THE IMPA T OF REIM URSEMENT POLI IES AND PRA TI ES ON HEALTH ARE ... - ASPE

THE IMPACT OF REIMBURSEMENT POLICIES AND PRACTICES ON HEALTHCARE TECHNOLOGY INNOVATION

FINAL REPORT | FEBRUARY 2016

Brian Bruen A Elizabeth Docteur B Ruth Lopert A Joshua Cohen C Joseph DiMasi C Avi Dor A Peter Neumann D Regina DeSantis A Chuck Shih A

A George Washington University B Elizabeth Docteur Consulting C Tufts Center for the Study of Drug Development D Tufts Medical Center

This project was supported by the U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation (Contract No. HHSP23320095635 Order No. WCHHSP23337014T). The authors are solely responsible for the content of this document, and any statements or conclusions should not be attributed to the U.S. Department of Health and Human Services, George Washington University, Tufts Center for the Study of Drug Development, Tufts Medical Center, or any other organizations with which the authors are affiliated.

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TABLE OF CONTENTS

Executive Summary........................................................................................................................................ i Introduction .................................................................................................................................................. 1

Research Objective and Questions ........................................................................................................... 3 Organization of the Report ....................................................................................................................... 3 Methods & Analytical FrameWork................................................................................................................ 4 Defining Key Terms ................................................................................................................................... 4 Development of an Analytic Framework .................................................................................................. 8 Analysis of Key Characteristics of Reimbursement Methods ................................................................... 8 Expert Consultations ................................................................................................................................. 9 Case Studies .............................................................................................................................................. 9 Results......................................................................................................................................................... 11 Tracing the Link from Reimbursement to Innovation............................................................................. 12 Key Characteristics of Reimbursement Methods ................................................................................... 13 How Reimbursement Characteristics Affect Components of ROI and Incentives to Innovate .............. 22

The Reimbursement Decision-Making Process................................................................................... 22 Product Categorization and Differentiation........................................................................................ 29 Method of Payment ............................................................................................................................ 36 Defining the Payment Amount ........................................................................................................... 41 Patient Cost Sharing............................................................................................................................ 47 Conclusion................................................................................................................................................... 54 Suggestions for Future Research ........................................................................................................ 57 Appendix A: A Standard Reimbursement Decision-Making Process .......................................................... 60 Appendix B: hi HealthInnovations Case Study ............................................................................................ 62 Appendix C: Premera Value-Based Formulary Case Study ......................................................................... 72 Appendix D: NICE (UK) Performance-Based Reimbursement for Velcade? ............................................... 83 Appendix E: Expert Panelists....................................................................................................................... 93

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EXECUTIVE SUMMARY

It is widely accepted that reimbursement policies and practices are important considerations in the research and development (R&D) decisions of potential innovators of healthcare technologies, and the investors who finance them. Experts broadly concurred that reimbursement is one of the factors that determines which products in development eventually make it to market, as well as the level of access to those products and use by care providers and patients. This, in turn, can affect product development and innovation. However, reimbursement is not necessarily among the most important drivers in every circumstance and likely plays different and evolving roles with respect to drugs and devices. Scientific discoveries and perceptions of clinical need may be the most important factors influencing innovation.

It is also widely held that decentralized decision-making, the absence of government-regulated pricing, and lack of restrictions on reimbursement create an environment that is generally conducive to greater R&D expenditure. Without price controls and reimbursement limits, firms are able to invest in drug development with fewer concerns about future market access and reimbursement levels once their product is approved. But, more expenditure on R&D does not necessarily give rise to more innovation that improves consumer welfare (as defined in this project), as more spending in the drug and device development pipeline may not yield products offering value concurrent with the benefits conferred. The appropriate question, therefore, is not how much is spent on R&D (i.e., the enterprise), but how to measure the benefits to patients, payers, and society of the resultant drugs and devices that are brought to market.1

Payers account for a large share of the purchases of healthcare technologies.2 Consequently, the decision by a public program or health plan to subsidize use of a technology (often referred to as a coverage decision) is a critical determinant of expected, and actual, return on investment (ROI) for developers and investors. The level and method of payment selected and any policies or practices defining the circumstances under which the healthcare technology is reimbursed serve as (lesser) determinants. In making these reimbursement decisions, payers make formal and informal evaluations of the value that drugs and devices confer. By doing so, they may establish a market that is more conducive to rational, value-based consumer decisions.

It is thus important to understand how reimbursement affects actual or expected ROI, and by extension, how ROI may impact innovation, as developer and investor assessments of the market viability of a new

1 Schaeffer, S., & McCallister, E. (2014, September 1). Paying the piper. BioCentury. Retrieved from

2 An estimated 75-80% of the costs of biopharmaceuticals are borne by payers, according to Kaiser Family Foundation calculations (2008) using National Health Expenditure historical data from the Centers for Medicare and Medicaid Services (); unfortunately, there is relatively little data available pertaining to insurance cost share for medical devices.

Executive Summary | i

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