The pharmaceutical
industry sometimes forgets how payers calculate the value of their products.
Payers do not view value solely through the lenses of clinical efficacy,
safety, and utility. The case for the value of a COVID-19 vaccine to prevent disease
or an antiviral to prevent COVID-related serious complications and
hospitalization can readily be made. What about the following, less-obvious scenario?
A pharmaceutical offers some (but not high) level of clinical benefits in a common
disease state for which no other pharmacologic therapy has been proven to work?
It is surprising how
many disorders do not currently have effective, approved treatments. This is
particularly true in the orphan disease areas (especially ultra-orphan
diseases), in which fewer than 200,000 people have been afflicted by an illness.
Often, genetic mutation or deletion is the principal cause. In other cases,
like pancreatic cancer, outcomes with known therapies are considered minimally
effective. When speaking about a high-prevalence disorder, the same can be said
for nonalcoholic steatohepatitis (NASH). At least two therapies are in
late-stage trials, but many questions regarding their clinical and
quality-of-life outcomes are yet to be answered.
When developing a new
pharmaceutical for orphan diseases or more prevalent disorders that do not yet
have effective treatments, the calculation of value is not so well defined. In
our market research with payers, we find that the first treatment found to have
any clinical effectiveness for a disorder is likely to gain some level of coverage.
This does not mean it will be favored as a preferred product. One can assume
that prior authorization requirements will be the principal way in which access
is controlled, particularly when the drug is priced as a specialty
pharmaceutical.
This is why payers are
increasingly looking to organizations like the Institute
for Clinical and Economic Review (ICER) to help them set pricing standards
in the sometimes ambiguous world of pharmaceutical value. The analysts at ICER
take a direct approach to the consideration of pharmacoeconomics. They evaluate
whether the price proposed by the drug maker is cost effective based on its predicted
clinical improvement and potential medical cost offsets, and, perhaps more importantly,
at what price would the drug be cost effective?
The standard pharma
company method includes gaining payer feedback in several prelaunch phases.
This consists of presenting a condensed profile of “Product X,” which
highlights the new drug’s benefits (real or aspirational), risks of treatment,
and the intended patient population. After digesting this information, payers
(usually a mix of medical directors, pharmacy directors, and clinical pharmacists)
are offered a wide choice of potential prices, in an effort to better obtain a
narrower range of acceptable prices. Subsequent rounds of feedback are obtained
regarding rebates necessary to obtain preferred formulary placement and what prior
authorization criteria will be utilized to manage patient access.
Rarely, do pharma
companies directly ask the payers what price would make financial sense based
on the product’s apparent value. It seems an obvious question, and it does sometimes
get asked, but not often enough. This leaves payers (and most other
stakeholders) with the impression that the price is an actuarial business
decision: let’s pick a price point that maximizes revenue. This doesn’t mean
the price is indefensible, but it does imply there is little transparency or logic
to the pricing.
There are ample examples
where initial pricing was drastically changed once the agent was introduced and
caused an outcry that affected managed care plan coverage. Despite promising
the first medical cure for patients with hepatitis C, the initial price tag for
Gilead’s Solvaldi caused
an uproar. Cost increases to cancer products like Revlimid, which may be
associated with only incremental benefits, have been debated by oncology
centers like Memorial Sloan Kettering Cancer Center as well as by Congress. Manufacturers
like Amgen cut the price of their PCSK9 cholesterol-lowering agents by
60%, because of payers’ perception that the initial price was not rooted in
value (and their subsequent refusal to provide broad formulary access).
Too many specialty drugs
today and in the pipeline tomorrow carry price tags that do not align with
their claimed value. Biopharmaceutical companies should expend considerably
more time and effort incorporating payers’ assumptions and opinions on the
value of new medications before setting price, or at least really gauge their
reaction to proposed pricing well before launch. This will result in at least
some degree of price acceptance at launch or at least the impression that the
company cares about the payer perspective.
In a value-based health
system, this will matter a great deal.
