Health Care Current library
Health Care Current: January 14, 2014
Fostering innovation while driving competition in biopharma
This weekly series explores breaking news and developments in the U.S. health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory and legislative changes.
By Neil Lesser, Principal, Deloitte Consulting LLP
Understanding the balance between fostering innovation and driving competition in biopharma
I am a long-suffering fan of the New York Knicks. The team has not won an NBA championship in more than 40 years and this year is unlikely to be any different. The team’s ownership faces quite a quandary: (1) make the most out of today or (2) invest for tomorrow at today’s expense. The first option, through trading for high-priced veterans late in the year, could improve the team’s playoff hopes but will likely result in an early playoff exit anyway, placing the team in a similar position next year. This choice has a low risk/return profile — fans stay interested the whole season, but the long-term rewards are lower. The second option focuses on the future and effectively sacrifices this season for the chance to select the next LeBron James in the upcoming NBA draft that is loaded with college talent. The stakes of this choice are high — the difference between the right and wrong choice in the draft is the difference between a five year rebuilding effort and a mantel full of trophies.
The biopharmaceutical industry is in an even more precarious position regarding innovation: big bets in bold new areas are fraught with complexity and long timelines and success in mature areas is increasingly harder to come by. Creating and sustaining innovation within the industry has always been challenging and costly, but the resulting benefit to patients has generally provided innovators with an investment return sufficient enough to balance the risk. However, the balance of this risk and reward equation has been shifting and it appears to be getting even tougher for innovators: the internal rate of return of research and development (R&D) has dropped from 10.5 percent in 2010 to 4.8 percent in 20131 and recent studies suggest that the cost of developing a new drug has ballooned to over $1.2 billion or higher.2 Only two out of every 10 approved drugs recoup their investment costs. There is little reason to expect this to change because innovators, especially with new biological therapeutics, are facing significant uncertainty:
- Scientific uncertainty: Addressing the novel areas of unmet medical needs requires innovators to tackle challenging therapeutic areas or emerging biological modalities. The complexity and limited scientific maturity of these areas present innovators with significant uncertainty.
- Regulatory uncertainty: The U.S. Food and Drug Administration (FDA) approval process presents a high-degree of uncertainty that complicates an innovator’s ability to predict review times, pre-approval requirements and post-approval requirements. Between 2009 and 2012, 42 percent of new drug applications received complete response letters3 and more than 85 percent of approved new molecular entities required post-marketing commitments.4
- Coverage uncertainty: In response to market trends as well as the Affordable Care Act (ACA), health plans have tightened reimbursement policies and formulary placements, causing significant uncertainty in patient access to new treatments. In recent years, the number of plans using 4- or 5- tier formularies and co-insurance exceeding 30 percent has risen dramatically, making it more difficult for patients to afford innovative medications5.
- Policy and implementation uncertainty: Innovators have to account for future competition from biosimilars, biologic medicines that are developed to be similar to innovator biologics. The ACA created an abbreviated FDA approval pathway for biosimilars as well as provided a 12-year period of data exclusivity for innovator biologics before biosimilar products can be approved by FDA. However, the law created a lot of uncertainties and leaves many important areas to interpretation. Moreover, the law’s central provision to provide 12-years of data exclusivity to innovating firms is, ironically enough, the largest driver of policy-related uncertainty as some policymakers continue to promote changing it to a seven-year exclusivity period.6 A decrease in the data exclusivity period for biologics creates financial and business uncertainties about potential returns on investment and substantially increases the risk that innovative biologics may not achieve a positive return.
These uncertainties introduce increased volatility into investment projections and this impacts the incentives of the complex network of financiers who support drug development. It is likely that these trends will impact the industry’s innovation ecosystem in a permanent way: both venture capital and large biopharmaceutical companies may shift their focus away from challenging innovation opportunities — which would be to the detriment of patients and health systems that rely on breakthrough innovation.
