Keeping Consumers Out of the Crossfire: Final-Offer Arbitration in the Pharmaceutical Market

Abstract

Big pharma greed is not the sole cause of skyrocketing drug prices. A consumer’s out-of-pocket drug cost is decided each year at a negotiating table, where insurance companies leverage price concessions from drug companies by threatening to limit coverage for a certain drug. As a result, the health insurance industry is also booming, but it is an expensive way to save money.

Social value in the drug industry comes from ensuring that consumers get the drugs they need. But it also comes from encouraging new drug development. Thus, any solution that lowers the consumer cost of drugs, must preserve as much as possible the incentive for drug companies to innovate. In the United States, where new drug development is largely in the hands of drug manufacturers, these objectives directly conflict: Less drug company revenue amounts to less invested toward the next breakthrough drug. To achieve a suitable balance, this Comment suggests making two changes to the market, both to ensure that insurance companies deliver reasonable coverage and that drug companies agree to reasonable prices.

First, a system of dispute resolution known as final-offer arbitration, used in collective bargaining disputes, should be implemented to change drug company pricing behavior at the negotiating table. In this system, the arbitrator selects the more reasonable of the negotiating parties’ final offers, rather than determining a reasonable price on her own. The threat of losing one’s negotiating position has been shown to encourage reasonable pricing and can offset the practically unlimited pricing power drug companies exert on patent-protected drugs.

With this in place, various cost-containment strategies that insurance companies use to externalize the cost of drugs onto third parties should be restricted.

65.4.3-Lamm
By uclalaw