SM Health Communications provides writing, consulting, and innovative market research services for the payer markets. Its proprietary P&T Insight™ virtual P&T Committee program is the leading mock P&T Committee product in the field. We’ve participated in many market research projects involving biosimilar development and launch, from the point of view of the biosimilar and the innovator drug manufacturer. For more information, please visit www.smhealthcom.com or contact Stanton R. Mehr, President, at stan.mehr@smhealthcom.com.
In our previous post, we documented the difficulties and challenges in considering a “Medicare-for-all” scenario to extend coverage to virtually everyone. We also discussed the potential for implementation of a “public option,” which was first proposed with the initial version of the Affordable Care Act. One of the least considered alternatives to extend universal coverage is Universal Catastrophic Care (UCC).
Any attempt at extending coverage to the fullest, appropriate American population should accomplish three objectives: (1) it should lower the risk of medical bankruptcy (or even eliminate the possibility), (2) vastly simplify the health system from the consumer’s point of view, and (3) lower overall costs (administrative and healthcare costs) from the society’s view. The chart below is a simplified view of how well the three mechanisms discussed in this series of posts attack these objectives.
Objective
Medicare for All
Public Option
Universal Catastrophic Care
Lower Risk of Medical Bankruptcy
+++
+
+++
Simplify Healthcare for the Patient
++
—
+++
Lower Overall Costs From Societal View
+
+
++
Health Insurance as Insurance Once Again
Insurance of nearly any type is supposed to protect people from unlikely, negative events. For auto or homeowners insurance, this means the unlikely prospect of a serious vehicular accident or fire in the home. A routine visit to a doctor is a regular occurrence for the majority of the population. Chronic prescription medicines are taken by a substantial portion of Americans. This does not fit the concept of insurance, wherein low costs are paid by the many so that they few have protection in times of need. With healthcare, most people have a regular need.
The problem for underwriters is that general health care delivery is not truly something that can be insured. Unlike auto insurance, it is a service that the majority of people utilize at some point of time, and the costs associated with that care are not limited. As it is, most people pay large sums each year on auto insurance and do not file claims in a given year. Health care, however, is a service that many people utilize at some point during the year, and some repeatedly. First-dollar coverage for many services, including preventive care, raises rates. A wide array of services covered raises rates. Increasing provider charges raises rates.
Universal catastrophic care enables healthcare insurance to act more like insurance once again. It resets the definition of health insurance to that of reinsurance. A design such as UCC prevents medical bankruptcy for most consumers who require expensive care–like in today’s traditional Medicare, government funding is used to pay for their expensive episode(s) of care. Instead of being funded through premiums, UCC will be financed through payroll and employer taxes, like the Medicare-for-all plans being raised today.
Under UCC, individuals would be responsible for paying for (or obtaining private health insurance to pay for) medical care up to a specific threshold expenditure. Everyone can buy this insurance through their own resources or through government subsidies (based on a sliding income scale). In simple terms, people with incomes qualifying for today’s Medicaid will pay nothing out of pocket; a person earning $300,000 a year must pay for all care up to the level defined as catastrophic care. Medical savings accounts like those seen today to pay for today’s care under a deductible can still be used to pay for medical care below the catastrophic care threshold. Beyond that level, the government pays all costs. Above this level, the government negotiates all bills and sets fees with physicians and hospitals, and other health providers.
For example, Mr. Jones chooses his doctor, any doctor he believes will serve him best (no referrals). His doctor says Mr. Jones needs surgical intervention. Prior authorization or precertification is not required (or is completed electronically, instantaneously for highly complex cases only). He chooses any hospital he wants to perform the surgery, because the hospital network is universal. He is treated by numerous professionals, none of whom are “out-of-network,” because every credentialed provider is part of the UCC network. All hospitals and providers must meet accreditation and quality standards to operate.
What Happens Before
Reaching the Catastrophic Care Threshold?
Before reaching the UCC threshold, Mr. Jones pays up to the preset threshold amount for all his medical care (it is also possible that dental/ vision can be added to this benefit, depending on financing). This threshold will be calculated based on the initial target national health expenditure. Let’s say that this number is set at $8,000 for 2022. Mr. Jones, who earns a moderate income, would be asked to pay for all of his care up to this amount or purchase health insurance that covered this care up to $8,000 (family care limits may be something similar to today’s high-deductible limits). If Mr. Jones earned very little (i.e., qualified for Medicaid in today’s system), the government would subsidize 100% of his payments. Patients with preexisting conditions may be compensated with a credit towards their initial cost of care. Remember, relatively few patients would require care that costs more than $2,000 in any given year. Overall, the vast majority of people would pay far less in premiums and incur lower costs than they do under today’s system.
