Creating a cost offset narrative early is essential for deal making in assets with infrastructure issues such as Psychedelics and Cell Therapies

5 minute read

by Ralph Hughes, Vice President, PharmaVentures.

What is a cost offset narrative?

A key economic principle that all healthcare systems are founded on is the concept of opportunity cost. In an efficient system, if costs can be reduced without sacrificing quality (safety and efficacy), it is a benefit; and if the quality can be improved as well, it is even better. The term “cost offset” is a commonly used phrase for this underlying principle.

Payers, especially those focused on the value for the entire system, will consider these cost savings and balance them against the cost of a medicine. Having a robust cost offset story and data can help justify a higher price.

There are two ways medicines can create cost offsets:

1. A treatment that creates efficiencies in the care pathway. A good example of this is a recently launched antibiotic, dosed weekly, that replaces the need for daily outpatient IV administration of vancomycin by a nurse. The cost of the avoided outpatient administration can therefore be added to the cost of the drug to come to reach a premium price.
2. A treatment that brings improvements in efficacy or safety thus reducing downstream costs. A good example of this is the oral anticoagulants like apixaban and rivaroxaban that replaced warfarin. Better control of clotting in atrial fibrillation prevents costly downstream events like stroke and the associated disability.

By comprehending the expenses that payers are concerned about, constructing a compelling narrative around cost offsets, and gathering data to back it up, the value proposition, pricing, and positioning of a drug can be enhanced. This also enables a developer to understand how perceptions towards the drug may evolve, giving them a solid bargaining power when dealing with major pharmaceutical companies.

How can cost offsets help drugs with infrastructure challenges?

The Chief Medical Officer from a large US Accountable Care Organization (ACO) offered a noteworthy illustration of this concept. They described the evolution of attitudes towards CAR-T therapy as the understanding of its potential cost offsets has changed:

• “When CAR-Ts were first launched; there was the issue of infrastructure, so not only was there the price of the drug at $600k but also the cost of the associated procedure.” This was a problem that they could fairly rapidly be overcome however: “We managed to get them [CAR-T] reclassified as transplants and we now do them ourselves at specialist centres, so now we are only negotiating the cost of the drug.” And already we can start to see how, when payers are motivated the right way, they can find ways to overcome barriers.

• Reclassification or not, CAR-Ts are still very expensive. But the payer went on to explain how, with the emergence of sufficient durability data, she is now starting to see CAR-Ts as a way to avoid cost: “I have a patient with multiple myeloma who has undergone six or seven lines of treatment, including a bone marrow transplant, and already cost me $1.7m. So now I am asking the question: why not do the CAR-T at second line? CAR-Ts cost $600k a pop, which is a lot of money but if it could spare me some of that $1.7 million, then it is good news.”

• This is also good news for manufacturers, because earlier lines of therapy mean more patients; more patients mean greater economies of scale; and greater economies of scale means the potential for the same profit at reduced prices. The very definition of a virtuous cycle.

For this payer, we can see that the cost offset discussion has become an issue of the total cost of care, not just the cost of the medicine: “I want to map the patient journey and the total cost of care and put CAR-Ts where they can have the greatest impact… It is the providers who are the challenging ones, not the payers in this situation.”

Lessons for another drug class with infrastructure challenges: Psychedelics.

The issue of infrastructure is a particularly sticky one for psychedelic treatments, as the cost of patient care, such as observation and counselling, will likely be covered through fixed fees or Diagnosis-Related Group (DRG) systems. DRGs assign a pre-determined tariff for each inpatient “episode of care,” which serves as the reimbursement amount for the centre providing the care. If a hospital is able to deliver the DRG at a lower cost than the tariff, they keep the difference. On the other hand, if the cost exceeds the tariff, the hospital bears the additional expense.

According to the vice president of a major US Pharmacy Benefit Manager: “Most psychiatry offices are not set up to do very much medical stuff, the don’t have space for this kind of thing.” This sentiment was echoed by a payer from an ACO who stated, “There is a [psychedelic treatment] where you have a provider talking to the patient and monitoring the patient for like 5 hours or something. And I said no one’s going to do that. And my value-based system when I pay these people capitation [fixed fee], no one is going to do that.”

