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.

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