In Vivo Market Access mini-magazine by Informa Pharma Intelligence

In Vivo

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vol. 35 â?&#x161; no. 10

Proving The Value Of Value-Based Deals

NOVEMBER 2017

pharma intelligence â?&#x161; informa

Options For Medtechs In A Value-Based World

Orphan Drug Pricing And Reimbursement

Market Access: Time For A Reset?

❚ MARKET ACCESS: Value-Based Contracts

As controversy continues over pharmaceutical pricing, more drugmakers are eyeing deals that peg health plan cost to outcomes to boost volume and win formulary placement. But these deals are challenging to construct and to date there is little evidence that they reduce costs for patients.

BY ED SILVERMAN Despite all the talk about outcomesbased contracts between pharmas and payers, not very many have been signed to date because they are so tricky to execute.

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One key hurdle is investing in the infrastructure needed to capture data showing whether a patient is actually benefiting from a medicine. Federal regulations may keep some on the sidelines over concerns about requirements for reporting Medicaid pricing and anti-kickback stipulations. So what? As they forge these contracts, drugmakers and payers will also have to grapple with impatient consumers who want lower drug prices now, not behind-the-scenes deals that may lower premiums, broadly speaking, sometime in the future.

2 | In Vivo | November 2017

everal times a month, Michael Sherman, MD, gets a call from someone curious about his deal-making. Sherman is not a venture capitalist or head of technology transfer at a university, though. He is chief medical officer at Harvard Pilgrim Health Care Inc., which is the second largest health insurer in New England. But his willingness to embrace a controversial approach in the US toward negotiating with drugmakers has placed him at the center of a growing debate over the value of prescription medicines. Over the past two years, he has inked half a dozen outcomes-based contracts with drug companies, making Harvard Pilgrim something of a trailblazer among payers. The arrangements vary, but basically revolve around the notion that the insurer will get a medicine at a lower cost if the patient doesn’t benefit as planned. Deals have been reached with Novartis AG, Amgen Inc. and Eli Lilly & Co., among others. “There’s tremendous interest in discussing value for medicines,” says Sherman, who has inadvertently become a spokesman, of sorts, for the concept. “The current pricing environment is making everyone – payers and manufacturers – more aware of the need to do so, and this approach is attracting attention, although my position is evolving. I think it may be better suited for some drugs more than others.” To be sure, value has become the hot new buzzword in the pharmaceutical industry as Americans spend more for their prescriptions – and grow angrier as a result. On one hand, total spending on medicines in the US rose by 5.8%, to $450 billion, in 2016, which was less than half the rate seen in the previous two years. In 2015, for instance, drug spending climbed 8.9% after reaching 12% the year before. But after subtracting rebates and discounts that drugmakers pay insurers, net spending was $323 billion, a 4.8% increase over 2015. invivo.pharmamedtechbi.com

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Proving The Value Of Value-Based Deals

Moreover, this is like inside baseball chatter to most Americans, who aren’t seeing any price drops. That’s because their co-pays remain wedded to rising list prices, even though payers claim they are negotiating harder, notably for medicines where competitive choices are clear. And although manufacturer coupons are available for a growing number of drugs, cashpaying customers have it even tougher. This explains why Americans believe they are not getting good value for so many medicines.

year’s second quarter were 7.1%, below the 9.7% hike that occurred in the same period a year earlier, according to Sector & Sovereign Research. (See Exhibit 1.) Yet price hikes continue to outpace inflation. This is significant. Any company that thinks it can dodge a bullet by raising prices, say, 9.8% a year – in hopes of avoiding nasty headlines – is unlikely to escape notice in such a heated environment. Consider the critical reaction to recent price hikes taken by Celgene Corp. – three increases in less than a year that amounted to an 18% cumulative rise. These developments raise several crucial questions: To what extent might outcomesbased contracts make a difference? Can drugmakers and payers, who are perennially wrestling over costs, use these to provide value or are the hurdles too daunting? Will policy-makers view them as a solution to high prices? And might these deals make it possible for consumers to actually pay less for their prescriptions?

Too Many Americans Are Angry Over Rising Drug Costs As a result, 40% of Americans say that taking action to lower drug prices should be a top priority, according to a recent poll by Harvard University’s T.H. Chan School of Public Health and Politico. And a Kaiser Family Foundation poll conducted last spring found a majority of Americans favor various actions to lower the burden of high drug costs, from allowing Medicare to negotiate pricing and importing medicines from Canada to limiting what companies can charge and getting generics to market faster. A few drugmakers have responded by publicly committing to keeping increases below double digits. And though headlines would suggest otherwise, there actually has been a gradual de-escalation recently. Increases for brand-name drugs in this

Talking About Value Is One Thing, But Getting There Is Another The answers are unlikely to be known for some time. But some say skepticism is warranted. The sorts of deals that Harvard Pilgrim has reached may make noise – and appeal to policy-makers to encourage value-based contracting – but not everyone is convinced these contracts can deliver, yet. “Despite the examples you may read

