The Wall Street Journal had an excellent article earlier this week on the next round of super high cost drugs that are either recently approved or nearing the approval decision point. There is a key point — how do we pay for these drugs as the current insurance model is not incentive compatible with the new mechanisms. [DISCLOSURE: Quite a few of my Duke Margolis colleagues and co-workers are getting paid from a variety of sources to think long and hard about these problems. A portion of my stipend/grad student funding was charged to these accounts in 2022]
Since August, U.S. or European health regulators have approved four new products intended as one-time treatments for rare genetic diseases that carry list prices of at least $2 million a patient, including two from Bluebird Bio Inc.
The most recent one approved in the U.S. set a price record: $3.5 million for CSL Ltd.’s Hemgenix, a treatment for the blood disorder hemophilia B…
Some of the new therapies could produce long-term savings, the companies say, by sparing patients from having to take older treatments repeatedly for the rest of their lives…
health insurers say they aren’t set up to handle such big payouts. They are accustomed to paying for older, chronic treatments on a recurring basis over time, rather than paying a high price for a single treatment that could have lasting benefits.
This is the crux. Let’s assume for the sake of the blog post that these treatments actually do what the companies claim AND that the positive effects are persistent. From a financial point of view, what the companies are doing is collapsing ten, twenty or thirty years of spending into a single year. Using an appropriate discount rate and a broad societal perspective, the multi-million dollar one time charge could quite conceivably have a lower net present value than the long duration, recurring annual payments. This type of thinking makes a ton of sense in a British National Health Services setting or the US Veterans Administration setting. It makes a decent amount of sense in the Medicare and Medicaid context.
However, it is a hard thought process to make sense in the context of the US commercial health insurance space. Health insurance contracts are overwhelmingly one year contracts in the United States. People with employer sponsored insurance through work typically don’t stay with the same insurer for more than a few years because either the employee changes jobs or the employer changes insurers. This is not particularly relevant for large group self-insured employers where the insurer is merely an administrative entity, but for smaller groups where the insurer takes on full payment risk, this is problematic. In the individual ACA market, people move fast. Below is an appendix table from a recent JAMA Health Forums paper by Wolf et al that looks at the probability someone is insured on Covered California by months after initial sign-up. NOTE this is Covered California so it is not accounting for within marketplace switching from say Blue Cross to Health Net or vice versa.
The key thing to note is that about half of enrollment disappears in just over a year. 75% of enrollment disappears in 35 or 36 months.
Insurers that have full risk have no business case to care about avoided costs more than a few years out. The “few” may vary by line of business and how good risk adjustment is, but a $3 million dollar treatment that is close to curative which will reduce life time, properly discounted expenditures by $5 million can be a huge social win and also a massive money loser for the insurer pays for that cure because there is no chance in hell of $3 million dollars in avoided claims occuring within two or three years after the procedure. Assuming that these treatments become common, insurers are going to play hot potato with patients who are likely eligible for these treatments. The insurers’ incentives are to make someone else pay for these treatments and then collect back end risk adjustment payments for history and status codes while not paying for treatments.
We will need to figure out how to payment and churn incentives align while also thinking about how risk adjustment works.
Meyerman
Seems like time to start a reinsurance market for health insurers. Federalize it like NFIP and make insurers pay in every year. When they get hit by one of these big claims, they can look to the federal pool. I leave defining what is covered by the reinsurance pool to my able representatives in Congress.
bbleh
How large is a one-time $2-3 million-dollar payment compared to the annual outlay of, say, the median health insurance company?
My impression was that the typical company is absolutely gigantic, that $2-3 million is closer to one day’s outlay than one year’s, and hence that pricing in this kind of risk ought to be entirely straightforward for them.
