Professor James C. Robinson

University of California, Berkeley

Insurance Coverage and Payment for Insurance Coverage and Payment for Biotechnology and Medical DevicesBiotechnology and Medical Devices

Academy HealthAcademy HealthJune 4, 2007June 4, 2007

Innovation as virtue and challenge Coverage and conditional coverage policy Distribution and physician payment methods Consumer benefit design and coinsurance Reimbursement, pricing, and purchasing

OVERVIEWOVERVIEW

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: Biomedical and Clinical Innovation: The Most Important Dynamic in MedicineThe Most Important Dynamic in Medicine

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

Biomedical and Clinical Innovation: Biomedical and Clinical Innovation: The Challenge to AffordabilityThe Challenge to Affordability

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

The Role of Insurers in Managing The Role of Insurers in Managing Biomedical Innovation AdoptionBiomedical Innovation Adoption

Insurers cover “medically necessary” drugs and devices Cost is only implicit in coverage policy

– Cost effectiveness banned for Medicare, covert for private carriers

Comparative efficacy can be important component– Contrast with FDA safety and effectiveness reviews– Manufacturers selective over which comp efficacy trials to support

Coverage may be conditional

1. Coverage Policy1. Coverage Policy

Limit by indication or disease severity– Enforced via prior authorization (esp. biotechnology)

Limit by role in standard course of treatment– Step therapy for biologics

Limit by imposing conditions for data collection– Coverage with evidence development (CED)– Registry participation: biologics v. devices

Conditional CoverageConditional Coverage

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

2. Distribution and Physician Payment2. Distribution and Physician Payment

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:Distribution and Incentives:Biotechnology “Buy and Bill”Biotechnology “Buy and Bill”

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:Distribution and Incentives:Biotechnology Specialty PharmacyBiotechnology Specialty Pharmacy

Medtech distribution based on highly trained reps who are present in OR, paid on commission

Widespread financial relations with surgeons– Consulting, product development

Physicians own distribution firms in some cases– 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:Distribution and Incentives:Medical DevicesMedical 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?

Distribution and Incentives:Distribution and Incentives:Medical DevicesMedical Devices

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

3. Consumer Benefit Design3. Consumer Benefit Design

Costly biologics are being placed in fourth tier– Coinsurance (50%?) rather than copayment

They quickly hit annual out-of-pocket maximum– 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: Consumer Benefit Design: Biotechnology in Tiered FormularyBiotechnology in Tiered Formulary

“Value Based” (VB) benefit principles argue relative copays should be based not on cost but on value– Low copays for expensive drugs that are very effective

This would imply low copays for biologics that have no alternatives and are highly 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: Consumer Benefit Design: Biotechnology and VB Benefit DesignBiotechnology and VB Benefit Design

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

Consumer Benefit Design: Consumer Benefit Design: Medical DevicesMedical Devices

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.

4. Reimbursement and Pricing4. Reimbursement and Pricing

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:Reimbursement and Pricing:BiotechnologyBiotechnology

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

Reimbursement and Pricing:Reimbursement and Pricing:Medical DevicesMedical Devices

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)

ConclusionConclusion