This situation may be viewed as an unintended consequence of trying to balance the needs of all players in the health care ecosystem. There has been a significant emphasis on constraining health care costs and ensuring patients have access to biopharmaceutical therapeutics today. However, there is also the need to continue cultivating and incentivizing innovation within the industry to develop the breakthrough treatments of tomorrow. It’s imperative to recognize that these two needs cannot be viewed in isolation from one another because they are directly related. Policy makers face a huge challenge moving forward: how to protect and incentivize life-saving innovation, while at the same time ensuring that patients can readily access it.
This challenge is not easily solved — everyone acknowledges the importance of access to innovation today and the creation of new treatments tomorrow. And when I think about the choice facing my beloved New York Knicks, as a fan, I clearly want the best of both worlds as well (a winning team this year and in the future) but recognize that is not possible. From my perspective, sustaining future innovation will require a great deal of collaboration among stakeholders within the ecosystem. The current approach is not sustainable and an improved process for delivering innovative products to solve unmet medical need may be required. The stakes are high and time is of the essence – but a focused effort to collaborate to reduce the impact of these uncertainties could have a demonstrable impact on R&D returns.
1 Deloitte UK Centre for Health Solutions, “Measuring the Return from Pharmaceutical Innovation 2013 – Weathering the Storm?”
2 J.A. DiMasi and H.G. Grabowski. “The Cost of Biopharmaceutical R&D: Is Biotech Different?” Managerial and Decision Economics 2007; 28(4–5): 469–479.
3 Datamonitor Healthcare Report, “Complete Response Letter Trends and Influence on Approval Delays”
4 FDA Postmarketing Requirements and Commitments Database; Deloitte Consulting LLP Analysis
5 Henry J Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits 2013 Annual Survey, p 148-149.
6 Patent Docs, May 2013, http://www.patentdocs.org/2013/05/senators-back-12-year-data-exclusivity-period-for-biosimilars-and-president-once-again-does-not.html
Implementation & Adoption
Survey finds one in four eligible Americans visited HIX
Last week, The Commonwealth Fund released its second Affordable Care Act (ACA) Tracking Survey. Conducted from December 11-29, 2013, the survey found that one in four Americans who was potentially eligible for new insurance coverage had visited the health insurance exchanges (HIX) by the end of December. The results showed a seven percent increase from findings released in the first report last October. Of the individuals visiting HIX, 41 percent were between the ages of 19 and 34 and about 77 percent described themselves as being in good, very good or excellent health. Although visitors reported an improved experience with the marketplace compared to October, 70 percent still rated the marketplace as “fair” or “poor”. The survey also found that approximately one in five visitors had received cancellation notices from their insurer.
CMS creates office for HIX and Medicare complaints
The Centers for Medicare and Medicaid Services (CMS) has created the Office of Hearings and Inquiries (OHI) to process issues with HIXs and provider appeals under Medicare. OHI will be tasked to assist consumers appealing a range of marketplace decisions; to help Medicare beneficiaries with complaints, inquiries and grievances; and to handle administrative hearings and appeals. This new office will assist the Office of Medicare Hearings and Appeals which has been working on the backlog of appeals for Medicare claims. OHI will hold a meeting next month to discuss its strategy and plan to reduce the appeals backlog.
123 new ACOs created to coordinate care for Medicare beneficiaries
Last month, CMS announced that beginning January 1, 2014, 123 new Accountable Care Organizations (ACOs) would join the Medicare Shared Savings Program for a three-year term. The program creates a partnership between physicians, hospitals and other health care providers to improve coordination of care for Medicare beneficiaries. Under these partnerships, physicians take a greater role in coordinating care for patients, care delivery innovation is rewarded and health care costs are expected to be reduced. Since the passage of the ACA, approximately 360 ACOs have been established. These 360 ACOs are expected to serve more than 5.3 million Medicare beneficiaries and will be evaluated by CMS using 33 quality performance measures. Applications for the next round of ACOs beginning in January 2015 will be due the summer of 2014.