Of course, I’m not known for my bleeding-heart sympathy for insurance companies, so maybe Im being unduly harsh here …
Barbara
Without saying too much, I have first hand experience of this issue — it’s really obvious with “once in a blue moon” diseases and million dollar treatments, but it permeates a lot of coverage issues for expensive drugs. The more common the drug/condition is, the more likely it is that risk will get distributed more or less evenly or randomly so that you will both be the payer and the beneficiary of other payers — but this isn’t true with super high cost, one time or short term treatments. For those, my view is that they need to be treated like utilities, sort of like the vaccine compensation fund — a way to fund the costs of socially desirable goods whose distribution/payment eludes free market solutions.
JKC
Great post, Dave. I’m currently working in an HIV primary care clinic, and antiretrovirals are eye-popping expensive. Insurers/PBM’s are starting to meddle in treatment choices, which is maddening as they generally have no clue about drug interactions, viral resistance, or pill burden.
Barbara
@Meyerman: Yes, this is a good solution as well — again, sort of like the vaccine compensation fund, where all payers pay in so that no single payer gets slammed with these kinds of claims. The only issue is deciding which treatments will fall within the fund.
bbleh
@Barbara: As such treatments become more common, however, it is more likely that “risk will get distributed more or less evenly or randomly” among insurers, which ought to make pricing in such treatments more straightforward
ETA: all this elides the question of why the price is so high in the first place, to which the answer almost inevitably is, it’s priced just a little below the expected lifetime cost of the (typically) lifetime treatment it replaces, and it has little to do with the actual cost of developing or manufacturing the drug.
Another Scott
Woah! Surely that graph is a special case?? Like people move out of a Covered California BCBS policy into a similar BCBS policy through their new employer when they get a better job?? I admit that I’m a special case, but it’s very common for people like me to have the same insurance through our employer for decades.
I get that it’s a problem, and a serious one. As you hint, the obvious solution is to spread the $3.5M payment (or the effective cost (e.g. via a loan- or lease-type arrangement – “Cure your cancer with no money down during Toyotathon!!!1 (Not all patients will qualify…)”) out over several years. I would think it would be “easy” to set up some sort of program to do so, maybe via something like the “reinsurance” stuff that already shifts risks onto other entities.
Of course, the companies want their money NOW NOW NOW…
Thanks.
Cheers,
Scott.
daveNYC
I don’t see a particularly easy way to do that though. The number of people with Rare Genetic Disease X is a relatively known number, baring some Thalidomide or Love Canal type stuff, so I guess it’s vaguely possible to have all the insurers pony up some annual amount of money into the Genetic Cure Fund and then every insurer who has paid for one of their customers to get one of those cures gets to take some amount out for X years to cover some portion of the huge-ass amount of money they spent so that some other company doesn’t have to cover the medical expenses of that disease. It’s silly and a kludge, but I guess the math can vaguely work.
But actually sorting out the insurance business model and customer turnover to fix the issue? I’m not even sure how you’d begin with that. There’s no realistic way to prevent someone from switching insurance companies. Sure, someone buying their own might get sucked into a 10 year contract or something highly weird and bad in other ways, but employer provided insurance isn’t gonna work like that.
These treatments might result in insurance companies offering better policies in the hopes to boost retention, but that’s really not solving the issue either. Single-payer obviously fixes it, but Congress and shit. Otherwise I just don’t see non-WTF-kludge way to sort out the issue that the company that drops the seven figures might not end up seeing any of the cost savings from that.
sab
@bbleh: Is your cynicism entirely warranted? A lot of these one off treatments require a big group of highly trained scientists working together to tailor the treatment to one specific patient’s needs.
That caliber of scientist doesn’t come cheap.
Cervantes
There’s a similar problem with some on-pharmaceutical interventions. Diabetes management programs can save in the long run by preventing complications, but they aren’t worth the investment if the person isn’t going to stay on the plan for the long term. Generally they won’t, because they’ll be on Medicare before they need amputations of dialysis. So the insurers won’t pay for them.
Another Scott
@sab: I’m an expensive researcher (not in health care), and I get your point, but then I see the fancy commercials for the expensive new drugs on my TV every single day. $4.5B+ on direct to consumer TV ads in 2020. I don’t see too many fancy commercials for my field on the TV…
Cheers,
Scott.
daveNYC
Pharma is really big in the US. $534.21 billion market size in 2020. Lots of issues in the industry, but size-wise, I’m not sure the advertising budget is the problem.