A person who wished to purchase coverage for an individual or their family from traditional health insurers up to the threshold amount should be subject to very low premiums. This is because health benefits costs are capped at a relatively low amount. And insurers may not find it necessary to require any tiered networks or other marginal mechanisms to hold down excessive costs. Furthermore, health insurance companies will need to market themselves differently than they do today to capture consumer marketshare—with this structure, Medicaid and Medicare can be folded into this system (or not), while providing the same or improved benefits to consumers.
Marketing to People, not to Health Plans
This also means that hospitals and other centers must be more consumer centric in their approach, as the patient is more directly involved with choosing a provider, without unnecessary gatekeeping referrals, or other forms of authorization.
Optimally, the hospital would be paid a single global fee for its inpatient services, medication use, and follow-up care. Optimally, drug companies would be paid a standard fee for outpatient medications (they are also paid a standard negotiated fee for inpatient medications; payment does not vary by hospital).
For routine office visits and elected procedures, the patient chooses their providers, with as much information on quality that can be made available. The hospital and/or physicians must compete for that patient, especially for those initial, below-the-threshold dollars.
Today, we pay $3.7 trillion on US health care expenditures, or more than $11,200 per person, which is far more than any other nation pays for their advanced health care systems. In comparison, UCC has the potential to lower this amount, while providing care access for every US citizen.
Simplicity. Competing for patient dollars. Quality. No preexisting exclusions. The health care system can be refreshingly simple, wherein patient choice carries much greater weight (which would enable the market to work better), where physician practices would reap savings in administration, and where patients and consumers might actually see considerably lower costs.
Several complex issues would need to be addressed, such as setting fees, labor practices, medical malpractice, the role of pharmacy benefits managers, encouraging routine vaccinations, and others, but this may be the simplest, most refined and rational way to deconstruct the decades-old patchwork machinery that has promoted rampant costs, decreased physician satisfaction, increased underinsurance, limited a patient’s ability to navigate the system, and ceded a world-leading position in health care effectiveness and innovation.
Some election-year topics are hotter than others, and now
that impeachment seems to be behind us, many expect that the topic of health
care access will heat up.
Not that this hasn’t gained plenty of press and airtime in
the past few months. The Democratic presidential campaign has focused on the
potential of “Medicare for All” to either spur the discussion of improving health
coverage or kill it altogether. And the reasons are not simply about money. It’s
also about a relatively quick closure of a massive industry and the jobs it
would lose.
As of 2018, the Kaiser
Family Foundation indicated that 16% of all adults 18 to 64 years of age
were uninsured. Broken down by states, around one-fifth of nonelderly adults were
uninsured in Texas (24%), Oklahoma (20%), Florida (19%), Georgia (19%), and Mississippi
(19%). Far fewer are found in states that expanded their Medicaid programs
under the Affordable Care Act. Underinsurance is a separate issue; this
includes those families with unaffordable deductibles or especially who have coverage
in plans that offer limited benefits and exclude benefits for preexisting
conditions. The percentage of the population who are underinsured is growing.
And let’s put aside the rhetoric that such a move would amount
to a socialist takeover of the country. Universal health coverage is an
important, worthwhile goal. The real question remains how to close the remaining
access gaps in our system and do so in a way that covers more people faster
than we gain uninsured amidst rapidly rising health insurance premiums, cost
sharing, and deductibles.
As many analysts have pointed out, gaining fully universal coverage
through such a plan will either cost trillions more than the bloated amount we
already spend on health care (over
$3.6 trillion in 2018), or it will cost a somewhat small percentage more than we already spend. The Sanders campaign
believes it will save money over the long term, but there haven’t been as much
support for this viewpoint. If it is phased in over a relatively short 4 years,
that means that all health insurance employees and executives will need to find
new occupations by 2024. I haven’t been able to locate consistent figures; the
US Bureau of Labor Statistics does not specify numbers for “health service managers”
that include health plans, insurers, PBMs, but of course many may overlap with
physician, pharmacist, and other medical professional counts. However, if I could
count all of the at-risk employees of UnitedHealthcare, CIGNA, CVS Aetna,
Humana, and the regional health plans, the number of people affected could approach
or surpass 750,000.
