How Do We Pay for Medical Innovation?

We are in the midst of a golden age of stunning medical advancements, but in many ways, we are stuck in the Stone Age when it comes to our health care delivery system and the financing of groundbreaking therapies. As a result, we are seeing mounting tension between these areas, with hepatitis C virus (HCV) serving as the perfect example. Until 5 years ago, there were virtually no effective treatments for this debilitating disease, which afflicts 3 million to 5 million people in the United States. Thanks to breakthrough antiviral drugs, HCV can now be cured in most patients, and the treatment is easily tolerated. However, because these are onetime, short-term treatments with a higher price, many insurers restrict their use to all but the sickest of patients.

This is a disaster for both patients and the health care system at large. Investigators have estimated that HCV treatments pay for themselves over 15 years because patients avoid expensive adverse events, such as liver cancer and organ transplants. The savings accrued from preventing HCV complications represent a net gain of nearly $3000 per patient over the cost of the treatment. But those savings do not usually benefit the original payer, since long before those 15 years are over, the patient likely has switched to Medicare, Medicaid, or a different commercial insurer. 

This disconnect between short-term budgets and long-term benefits and between the impact on initial payers, downstream payers, and society as a whole will just become more pronounced as medical science continues to produce better therapies. Insurers tend to make coverage and premium decisions based on the immediate outcomes and 18-month actuarial tables. However, many of the most exciting new medicines—gene therapies, immunotherapies, personalized medicines, and treatments for a wide range of rare diseases—may ring up substantial immediate costs, whereas the financial benefits to the health care system usually take years to accrue. These health benefits can be close to miraculous, from outright cures to changing once-certain death sentences into chronic, manageable conditions. 

Such outcomes are certainly good for society, turning very ill patients into productive citizens. And they are, of course, good for patients and their families, who yearn for better health and quality of life, improved function, and longer overall survival, regardless of cost. 

It’s time to think differently about how we pay for health care and assess value and benefits. Creative strategies are needed to ensure that economic incentives are in place for the development of transformative therapies, appropriate patient access, and sustainable payer economics. These solutions also need to be flexible to accommodate the radically different timelines for costs and benefits depending on specific therapies.

One challenge for insurers in determining reimbursement standards in this brave new medical world is that people rarely stick with a single insurance carrier for more than a few years. Studies have found that approximately 1 in 8 adults under age 65 with employer coverage switches health plans every year. Given the prohibitions on banning people with preexisting conditions, insurers generally expect that the short-run losses from therapies for patients who “switch out” are offset by the gains from patients who “switch in,” as their treatments may already have been covered by other commercial payers. But those assumptions no longer apply for older plan members, since everyone is eligible for Medicare at age 65 and remains in the program thereafter. Because many new therapies tend to have front-loaded costs and back-loaded benefits, Medicare would seem to be the financial winner, but that is not always the case.

The reverse pattern can also hold true, with Medicare on the losing side of the equation. Consider patients treated for cardiovascular therapy before age 65. Because their therapy needs typically become costlier as they age, commercial insurer costs are lower than the total lifetime impact. If patients start cardiovascular therapy over age 65, Medicare must then absorb all the treatment costs, including the extra health care needs associated with extended life.

Solutions that work for all parties require rethinking the way medicines and insurers are regulated. Currently, prescription medicine prices cannot account for outcomes that weren’t measured in clinical trials, such as fewer hospitalizations over a number of years, even though the consideration of such long-term outcomes may be a more effective way to account for risk. Payers, meanwhile, generally assume the full cost of a medication, regardless of how well it works or doesn’t work over time, leading to situations in which an insurer is reluctant to pay for a costly treatment that may not show immediate offsetting benefits. 

Risk-sharing agreements are not completely novel, as a number of biopharmaceutical companies have entered into value-based agreements that offer payers refunds or discounts if a therapy fails to generate certain health outcomes. Given the existing regulatory barriers to implementing value-based agreements, however, these alternative reimbursement models seem more common in breakthrough medicines for life-threatening and severely debilitating rare diseases, though it is recognized that these innovations also may be more expensive. With more gene-based and potentially single-dose therapies anticipated for FDA approval in the coming years, we expect developers to continue to pursue innovative contracts to close the gap between those payers who reimburse at the start of a medicine’s life, and the downstream winners.

Regardless of the type of model used, we need to reframe how we analyze costs and reimbursements based on a patient’s long-term outcomes and well-being, not just the next 12 or 18 months, and not only in cases of rare disease but for all conditions. These types of changes will be challenging, to say the least. But if the nation and its patients and consumers are to take full advantage of medical advances, the entire health care community—insurers, pharmaceutical and device developers, providers, and regulators—must work together to address that challenge.

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