Reimbursing Designer Drugs

Now that FDA is pushing a regulatory pathway for personalized medicine through the Critical Path initiative, the next step for industry should be securing payment, especially given what could be relatively high price tags. So what are payors--and the biggest payor of all, CMS--doing to prepare? The answer is, not much.

Personalized health care may be the wave of the future, but is anyone thinking about who’s going to pay for those products—and how much?

Kate Rawson

The prospect that pharmaceutical research and development will eventually evolve from drugs for the masses into targeted therapies intended for much smaller populations—perhaps even as small as one—is a tantalizing scientific proposition.

But the basic laws of economics dictate that as the target population decreases, the price tag to the end user has to increase if R&D is going to remain as profitable an enterprise for Big Pharma.

Now that the Food & Drug Administration is pushing an approval pathway for personalized medicine—in part through the Critical Path initiative—many experts suggest that designer drugs could become a mainstream R&D strategy within the next decade. (See "Getting Personal: FDA’s Plan to Save the Drug Industry," The RPM Report, September 2006 (Also see "Getting Personal: FDA's Plan to Save the Drug Industry" - Pink Sheet, 1 Sep, 2006.).)

The next step for the pharmaceutical industry should be securing payment, especially given what could be relatively high price tags. So what are payors—especially the biggest payor of all, the Centers for Medicare & Medicaid Services—doing to prepare?

The answer is, not much.

"More of the focus from what we have seen has been on the clinical and regulatory side—how can we get these products to market—than how the products will be reimbursed," says Kevin Barnett, SVP-managed markets of the pharmaceutical and biotech management consulting firm Campbell Alliance.

To Tufts Center for the Study of Drug Development director Ken Kaitin, PhD, the lack of a workable reimbursement model for personalized medicine is a scary proposition. "With all of the promise of personalized medicine, the products that health plans are going to have to cover in the future are going to be a magnitude of order greater in price."

"The day is coming where a major breakthrough hits the market, and nobody can afford it," Kaitin predicts. "We’re almost in that period now, where we’re talking about Genentech and Avastin. But that’s one product. What if all of the products in a particular therapeutic area—all cancer products, all focused on particular genetic groupings—are priced like Avastin? What health plan is going to be able to afford that?"

The question is an important one. For industry, there’s no point in investing in developing personalized drug therapies if payors won’t cover them. One thing is sure: manufacturers better not follow FDA too far down the Critical Path to personalized medicine without finding the right formula for payment at the end of the road.

The Part D Distraction

There are some pretty clear reasons why CMS and private payors haven’t dedicated much time to reimbursement strategies for personalized medicine.

First, Campbell Alliance’s Barnett points out, the scientific and regulatory aspects of personalized medicine haven’t really advanced to the point yet where it makes economic sense for payors to establish payment systems for them. Until the products exist, it’s hard—and even counterproductive—to think about how to pay for them.

"The real driver there—both with CMS and private payors—is that the technologies are so new that there’s really not much data to justify the reimbursement," Barnett says. "Only recently, say over the last couple of years, have we begun to see managed care organizations begin to get their arms around how they can actually effectively manage utilization, and therefore cost, of today’s widely available specialty products."

So it’s hardly surprising that payors don’t know how to assign the appropriate dollar value to a personalized product. "It really is a completely new area from the reimbursement perspective," Barnett says. As such, Campbell’s surveys of payors show a "mixed bag" in terms of approaches under consideration.

One area where Campbell has found a particularly wide-ranging view on reimbursement is genomic testing.

"Some plans will put restrictions in place, but will still reimburse, or at least partially reimburse for genomic tests," Barnett says. "But other plans are suggesting at this point in time that they are going to put their foot down. Either they haven’t yet reviewed a new technology, or they’ve reviewed it and there’s not enough compelling data to reimburse."

Moreover, the delay in establishing a personalized medicine payment system can be attributed to CMS and private payors focusing their energies on the sweeping reforms enacted by the Medicare Modernization Act of 2003.

"We hear all the time that managed care organizations have to ‘pick their battles,’ Barnett says. "Whether it’s getting the Medicare Part D drug benefit up and running, recruiting Part D-eligible patients to enroll, the Competitive Acquisition Program, or Part B reimbursement reform, they’ve certainly been quite busy."

Payors Ponder Options

But some managed care executives have started to consider, at least in broad terms, what reimbursement strategies for personalized medicine might look like.

"They are thinking about it," Roche VP-Preclinical R&D Lee Babiss, PhD, says. "There are a number of people that we work with that certainly do a lot of modeling around that and a lot of scenario planning."

As they begin those discussions, some payors are finding that the building blocks of reimbursement for personalized medicine are already in place.

"We really have a foundation for personalized medicine today," Wellpoint Health Networks Inc. Chief Pharmacy Officer Robert Seidman says. Like reimbursement for any health care product, he notes, "it’s absolutely essential that the science drives that process."

