Why we must build a better reimbursement model for novel therapies.


Orphan drugs and other precision therapies are the future of the industry. Orphan drugs alone accounted for more than 40% of FDA approvals over the past three years1, and we are now seeing more than 300 orphan designations per year2. Novel therapies, like Kymriah (the first approved gene therapy in US) and Spinraza (the first approved treatment for spinal muscular atrophy), represent dramatic advances in treatment and they are saving lives. Precision therapies are no longer the exception, but the rule.


Innovation vs. Access

A common consideration among pharma companies is striking a balance between innovation and access. But in precision medicine, this presents a major challenge.

Here’s the problem: we are advancing 21st century medicine using a 20th century reimbursement system. Precision medicine opens up a new world of highly targeted, high-efficacy therapies. But health insurance is from a different time, designed around common treatments like antidepressants that are taken by large populations over long periods of time, it’s just not suited to handling single-injection cures that cost hundreds of thousands of dollars per year.

Most of the world is moving towards value-based care but the pharmaceutical reimbursement model has been slow to advance. Funding for drugs continues to follow a rebate model, and most payers, by their own admissions, lack the infrastructure and capabilities to move towards outcomes-based reimbursement.

The regulatory system is not set up to handle these new therapies, and nor is the budgeting system, which is designed to pay for expensive things over a long run, not in a single investment. The reimbursement model simply doesn’t work for one-time cures. And so we have to fix it.


Demonstrating value

Even with precision therapies, establishing and communicating value can be difficult, and so we need to invest more in understanding how to do it. The definition of value varies greatly, and it extends way beyond financial offsets, of course.

For example, Spark Therapeutics is on the verge of gaining FDA approval for Luxterna, a gene therapy treatment that can cure a specific inherited retinal disease that causes blindness. Think about the idea of curing blindness with a single injection. The benefits are far greater than the medical costs they would have incurred over time. But beyond that, there is also a societal impact to curing blindness, and our existing value-assessment frameworks don’t account for that.


The price of innovation

So how much is a life-changing treatment worth? And how much are payers and patients prepared to pay for it?

In the US, every public company has a fiduciary responsibility to maximize shareholder value, which implies that manufacturers should price therapies as high as the market will allow and as Turing’s adventures with Daraprim illustrated, the market can handle virtually anything.

But there’s more to it than that. In this post-HCV world, there is an increased focus on pricing and a renewed expectation that companies will behave in a socially responsible manner. And so, if I’m J&J or Merck or Pfizer, or any other socially responsible research-based pharmaceutical company, and this is one of many drugs I’ll be communicating. I’m going to ask, not “How CAN I price it?” but “How SHOULD I price it?” because I need to be able to communicate my value and defend my price point.

The best companies are going to ask both of these questions.

The high cost of innovative treatments means that co-pay programs are an important consideration, particularly in this era of high-deductible health plans and co-insurance, where patients are being asked to pick up an increasing share of the tab. And although it is the insurance companies that are responsible for increasing patients’ out-of-pocket costs, it is the drug companies that must invest in co-pay so that patients can access their treatments.


Checks and balances

Activism from the physician and patient communities serves as price regulators, and both groups are powerful advocates for articulating change.

For most oncology drugs, the physician community acts as a regulator switch in the marketplace. They sit on the Pharmacy and Therapeutics subcommittee, they write op-eds for The New York Times, and they take the stage at ASCO. The oncology community has really embraced this dialogue around value.

And so, although the payer may agree to a higher price tag, if the provider and patient communities don’t perceive value, then companies will be forced to communicate and defend value to those stakeholders.

By their nature, novel therapies bring life-changing value props, with some even offering cures. Such innovation doesn’t come cheap. But is it fair to expect society to pay more for drugs over time, assuming the innovation continues? It goes back to the idea of balancing innovation and access. We often talk about the increase in drug prices, but we also need to talk about the fact that cardiovascular disease, and heart attacks specifically, were a major cause of deaths in the US. While this remains a disease burden in the US and world, over the past 30 years innovation in new therapies has moved the needle to improve outcomes for patients. And hopefully, we will one day be talking about cancer as a chronic condition, too. But behind every innovation, there’s a major investment.


The path ahead

While the current reimbursement model presents the biggest challenge to precision medicine manufacturers, I think most stakeholders would agree that it’s ripe for disruption and innovation. Working through government mechanisms, and the partnerships between life sciences and the payer community, we have to move towards a creative reimbursement and funding model based on value and outcomes.

Similarly, we need to continue the dialogue around how best to define and articulate value, And we need to recognize that articulating value today is complex and that it extends beyond payers into the physician and patient communities.


1, 2  DRG Analysis — FDA