Factoring Reimbursement
Into the Deal
May 2, 2005
Agenda
• Tag overview
• Who pays for health care
• What is reimbursement
• How reimbursement affects deal’s value
• Developments and trends
• How Medicare is changing biotech market
• Building reimbursement analysis into deal
process
• U.S. reimbursement planning and
problem solving since 1998
• Former owner S&FA; Exec VP PAREXEL
• Payer research; strategic planning
• Reimbursement forecasting
• Competitive analysis
• Advocacy with major payers
Tag Client Mix
Investors/
Advisors
15%
Biotech/
Biologicals
40%
Ad/PR/PA
Agencies
10%
Devices/
Diagnostics
15%
Pharmaceuticals
20%
Who Pays for Health Care
Payment Sources for
Physician and Clinical Services
(Billions)
Private
Health
Insurance
$166.9
Medicare
$68.8
Federal and
State
Medicaid
$24.7
Other Public
$21.3
Other Private
$23.5
Out-ofPocket $34.3
_____________________________
Source: Health Affairs – Volume 23, Number 1; January 2004
Payment Sources for Prescription Drugs
Federal and
State
Medicaid
$28.6
(Billions)
Medicare
$2.6
Private
Health
Insurance
$77.6
_____________________________
Source: Health Affairs – Volume 23, Number 1; January 2004
Other Public
$5.0
Out-ofPocket
$48.6
Reimbursement and
How It Affects Deal’s Value
Know Whether “Reimbursement”
Means Coverage or Payment
Coverage
• Is the product or
related service an
insured benefit?
– Under what
circumstances?
Payment
• How much will the
insurer reimburse?
– To whom?
Many Factors Affect Reimbursement
• Tech category (e.g. Rx,
•
•
•
•
•
•
•
OTC, DME, supply,
diagnostic, screen)
Payer
Tx setting
Dosage form
Admin method
Labeling (on/off)
Diagnosis
Safety & efficacy
• Product cost (price)
• Related costs (e.g. lab)
• Uniqueness
• Alternative cost
• Cost offsets
• Prescribing Dr.
• Abuse potential
• Political/social
• Evidence-based outcomes
Reimbursement Winners
• Norplant – Medicaid; not an OC
• Lupron depot – Clinician administered
• EPO – Cover as sub Q or we do trials as
IV only
• Drug eluting stents – Showed payers
cost impact, good and bad
… And Losers
• tPA – Great science, no payment
• Lupron daily injection – No coverage for
self-admin
• Gliadel wafers – Part of DRG, no payment
• Rocephin (otitis media) – Pediatricians
were capitated
Take Away
• Great medicine (tPA) will trump poor
reimbursement …
• But not every good technology is great
medicine
Case Study: Same Technology,
Different Reimbursement
• QLT’s Photofrin (porfimer sodium)
photodynamic therapy
• Sanofi-Winthrop: esophageal and lung
cancer
• Novartis: macular degeneration
Poor Return for Sanofi-Winthrop
• Hospital O/P procedure in era of poor hospital
reimbursement
• Endoscope/bronchoscope procedures under-
reimbursed based on simple tech
• 2 year wait for drug reimbursement code
 Because of reimbursement, procedure viewed
as last resort despite good clinical outcomes
Winner For Novartis
• Decent reimbursement for physician office
single eye procedure
– Strategy developed to deal with subpar
reimbursement of 2nd eye procedure
• Good drug reimbursement year 1
• No therapeutic alternative
 Robust uptake, despite mediocre clinical
results
Developments and Trends
Overview
•
Evolving payer objectives: Cost avoidance
> Cost benefit > Value > Affordability
•
Utilization control via patient cost sharing
•
Federal government becoming largest
customer for Rx drugs
•
Medicare evolving: payer > national heath
policy and treatment manager
Overview – cont’d
•
Elimination of provider profit on drugs
•
Power shift: Provider > Distributor
•
Coverage policy linked to outcomes data
•
Health econ and off-label requirements
changing scope of registration studies
Evolving Payer Objectives
• 1980’s – Cost avoidance (managed care)
• 1990’s – Cost benefit (outcomes analysis)
• 2000’s – Value - money for quality (evidence
based medicine)
• On The Horizon – Affordability -
Employers (declining profits) and governments
(increasing deficits) not willing to absorb cost
of every medical breakthrough
Utilization Control Via
Patient Cost Sharing
• “Get more beneficiary skin in the game and
better utilization decisions will result”
• Co-insurance (30%) for self-administered
injectables
– “Do I really need Enbrel for my psoriasis?”