There are a number of different options, some of which have
been well addressed and others have not.
The Public Option. This may have been an opportunity missed during the Obama Administration. The “public option” was originally planned as part of the Affordable Care Act but was dropped from the legislation to assure its passage. The public option was supposed to be a government-managed health insurance choice, apart from the private exchange plans. This has been raised again by certain Democratic presidential candidates, and there is polling evidence that it has more support than Medicare for all.
When first considered in 2009, the benefits of the public
option were twofold: (1) the administrative costs of this nonprofit health plan
would very likely be less than that for private health insurance, resulting in a
lower cost alternative; and (2) with sufficient growth, it could force private
plans to accept higher medical loss ratios to compete. The potential
implication is that private insurance plans that have to show profits would not
be able to compete in reality, and the public option would become a de facto national health insurance. And
it may have driven private health insurers into narrow areas, such as integrated
plans like Kaiser Permanente, which could still remain viable.
The public option remains available. If it was implemented
in 2012, when the ACA took effect, consider how the coverage, cost, and
deductible situation might have been different today.
Universal Catastrophic Care.This option has not been well
described. It resets the definition of health insurance. In this iteration, it
is more a type of reinsurance—it prevents most consumers who experience the
need for expensive care from suffering medical bankruptcy. An added benefit is
that it would help individuals and their dependents more easily navigate their
acute care needs.
The problem for underwriters is that general health care
delivery is not truly something that can be insured. Unlike auto insurance, it
is a service that the majority of people utilize at some point of time, and the
costs associated with that care are not limited. As it is, most people pay
thousands of dollars per year on auto insurance, and do not file claims in a
given year. Health care, however, is a service that most people utilize at some
point during the year, and some repeatedly. First-dollar coverage for many
services, including preventive care, raises rates. A wide array of services
covered raises rates. Increasing provider charges raises rates.
Under this scenario, individuals would be responsible for
paying for (or obtaining private health insurance to pay for) medical care up
to a specific expenditure. Everyone can buy this insurance through their own
resources or through government subsidies (based on a sliding scale). In simple
terms, a person with incomes qualifying for Medicaid pay nothing out of pocket;
a person earning $500,000 must pay themselves, again up to the level defined as
catastrophic care. Beyond that level, the government pays all costs. Simple.
In our next post, we’ll detail more closely how the catastrophic care option can work.
It is well known that the cost for specific procedures in US hospitals is not only far higher than in most Western countries, but it may be far greater from hospital to hospital in the same geographic area. And this may not include an apples-to-apples comparison of all of the components of care. As a result, it is well accepted that the cost of US health care is too high, outcomes are generally no better than in other Western countries, and the search for better value continues.
A unique, jumbled health care financing scheme has ruled the nation for many years. Hospitals and clinicians are paid in various ways in this country: reimbursed for most every service provided, prepaid in a form of capitation (fixed rates no matter how much service they provided), fixed rates for specifically defined “episodes of care,” and per-diem rates for hospitalization (a fixed rate for each hospital day, which includes most routine care and testing).
FEE-FOR-SERVICE PAYMENTS STILL DRIVE COSTS
Except for fee-for-service (FFS), these payment mechanisms attempt to place some risk on physicians, hospitals, and most onerously on patients. In the 1960s through the 1980s, FFS was dominant. Providers were deeply satisfied with their remuneration and their autonomy (until the rise of managed care in the late 1980s and early 1990s). Steep cost increases have been well publicized overall. Disease treatment has improved of course with the introduction of new technologies, but our ability to manage the costs of their increasing utilization in practice is a tremendous challenge (consider biologic drugs, genetic therapy, robotic surgical procedures, new diagnostics). Today, hospitals and payers play a perverse FFS game of enormous charges vs. low reimbursements, with the patient often caught in the middle.
