Health Care Current: June 16, 2015

Building an open innovation approach to R&D

This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory and legislative changes.

Building an open innovation approach to R&D

Open Innovation (OI) is gaining an important foothold across a number of major industries, from information technology to retail. Today, health care leaders are starting to recognize that OI can have great value in research and development and in marketing strategies to build or recover market share. Though entry has been slow, some major biopharmaceutical companies are beginning to make considerable moves to leverage the OI trend.

As an example, regional innovation centers established by Johnson & Johnson are attracting scientists, entrepreneurs, academics and other businesses and are embracing the value of building partnerships. These centers are innovation hubs that are helping to develop new medical, diagnostic and marketing capabilities.1

Eli Lilly’s Open Innovation Drug Discovery laboratory provides access for outside partners to two complementary scientific platforms. Data and intellectual property (IP) generated by the alliance stays with the institution or medical investigator. The value to Eli Lilly is its right to negotiate for access to molecules or to continue to partner to advance promising breakthroughs.2

Such efforts show an industry that’s starting to “get it,” and move in the right direction. As outlined in a recent Deloitte report, Executing an open innovation model: Cooperation is key to competition for biopharmaceutical companies, analysis reveals that the success rate of OI pursuits in biopharma is higher than for closed-model product development. Fifty-four percent of all active drugs were sourced through an OI model, compared to the 46 percent derived from a more traditional closed model. But, life sciences companies are comparatively late to the OI game; adoption has been slow, and so far infrequent. According to analysis performed by Deloitte researchers, organizations are still sourcing about 80 percent of their research and development (R&D) pipeline through the more closed end of the OI spectrum.

The heavy reliance that has been placed on the traditional closed model could well have a stifling effect on innovation. At this point, it is probably fair to say that those organizations resistant to some aspect of OI – recruiting external partners and crafting a truly collaborative model – could find themselves lagging behind. The main areas of concern tend to be uncertainty about OI-centered R&D models, questions of IP rights and issues pertaining to management style, culture and company outlook. The expansion of data-sharing is critical to creative success down the line, but it continues to keep some companies nervous about proprietary control.

These are legitimate concerns and questions that need to be answered to each organization’s satisfaction. But one thing is clear when it comes to the broader application of OI sources and strategies within biopharma: OI likely will be integral to future of pharmaceutical industry R&D and product development.

In this new age, competitive balance can be established by those companies willing to allocate time and resources to partner with innovation centers, academic sources, venture capitalists and other entrepreneurial sources.

OI can be part of the roadmap for that journey ahead. Companies looking to start or restart OI projects should consider taking the following steps:

  • Measuring the current state of their existing OI activities against each OI framework element
  • Developing strategic goals for the future state of OI
  • Conducting a gap analysis and developing an execution roadmap
  • Garnering leadership support and gaining stakeholder alignment to integrate OI with existing R&D initiatives and striving for consistent success measures
  • Mitigating execution risks

The potential of OI methodologies to bring drugs to market in a more cost-conscious and time-effective way is tangible – especially as participants pursue efforts at the most open end of the spectrum. The biopharma industry, as has been seen across the provider and health plan sectors, is in the midst of a transformative change. Collaboration is replacing direct competition as the driver of exciting new research and product development breakthroughs.

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PS. The concept of OI is likely to be front and center at two important industry events this week – the 2015 BIO International Convention and DIA 2015.

1Diego Miralles, “Averting an Innovation Cliff,” Scientific American, 2013, accessed October 1, 2014:
2Eli Lilly & Company, “Lilly Open Innovation Drug Discovery Program,”

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My Take

By Jennifer Malatesta-Johnson, Deloitte Advisory Principal and Life Sciences Sector Leader for Advisory Services, Deloitte & Touche LLP


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Exchange enrollees have lower average drug spending and usage, but trends vary based on time of enrollment

According to a recent study published in Health Affairs, early exchange enrollees had higher rates of drug use than those who enrolled between March and May of the first open enrollment period. Overall, exchange enrollees spent less on medication and had lower use of drugs than people with employer-sponsored health insurance.

The researchers looked at prescription drug use, expenses and enrollment trends of more than one million exchange enrollees to understand the health status and characteristics of individuals who gained insurance through the exchanges. The researchers also looked at pharmacy benefits claims for a similar group of people with employer-sponsored coverage.