HHS requires insurers to provide preventive breast cancer drugs at no cost
Last week, the U.S. Department of Health and Human Services (HHS) issued guidance stating that under the ACA, most health insurance plans must cover chemo-preventive medication like tamoxifen and raloxifene for women who are at risk of breast cancer. The medications must be offered without co-pays or out-of-pocket expenses starting next September. Increasing access to these medications is a new preventive measure intended to help reduce the number of women affected by breast cancer every year. The U.S. Preventive Services Task Force made the recommendation last September and many advocacy groups praise the decision as a way to help women stay healthy. The insurance industry notes, however, that higher premiums may result due to coverage of the prescription drugs.
On the Hill & In the Courts
CMS proposes rule changes to Medicare Part D and Medicare Advantage Programs designed to save $1.3 billion
CMS is seeking to save up to $1.3 billion over a five-year period through Medicare Part D and Medicare Advantage program changes. Some of the proposed changes include:
- Limiting the number of Part D plans offered per service area to no more than two to give consumers “meaningful differences” in coverage options.
- Setting higher standards for covering “all or substantially all” drug offerings for a specific disease group, also known as “protected class” drugs. The proposal would limit coverage for particular classes of drugs, saving the Part D program an estimated $720 million from 2015 to 2019.
- Stopping mail-order pharmacies from charging lower copayments than retail pharmacies.
- Curbing prescription drug abuse by excluding providers from Medicare if a pattern of abusive prescribing of Part D drugs is identified.
CMS is accepting comments for the proposed rule until March 7.
Telemedicine coverage expands for military members
Last month, President Barack Obama signed the 2014 National Defense Authorization Act, which included expanded telemedicine coverage for military members. The current Transitional Assistance Management Program (TAMP) provides service members transitioning to civilian life 180 days of health insurance coverage. The new bill will add 180 days of coverage through telemedicine. The Department of Defense embraces telemedicine as a way to provide mental health and other health care services through the use of mobile phones. The Army has been using telemedicine since 1992 and is now transitioning into a mobile program to expand accessibility for a range of covered services, including behavioral health, cardiology, dermatology, infectious diseases, neurosurgery, pain management and orthopedic surgery. Given that post-traumatic stress symptoms often do not appear until months after deployment, the bill is intended to help ensure that those who serve have access to services when they are needed most.
CMS proposes rule allowing all pharmacies to participate in preferred cost-sharing
A proposed rule issued by CMS on January 6 would allow pharmacies the opportunity to offer cost-sharing for Medicare Part D prescription drug plans in Contract Year 2015. Smaller community pharmacies had previously expressed concern that they were not given an option to participate in preferred networks, which they claimed were biased against small businesses. The proposed rule would allow all willing pharmacies the opportunity to participate in preferred cost-sharing networks. This rule is expected to improve competition by increasing the participation of pharmacies of all sizes, thereby reducing charges to CMS. Medicare Part D could potentially see some savings if the preferred cost-sharing reduces costs. However, CMS notes that higher costs may be seen from plan sponsors charging higher prices combined with lower cost-sharing participation. CMS will accept comments on the proposed rule until March 7, 2014.
Around the Country
Wisconsin receives CMS approval for Medicaid plan
Last week, CMS approved Wisconsin’s waiver to the state Medicaid program, BadgerCare, as an alternative to Medicaid expansion. The approved five-year plan is expected to add 80,000 low-income residents without children that meet the income eligibility requirements, while ending coverage for about 77,000 childless residents who earn between 100 to 133 percent of the federal poverty level. Individuals above the poverty level will instead be directed to HealthCare.gov. Because Wisconsin failed to expand Medicaid coverage under the ACA, federal funding will not be provided to the state, leaving many individuals unable to receive credit to purchase plans through HIX. In a statement, CMS noted that while the waiver was approved, the agency does not view this plan to be an ideal long-term solution.
Millions expected to shift between HIXs and Medicaid
Until now, people who churned out of Medicaid because of an income increase often wound up uninsured because they couldn’t afford private insurance. Under the ACA, many individuals who lose Medicaid eligibility will become eligible for insurance and subsidies through the HIXs. As they move from Medicaid to a HIX or vice versa, patients may end up in different plans with different doctors, resulting in interruptions to care. Nevada, Washington state and Delaware have programs in place to smooth the transition for patients between Medicaid and HIX-based plans. Oregon is studying other states’ approaches before implementing its own. In Congress, a bill sponsored by Gene Green (D-TX) and Joe Barton (R-TX) would require states to guarantee 12 months of continuous eligibility to enrollees of Medicaid, to help reduce churning. About two dozen states have similar programs in place for children enrolled in Medicaid and the Children’s Health Insurance Program (CHIP).