MattF
How about separating short-term from long-term health insurance? They each have value, they each quantify a particular set of risks, they each are reasonable investments, but they are counterparties financially. I can imagine a short-term health insurance share holder betting that a long-term treatment will fail eventually, and v.v. for a long-term health insurance share holder.
bbleh
@sab: Pretty much EVERY truly new drug, especially every “game-changer” drug (i.e., new class), requires a tremendous cash outlay — hundreds of millions of dollars — to develop, and a lot of new immunomodulatory drugs, eg cancer “vaccines” that modify components of the immune system to respond to particular cancers, require individual customization and hence have very expensive treatment costs in addition to the costs of drug development. But having worked on drug pricing, such calculations are in my experience entirely standard — “value pricing” — and otoh millions of dollars worth of effort to prepare and administer each single course of treatment seems extremely unlikely to me.
Ohio Mom
@Cervantes: A staple of birthday party games in my preschool years was Hot Potato. You know, everyone sits in a circle and passes some object around, pretending it is searingly hot. There is a lot of tossing it about and if when it’s your turn, you miss catching the “hot potato,” you’re out.
I hated that game but in later years I have come to understand it is a powerful metaphor for much of what you come across in life, not least of all our dysfunctional health coverage system.
As you point out, an entity that is frequently “out” is the federal government/Medicare, as it catches the consequences of delayed treatment.
Sure Lurkalot
@Another Scott: Thanks for pointing out the large sums spent on advertising pharma. The “ask your doctor” shit is maddening. The US and NZ are the only countries that allow it. Wish we could make it extinct.
bbleh
@Another Scott: @daveNYC: DTC advertising IS a big cost in drug development now. In some cases (rare) it even can exceed the (other) development costs (discovery, clinical trials, manufacturing, etc.) From what I know (and this was not my area of specialization), the costs tend to be concentrated in a relative handful of drugs that are in close competition with competitors in particularly large/lucrative markets, along with some new drugs in similar markets (just to establish the brand), although of course the costs are not necessarily funded entirely by sales of the particular product itself.
I happen to think that the industry would be perfectly happy to have the practice banned, precisely because it’s such a money-sink. But at least from what I’ve seen, it’s a bit like battleships in WWI: once a competitor does it, you feel obliged to match them, and the process has a tendency to spiral upward for a while
Prior to the Reagan administration, it was effectively — although not legally or by regulation — banned, sort of like advertising for law firms. But that norm fell during the heyday of “deregulation,” and here we are.
justawriter
Medicare Part XYZ? A list of high-cost curative treatments that are mostly reimbursed by the Federal Government funded by Elon Musk’s swear jar, or a Wall Street hooker and blow tax. I do wonder how much covering say, anything over a $1.5 million single treatment would cost. 100,000 cases a year I imagine would put the cost in the Defense Budget area, which of course is too much spend on saving lives. (that last bit is sarcasm)
Barbara
@Ohio Mom: I don’t know that I agree with your view — I think it’s too simple. In most cases “chronic” conditions are not caused by lack of medical care per se, but lack of self-care, which is triggered by lack of access to the tools needed for healthy living, and/or, usually, lack of resources aka poverty. Sure, if someone doesn’t take their diabetes medication because it is too expensive then there will be long-term medical expenses that might have been avoided, but avoiding diabetes in the first place — that isn’t something that we should even be looking to insurance for, IMHO. I will not get on my soapbox about social spending being somehow only a good thing if it forestalls medical expense, but that is how a lot of people think and act. It’s unbelievably stupid and more than a little immoral, but it is where we are as a society in many ways.
