Developers of innovative medicines seeking patient access to their drugs are well-served to understand the objectives of public payers, and the innovative payment mechanisms available where traditional approaches to reimbursement run into roadblocks. Public payers with fixed budgets are motivated to deliver the greatest health benefit at the lowest cost, utilizing multiple strategies to do so:
- Ensure that only treatments that deliver value for money are reimbursed
- Keep drug prices as low as possible
- Ensure the benefit of a treatment shown in a clinical trial is delivered in the real world
- Limit the total spend on a given treatment
Value is broadly conceived as the cost of a treatment versus the benefit it delivers. In Europe, all public payers follow some form of health technology assessment (HTA), albeit with methodological variations. For example, the UK looks at ‘cost per QALY’ to compare treatments, pegged around £30,000 for an additional quality-adjusted life year. French authorities consider the added benefit a drug delivers, which becomes the basis for price negotiations. And in Germany, a developer enjoys an initial period of free pricing followed within twelve months by a formal review of the added therapeutic benefit of the medicine.
Keep prices low
Regardless of the therapeutic benefit of a new medicine, public payers seek to limit the prices they pay in a variety of ways. One common approach is international reference pricing, which looks to the pricing of a medicine in a set of benchmark countries. The UK market is the most widely referenced internationally, creating incentives for developers to emphasize access there. A variety of countries cross-reference medicine prices, creating circularity and downward pricing pressure. This incents developers to negotiate high public prices that they offset by non-disclosed rebates.
Ensure that benefits are delivered by managing uncertainty as to cost-effectiveness
Sophisticated public payers manage uncertainty about how the benefits shown in clinical trials will be delivered in clinical practice. The question of how the value demonstrated at the time of regulatory approval will be delivered post-launch has multiple components, including:
- Will the drug duplicate the clinical trial effectiveness in a broader, real-world treatment population
- Will the drug show the same effectiveness in clinical practice as it did under trial conditions, and
- Will the drug show a benefit that is durable beyond the time period studied in clinical trials
Public payers may seek to ‘share the risk’ related to the drug’s real-world performance with the developer. This leads to payment models that condition a portion of reimbursement on evidence from the use of the medicine collected over time. Forms of such outcomes-based reimbursement models include:
Payment by result – this approach monitors the response and outcomes achieved by patients using the treatment in question, and ties either up-front payment or a rebate to the results. The length of time over which a patient is monitored depends on the treatment, from a short period with an anti-infective, to a multi-year period to confirm the durability of a gene therapy. Such arrangements have been used widely in Italy, as well as in France to support the introduction of Hepatitis C treatments.
Coverage with evidence development – where a medicine is approved based on a limited dataset, coverage with evidence development allows patient access while more definitive evidence is collected. This approach has been used to support the reimbursement of orphan drugs in the Netherlands, with the stipulation that population effectiveness data will be gathered by developers. In practice, developers have not always lived up to data generation commitments, but withdrawing reimbursement for a medicine once introduced has proven to be politically challenging for reimbursement authorities.
Limit the total spend on a given treatment
Even where a highly cost-effective new treatment delivers predictable and durable benefits, the total expenditure on the drug can strain the resources of a healthcare system. Recall the introduction of Sovaldi for Hepatitis C: a highly efficacious drug used by many patients can create a significant draw on healthcare budgets and displace other expenditures. Payers take multiple approaches to limiting the spend on a specific treatment:
Price-volume agreements – such arrangements reduce the per-patient price of a treatment as the number of patients treated increases. Thus, the more a drug is used, the cheaper each dose becomes. Price-volume agreements are relatively simple to implement and are well-suited to public payers who are the central purchasers of a medicine.
Dose capping – such arrangements limit the number of doses for each patient that the payer will reimburse, beyond which the developer is responsible for providing additional doses deemed medically necessary at no further cost to the payer. Dose capping requires the tracking of per-patient courses of treatment, making it more administratively complex than price-volume agreements.
Patient eligibility limitations – payers can limit the total spend on a treatment by constraining the patient population that is eligible for reimbursement. Using subgroup analysis of clinical trial results, payers may narrow the treatment population to a subset of the label.
Spreading payment over time – in cases where the introduction of a new treatment will create a significant short-term increase in demand, a finance mechanism that spreads the payer’s cost over time can ease the fiscal jolt to the healthcare system. Such an arrangement can rely on third-party financing (such as a healthcare bond) that provides immediate payment to the developer that the public payer can repay over time.
Developers need to weigh whether the greater administrative complexity required to enter into such schemes can meaningfully enhance patient access to their treatment. Developers of novel and high-value treatments should consider the following well before a medicine’s launch:
- What are the potential concerns of public payers and HTAs for regarding the new technology?
- Which jurisdictions are most critical for market access?
- What are the least cumbersome ways of addressing public payers’ concerns in high-priority jurisdictions?
By understanding the objectives of public payers and becoming versed in the innovative mechanisms by which those goals can be met, medicine developers can place themselves in the best position to ensure that their treatments reach the patients who need them.
Nicholas Gertler and Matt Diver are co-founders of Galen/Atlantica, a firm addressing strategic regulatory, reimbursement and policy issues in healthcare. Prior to founding Galen/Atlantica in 2015, they were partners at Tapestry Networks, where they led collaborations of senior executives of the pharmaceutical industry, government agencies, civil society and KOLs to advance responsive and sustainable healthcare innovation.
Before his time at Tapestry, Nicholas was head of the CEO’s office of a $5B technology company, a McKinsey consultant, and an attorney in the Washington, DC office of Latham & Watkins. He holds masters’ in engineering and policy from the Massachusetts Institute of Technology and a JD from Harvard Law.
Matt’s career spans service as a Peace Corps Volunteer in Africa, as an investment banker focused on the technology sector, and a manager at BCG. He holds a business degree from UC Berkeley and a master’s in public policy from Harvard’s Kennedy School.