• $30 difference between 2nd and 3rd tier
brands
– “Maybe this other drug is just as good as Prozac.”
Federal Government Will Control
40% of Rx Market (White Dots)
2002 Rx Payment Sources (bil)
Medicaid
$28.6
Other
Public
$5.0
2008 Projected (bil)
Medicaid
$30
Out of
Pocket
$48.6
Other
Public
$10
Medicare
$65
Medicare
$2.6
Private
Ins
$77.6
Total = $162.4
___________________________
Out of
Pocket
$60
Total = $260
Source: 2002 data: Health Affairs Volume 23, Number 1; January 2004.
2008 data: Tag & Associates estimate.
Private
Ins
$95
Medicare Evolving to Be National
Treatment Policy Manager
• CMS process for evaluating new technology
is rigorous and willing to embrace new
costs
– Implanted automatic defibrillators
– Drug eluting stents
• Adverse Medicare coverage policy decision
is routinely followed by private payers
Elimination of Provider Profit on
Clinician-Administered Drugs
• Medicare: AWP > ASP; CAP
• Medicaid: National “reform” on the
horizon
Elimination of Provider Profit on ClinicianAdministered Drugs – cont’d.
• Private insurers: Feb 2005 interview of 15
medical/pharmacy directors (100 mil. lives)
– “How will ASP influence your 2006
reimbursement?”
• 4 will convert
• 9 are studying
• 2 no influence
– 10/15 have direct supply program
Power Shift to Distributors
• CAP, direct supply shifts power to
distributor
– Ability to control access via formulary
– Reflected in M&A activity
• Medco/Accredo
• AmeriSource Bergen/US BioServices
• Caremark/Advance PCS
Coverage Policy linked to
Outcomes Data
• New in 2005: Medicare expands
coverage for selected technologies only
if manufacturer agrees to data collection
per CMS spec
– Implanted defibrillators
– Off label use of 4 new Ca drugs
Coverage Policy Linked to
Outcomes Data – cont’d.
• Since late 1990s: Private tech evaluators
become more influential each year
– BC/BS TEC
– Wilkerson Group
• Globalization: UK NICE influence spreads
across EU
Broad Registration Studies Needed to
Support Reimbursement
• Traditional FDA strategy of “path of least
resistance” still OK for FDA but no longer
viable for payer success
– Payers demanding health econ data for
coverage
– Clamping down on off label uses not
supported by scientifically rigorous data
How Medicare Is Changing
the Biotech Market
Clinician-Administered Drugs
• Physician office and hospital O/P drugs
are a pass-through expense rather than a
profit center
• First time ever formulary as a result of
CAP
– Some categories need only 1 drug
Clinician-Administered Drugs – cont’d.
• Coverage of new tech will require 1 of
the following:
– Lower price
– Impressive safety or efficacy
– Favorable outcomes data
– Widespread socio-political demand
Self-Administered Drugs
• Part D establishes a de facto national
baseline formulary of ~250 drugs
• Beneficiaries have strong $ incentive to
keep total Rx spending <$2,250
– Between $2,250 and $5,100, patient pays
100%
Building Reimbursement Into
Deal Process
Make It Fundamental to the
Go/No Go Decision
• Immediately identify reimbursement
issues
• Can development decisions be used to fix
problem or gain advantage?
• If problem can’t be fixed, how will it
impact the value of the technology?
Take the Payers’ Perspective
• Which payer has the biggest stake?
• To whom are they beholden?
• What/who influences their decision
making?
• How will technology impact them?
• What happens if they say “No?”
Do Not Rely On the Downstream Partner
• Regardless of size and general competence,
they are wrong as often as they are right
• They will under-value the technology b/c of
easily manageable reimbursement problem
• To the person you are dealing with, it always
looks “just like this other product we had 2
years ago in this other category ….”
Teach Your Client
• Most technology developers are unaware
of reimbursement issues or have the
wrong information
• Help them understand why payers are as
much a customer as clinicians
Bring a Reimbursement POA to
the Discussion Table
• Show prospective partners that you
– Expect them to invest at an appropriate level to
conquer or capitalize on the reimbursement issues
– Will not allow reimbursement to be a red herring
that distracts from other more significant issues
1o1 North Columbus Street
Alexandria, Virginia 22314 USA
703.683.5333
howard.tag@taghealthcare.com