Ruckus
@bbleh:
In my early this century business, a retail sporting goods store, I was 2 doors from a company that was making drugs for rare diseases. New technology in drug design and mfg made this possible but the cost to get to market is high and the market size is rather small. The overall cost to the public and insurance companies is exactly what David is talking about here, the cost over all is a lot cheaper to the public, no matter who is paying but the payback time is very short, compacted if you will, and less than caring for the disease long term. But insurance and healthcare in this country is not set up for that type of medication, which in the long run could reduce pain and suffering, and the cost of lessor treatment. There should be some type of process for this new(ish) type of medicine but the reality is that the business of medicine has changed so much in the last 50 yrs that it is difficult to recognize as the same process and no one has really dealt with this in an overall view point.
Countries with nationalized healthcare could do this easier, countries with privatized healthcare and payment systems based solely on profit can not do this at all.
Bill Hicks
How do countries with non-shitty healthcare systems, maybe a country like Finland or the UK, deal with these super expensive drugs? I’m sure they need to have some sort of process/triage for determining on who and when they can be used. Is it logical or scary or have problems an insurance based system does not, or do they do it better? I guess what I am asking is it done well elsewhere or is our system better in this case?
Also, are the drug companies who develop these expensive medicines making money mostly off the U.S. and our overpriced system?
beckya57
This is yet another example of how our privatized, fragmented health care system just doesn’t make any sense, and increases costs while worsening outcomes.
Ruckus
@Another Scott:
When I was an employer I paid for healthcare insurance as part of the employment agreement. Every year I had to make a decision of who to pay, best bang for the buck. The cost to my company was a lot, but the employees didn’t see that. I wanted a company that was going to do their damn job and actually pay for employee healthcare, one that wouldn’t screw my employees and myself. And the choices were many, the differences small but vital for everyone involved. The employees got healthcare insurance, I got migraines dealing with them. It shouldn’t be that difficult, but it is, because minor differences could make a huge difference to me and my employees.
Kayla Rudbek
And here I am staying with my current insurance provider because they will cover liquid tamoxifen as Tier 3 instead of Tier 5…still not cheap as compared to if I could get tablets without lactose in them. At least it’s only 4 more years to go on that medication.
Ruckus
@Ruckus:
All of this is derives from profit first. Which in healthcare can easily mean shitty life/death to patients because, well it should be obvious. And many types of business are this way. My tooling manufacturing business was “self regulated” in this manner. And it’s not that overall profit was the problem it was that every single step of the process was. I manufactured tooling for other businesses to make a product and better tooling cost more. More time, more expensive equipment, more/better training for my employees – higher pay for same. It was always a battle no matter the segment of the economy that the end product was made for. The business model for drug companies is really no different. New drug development is very expensive, look at where most of our long term drugs are manufactured now. Their manufacturing costs are low per dosage and the process of their manufacture is a known. Most of the drugs I take are off patient and therefore cheap. The drug I take for migraine was $225/ten units, 25 yrs ago. I tried buying it from Canada back then and the same drug cost $140 delivered but drug importation was banned because the companies here were losing highly profitable business. Now it is retail approx $8.50/per dosage and far less through the VA.
bbleh
@Ruckus: but again, the cost to get to market is high for ALL truly new drugs (even for “me-too” drugs although usually not as high), and so for very small markets the per-patient cost is indeed much higher. But for drugs that make it to market, it’s still less (on a risk-adjusted present-value basis) than the alternative treatments (since otherwise it wouldn’t be worthwhile to develop), and usually materially lower (since otherwise there would be no profit in developing it), and the price ends up being just enough lower that the overall cost of treating those patients is slightly less and so worthwhile for payers to cover.
The problem I think David is talking about is cash-flow for the (non-centralized) payers: the payment comes all at once rather than over years, and the insurance company isn’t guaranteed to enjoy the benefits of the reduction in lifetime-care costs because the patient might switch companies.
But again, I don’t see a fundamental problem. Consider, for example, property insurance for catastrophic events such as floods or storms. Many payouts are smaller and widely scattered, but in some cases they can come in huge chunks: a big storm causes billions in damage over an area (say, coastal and central Florida) in which a company has a large number of customers. (I’d even hazard a guess that such events are more common in property insurance other than healthcare.) And there’s no guarantee a property owner will stick with them afterwards. How do they prepare for this? Cash cushions sized using a probabilistic model? Reinsurance? Some other form of risk pooling or redlining (eg federal flood insurance)? Surely this isn’t reinventing the wheel by any stretch.