Exhibit 1

US Brand-Name Drug Price Inflation Units

Net sales

25%

WAC

Net price

Mix

Excluded

Residual

20%

Real y/y chg

15% 7.1%

10% 5% 0%

1.3%

-5% -10%

1Q17

3Q16

1Q16

1Q15

3Q15

3Q14

1Q14

1Q13

3Q13

3Q12

1Q12

1Q11

3Q11

3Q10

1Q10

3Q09

1Q09

3Q08

-20%

1Q08

-15%

about, it’s actually been very slow going,” says Lou Garrison, PhD, a University of Washington health professor who specializes in pharmaceutical economics and a past president of the International Society for Pharmacoeconomics and Outcomes Research. “There are still lots of barriers to doing these deals … It does make you wonder if there’s an iceberg phenomenon.” Not including contracts that drugmakers may have reached with Medicare, Garrison counted less than 50 examples of outcomes-based contracts in the US in his database. And he points out that, on average, only a handful have been reached each year. “I don’t see a tipping point unless there’s some other way we can encourage them,” Garrison says. To be sure, some encouragement is needed, because not everyone is rushing to do a deal. Only 25% of drugmakers use value-based drug contracts of any kind and just 38% of pharmaceutical executives believe the potential rewards of a value-based contract are worth the risks, according to a recent survey conducted by the PricewaterhouseCoopers Health Research Institute. Yet, 60% believe their existing deals are somewhat or very successful, 50% reported they are very likely to renew current contracts or sign new ones, and 71% agreed that value-based contracts could improve patient outcomes and provide rewards.

Pharma Has No Choice But To Explore Value-Based Deals The findings may appear somewhat contradictory, but the varying responses also reflect the different commercial landscapes that executives encounter in the US and elsewhere. In Europe, most notably, pay-for-performance agreements, as they are often called, have been in effect for some time as drugmakers negotiate with cash-strapped government gatekeepers. In the US, however, interest in outcomes-based deals – and value-based arrangements, in general – is still evolving and, of course, growing out of necessity. Drugmakers face a keen predicament. They’re simultaneously grappling with harsh criticism over pricing strategies and increasing market access hurdles, even for highly innovative treatments, as payers impose restrictions that make it more

November 2017 | In Vivo | 3

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MARKET ACCESS: Value-Based Contracts ❚

❚ MARKET ACCESS: Value-Based Contracts difficult for patients to obtain prescribed medicines. To some, the dilemma calls for creative thinking, especially if drugmakers have less room to maneuver. “We’re in the very early days, so for anyone to say the approach won’t work, when the entire medical community is moving in the value-based direction, is premature,” says Roger Longman, who heads Real Endpoints, a consulting firm that focuses on pharmaceutical reimbursement. “The issue is how do drugmakers get around the problem of formulary restrictions? And what’s the alternative if they don’t?” This explains why some drugmakers are trying different arrangements, or at least exploring the possibilities. Some contracts give insurers unique terms if a drug provides a certain outcome or if a medicine improves a key barometer that suggests good health is being maintained.

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Have A Heart Attack And Your Insurer Gets Money Back For instance, Harvard Pilgrim gets a full refund if a patient on Amgen’s Repatha (evolocumab) injectable cholesterollowering drug has a heart attack or stroke. In another deal, the insurer can get bigger rebates from Eli Lilly if fewer patients using the Trulicity (dulaglutide) diabetes drug reach their A1C targets compared with those on similar medicines. But if more Trulicity patients hit their goals, then Lilly is paid a higher net price. Here’s another example: Aetna Inc. and Cigna Corp.get a discount if Novartis’ congestive heart failure drug Entresto (sacubitril/valsartan) does not reduce hospitalizations by a set amount. In exchange, Novartis gains volume and its medicine will win preferred status on the formularies, subject to prior authorization. Such deals reflect a growing move toward cost-effectiveness. At launch, Entresto cost about $4,560 per year, but this was more than what Wall Street and health industry analysts expected. Moreover, the Institute for Clinical and Economic Review (ICER), an independent non-profit group that assesses pricing, determined the price should have been 9% lower. “All we’re asking for is a level playing field. Maybe our drug doesn’t stack up, but we’re willing to take that bet and ask to get incentivized,” says Stephen Moran, PhD, who is global head of strategy at Novartis. 4 | In Vivo | November 2017

“Price, per se, is not really the question, though. It’s more about the absolute spending on medicines and I think that’s the motivation so far for payers.” As he sees it, these arrangements should, ultimately, help improve access, demonstrate true benefits to insurers, and address costs over the long term. But value, he suggests, is a more nuanced argument that encompasses clinical metrics, improving a patient’s quality of life, convincing insurers that costs can be reduced while care is improved and putting people back to work, which is a win for society. “The problem is that value has never been really captured properly in the pricing discussion. Where we really want to go is to value-based pricing,” Moran explains. “We’d like a proper risk-bearing agreement. If our product delivers more value, then we’d get more upside … Even if prices might be high, at least it is reflected in true value of the product.”

