Delinking Reimbursement

Abstract

Over the past few years, calls for the Food and Drug Administration (FDA) to approve pharmaceuticals more speedily have grown louder. At the same time, many have argued that America’s drug pricing problems can be solved if only Congress were to give Medicare the authority to negotiate drug prices. But scholars and policymakers have largely missed the linkage between these arguments. The FDA’s regulatory system cannot be meaningfully changed without affecting the amount spent on pharmaceuticals, and Medicare’s authority to negotiate drug prices depends on the FDA. This is true for a simple reason: FDA approval is often linked by law to insurance coverage. Insurers must cover most, if not all, FDA-approved drugs.

This Article first explains the link between FDA approval and insurance coverage, describing a range of insurance programs and analyzing what drugs they are legally required to cover. The Article then considers how the link between FDA approval and insurance reimbursement affects policy choices. For instance, proposals that would require the FDA to approve drugs on the basis of less robust evidence would result in the approval of more unsafe, ineffective drugs — and Medicare and Medicaid would need to cover all of them. Alterations to the FDA approval system without altering reimbursement requirements would increase costs, not decrease them.

The Article then envisions what the implications might be for both innovation and access if approval and reimbursement were delinked. There are at least three potential policy consequences, although their precise reach undoubtedly depends on the scope of delinkage. First, there would be some reduction in access to these medicines. If Medicare and Medicaid are not legally required to cover certain drugs, they will no longer choose to. But second, if companies know that they must earn coverage, perhaps by demonstrating efficacy over competitors, they may innovate in more socially valuable ways. Third, delinkage of this type would help address the drug pricing problem, precisely because of both of the above considerations.

Further empirical analysis will be needed before we can conclude as a policy matter that the benefits of delinkage outweigh the costs. But it ought to be part of the conversation, as it has the potential to address some of our innovation and pricing concerns while imposing minimal access constraints.

Keywords: FDA, CMS, Reimbursement, Access, Innovation