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)