Early enrollees (individuals who enrolled in coverage between October 2013 and February 2014) tended to live in regions of the country with higher income and educational attainment. These early enrollees were on average four years older and filled twice as many prescriptions as later enrollees. In addition, early enrollees were more likely to have had prior coverage. Each wave of new enrollees used prescription drugs less. Use of prescriptions for Hepatitis C and HIV was higher in the overall sample compared with the employer-sponsored population.

Analysis: The Congressional Budget Office (CBO) predicted that individuals in poorer health would be the most likely to enroll in exchange plans during the first open enrollment period. This study shows that this was true for the first several months of 2014 open enrollment.

The authors also said that one explanation for the difference in prescription usage observed between exchange enrollees and those covered by employer-sponsored insurance may be the lag between enrollment and care. It can take some time for a previously uninsured individual to seek care, receive a diagnosis and develop a treatment plan. Future research which captures a longer observation period may shed even more light on drug utilization trends among exchange consumers.

(Source: Donohue, Julie M., Papademetriou, Eros, Henderson, Rochelle R., Glave Frazee, Sharon, Eibner, Christine, Mulcahy, Andrew W., Mehrotra, Ateev, Bharill, Shivum, Cui, Can, Stein, Bradley D., Gellad, Walid F., Health Affairs “Early Marketplace Enrollees Were Older And Used More Medication Than Later Enrollees; Marketplaces Pooled Risk,” June 2015)

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Implementation & Adoption

HHS issues fraud warning about physician compensation arrangements

Last week, the US Department of Health and Human Services (HHS) issued a fraud alert to physicians warning them that some compensation agreements could violate the Anti-Kickback Statute. HHS said that even if these arrangements are “legitimate,” they may violate the statute if physicians are being paid to make referrals that are intended to boost Medicare or Medicaid business.

HHS referenced 12 cases of anti-kickback violations for which it recently reached settlements with individual physicians. The physicians in these cases were not being paid the fair market value for the services they were performing, and their payments were partially based on the volume and/or value of their referrals, according to HHS. Under these contracts, the health care systems were also paying the physicians’ front desk staff salaries. HHS said that these payments “relieved the physicians of financial burden they would otherwise have incurred” and resulted physicians getting higher payments out of the arrangement.

The Anti-Kickback Statute was enacted as part of the Social Security Amendments of 1972. It prohibits incentives for patient referrals or other business generation. The Affordable Care Act (ACA) revised the statute to clarify that individuals do not need to have knowledge of or intent to commit a violation under the statute in order to be prosecuted under it.

Analysis: A number of health care industry drivers are increasing fraud and abuse risk within health care organizations. Organizations are working more closely with one another, the shift to value-based care is spurring collaborative efforts to lower costs and improve quality/outcomes and fraud and abuse is increasing the already high cost of health care. As a result, federal regulators are increasingly focused on applying data analytics to fight health care fraud and abuse.

As explained in a recent report, Health care fraud and abuse enforcement: Relationship scrutiny, organizations that implement a fraud and abuse mitigation framework that can identify which improper relationships may present risks could avoid the potential burdens of government investigations and enforcement actions. An effective program will likely enable organizations to identify risks in real time, adjust to mitigate them, communicate their importance and learn from the regulatory and legislative landscape.

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Health care spending sees major uptick

New economic data from the Altarum Institute suggests that health care spending continues to rise. National health spending for the month of April increased 6.2 percent from April 2014. The category of spending with the highest growth over the last 12 months has been prescription drugs at 10.5 percent. Spending on hospital services grew at 8.5 percent. The lowest increase has been for dental services.

Hospital services make up the largest share of total spending, at 33 percent, followed by physician and clinical services:

Altarum’s spending assessments are derived from data issued by the Bureau of Economic Analysis, and the Institute issues reports on health spending monthly.

(Source: Miller, George, Hughes-Cromwick, Paul, Turner, Ani, Daly, Matt, Altarum Institute, “The Health Sector Economic Indicators,” June 2015)

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Congressional lawmakers detail potential solutions for a SCOTUS ruling against the administration

Many health care stakeholders are anxiously awaiting the US Supreme Court decision in King vs. Burwell, the case that challenges the availability of advance premium tax credits in states with federally-facilitated exchanges. No one can predict the decision of this case with certainty. However, if the Supreme Court rules against the administration and for the King plaintiffs in this case, Congress may have to intervene and offer solutions for a path forward.