CAPITATION: EFFICIENT BUT DISLIKED
Capitation placed the most risk on providers, and this was used most commonly in primary care practices. Doctors contracted with health plans to receive a fixed, per-member payment. Regulators feared that the physicians might underutilize resources while treating their patients, in order to optimize their capitated income. That is, clinicians might not send patients to higher cost specialists, elect to not give them the most effective (but higher cost) treatment, or not refer the patient for necessary testing. One challenge with contracting for the “right” capitation rate was to factor in an appropriate add-on payment to cover the cost of those with expensive-to-treat illnesses (i.e., risk adjustment). That is one reason why capitation rarely included drug costs.
However, capitation did remove the incentive to overtreat patients, by exposing them to excessive testing. It is efficient, maybe too efficient: It helped establish the concept of assembly line medicine. Practices had to reduce patient visit times to squeeze more patients onto their appointment schedule—a necessity if they were to optimize revenues. Inevitably, it leads to burn out and dissatisfactionwith their practice. Capitation still exists today, but outside of more extensive utilization across the country or a more sophisticated form (e.g., the patient-centered medical home), it seems potential value may be limited.
PER-DIEM PAYMENTS
Prospectively arranged per-diem rates are commonly used by Medicare and private insurers, but the per-diem might not account for some carved-out services. Hospitals may be incentivized to provide more of these specific services than necessary, bloating their charges. To counter this incentive, per-diems may be charged fordifferent types of patients(e.g., cardiac, obstetrics, intensive care).
However, this form of inclusive payment made it easy for health plans and insurers to deny hospital claims for additional days of care. This led to hospitals claiming that patients were discharged earlier than warranted medically. Inevitably, hospitals would seek ways to justify longer hospital stays (and thus additional per-diem payments). Somewhat surprisingly, this resulted in more layers of administrative complexity and costs (to determine the appropriateness of stays), and less surprisingly, how to collect denied charges from payers.
BUNDLED AND GLOBAL PAYMENTS
From a health plan or purchaser’s standpoint, arranging fixed rates for a full episode of care was thought to be the most efficient way to pay for care. It would remove the incentive for excessive charges, and compel providers to be as efficient as they can with their own resources. In other words, it aligned all incentives on both the payer and provider sides.
Medicare or a private payer would prospectively contract for a set amount for knee replacement surgery and care. This would encompass all charges, including the orthopedic surgeon, surgical facility, joint replacement device, medications, anesthesia, nursing care, and even rehabilitation care (i.e., a global payment). On the other hand, these payments could be “bundled” to incorporate just surgical and operating facility expenses or other groups of related services. The terms global or bundled payments are often used interchangeably.
Medicare pioneered this movement, with the initial introduction of a type of global payment called diagnosis-related groups(DRGs) in the 1980s. These single payments were based on the average costs to treat a similar type of patient, regardless of additional services rendered. This approach was considered an appropriate way to reduce or at least minimize costs, because the incentive would allow providers to care for patients more efficiently.
CONFUSING RESULTS
The Centers for Medicare and Medicaid Services (CMS) instituted a program in 2016 that forced the use of a bundled-payment model for hip or knee replacement in 75 random metropolitan areas. In this program, hospitals received bonuses or paid penalties based on their Medicare spending over the time of hospitalization plus 90 days postdischarge. This is referred to as holding upside and downside risk. This program was dubbed Comprehensive Care for Joint Replacement. Medicare hoped it would save a bundle using bundled payments compared with standard reimbursements in other geographic areas.
And save it did, but on a very small scale. A study published in the New England Journal of Medicine revealed only modest savings for Medicare. Researchers reviewed costs for over 650,000 knee and hip replacements in both the areas designated to receive bundled payments and those not receiving bundled payments. The average savings amounted to $812 per patient for the bundled payment providers, or a 3.1% decrease compared with the control group. The researchers believe that the greatest factor in the decrease was that few patients in the bundled payment group were discharged to post–acute care centers. When hospitals that earned bonuses were paid out, the savings were smaller still. In other words, the savings did not accrue from the most expensive portion of the care—that provided in the hospital.