Ruckus
@bbleh:
The problem is government. Specifically the type of government. We have a government that relishes freedom over everything else (not a bad idea – but humans…), others have governments that value themselves or at least those at the top of the pecking order, see current day Russia. But the problem is humans, because we range, even in a free country, widely in our views/ideals and that variation often requires some restraint to squelch open warfare. Our government, ruled by representatives of the people has a tendency to be restrictive in some ways because humans often require some level of restriction. Speed limits – often disregarded wholesale would be one example. And of course governments are always run by humans so…. The problem is that money is desired by all and hoarded by some. In a perfect world the cost of drug development would be spread over the entire population, even over those that have zero need for a specific drug. But being human we like money and we like having more than less. So profit becomes the major limit of what we actually do. The more we profit the more we like it. In fact some value profit so highly that we screw other humans to get it. Now I like freedom as much as the next person, but there are always limits to everything, even freedom, because we live in a world where we have to depend on others to provide stuff, the same as they depend on us to provide different things, etc, etc, etc – on to infinity. We roughly look the same as humans but reality does interfere in that we don’t all look as pretty or have the same level of intelligence or same skills or work ethic or drug/alcohol propensities, or on and on. I was a precision machinist, reasonably proficient and not everyone can do that, which of course applies to everyone about every aspect of human life. We all add value to the end result, both positive and negative value. Over time it sort of equals out, but short term it just as often doesn’t come close. In this country we often value money over everything else and that is crap because as a society advances there are always haves and have nots. The haves often have too much and the have nots often have absolutely nothing. I can take you to areas of LA that have mostly have nots, people in a modern world living on the street with almost zero value. We need to do better.
The point to the above in relation to expensive drugs is that we can fix this, if we want to. We can make health care better. We can make it apply to everyone as they need it, rather than to those who can afford it. Because at our current level many if not most of us can not actually afford it. And that is fucking wrong in any human form of government. And our current level is that profit is above all else. We compete for profit, rather than healthcare. Every single one of us does that. I am, for example a vet and I use the VA because for me that is a far better system than public health care as a retired senior citizen. I’ve used the public healthcare system and it has served me well, but then I had a job that paid reasonably and had healthcare insurance. Now I don’t, and the public healthcare business sucks for most people in my position. And it’s all a matter of profit. I’m not a member of the profitable segment of healthcare recipients, because of my age. In a fair world the really profitable people would level out those that are not in that segment. Like me. But then this isn’t a fair world, is it?
Chris T.
It’s bad enough even with “less expensive” drugs like Jardiance: 30 pills, i.e., a 1 month supply, is $500 retail (vs whatever your co-pay is with insurance).
gene108
Can the Medicare approach to ESRD be expanded for other conditions?
This is assuming the political will is there to increase Medicare funding for other health problems for certain periods of time.
pluky
@Meyerman: There already is, and has been for decades, a reinsurance market for medical insurance on both specific (i.e. individual claim) and aggregate (covered group experience) basis.
daveNYC
@Bill Hicks: UK would be easy peasy. They’ve got the NHS, so they’d just pay for it. Or not. Tories suck.
Basically the same as what the VA would do since that’s another system with… lifelong customer capture I guess you could say.
WeimarGerman
These new super drugs are a huge issue, but the underlying economics have distorted US health care for decades. One great example that effects a lot more people is gastric reflux (GERD). In the US many insurance companies will not pay for a surgical cure because of the same issues of lack of time to recoup the costs, and instead force members to pay for chronic, continual treatment of the symptoms.
There is a Ryan White HIV/AIDS Program that was designed to create a public set of funds to cover the high cost of retroviral treatments. It’s been a very good model, but it would also need tweaks to address these curative treatments and their different cost cycles.