The DRG system means that clinics will receive reimbursement for an episode of treatment e.g., for depression, they will not be reimbursed for any extra time they spend with the patient or the specific drugs they use. This creates an incentive for clinics to deliver care as cheaply and as quickly as possible and then discharge patients on generic medications which will be paid for by the insurer.

“Spending 4-5 hours monitoring a patient, in addition to the cost of the drug, will be difficult to justify,” the insurer said, emphasising that “the fee schedule would have to be adjusted to allow for that kind of therapy to occur.”

What is noteworthy is that the challenge isn’t solely about the cost of the drug, but also the cost of delivering care. The ACO payer suggested that psychedelic treatment could only be feasible “after hospitalisation for suicide to get the patient started and then transition.” This, she believed, was the only opportunity to provide the treatment, as it requires sufficient time and the patient population is small enough.

So how can cost offsets be applied to psychedelics to overcome these issues?

Interestingly, it is this final payer comment that provides a potential solution to the infrastructure issue. Just as with CAR-Ts, it may be possible to reframe the issue in terms of cost offsets, for example, Psychedelics should be used initially for suicide prevention in a more severe patient population:

1. The cost of avoiding hospitalisation is potentially high. If these drugs could be demonstrated through RWD, budget impact analysis and cost-effectiveness modelling to avoid this cost, this would be immensely valuable to a value-based health system like an ACO.
2. Through measuring quality of life outcomes, it is possible to identify the benefit of suicide prevention to those patients who would have committed suicide and help us to understand the willingness to pay for preventing this outcome.
3. A lot of development in psychedelics persists in targeting MDD; while this might be the biggest and easiest population to demonstrate efficacy in, it is not the population that it will get used in initially. Just like the CAR-T example, focussing on more severe lines of therapy, e.g., treatment resistant depression or high risk suicide cases initially, demonstrating the cost benefit here, could lead to progression to earlier lines of therapy over time.
4. Just as CAR-Ts have been re-classified as transplants, it is possible to work with payers to try to find a way to reclassify the procedure associated with psychedelics to enable greater willingness to pay for patients in earlier lines of therapy.

Why are these issues important at the early stage?

Pharmaceutical companies are aware that no drug is the perfect solution its creators envision it to be. All drugs must navigate the complex and ever-changing healthcare system with its distorted incentives and unclear funding pathways. It is the responsibility of pharmaceutical companies to manoeuvre these obstacles. Early drug developers must understand this if they hope to attract pharmaceutical companies to partner or license their product. Drugs that rely solely on their efficacy and safety to justify their price are likely to face difficulties due to the intense competition, numerous generic options, and pressure on the system. According to Deloitte: in 2020, nearly 40% of drugs that failed to meet projected expectations did so due to inadequate market access.

Understanding payer attitudes, funding pathways, and establishing a persuasive cost offset narrative can help drug developers proactively address partner’s market access and pricing concerns. This will give confidence to potential pharmaceutical partners that they will be able to secure a favourable price and market access when bringing the drug to market.

Find out more about Pricing and Market Access from our website or contact us.

Understanding the payer perspectives and incentives can lead to a more commercially viable development strategy across the innovative spectrum from gene therapies to value-add therapies

2 minute read

by Ralph Hughes, Vice President, PharmaVentures.

In his book, The Price of Global Health, Ed Schoonveld provides a brilliant analogy of what a payer is. He describes a dinner party in which one person orders the meal (the physician), another person eats the meal (the patient) and a third person picks up the cheque (the payer). This analogy does a great job of capturing the essence of the health system and enables us to see the how perverse incentives and behaviours might emerge from such a setup.

In reality, the payer system is orders of magnitude more complicated and so are the incentives and behaviours. Understanding what drives different types of payers and the different funding flows that they must contend with, helps us to build a picture of how an asset might be paid for or reimbursed. This can have a big impact on the value and price of a development asset.

