Risk adjustment and cures

My post on how to get million dollar claims had as its last paragraph a digression on the valuation of genetic disease cures that received a lot of attention on Twitter.

A reliable genetic cure for Cystic Fibrosis is easily worth $5 million dollars. The first true cures for blindness can be worth a million dollars. We had a massive collective cash flow freak out over the Hep-C pricing levels as those delivered real cures that provided real value through both improved health and avoided treatment costs but it brought forward years of spending into a single policy year. If and when genetic cures proliferate, the Hep-C angst will look adorable….

There are two strands that I want to respond to at greater length. The first is from Walid Gellad:

@bjdickmayhew agree about IP holders, but that's why I push back when non IP holders say a therapy will be worth $5million.

— Walid Gellad (@walidgellad) May 4, 2017

He is totally right. I need to be discerning in my language. Intellectual property holders for a reliable Cystic Fibrosis (CF) cure will try to charge $5 million or more for a (CF) cure to capture almost all of the newly created surplus as producer surplus and then economic rent. The spreadsheet that justifies $5 million per cure does not need heroic assumptions.

However the cost curve only bends when the economic rent is minimized. That should be a major policy objective.

The second and more technocratic point is one raised by John Graves:

@bjdickmayhew @wcsanders But isn’t this mitigated to some degree by risk adjustment, since you have to factor in cost of broader popl'n not just the one you cover?

— John Graves (@johngraves9) May 4, 2017

There are two major problems with counting on risk adjustment to resolve the collective action problem of having multiple payers paying for very high cost cures where most of the benefits occur in the out years. The first is purely technical. Risk adjustment data lags reality. The 2018 ACA Exchange risk adjustment letter is a good illustration of this problem.

This guidance announces the final risk adjustment model factors for the 2018 benefit year resulting from the blended factors from the MarketScan® data for 2013, 2014 and 2015 separately solved models…..

Sovaldi, the first of the Hep-C cures, was approved by the FDA in December 2013. It was not widely prescribed until 2014. Assuming there is still an exchange in 2019, that will be the first year where the model’s Hep-C co-efficients are based on the new clinical regime of cures instead of treatment. There are two skews in play. The first is the pre-Sovaldi Hep-C data was more expensive per successful cure but generated far fewer successes. Secondly, we have seen the average price paid for successful cure decline as more near substitutes for Solvaldi have come onto the market. This second skew means the model will overstate the risk adjustment value of 2018 and 2019 Hep-C treatments relative to everything else.

More importantly, risk adjustment only has a chance of being an equalizer and collective action problem solver if all payers are in the same pool with risk adjustment transfers. There is risk adjustment that is internal to the individual market. There is risk adjustment that is internal to a state’s Medicaid managed care programs. There is risk adjustment in Medicare Advantage. There is risk adjustment in a single carrier’s ESI based accountable care organizations and shared savings programs.

There is no risk adjustment across multiple lines of business and multiple types of products.

People churn through coverage. People move from Exchange to Employer Sponsored Insurance (ESI). They move from Medicaid to Medicare. They move from ESI to CHIP. They move from Evil MegaCorp self-insured ESI to Little Fun Start-up fully insured ESI.

An insurer that is covering an individual who would benefit from a very high cost cure where the major economic gains are more than a few years out from the date of payment has to be extremely reluctant to actively seek to pay for these types of cures. Making these cures someone else’s problem under current healthcare financing regimes in the US is a viable business decision. People churn through coverage quickly and if expensive people can be either nudged or hip checked to seek coverage elsewhere just before they have a multi-million dollar claim, insurers will try to do that.

Medicare, Medicaid and the VA face different incentives as their time horizons are much longer but multi-million dollar cures that bend the cost curve through averted future care of the current next best alternative will still produce strong incentives for insurers to seek not to pay when and where they can get away with that.

Risk adjustment can either be a dessert topping or a floor wax; it can’t be both.

*** As a side note ICER has a great white paper on paying for genetic treatments. I am ripping most of my thoughts from that but I think it needs to deal with churn more than it did.