Drug Costs

What Is Binding Arbitration?

May 31, 2019 11:54 am

After a top aide to House Speaker Nancy Pelosi (D-Calif.) last month seemed to endorse the use of binding arbitration under Medicare, STAT News wrote the idea “stands as an alternative to wholesale government negotiation with drug companies.”


In reality, however, binding arbitration would have the same negative effect on innovation that price caps or “wholesale government negotiation” would have.


Before we explain, let us define what binding arbitration is, and what the House speaker has pitched.


Arbitration is a tool used when two sides–for example, an employer and a labor union, or a service provider and a large-scale customer–cannot agree on a price or a wage for a contract. The two sides go before a third party, which is supposed to be impartial, and that party determines the dollar amount to be paid for the work, service or product. That decision is binding.


Under the proposal Speaker Pelosi reportedly supports, if Medicare officials and drugmakers could not arrive at a product price for the program, a third-party arbiter would be consulted. It’s unclear what type of entity, or what individual, the speaker wants to act as the go-between, but we don’t need to know that information in order to predict the outcome.  


As Market Access Solutions Founder and President Sandip Shah explains in the Orange County Register, “The government would undoubtedly choose arbitrators who are inclined to set low prices.”


Just like with the International Pricing Index or “wholesale government negotiation,” that, of course, would leave fewer dollars for innovation. Shah predicts, “Binding arbitration would destroy the appeal of drug development and leave countless potential cures to die in the pipeline.” Also writing in the Orange County-Register, Frontiers of Freedom President George Landrith agrees. Landrith explained, “If binding arbitration takes off … patients would be left at the mercy of diseases for which there are currently no cures.”


Landrith called binding arbitration a “fig leaf for government price controls.”


Calling binding arbitration “a system without checks or balances,” in Morning Consult, Dee Stewart, president of the Center for Innovation and Free Enterprise, argues the process also would easily become corrupted. Stewart explains arbitration “offers no recourse for participating parties when they disagree with the arbitrator’s decision; they cannot file court cases, and they cannot appeal to Congress or any other body that is accountable to more than just itself. This lack of transparency serves no one, but especially not patients.”


Frontiers for Freedom Senior Fellow Peter Roff explained in a Houston Chronicle op-ed this week that Germany implemented binding arbitration in 2010.


What happened?


Roff says, “[D]rugmakers are less willing to sell their products in Germany.” Indeed, “When a new cancer medication is approved by regulators anywhere in the world, American patients can access it within three months, on average. By contrast, German patients must wait 11 months, on average.”


Whatever you call binding arbitration, it is bad for patients.