The researchers did find compelling evidence that there were seemingly no differences in health outcomes between the two payment groups. But then again, it seems that the care provided in the hospital may not have really been different.
Participation in this program was mandatory in the first 2 years, unlike other alternative reimbursement programs spurred by CMS, which are voluntary in nature. In fact, the Comprehensive Care for Joint Replacement program was changed to voluntary status at the end of the 18-month study period. Today, HHS Secretary Azar is considering converting participation from voluntary to mandatory. A recent GAO report supports this, saying that if a program is voluntary, providers that fare poorly will quickly drop out. Yet, the results from study’s mandatory participation period failed to yield anticipated savings.
WERE THE PAYMENTS TOO GENEROUS IN THE FIRST PLACE?
The savings were disappointing if you consider that hospitals had both upside and downside risk. The only real difference in hospital behavior was the lower use of post–acute care in those receiving bundled payments. It might well be that the problem was that the bundled payments were too generous in the first place. However, by lowering this amount greatly (and thus compelling greater savings), the outcry from providers forced to participate would have been deafening.
Yet, this is one of the main problems: health care costs are unjustifiably high in the US. On the other hand, can one argue that since the savings were so modest, traditional reimbursements to providers may not be so high after all? Well that just seems wrong, based on our knowledge that US health costs are much higher than elsewhere around the globe.
It’s difficult to appraise what the total cost should be, as some studies include hospital costs only and not the total episode of care. Therefore, it may take some more experimentation to fine-tune how to extract more savings.
Consider though, if global payments cannot reduce our medical expenditures significantly, what can?
The rebates given to pharmacy benefit managers to secure a drug’s place on the formulary have become a difficult barrier to coverage for new products. The rebate income for these PBMs is sometimes passed on to health plans, insurers, and employer purchasers, but more often it is not.
A big issue is that managed care organizations tend to become addicted to millions of dollars in rebate “income,” and this mindset prevents serious consideration of new medications at competitive costs.
For biosimilars, Pfizer and Merck have had a difficult time dislodging Janssen, maker of Remicade®, from its preferred formulary position, despite lower prices based on wholesale acquisition cost (WAC). Janssen has simply matched the net cost (through increasing rebates), while keeping its WAC costs high—tempting plans with ever-increasing rebate revenue. The health plans don’t see the benefit of incurring the administrative costs of moving masses of patients from the preferred product to a new one, or seeing this revenue stream interrupted, without an overall further improvement in net costs.
Managed care plans have long said that discounts of 25% or more will be necessary to release the rebate stranglehold of preferred products. In the case of infliximab, this has not yet occurred, based on recent minor inroads made by Merck’s Renflexis® biosimilar, despite larger discounts. Until greater competition is available, which drives down the WAC prices (and then average sales prices [ASPs]), barriers to accessing new medications will remain. In fact, when competition does increase, makers of the originator products, like Janssen, can simply ratchet up their rebates to maintain a hold on sales (and a billion-dollar plus profit).
Perhaps the best way around this is to force a change in the marketbasket. This can be accomplished in a couple of ways. The first, by instituting separate tiers for biosimilars and reference agents, takes the biosimilars out of the 1 of 2 preferred drug contracting restrictions, and allows patients to access biosimilars as well as preferred brands.
A second way is to reconsider biologic agents according to indication-based contracts or mechanism-of-action (MOA) based differences. Therefore, the marketbasket is modified to consider anti-TNFs separate from interleukins, allowing preferred agents in each separate category. This would allow, for instance, for more effective psoriasis agents to be well covered, and maintain the preferred position of Humira® and Enbrel® for appropriate patients.
A third way is to work out some innovative value-based contract, in which the manufacturer and health plan/insurer reaches an agreement on (usually) the expected outcomes of drug use and additional rebates or performance guarantees if the medication fails to deliver on this performance. The most important consideration in this agreement is the practicality of measuring an outcome of interest or ensuring adherence.
The rebate trap seems to be ensnaring more manufacturers of new biologics and biosimilars. Without greater consideration of the overall good, this trap can cause systematic problems for the pharmaceutical industry and discourage drug innovation and accessibility.
CONFUSING RESULTS