Pricing Drugs Fairly
84 Pages Posted: 27 Nov 2020 Last revised: 28 Dec 2020
Date Written: October 10, 2020
Dissatisfaction with drug prices has prompted a flurry of recent legislation and academic research. But while pharmaceutical policy often regards fair pricing as a goal, the concept of fairness itself frequently goes undefined. Legal scholarship—even work ostensibly focused on fairness—has not defined and defended an account of fair pricing. Recent legislative proposals passed by the House and proposed by Sens. Ron Wyden and Chuck Grassley have similarly avoided a determinate position on fairness. This Article explains and defends an account of what makes a price for a drug fair that identifies fair price with social value, argues for implementing fair pricing through a price ceiling grounded in social value, and examines how the proposed price ceiling could overcome legal and political obstacles. By focusing on fairness, this Article pursues a goal that complements, rather than duplicates, recent legal scholarship on pharmaceutical pricing.
This Article makes three contributions. First, it identifies, makes explicit, and categorizes the most prominent conceptions of fairness in drug pricing. Second, it advances an account of fair pricing that centers on a drug’s value to society. Third, it proposes that fair pricing be implemented via a price ceiling that ensures that the price of a drug does not exceed its value to society, and explains how this price-ceiling approach would address a variety of legal and political obstacles.
In Part I, the Article categorizes conceptions of fair pricing. It first considers procedural fairness, and critically evaluates the view that any price reached in a procedurally fair negotiation is substantively fair. It then reviews four comparators used for assessing substantive fairness: (a) the cost of developing the drug, (b) the drug’s affordability to patients, (c) the drug’s customary price, and (d) the drug’s social value. Part I concludes that social value should be used to identify when a price is unfair, although the other factors can indicate procedural unfairness or serve to justify other policies, such as subsidized insurance. Part II then takes on the task of defining social value. It explains how cost-effectiveness analysis could be used to define social value, and argues that cost-effectiveness analysis should be modified to incorporate factors other than overall costs and health benefits, such as fairness to patients with preexisting disabilities and reduction of health disparities, but should not be modified to provide greater incentives to treat rare diseases or diseases lacking other treatments.
Part III turns to implementation, arguing that fair pricing can best be achieved through a price ceiling that tracks social value. It explains how such a price ceiling could incentivize the production of socially valuable treatments, and describes the legal, ethical, and political advantages of price ceilings over other options such as reimbursement ceilings. In particular, the availability of treatments whose price exceeds the reimbursement ceiling will lead to administrators enforcing the reimbursement ceiling being blamed when patients die or suffer illness. In contrast, while price ceilings may discourage the development of costly drugs, they do not require families or payers to say no to identifiable patients who could benefit from existing treatments. Price ceilings also avoid the legal limitations that private and public insurers face when they attempt to deny coverage for expensive treatments.
Part IV identifies potential legal obstacles to the implementation of a price ceiling and explains how to avoid them. Some, like preemption and the Dormant Commerce Clause, apply only to state-level efforts. Others, such as the Takings Clause and a potential revival of Lochner-era freedom of contract, also apply to federal initiatives.
Keywords: pharmaceuticals, pricing, fairness, drugs, social value, cost-effectiveness, price regulation, preemption, dormant Commerce Clause
JEL Classification: I18, K11, K32, L65, O31, O32, O34, O38
Suggested Citation: Suggested Citation