How a Bad BATNA Keeps Medicare Drug Prices High

A weak BATNA, or best alternative to a negotiated agreement, can keep us from getting what we want out of our negotiations, as Medicare drug prices show.

By — on / Business Negotiations


It’s Negotiation 101: to get what you want, you need to be able to make a credible threat to walk away from a subpar deal. And for your threat to be credible, you can’t walk in with a bad BATNA, you have to have a strong BATNA, or best alternative to a negotiated agreement. In recent years, the lack of a strong BATNA has held back the U.S. government from negotiating to lower Medicare drug prices.

A Push for Negotiation

While running for president, Donald Trump disagreed with his Democratic competitors, Hillary Clinton and Bernie Sanders, on most issues. But on the issue of prescription drug prices under Medicare, Trump agreed with Clinton and Sanders that the U.S. government is getting a lousy deal.

All three major candidates called for the U.S. government to directly negotiate drug prices on behalf of Medicare’s 37 million members. Through negotiating skills and negotiation tactics, they suggested, government dealmakers should be able to slash Medicare costs.

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Currently, as mandated by Congress, only private insurers can negotiate with pharmaceutical companies over the price of drugs used by Medicare patients. These negotiations lead to savings of up to 30% off the list price of drugs, the government reports. But government health systems in other countries that negotiate directly with drug companies get far bigger discounts, writes Margot Sanger-Katz in the New York Times.


By negotiating as a monolith, shouldn’t the United States be able to get better deals? Not exactly, experts say—and a familiar negotiation concept, BATNA, helps to explain why this may be the case and suggests best negotiation tactics for similar situations.

Rules passed by the U.S. Congress leave the government with not just a very bad BATNA in potential negotiations over Medicare drug prices, but in essence no BATNA at all.

Because Medicare beneficiaries want access to whatever drug they might need, Medicare is required to cover most drugs. Consequently, government negotiators would not be empowered to walk away from negotiations from drug companies. In such negotiations, the government would have no BATNA—no choice but to do a deal.

An Unpopular Tradeoff

Other nations, such as Great Britain, as well as the U.S. Department of Veterans Affairs, negotiate steep discounts on drug prices, but patients have access to fewer drugs because the negotiators have a strong BATNA—the power to walk away from the table.

“To negotiate prices any further, the government would need to impose access or coverage restrictions on medicines,” Harvard Kennedy School professor Doug Elmendorf testified to Congress in 2009, when he was the director of the Congressional Budget Office.

That tradeoff, which could inspire hardball tactics in negotiation, has proven politically unpopular. In 2014, the Obama administration proposed removing some categories of drugs from Medicare to save the program $1.3 billion from 2015 to 2019. But in the face of protests, the administration quickly backed down, according to U.S. News and World Report.

Because of the government’s bad BATNA, or lack thereof, even hardball tactics in negotiation are unlikely to go far. Lifting the ban that currently bars it from negotiating Medicare drug prices directly would have a “negligible effect” on federal spending, the Congressional Budget Office reports.

In the end, after taking office in January 2016, Trump changed his tune on negotiating Medicare drug prices, but not because of the BATNA conundrum. Rather, emerging from a closed-door meeting with pharmaceutical-company executives, he told the press: “I’ll oppose anything that makes it harder for smaller, younger companies to take the risk of bringing their product to a vibrantly competitive market. That includes price-fixing by the biggest dog in the market, Medicare.” The executives apparently had convinced the president during their meeting that they were the ones with the bad BATNA.

Power-Enhancing Bargaining Strategies in Negotiation

Fortunately, most business negotiators are typically in a better bargaining position in their negotiations than U.S. government negotiators would be in negotiations with drug manufacturers. How can you increase your power when your BATNA seems hopelessly weak—or when you don’t seem to have any BATNA at all?

Here are three negotiation tactics from Harvard Business School professors Deepak Malhotra and Max H. Bazerman’s book Negotiation Genius: How to Overcome Obstacles and Achieve Brilliant Results at the Bargaining Table and Beyond:

  1. Leverage their weakness. You may feel completely dependent on the other party, but consider that she or he may be just as dependent on you. Be sure to study your counterpart’s BATNA as well as our own. When both sides would suffer from walking away from a deal, value-creating deals are possible. Highlight your counterpart’s lack of alternatives—and avoid calling attention to your own.
  2. Highlight your DVP. Business negotiators who have difficulty competing on price may be able to increase their power by determining and highlighting their distinct value proposition (DVP)—that is, what makes them unique, such as a good reputation or a strong brand. Make your DVP a factor in the negotiation by submitting multiple proposals that vary on price, service, and so on, as a means of showing what you have to offer and determining what the other side values most.
  3. Consider your entire negotiation portfolio. Sometimes negotiators become so focused on how much they have to lose in a particular negotiation that they fail to set a strategy for their entire portfolio of negotiations. Malhotra and Bazerman advise us to distinguish between negotiating partners who will accept a higher margin and those who will not. If you can justify charging different prices to different customers, you may be able to raise your overall profits by charging higher margins only to those who can afford them.

What techniques have you used to improve your BATNA in business negotiations?

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