Payers are not a homogeneous group:

There are many ways of characterising payers, e.g., by the regions they cover, or the populations they cover or the perspectives they take. There are so many different types of payers in the US as it is such a fragmented health system, but what is important is the risk that payers take, what they can do about that risk and therefore the view they take on drug coverage:

• The insurer view: Payers like managed care organisations, manage the risk of a patient primarily in the outpatient setting through a pharmacy benefit manager and will leave the management of an inpatient up to the hospital and fund them through fixed fee payments.
• The value-based view: Payers like Integrated Delivery Networks or Accountable Care Organisations, own the total risk of the patient from end to end as they manage a network of providers. Through this network, they can deliver care as inpatients and outpatients in the most efficient way possible, this enables them to think about the total cost of care.
• The provider view: The provider will only be responsible for their own centre or hospital; this means that they will be focussed on the value coming from reimbursement via the insurer versus how much they must spend to deliver care.

Understanding the difference between these key groups helps us understand the incentives at play and how they might impact on a drug in development.

Different payers have different views:

A payer conveyed to me a compelling illustration of the significance of getting different views. One of the major challenges with gene therapies in the US is the portability of patients under outcome-based or amortisation schemes. This means that an arrangement for spreading the high, one-time cost of a gene therapy over several years with one insurance company may be made, but in the US, people typically switch insurance companies every 1-2 years, making it difficult for the scheme to follow them to the new insurance provider. However, with the prevalence of accountable care organisations, the frequency of switching is much less, occurring only every 4-5 years, which makes patient portability a lesser concern and makes these types of payers more willing to enter into amortisation agreements.

Another instance that showcases all three perspectives well is the recent launch of an antibiotic that requires weekly dosing, eliminating the need for daily IV administration of vancomycin by a nurse through Outpatient Parenteral Antibiotic Therapy (OPAT) and demonstrating similar effectiveness for severe infections. When speaking with payers, I encountered three vastly different views on the value of this product and how the incentives are structured:

1. A hospital payer stated that they wouldn’t prescribe it for inpatients because its efficacy is the same as a daily generic and they’d rather have the patient return to the outpatient clinic the day after discharge to receive the drug, passing the cost onto the insurer and avoiding adding to their fixed fee episode cost.
2. A Pharmacy Benefit Manager (PBM) informed me that they would only approve the prescription if it was a continuation from the hospital, and if it was a new script, they would apply a prior authorisation if the price was too high. The price could also factor in the cost savings from avoiding OPAT.
3. An Accountable Care Organization (ACO) payer stated that there was a massive potential for system efficiencies as it could facilitate early discharge, decrease the need for skilled nursing facilities, and OPAT. Taking a value-based approach, they were able to consider inpatient and outpatient as a seamless continuum.

It’s not to say that payers always disagree. There are many aspects that payers consistently agree on, and this applies across the innovative spectrum from gene therapies and 505(b)(2) products and across the geographical spectrum from Australia to the USA. One such issue is the importance of choosing the right comparator for an asset: what is your price and efficacy compared to?

A good example of this is with the gene therapies for muscular dystrophy compared with those for haemophilia. An insurer explained that for muscular dystrophy; certain assets have been launched with weak data on surrogate endpoints with no comparator “only adding new costs”. These are contrasted with assets launching for haemophilia that will replace the extremely expensive blood clotting factors, which can cost up to $1 million annually. “Ultimately, you can divide gene therapies into two categories: those that bring new costs and those that can offset costs.” It was clear that there was a much higher willingness to pay for assets that avoid significant existing cost. This is highly relevant for drug developers, as the comparison and offset costs are crucial for the acceptance of a price by payers and potential partners.

Why is this important to do early?

Whether you’re developing a gene therapy or a value-added drug, it’s crucial to consider the various payer perspectives as it can help you evaluate the significance of these issues to your asset, the potential blockers to progress and the ways to overcome them. From these examples alone we can see:

• The ability to add certain cost-offsets to our price to drive value with specific payer types.
• The likelihood of getting value based contracts and spreading the price.
• The importance of developing the right endpoints.
• The importance of considering the right comparators in your trials.

It is certain that major pharmaceutical partners will understand these barriers. For early developers looking to get deals with those pharmaceutical companies, taking steps early on to reveal obstacles and the method for overcoming them can result in better-than-expected pricing outcomes. It enables smaller biotechs to enter important negotiations on a more equal footing with larger pharmaceutical partners and add value to their asset in the mutual valuation.

Find out more about Pricing and Market Access from our website or contact us.