CMS creates workarounds for sending eligible Medicaid applicants to states
Due to continued technical problems, HealthCare.gov, the Federally-facilitated HIX, is facing limitations in transmitting completed Medicaid applications to 36 state agencies that are relying on the federal marketplace for enrollment. As a result, an estimated 100,000 Americans eligible for new Medicaid or CHIP coverage have not been enrolled. CMS has developed two new workarounds to help make sure these newly eligible people receive coverage: (1) grant waivers to states to use “flat files” that contain limited information transmitted from the federal site to establish eligibility or (2) call the individuals temporarily deemed eligible to help them to apply directly to their state’s HIX rather than waiting for their HealthCare.gov application to be transferred. CMS has improved the quality of the flat files by adding additional data fields for income and gender. Many states are undecided on whether they will wait for the technical issues to be fixed or will move forward with the workarounds.
Massachusetts launches next phase of its HIE
Last Wednesday, Massachusetts launched the next phase of its health information exchange (HIE). New tools, known as the MA Health Information Highway, were added to the HIE to locate, request and retrieve medical records for nonresponsive patients. These tools are expected to allow providers to diagnose patient conditions more efficiently and accurately, improve health outcomes and reduce health care costs. The state’s HIE was first launched in October 2012 and, since then, about 55 institutions have signed up to use it. The system also enables providers to connect with the Massachusetts Department of Public Health to submit data that allows the state to monitor and improve public health. CMS has granted Massachusetts up to $22.3 million in federal grants to develop the HIE.
Report identifies strategies for states to cut health care costs and improve quality
A newly released report from the State Health Care Cost Containment Commission supported by the Miller Center at the University of Virginia, suggests that states, regardless of their political views, should engage a range of strategies to decrease health care costs while enhancing patient safety and care quality. The report suggests that states first define goals on spending and quality and safety and then initiate data collection to monitor progress and identify gaps. As major health care payers, states are able to incorporate and test new strategies. The report includes a number of suggested strategies:
- Relax constraints on scope of practice
- Evaluate malpractice laws to decrease defensive medicine and insurers’ premiums
- Exclude mandated benefits that are not supported by evidence-based medicine
- Dismiss contractual rules between insurers and providers that inhibit the provision of efficient care
- Promote consumer choices through enhanced price and quality information
- Engage in more public education and outreach about end-of-life care
Study: telestroke services are cost-effective for rural providers
According to Mayo Clinic researchers, delivering stroke care through telemedicine, known as telestroke, has been found to be cost-effective for rural hospitals lacking a specialist on site. Telestroke services are provided in real-time by a specialist located remotely through a computer. The study, which was published in the December 2013 issue of the American Journal of Managed Care, found that hospitals in a telestroke network are likely to save money while also improving patient outcomes. The cost for patients cared for under the telestroke network were, on average, $1,436 less than the costs of routine stroke treatment at community hospitals not in the telestroke network. The use of the telestroke system also leads to an estimated $100,000 in average cost savings for each participating rural hospital per year due to an increase in treatment efficiency.
ECRI report lists 10 health care technologies and systems that offer best returns
Last week, the ECRI Institute, a nonprofit organization that uses scientific research to identify which medical procedures, devices, drugs and processes are best to improve patient care, released its 2014 Top 10 Hospital C-Suite Watch List. The report seeks to provide hospital leaders with a prioritized list of specific technology innovations and guidance as to what investments will offer the best return. Some highlights of the list include:
- Computer-assisted sedation systems
- Emergency departments designed just for elderly patients
- Magnetic resonance-guided focused ultrasound for cancer pain
- Intelligent pills to improve medication adherence and prevent readmissions
- Big data tools to improve care and outcomes