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Binding arbitration policy would cause drug development pipeline to run dry

Pharmaceutical giant Biogen recently pulled the plug on its experimental Alzheimer’s drug after disappointing clinical trial results.
The news shook investors. Biogen shares plummeted 32 percent, wiping $18 billion off the company’s market cap. The disappointing announcement underscored how risky drug development is, especially for Alzheimer’s treatments. Nearly 150 potential Alzheimer’s drugs have failed during clinical trials in the past decade alone.
The disease still has no cure. It costs our healthcare system $277 billion each year. And that cost will only rise as America’s population ages. Yet investors keep funding these long-shot efforts because they know that just one breakthrough drug could generate millions in profits.
Unfortunately, House Speaker Nancy Pelosi seems determined to change that risk calculus. She and several other lawmakers are considering a policy — known as “binding arbitration” — that would essentially allow the government to dictate prices for drugs covered by Medicare. Arbitration would let the government underpay for drugs, killing the incentives for investors to fund new treatments. As a result, it would hamstring research for breakthrough medicines.
Like all industries, the pharmaceutical sector has to provide adequate return on investments for their shareholders. After all, it costs billions of dollars and takes more than a decade to develop just one new therapy. Only 12 percent of drugs ever make it to pharmacy shelves.
Companies need revenues from successful medicines to offset the cost of failed drugs to fund future projects and provide adequate ROI for their investors. Take away the possibility of high returns on the rare, successful drug, and investors would have no reason to invest in more R&D.
Here’s where it gets tricky. After a drug receives FDA approval, drug companies and insurers come together to negotiate its price. Some of these insurers are responsible for administering Medicare’s Part D drug benefit for the elderly. As with any negotiation, these talks sometimes hit roadblocks.
Binding arbitration gives the government a way to break the deadlock. If manufacturers and insurers can’t agree on a price, Medicare officials could bring in a third-party arbitrator. After manufacturers and Medicare officials each suggest a price and present arguments in favor of their positions, the arbitrator would set a price.
Speaker Pelosi hasn’t yet announced her plan publicly. So it’s unclear whether the arbitrator would simply choose between the proposed prices, or if the arbitrator could come up with an alternative price. It’s also unclear whether the arbitrator would be a single person or a committee.
But two things are certain. Both parties would be legally bound to accept the arbitrator’s decision. And arbitrators would almost always choose artificially low prices favored by the government.
After all, government officials get to hand-pick these supposedly “neutral” arbitrators. The government would undoubtedly choose arbitrators who are inclined to set low prices. That translates into lower profits for drug makers — and fewer dollars to pour into new projects.
Just as concerning, however, is that these third-party negotiations disrupt the free market forces in play in the drug pricing system. In addition to smothering future investment, such meddling will only act to delay patient access to potential life-saving medicines.
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American patients can’t afford a drop-off in R&D — and neither can the government. Currently, 191 million Americans live with at least one chronic disease, and 169 million more could join their ranks over the next decade. Without the help of new medicines, chronic disease will cost our nation $42 trillion by 2030.
Innovation, not price controls, is the best way to bring innovative treatments — especially those that reduce overall spending in the long run. Ensuring that drug companies can still attract plenty of research funding could even reduce government spending. The development of a single drug that delays the onset of Alzheimer’s could save Medicare and Medicaid $218 billion annually by 2050.
Binding arbitration would destroy the appeal of drug development and leave countless potential cures to die in the pipeline. If Speaker Pelosi and others are serious about cutting costs and helping patients, they’ll drop this plan immediately.
Sandip Shah is founder and president of Market Access Solutions which develops strategies to optimize patient access to life-changing therapies.

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