For Seidman, personalized medicine can be charted on a continuum. "On the left side, you have asthma and hypertension guidelines, moving toward some of the assays that we use for hepatitis C and then to more of the DNA sequencing as we move to the future," he explains. (See Exhibit 1.)

"Personalized medicine is not necessarily the ‘future’ or ‘Star Wars,’" Seidman says. "We’re doing some of this today."

In the statin market, for example, patients and physicians use the national guidelines for cholesterol-lowering drugs to weigh their individual risk factors, and then chose the most appropriate statin. From there, Seidman suggests, it’s not such a big step to using more individualized genetic testing to direct therapeutic choices.

CMS’ Role in Personalized Health Care

For many private payors, however, one outstanding question is where CMS will come down on the issue. Private payors tend to follow CMS’ lead on big reimbursement decisions—like the agency’s switch to the average selling price formula under Medicare Part B. (See "Show Me the Value," The RPM Report, May 2006 (Also see "Show Me the Value" - Pink Sheet, 1 May, 2006.).)

The same likely will be true for a new frontier issue like personalized medicine, Campbell’s Barnett says. "CMS really needs to step up and lead the way as it relates to what the policies should be around personalized medicine," he says. "I suspect that will happen."

So far, however, "it certainly doesn’t seem that they’ve had any serious assessments around this, or offered any guidance in terms of how they would reimburse," Barnett says. While FDA and CMS are starting to talk about reimbursement for pharmacogenomic tests, he notes, "it’s really just in the spirit of saying, ‘Yes, we’re now beginning to talk about this.’"

But from CMS’ point of view, there’s no need for a systematic change to the reimbursement system for personalized health care products.

"There is no structural problem with the process," CMS senior advisor Peter Bach, MD, says. The current Medicare payment formula for physician-administered drugs—the average selling price plus 6%—"will work for therapies whether they are personalized or not."

For insight into how the federal government might reimburse for drug-diagnostic combinations, Bach points to CMS’ recent national coverage decision for Guidant Corp. ’s microvolt T-wave alternans (MTWA), an electronic test that helps determine whether a patient is at risk for a heart attack and should receive an implantable defibrillator.

In the March national coverage decision, CMS agreed that the MTWA test is "reasonable and necessary" for the evaluation of patients at risk of sudden cardiac death. But notably, Bach says, the decision stressed that the test is not required as a condition of payment for an implantable defibrillator. For device companies, that’s an important distinction: requiring the test would translate into more sales.

And for the drug and device industries, a little encouragement from CMS that the government would pay more for targeted therapies might help justify even bigger investments in personalized medicine.

While the economic rationale for seeking higher prices for targeted therapies is obvious to industry, it’s a difficult argument politically, at a time when drug prices are routinely described as already too high.

There is one prominent test case for industry to watch: while technically not a "personalized" medicine, Biogen Idec Inc. and Elan Corp.’s multiple sclerosis therapy natalizumab (Tysabri) shows how manufacturers could justify charging higher prices for a product marketed to smaller patient populations. (See "The Tysabri Test," in this issue (Also see "The Tysabri Test" - Pink Sheet, 1 Oct, 2006.).)

But many in industry are understandably wary of committing to drug development plans that assume prices an order of magnitude higher than what is typical today—at least until the government says that higher prices can be justified.

"While the commitment to personalized medicine needs to come from within industry, there hasn’t yet been a commitment from CMS that it would pay a premium for these products," Personalized Medicine Coalition executive director Ed Abrahams says.

And Abrahams would know: his organization was established to foster discussion and adoption of personalized medicine. As such, PMC has been instrumental in helping drug companies and government officials see eye-to-eye on the issue.

The Oncotype Prototype

For now, at least, payors are moving very slowly, even when coverage arguments appear to be relatively easy, like when a diagnostic test can be used to screen out non-responders from receiving an expensive treatment in the first place.

Genomic Health Inc.’s breast cancer assay Oncotype DX is one example of this first stage of payment for more personalized health care. The diagnostic predicts the likelihood of breast cancer recurrence in women with newly diagnosed, early-stage invasive disease and assesses the benefit from certain types of chemotherapy.

Laboratory services like Oncotype DX are regulated under the Clinical Laboratory Improvement Amendments of 1988. CLIA allows for product marketing and coverage of lab-based assays without FDA approval, although a recently proposed draft regulation may close off that shortcut. (See "Closing the Loophole on ‘Home Brew’ Tests" sidebar, in this issue (Also see "Closing the Loophole on "Home Brew" Tests" - Pink Sheet, 1 Oct, 2006.).)

The advantage of knowing in advance which breast cancer patients will benefit from chemotherapy is incredibly cost-effective for payors, Genomic Health says.

"We’re giving a tremendous amount of chemotherapy in this country with very little benefit," CEO Randy Scott said during a Thomas Weisel conference September 6. "From a payor standpoint, you don’t mind paying for expensive chemotherapy—and the average course of chemotherapy today is in the $15,000 range—but you’d like to know that you’re giving it to the right patient."