As these stakeholders await the decision, several Congressional legislators have offered potential remedies if the Supreme Court does rule against the administration. While some of the drafts are not in legislative form yet, all of the plans address the issue of the tax credits in states with federally-facilitated exchanges.

Analysis: It is unclear whether the Obama administration would support any of these proposals. HHS Secretary Sylvia Burwell appeared before the House Ways and Means Committee last week and repeated that HHS and the administration have no contingency plans for dealing with the outcome if the Supreme Court rules in favor of the King plaintiffs. Secretary Burwell said that “the critical decisions will sit with Congress and states and governors.” She also indicated that President Obama would not sign the Preserving Freedom and Choice in Health Care Act under discussion by Senator Ron Johnson as the “bill in its current form is repeal.”

The Supreme Court will be evaluating the case based on a reading of the statute and an examination of the Obama administration’s regulatory interpretation of the statute. While it is difficult to predict what the Supreme Court will decide in any given case, there are several scenarios to look for in this Supreme Court decision. In in a recent Reg Pulse Blog post, Anne Phelps, Principal, US Health Care Regulatory Leader, Deloitte & Touche LLP outlined four possible scenarios when the decision is handed down.

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On the Hill & In the Courts

House approves companion to the PATENT Act

The House Judiciary Committee approved the Innovation Act (H.R. 9) by an overwhelming majority last Thursday. The mark up on the bill came a week after the Senate committee passed the companion Protecting American Talent and Entrepreneurs Act, or PATENT Act (see the June 9, 2015 Health Care Current). Both the Innovation Act and the PATENT Act would protect companies against “patent trolls” who buy patents to file infringement lawsuits and collect settlement money.

Moving forward, the Senate and the House will have to pass the bills in their respective chambers and then reach agreement on certain discrepancies between the two pieces of legislation. A primary difference in the two bills is in how they deal with fee-shifting, the requirement that the losing party pay the prevailing party’s attorney fees. The Innovation Act would require the losing party to pay attorney’s fees in all cases. The PATENT Act takes a more moderate approach. Under provisions in the PATENT Act, the judge would have to rule that the losing party did not have a reasonable case in order to require them to pay the attorney fees for the other party.

Reaction: Many in the biotechnology and pharmaceutical industries are concerned that the sweeping changes brought about by these bills would harm their ability to enforce their patents. Pharmaceutical Research and Manufacturers of America (PhRMA) and Biotechnology Industry Organization (BIO) have expressed their opposition to the legislation. They claim that these policy changes could create patent unpredictability and could dampen incentives to invest in developing new treatments.

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Readmissions in New York hospitals decreased for three conditions after Medicare added financial penalties

A recent paper published in Health Affairs found that readmissions for heart attack, heart failure and pneumonia fell in New York. Researchers from Boston University and Boston Medical Center evaluated the effectiveness of the Medicare Hospital Readmissions Reduction Program (HRRP), which was implemented under the ACA. The program penalizes hospitals with high readmission rates for certain conditions and measures readmissions after 30-days. Beginning in 2012, Medicare financially penalized hospitals for having risk-adjusted readmission rates higher than the national average for heart attacks, heart failure or pneumonia. The first year, the penalty could be as high as one percent of a hospital’s total Medicare reimbursements and after two years it increased to three percent of a hospital’s total Medicare payments. Since then, Medicare has added more medical conditions to the program.

The researchers compared changes in readmissions among Medicare patients with the rates for privately insured patients. Rates of readmission declined for both groups, which suggested a modest spillover effect from the Medicare program to the group with private insurance.

Related: In another New York study, researchers looked at the rate of physicians participating in electronic health record (EHR) Meaningful Use (MU) incentive program. The study found that the financial incentives associated with the Medicaid and Medicare MU programs may have contributed to increasing rates of physician participation.

