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 (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

Reinsurance Share of Part D Spend Source: MedPac 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 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

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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