PRICING DRUGS FAIRLY.

• Author: Persad, Govind

Table of Contents INTRODUCTION 934 I. WHAT IS A FAIR PRICE FOR A DRUG? 937 A. Procedural Fairness 937 1. Is Procedural Fairness Sufficient for a Price to Be Fair? 937 2. Procedural Imperfections in Pharmaceutical Markets 939 3. How Procedural Fairness Matters 942 B. Substantive Fairness 942 1. Cost of Development 943 2. Affordability to Buyers 951 3. Customary Price 954 4. Value to Society 956 II. DEFINING SOCIAL VALUE 958 A. Conventional Cost-Effectiveness Analysis 959 B. Modifying Cost-Effectiveness Analysis 960 1. Fairness to People with Preexisting Disabilities 961 2. Consideration of Other Important Outcomes 963 3. Prioritizing Rare Disease Treatments 964 4. Assisting Patients Without Other Options 967 C. Defining the Social Value Threshold 968 1. Per Capita Income 969 2. Explicit or Implicit Valuations 970 3. Opportunity Cost 970 III. IMPLEMENTING THE SOCIAL VALUE THRESHOLD: A PRICE CEILING APPROACH 972 A. Political, Practical, and Ethical Advantages 973 B. Addressing Efficiency-Based Objections 977 C. Addressing Need-Based Objections 980 D. Addressing Liberty-Based Objections 983 1. Externalities 985 2. Internalities 988 E. Addressing Desert-Based Objections 990 IV. SURMOUNTING LEGAL OBSTACLES 992 A. Patent Preemption 993 B. The Dormant Commerce Clause 994 C. Takings 996 D. Freedom of Contract 997 CONCLUSION 998 INTRODUCTION

A new gene therapy for spinal muscular atrophy, Zolgensma, was recently priced at over $2 million per treatment. (1) Insulin prices have tripled between 2002 and 2013, with some patients paying more than $1000 per month. (2) Are these prices fair? If not, what should we do about it? While pharmaceutical policy often regards fair pricing as a goal, the concept of fairness itself frequently goes undefined. 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. Since the early 2000s, legal and political obstacles have stymied efforts to regulate drug prices. Washington, D.C.'s regulatory effort to cap the prices of patented drugs was found to be preempted by federal patent law, (3) while the recent Maryland drug price regulations were struck down on Dormant Commerce Clause grounds. (4) Much scholarship on domestic drug pricing has focused on specific legal obstacles to price regulation, such as patent preemption, the Dormant Commerce Clause, takings challenges, or void-for-vagueness challenges. (5) Other scholarship has searched for innovative legal avenues, such as antitrust or human rights law, to rein in prices. (6)

Despite popular, legislative, and academic dissatisfaction with drug prices, legal scholarship--even when ostensibly focused on fairness--has not defined and defended a specific account of fair pricing.' Recent legislative proposals either pass the buck on defining fairness by indexing the desired price to international drug prices or to inflation or use a catch-all approach that includes almost every plausible criterion for fairness. (8) Defining a fair price would help to enrich the burgeoning discussion around drug pricing. It could also help forestall the "drunkard's search" problem, when fundamental policy goals are determined by what seems achievable rather than by what is actually desirable. (9) And it could also help head off void-for-vagueness challenges. (10)

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 the implementation of fair pricing via a price ceiling that ensures that the price of a drug does not exceed its value to society, and it explains how this price-ceiling approach would address a variety of legal and political obstacles.

While this Article connects its contributions to one another, they are separable. Even those who reject its account of fair pricing should find the taxonomy offered in Part I useful. And Part II.D's proposal to define fair pricing in terms of social value could be implemented in other ways than the price ceiling the Article proposes. Conversely, the price-ceiling approach explained in Part III could be used to implement an account of fair pricing that defines social value differently from the Article's proposal or does not base pricing on social value.

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 takes on the task of defining social value. It explains how cost-effectiveness analysis could be used to define social value and considers whether to modify cost-effectiveness analysis to incorporate factors other than cost and health benefits. Part III then defends the use of a price ceiling--a limit on the price that any purchaser can be charged--that tracks social value. It explains how such a price ceiling could incentivize the production of socially valuable treatments, and it describes the legal, ethical, and political advantages of price ceilings over other options such as reimbursement ceilings that limit the price specific purchasers will pay for drugs. In particular, the availability of treatments whose price exceeds the reimbursement ceiling subject administrators enforcing the reimbursement ceiling to blame when patients die or suffer illnesses. In contrast, while price ceilings may discourage the development of costly drugs, they do not require payers to refuse to reimburse identifiable patients who could benefit from existing treatments.

Part IV identifies potential legal obstacles to a price ceiling and explains how to avoid them. Some obstacles, such as preemption and the Dormant Commerce Clause, apply only to state-level efforts. Other obstacles, such as the Takings Clause and a potential revival of Lochner-era freedom of contract, also apply to federal initiatives.

1. WHAT IS A FAIR PRICE FOR A DRUG?

   In this Part, I categorize and present a variety of approaches to fair pharmaceutical pricing and defend an approach grounded in social value. While legal scholarship has often raised the question of what a fair price is for a drug, there has not yet been a comprehensive attempt to address it. This Part fills that gap.

   I first consider and reject as inadequate the view that a fair price is the price that a drug would command in a competitive market. Even if this approach is normatively compelling, pharmaceutical markets deviate from ideal competition in a way that makes it inapplicable. I then review the four most prominent approaches to defining a fair price for goods in markets that deviate from ideal competition, which I call the cost, affordability, custom, and social value approaches.

   1. Procedural Fairness

      1. Is Procedural Fairness Sufficient for a Price to Be Fair?

         For most goods and services, modern market societies regard the prevailing price in a competitive market as fair. (11) Courts similarly often equate fair prices with market prices. (12) This approach makes fair pricing an application of what John Rawls famously called "pure procedural justice," under which an outcome's origin in a fair process establishes its fairness. (13)

         Unconscionability doctrine is the branch of law that has most closely examined whether fairness is purely procedural. Many legal systems historically regarded nonprocedural factors as relevant to fair pricing: such factors included the seller's labor investment, the community's view of reasonableness, and the prices other buyers pay for similar goods. (14) Modern contract law, in contrast, generally restricts itself to procedural considerations. (15) As Ian Ayres observes, "[c]ontracts are almost never struck down for unconscionable price terms," (16) and the black letter rule is that "courts do not inquire into the adequacy of consideration." (17)

         Notwithstanding this black letter rule, modern courts do sometimes question and reform prices in contracts. (18) Often, court intervention is motivated by procedural concerns: while some equate procedural unfairness with seller misbehavior, (19) courts and commentators have also endorsed intervention when sellers have monopoly power over necessary goods or when buyers lack important information. (20) And some courts have gone further, striking down or modifying prices even absent procedural unfairness. (21)

      2. Procedural Imperfections in Pharmaceutical Markets

         The possibility that contractually agreed prices can be unfair absent procedural unfairness would be sufficient to establish the relevance of Part II.B's inquiry into substantive fairness, even in a world where pharmaceutical markets were procedurally impeccable. But, more importantly, intellectual property protection, regulatory exclusivity, barriers to market entry, third-party payment, informational asymmetries, and buyer desperation push pharmaceutical markets far from the theoretical ideal of competition. (22) Pharmaceutical patents, of course, involve governmentally created monopolies. (23) But even markets for generic drugs are typically at best oligopolistic...