  • During the study period, there was a 2.4 percentage point increase in Medicaid participation
  • Researchers also found there was a 15.8 percentage point increase in Medicare participation from 2011 to 2012

The researchers found that physicians were more likely to participate in either MU program if they had used EHRs in the past, had access to financial resources and were part of a larger organization. The authors concluded that the financial incentives in these programs are unlikely to make a large number of physicians outside of the programs decide to participate.

(Sources: Kathleen Carey and Meng-Yun Lin, Health Affairs, “Readmissions To New York Hospitals Fell For Three Target Conditions From 2008 To 2012, Consistent With Medicare Goals,” June 2015; Hye-Young Jung, Mark A. Unruh, Rainu Kaushal and Joshua R. Vest, Health Affairs, “Growth Of New York Physician Participation In Meaningful Use Of Electronic Health Records Was Variable, 2011–12,” June 2015)

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Around the Country

CMS publishes guidance on states’ use of establishment grant funds

Last week, CMS published guidance and clarification on how states can use establishment grant funds for the insurance exchanges. This guidance comes after an HHS Office of Inspector General (OIG) report found that some states may be using funds for other purposes.

Establishment grants, which were created by Section 1311 of the ACA, exist to help states establish health insurance exchanges. Generally, HHS has required states to establish and fund their exchanges by one year after the grant is awarded. The recent guidance defines how states can use the grants after January 1, 2015. Permissible activities are:

  • Designing, developing and testing IT functionality
  • Setting up financial and programmatic audit data systems, policies and procedures
  • Outreach, education and call center support for enrollment purposes
  • Long-term capital planning

States may not use establishment funding to pay for rent, hardware/software maintenance and operations, telecommunications, utilities or call center operations that do not boost enrollment.

HHS also provided additional guidance on No Cost Extensions, which allow states to extend the project period in order to complete establishment activities. States can request a No Cost Extension if completing exchange activities will take more than one year after the grant was awarded.

Related: The King vs. Burwell case decision could have consequences for states currently running a exchange with the federal government’s help. If the Supreme Court rules against the Administration, states may decide to transition to state-run exchanges. Many experts believe that states in this situation would need additional guidance and funding to efficiently set up their own exchanges.

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Predictive risk model could help target therapies to high risk patients with hepatitis C

Hepatitis C is a liver disease that results from infections from the hepatitis C virus. According to the US Centers for Disease Control and Prevention (CDC), the virus can range from a mild illness lasting a few weeks to a serious, lifelong illness. An estimated 3.2 million individuals in the US have hepatitis C, and many do not know they are infected. In the last few years, new drugs have become available that can effectively treat the disease.

Even without treatment, many individuals with hepatitis C will remain stable for many years. However, around one-third of individuals will have complications and need immediate care. Researchers from the University of Michigan Health System have developed a predictive risk model that uses routine lab values and machine-learning methods to help physicians estimate risk of progression of liver disease for patients with hepatitis C. The research team says the model could assist physicians in triaging high-risk patients who could benefit from the new anti-viral drugs, while helping them monitor low-risk patients.

The model is featured in the June issue of Hepatology and is based on data from a National Institutes of Health (NIH) study combined with age, body mass index, virus type and routine lab measurements. Traditional models are not able to incorporate many of the lab values, and the added element of machine learning methods improves the ability to analyze how lab values change over time. Results show that the longitudinal models performed better than baseline models for both fibrosis progression and liver-related clinical outcomes, including mortality, liver transplant and hepatocellular carcinoma. Among the patients classified as low-risk, 6 percent are expected to have cirrhosis complications in the next year, compared to 56 percent in the high-risk group. The model can be added to an electronic medical record to serve as a clinical decision support tool. It can establish how often patients come in for office visits or have monitoring tests.

Analysis: The new specialty drugs available to treat hepatitis C can be extremely costly for a course of treatment. Medication adherence for hepatitis C and other conditions is a challenging public health issue. People may stop taking medications for many reasons, including side effects, cost or the regimen may be too complicated if they are on multiple medications. Some studies show that compliance rates for some of the new anti-viral drugs for hepatitis C could be improved. Because not all patients with the virus benefit from these new drugs based on their virus type and history of other treatments, inappropriate use of therapies is another challenge. These types of financial and logistical issues are what clinicians and policy makers are faced with when trying to target effective therapies to patients who have the most urgent need. This model has the potential to assist in triaging patients.

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Breaking Boundaries

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