For biopharma companies, it can be far more profitable to treat a disease than cure it. The traditional business model largely relies on the delivery of chronic therapies that slow disease progression and/or alleviate symptoms for patients with serious medical conditions. But the business model for curative therapeutics is different, and runs counter to this and many other industries where a successful product commonly leads to more customers and bigger profits. In biopharma, successful curative therapies can erode their customer base and, ideally, completely eliminate their need.
Near-term costs vs. long-term savings
Typically under the existing reimbursement model, health plans incur costs when a pharmaceutical treatment is administered, regardless of when value is realized by the patient or the health care system. But that model often doesn’t work for high-cost curative therapies where the value lies in the avoidance of future medical expenses over several years. In the US commercial insurance market, members might switch carriers every few years. While future medical complications related to a disease could be avoided, the savings might not be realized by the health plan that paid for the curative treatment. Additionally, the bolus of patients treated during the earlier years of a curative therapy could strain health plan budgets, regardless of whether the manufacturer deems the price justified based on the value delivered through long-term outcomes.
Case in point: Hepatitis C is largely an asymptomatic disease that can be managed effectively for years. But at some point, the patient might develop cirrhosis or liver cancer, which could create the need for a transplant. When it reached the market a couple years ago, Sovaldi, Gilead Science’s cure for chronic Hepatitis C, faced intense pricing scrutiny and pushback from health plans due to the short-term cost of about $1,000 a pill.1 As a result, the manufacturer offered steep discounts (e.g., about 45 percent for some private commercial payers).2
More extreme examples might be on the horizon. As of November 2016, there were more than 150 life sciences companies originating trials in gene and cell therapies. It is premature to assume that all of these will be curative, but it is conceivable that a non-trivial share will be. Health plans will likely need to weigh the short-term costs of the therapies against the long-term savings. For example, treating a hemophilia patient costs a health plan on average $150,000 a year. A breakthrough therapy might cure the condition and improve the patient’s quality of life, but it also could carry a price-tag of $1 million. While high at first-blush, the potential savings over 20-30 years could quickly dwarfs the upfront costs.
What can we learn from other industries?
To commercialize breakthrough medicines once they are developed, we might need to consider financial models used by other industries. Let’s look at the housing market. When you get a mortgage, the lender is providing you with an upfront lump sum and you have an obligation to pay back that loan over a defined period of time. If the lender decides to sell your mortgage on a secondary market, your payments transfer to the new debt holder.
While not exactly analogous, if we move that model to health care, we could develop a system where the obligation to pay for a curative therapy could be transferred across as patients switch insurers. Under such a model, Insurer A covers the full cost of the therapy in year-one. In year-two, the patient changes jobs and transitions to Insurer B. A breakthrough reimbursement model might require Insurer B to reimburse Insurer A 50 percent of the cost of the therapy. In year-three, Insurer B might be able to recoup part of that reimbursement. The cost could be spread out over several years across two or more health plans based on the value that has been delivered to the system through the avoidance of long-term costs.
For this model to succeed, health plans would likely need to track the outcomes of the patient over an extended period, and will likely require greater data transparency and interconnectivity than we have today. Additionally, the analytics and modeling required may already exist outside of the industry and be accelerated through novel partnerships. For inspiration, we can look to the partnership in 2010 between Roche and Swiss Re, a global wholesale reinsurer, to enable Chinese insurers to offer coverage for best-in-class cancer therapeutics that patients wouldn’t otherwise have been able to afford. What other novel players could potentially step in to accelerate change in the health care system?
The landscape for curative therapies is rapidly changing, but the reimbursement system will likely need to keep pace if biopharma companies are to succeed. Breakthrough reimbursement models likely need to be developed that allow health plans to connect short-term payment to long-term savings.
PS: If you are headed to the BIO International Convention in San Diego, we’ll be discussing this topic in-depth during the “Breakthrough Business Models for Breakthrough Therapies” panel on Tuesday, June 20 from 4:15-5:15 pm. I hope to see you there.
1 In practice, transformative therapies are often only efficacious for a portion of the population they intend to treat, and this introduces ‘gray area’ around this definition and adds complexity in patient selection and demonstrating cost effectiveness.
2 One time course of therapy does not have to be a single dose; it may involve, for example, an 8-week course of treatment.