Insurance Coverage and Payment for Biotechnology and Medical Devices Academy Health June 4, 2007 Professor James C. Robinson University of California, Berkeley OVERVIEW Innovation as virtue and challenge Coverage and conditional coverage policy Distribution and physician payment methods Consumer benefit design and coinsurance Reimbursement, pricing, and purchasing Biomedical and Clinical Innovation: The Most Important Dynamic in Medicine Innovation in drugs, devices and other forms of medical technology are responsible for major gains in clinical quality and patient outcomes There is wide variation in patterns of effectiveness, cost-effectiveness, and use Rapid innovation implies major gaps in understanding of safety, effectiveness, cost, comparative efficacy, long-term outcomes Biomedical and Clinical Innovation: The Challenge to Affordability Technology is the major driver of medical costs Medical cost growth is major driver of un-insurance While growth in medical expenditures have been “worth it” overall, the marginal benefit of many technologies is low, esp. relative to cost If America cannot manage innovation (cost growth) its efforts to ensure coverage will be in vain The Role of Insurers in Managing Biomedical Innovation Adoption Insurers are society’s agent for purchasing medical products and services, and hence are first line for covering, reimbursing, and managing technology “Agency failure” is endemic in insurance, including public (Medicare), nonprofits, for-profit carriers Nevertheless, insurer strategies and policies will have significant impacts and deserve study They are evolving rapidly 1. Coverage Policy Insurers cover “medically necessary” drugs and devices Cost is only implicit in coverage policy – Comparative efficacy can be important component – – Cost effectiveness banned for Medicare, covert for private carriers Contrast with FDA safety and effectiveness reviews Manufacturers selective over which comp efficacy trials to support Coverage may be conditional Conditional Coverage Limit by indication or disease severity – Limit by role in standard course of treatment – Enforced via prior authorization (esp. biotechnology) Step therapy for biologics Limit by imposing conditions for data collection – – Coverage with evidence development (CED) Registry participation: biologics v. devices 2. Distribution and Physician Payment Physicians choose drugs, devices, and course of treatment based on clinical evidence, experience Financial incentives matter Biotech and device manufacturers have developed very sophisticated distribution mechanisms, which reward physicians for using most costly inputs The lowest hanging fruit, from insurer perspective, is modifying physician incentives Distribution and Incentives: Biotechnology “Buy and Bill” Many biologics are administered in the office and hence are considered incidental to the practice of medicine – – – Contrast with outpatient drugs and pharmacy Medicare Part B rather than Part D Especially important for oncology, renal dialysis, auto-immune drugs Physicians purchase drugs from distributors and then bill insurers, often at substantial mark-up These mark-ups motivate choice of expensive drugs Distribution and Incentives: Biotechnology Specialty Pharmacy Insurers seek to displace MD as distributor “Specialty pharmacy” (SP) retains ownership of drug, drop/ships to MD office, provides ancillary services such as patient education, safe handling – Concern over SP as PBM, SP as agent of manufacturer Alternative is to preserve “buy and bill” but reimburse physician at cost (ASP), following CMS Concern over driving biologics into hospital OPD Distribution and Incentives: Medical Devices Medtech distribution based on highly trained reps who are present in OR, paid on commission Widespread financial relations with surgeons – Physicians own distribution firms in some cases – Consulting, product development Spine surgery components Insurers concerned over MD incentives to choose costly implants or, at minimum, not cooperate with hospital efforts to control supply costs (gainsharing, etc.) Distribution and Incentives: Medical Devices Insurers do not directly purchase or distribute devices nor pay physicians for devices They have no direct distribution strategy But they are very concerned with MD incentives – – Pay MD for procedure and device? (case rate) “Demand matching” through utilization review? 3. Consumer Benefit Design Most biologics and devices have not been directly subject to consumer cost sharing – – – Biologics are above the deductible, OOP max Devices are purchased by hospital, not patient Cost sharing assumes consumer understands choices But biggest insurer cost control success in recent years has been through benefit re-design – Tiered pharmacy formulary; CDHP designs Consumer Benefit Design: Biotechnology in Tiered Formulary Costly biologics are being placed in fourth tier – They quickly hit annual out-of-pocket maximum – – Coinsurance (50%?) rather than copayment Separate OOP Max for pharmacy and medical benefits? No OOP Max for pharmacy? Biotech firms subsidize copayments for insured patients and for uninsured (based on income) Consumer Benefit Design: Biotechnology and VB Benefit Design “Value Based” (VB) benefit principles argue relative copays should be based not on cost but on value – This would imply low copays for biologics that have no alternatives and are highly effective – Low copays for expensive drugs that are very effective Burden of proof is much higher for new biologics than for older drugs and procedures Debate over cost sharing rages on Consumer Benefit Design: Medical Devices Insurers considering formulary approach to devices – – Response to DTC advertising (e.g., knee implants) This is burdensome, as surgeons prefer to use one vendor for all patients, regardless of insurance Contrast with outpatient pharmacy and generic substitution Coinsurance and episode pricing will highlight device prices to consumers – Device is major % of cost of procedure 4. Reimbursement and Pricing Biologics and devices are rapidly evolving and often lack direct therapeutic alternatives This permits “value-based pricing” In contrast to managed care’s traditional focus on utilization, here the focus is on unit prices Appropriateness (over-use) is major concern in spine surgery, modest concern in cardiac stent. For ortho and CRM, under-utilization (not over-use) is major social issue. Reimbursement and Pricing: Biotechnology Insurers seek (modest) discounts thru specialty pharmacy and volume rebates Strong interest in follow-on biologics, but this is unlikely to be major factor in ST (outside epoetin) Emergence of classes with multiple (branded) biologics (auto-immune, blood products, growth hormone) may facilitate selective contracting and volume discounting (tiered formulary) Reimbursement and Pricing: Medical Devices Devices are purchased by hospitals, not insurers Hospitals are “carving out” devices from case rates and per diem payments and billing insurers based on invoice (cost) or chargemaster (mark-up) – – Salience of stop-loss provision in per diem contracts The continued erosion of prospective payment This drives interest in case rate (episode of care) payment, but hospitals generally are opposed Conclusion Insurer strategy for managing tech is nascent Imperative for better data (comparative efficacy, cost) Short term emphasis: payment incentives for MD and cost sharing for patients Coverage policy will be driven by Medicare Reimbursement and pricing will depend on follow-on biologics, therapeutic equivalents, and manufacturer concern for social backlash and price regulation (Part D)