The Trump administration proposed using an International Pricing Index in October 2018 to reimburse providers for drugs administered under Medicare Part B.  These drugs require the involvement of a physician and include, but are not limited to, infused and injectable drugs, some antigens, drugs used with durable medical equipment, and blood clotting factors.  Instead of reimbursing the provider of Part B drugs at the Average Sales Price (ASP) plus 6 percent to cover handling costs, the proposal would peg the Medicare Part B reimbursement to foreign-style price controls.  It has been roundly criticized as adopting foreign price controls and CAGW has expressed its opposition.  Because the U.S does not use price controls in the private market, this country leads the world in research and development, while foreign countries get a free ride on our discoveries.

The hot, new topic being discussed to lower drug prices in Medicare Part B is binding arbitration, an idea the Medicare Payment Advisory Commission (MedPAC) discussed in a March 7, 2019 public meeting.  According to news reports, the proposal is now being considered by staff from House Speaker Nancy Pelosi’s (D-Calif.) office and the White House and in meetings with Senate Finance Committee Chairman Chuck Grassley.  It would also constitute a form of price controls for Part B drugs.

Binding arbitration is familiar to most people.  Instead of using an expensive and lengthy court procedure, binding arbitration is often used to settle disputes between two different parties where a disinterested party comes up with a solution that is legally binding.  For example, professional baseball teams and players use binding arbitration to settle salary disagreements.  The teams and players jointly agree on a panel of three arbitrators.  This panel will then review the salary requests and offers and supporting evidence from the players and teams.  It will choose only one of the two salary figures.  

It has been argued that using binding arbitration could be used to drive down drug costs in Medicare Part B and even for Medicare Part D, which already uses private negotiations.  However, its design for these purposes would not be market-driven and should be rejected.

Binding arbitration would come into play when a subjective drug price threshold is exceeded, particularly for a newly-launched drug, or a drug with no competition.  The Department of Health and Human Services (HHS) secretary would request arbitration from a supposed neutral party.  HHS and the drug manufacturer would each offer a price for the drug and their supporting documentation.  The arbitrator would weigh the offers based on the criteria presented in the supporting documents and pick one of the prices.

If this policy was adopted, it would move the direct decision-making away from public officials, where they would be answerable for their decisions, to an unaccountable third party.  It is eerily similar to the Affordable Care Act’s Independent Payment Advisory Board (IPAB) that utilized an unelected and unaccountable board to cut Medicare spending.  Congress wisely repealed IPAB in February 2018.

It has also been suggested by MedPAC members that using binding arbitration in negotiations for Medicare Part B drugs would be similar to the process used by hospitals and insurers to work out payment for surprise medical billing.  This occurs when an insured patient is treated by an out-of-network provider at an in-network facility and is billed at an out-of-network price.  The June 2017 MedPAC report mentioned how New York’s law, the first in the nation that addressed surprise billing, has been used to settle pricing disputes and protect patients.  For example, according to a February 2019 NYS Health Foundation report, it helped to reduce out-of-network emergency department charges from 20.1 percent in 2013, before the law was passed, to 6.4 percent in 2015.

The New York law provides specific circumstances where a charge is determined to be a surprise bill and if a patient’s complaint falls within these categories, he or she is not responsible for any payment higher than their plan’s standard fees.  The plan then makes a payment to the out-of-network provider.  If the provider believes the amount is incorrect, the plan and provider then participate in an independent dispute process where a final payment is determined.

The MedPAC proposal is not similar to the New York law.  MedPAC admits in its “June 2017 Report to Congress” that the arbitration would likely be designed by the HHS secretary through the rule-making process.  In other words, the government controls the entire process:  the rules written for the arbitration process, when arbitration would be used, and who gets to be an arbitrator.  Since only the government chooses the arbitrator, the arbitrator is a non-neutral party that is sandwiched between the interested and aggrieved HHS and the drug manufacturer.  If the manufacturer does not participate, their drug will not be covered.  It is difficult to imagine how this process could ever be truly fair and independent.

Competition, not government-imposed price controls, lowers costs and encourages innovation.  The Food and Drug Administration (FDA) needs to continue to speed up approval times of generic drugs, reduce the backlog, and provide more choice.   According to the FDA, there are more than 300 brand drugs that have no competition, even though their patents and exclusivities have expired.  Incentives need to be created to encourage generic manufacturers to invest in these drugs.

In addition,  “me-too” drugs, which are drugs in the same class, should be encouraged, not disparaged.  Critics of “me-too” drugs often say they are a waste of research and development dollars because they really do not provide anything innovative, are redundant, and research companies should only focus on creating breakthrough drugs.  But “me-too” drugs provide choice and competition within a class of drugs when patents are still valid.  A “me too” drug could even work better for some patients than the original entry. 

These are true market solutions, not faux reforms based on government price controls.