The test isn’t cheap—Oncotype DX costs about $3,500—but it is still only about a quarter the price of a course of chemotherapy. And, Scott argues, the payoff from using the test is many times greater than that.

Current treatment guidelines recommend chemotherapy for as many of 90% of breast cancer patients, he noted, yet 85% don’t need it, because their cancer isn’t going to recur. Of the remaining 15% that do, Scott added, chemotherapy will only reduce the recurrence rate to 11%.

"That means that we’re giving chemotherapy today to 100 women to essentially benefit four," he said. "When you only benefit 1 in 20, it means that the effective cost of chemotherapy to the system is not $15,000. It’s almost 20 times that, or closer to $300,000 per patient that benefits. Think how those health care savings could be applied elsewhere."

Still, obtaining coverage for Oncotype DX has been slow going. It took more two years—until January 2006—to published sufficient literature to obtain coverage under Medicare. The test has also been picked up by Kaiser Permanente , among other private insurers. Most recently, Aetna Inc. issued a coverage policy on Oncotype DX—the first step towards national reimbursement of the test.

For products like Oncotype DX, the argument for coverage looks like a slam dunk—payors are already spending large amounts of money on chemotherapy, and the technology will help them reduce or redirect that spending. So if insurers are moving slowly with that kind of product, imagine how they are likely to react to a new targeted therapy for a currently untreated condition.

Beyond that, if coverage policies are dictated solely by demonstrable up-front reductions in spending, then it’s hard to see personalized medicine paying off for drug developers.

Welcoming a Targeted Approach

For Big Pharma, the key will be securing reimbursement for new medicines where there are not going to be direct up-front savings to payors. That means building a compelling argument for the value of personalized health care.

There are sound reasons to believe that CMS and commercial managed care organizations should welcome a more targeted approach. As with traditional pharmaceutical products, it’s in the best interest of any payor to cover an expensive personalized therapy if it means avoiding even higher costs elsewhere in the health care system.

"You can’t look at the price of the drug in isolation," Pfizer Inc. SVP-Science & Technology Peter Corr, PhD, says. "For payors, the question is: what’s the difference in cost between having and not having the treatment?" Just like more traditional pharmaceutical products, Corr says, once you factor in a surgical procedure or extended hospital stay, the drug therapy becomes a much less expensive option.

And personalized medicine has an added advantage in terms of securing payor coverage. "If you can identify the patients that really need a drug, and there’s a biomarker that shows that, it’s a much easier argument to managed care," Corr says.

The Biotechnology Industry Organization’s director of Medicare reimbursement and economic policy Jayson Slotnik agrees: "When you buy something, you want to know that it’s going to work. And if you know it’s going to work before you buy it, you’re more likely to buy it."

"It has value and demonstrated outcomes. You know it’s going to improve the quality of life and increase patient satisfaction and patient compliance—all of which need to be taken into consideration when thinking about the price of a therapy."

An Antidote to Rising Drug Prices?

But sticker shock is clearly a concern. Indeed, most payors assume that highly effective targeted therapies and diagnostics will come with a very high price tag. But are higher prices necessary for personalized therapy?

Some experts say maybe not. They argue that personalized health care won’t necessarily translate into higher prices. In fact, the science could reduce the cost of the therapy.

As industry becomes more sophisticated with personalized health care, patients will be diagnosed earlier, and therefore remain on drug therapy for longer periods of time, Pfizer’s Corr predicts. If diseases like oncology are eventually treated on a chronic—rather than short-term—basis, he says, "drug prices will have to come down."

Personalized medicine could also reduce R&D expenses in the long run, Campbell Alliance’s Barnett says. "Clinical trials certainly should be smaller, less expensive, and be run more quickly, if the drug is only tested on a subset of patients for whom it is likely to work."

Given the rising cost of many specialty care products, that scenario would make coverage a no-brainer for managed care. It also would be a welcome alternative to the type of cost-containment techniques under consideration by some payors. (See "Welcome to the P&T Committee: Reining in Biotech Prices," The RPM Report, July/August 2006 (Also see "Welcome to the P&T Committee: Reining in Biotech Prices" - Pink Sheet, 1 Jul, 2006.).)

However, the possibility of personalized therapies translating to lower prices is probably not realistic in the short term. At least for the first wave of personalized products, prices will be higher as market sizes start to shrink.

So drug manufacturers who are incorporating biomarkers and pharmacogenomics into their R&D plans will need to give careful consideration of how to present those products to payors for coverage.

Given the lack of attention payors have afforded personalized medicine so far, drug companies have a lot to teach both managed care and CMS. But instead of seeing that lack of attention as a disadvantage, it affords companies an opportunity to frame the debate on their terms—before personalized medicine becomes a mainstream R&D strategy.