Proposals draped in reasonable-sounding language designed to appeal to “both sides” are usually the ones to watch out for. Exhibit A: binding arbitration proposals for drug purchases within Medicare. Masked in this sleep-inducing jargon is an important issue for taxpayers and consumers.
Some want the government insurer to force drug manufacturers to a sit-down with a “neutral” third-party if the two parties can’t agree on prices. The arbiter (basically an unaccountable judge) would make a decision about the “fair” price, which pharmaceutical companies would have to agree to. This government price-fixing has proven a failure in the United States and other countries, hampering innovation and reducing drug availability. By committing to market-based reforms, bureaucrats can save U.S. consumers from a similar fate.
Across most sectors, binding arbitration is a normal part of resolving disputes and keeping contracts clear. Arbitration between two private firms is often quicker and cheaper without sacrificing consumers’ and workers’ rights. Government-forced arbitration, though, is a wolf in sheep’s clothing.
Since Medicare accounts for around a third of retail pharmaceutical spending in the United States, the government insurer has a lot of power in dictating terms with producers. Medicare could insist on relying on a specific arbiter as a precondition for doing business with a pharmaceutical company, even if said arbiter has a reputation for siding with the government. Effectively, the government will force manufacturers to hand the keys over to them to decide which prices are “fair.”
Germany is an excellent example of what happens when the government uses “binding arbitration” to force the hand of pharmaceuticals. The German system features negotiations between drug producers and non-profit associations backed by the government. Failure to agree on price results in mandatory arbitration.
But these panels are hardly fair to producers; OECD reports that on average, arbiters have set prices at “20 percent below the midpoint of the range between the prices claimed by manufacturers and SHI (public insurers).”
That may sound like consumers win, but this is anything but the case. Forced below-market prices stymie innovation and reduce availability of life-saving medications. Patients in Germany have access to less than three-quarters of new cancer medicines, while U.S. patients have access to 96 percent of these medications.
This disparity highlights the unfortunate wider tendency of European countries to price-fix their medications to consumers’ detriment. According to a 2018 survey, nearly 40 percent of European pharmacists find shortages of heart disease medications (i.e. statins) to be a significant issue in their countries. Companies creating game-changing, cholesterol-lowering medications know that they won’t recoup development costs by selling to European hospitals and pharmacies, making them afraid to even approach French, German and British markets.
As a result, only around 40 percent of patients with cardiovascular disease in European countries are on statin medications, versus 60 percent of high-risk patients in the United States.
But if the U.S. government begins to price-fix (whether outright or indirectly through binding arbitration), patients across the 50 states could soon face similar access restrictions. America itself is no stranger to price-fixing and rationing via “independent” boards. The Affordable Care Act infamously created the Independent Payment Advisory Board, which had the power to curtail government medical payments by fiat and make reimbursements artificially low. Fortunately, Congress recently repealed IPAB, relieving medical innovators and allowing prices to reflect research costs.
Instead of reversing course and retrying price-fixing, Congress should search for ways to lower costs and increase the availability of life-saving cures. One possible approach is to streamline the lackluster Food and Drug Administration approval process, which forces companies to spend billions of dollars per lifesaving drug. Instead of passing off pizzazzy proposals as real reform, policymakers should work to get the rules right and improve millions of lives.