Numerous Hurdles Make These Deals Challenging To Achieve But getting from here to there will be challenging. And there are plenty of reasons. On one level, there are the nuts and bolts of assembling these deals, and a crucial hurdle involves data collection. To truly understand if a deal is working, of course, companies need to know if a patient is actually benefiting from a medicine. The trick is having the infrastructure in place to capture that information, which is typically a notable investment, and many payers are not up to speed. “There is a lot of work involved to get there,” because drugmakers and payers must first agree on which data to collect, says Karla Anderson, a principal in the pharmaceutical and life sciences practice at PricewaterhouseCoopers. And then, it “takes time for payers to build the right systems to track what might be a small amount of the drug spending relative to total spending.” A related challenge is getting enough of the correct data. Take laboratory results. If an insurer does a deal that measures outcomes such as heart attacks, the hospital claim will provide that information. But if an insurer wants to track changes in cholesterol, it would need agreements with multiple laboratories to know whether LDL levels changed, because that sort of

data are not usually passed along. “You have to figure out smart data points to tell whether a drug is working or not,” says Longman. “Otherwise, it can be expensive and difficult.”

Why Some Drugmakers Are Skittish About Value-Based Deals Another concern that nags at drugmakers is government regulations and requirements. Drugmakers must report pricing to the federal government to determine Medicaid rebates, Medicare Part B payment rates and the maximum price that some government agencies can be charged. But the nature of an outcomes-based deal is not compatible with these requirements and, therefore, may cause a drugmaker to shy away to avoid being cited for a violation. For instance, current Medicaid regulations require that rebates paid to a commercial insurer as part of an outcomesbased contract would also have to be made available to state Medicaid programs. Yet those Medicaid programs would not, otherwise, participate in the terms of any arrangement. This is not a particularly desirable arrangement for drugmakers. Another issue that can vex some drugmakers is the federal anti-kickback statute, which prohibits drugmakers from offering inducements. Would an outcomes-based contract with a specified money-back guarantee run afoul of the law? Unfortunately, it remains unclear how enforcement agencies would view these arrangements. In a similar vein, drugmakers have been chafing over regulatory constraints that restrict what they can discuss with insurers prior to winning approval from the US Food and Drug Administration. Two years ago, Lilly and Anthem Inc.teamed up to push a white paper that suggested the agency issue new guidelines that would make it easier to review such things as trial data so that value-based deals could be struck. “For these deals to take off, we need regulatory reform,” says Joshua Ofman, MD, SVP of global value, access and policy at Amgen. “Once those occur, I think we’ll see a lot more activity.”

One-Size-Fits All Is Not A Good Approach One payer, however, sees some promise, at least theoretically. “We want to manage both pharmacy and medical together, invivo.pharmamedtechbi.com

so I’m in favor of a deal that puts us in a good position to manage total cost of care,” says Susan Scheid, vice president of pharmaceutical trade relations at Prime Therapeutics LLC, the pharmacy benefits manager, which likes deals that can gauge patient adherence. “We’ll spend more on pharmacy benefit if it means we can reduce our medical costs.” For the moment, though, these contracts are one-off deals and, essentially, are customized to fit the medicine and the health plan. So the more frequently a company enters into non-standard contracts, the more work a company must do on the back end to make sure everything is in order – and to avoid anything that may impact government regulations and inadvertently raise a red flag. Their one-off nature raises another point, which is the extent to which outcomes-based contracts are even suitable for a broad range of medicines. There are various reasons to consider this. Sometimes, a particular drug simply might not have enough impact on a health plan to make it worth investing in gathering and tracking patient data. This could hold true for a medicine that isn’t likely to be widely prescribed or when a health plan already receives a reasonably good discount from the drugmaker. Equally challenging is the time needed to determine some outcomes. Different diseases play out differently, of course, so the ability to competently measure patient benefit will vary. “Not every product is going to be a good candidate,” says UW’s Garrison.

What Happens If Beneficiaries Change Plans? Another test is sorting out movement among health plan beneficiaries. Many people change employers and insurance coverage, so drugmakers and insurers must consider such variables, assuming it’s even possible, according to Steve Pearson, MD, who heads ICER. “How do you track people if they change insurers? This is the sort of thing that will create a lot of interesting problems.” Indeed, imagine a deal in which there is a cardiovascular outcome that may not be seen for, say, five years. By then, some patients are covered by different payers. “We prefer [arrangements that run] less than a

year so we can be assured the member is still part of our plan,” says Scheid. These are among the unknowns that have Harvard Pilgrim’s Sherman thinking hard about which deals to pursue next. Of special concern, he says, are some of the newest therapies that carry high price tags, but are not necessarily going to be widely prescribed. As more of these medicines win FDA approval – and more are expected to do so thanks to advances in science and political pressure on the agency – he believes drugmakers should automatically explore outcomes contracts. “I think if you’re going to move the needle, you need agreements for high-cost rare disease drugs that are priced in the mid-to-high six figures,” says Sherman. “If you’re a company that is charging a price of that magnitude, there should be pressure to enter into these agreements. But the payment for a failure should be miniscule or nothing.” (Also see “Orphan Drug Pricing And Reimbursement: Challenges To Patient Access” this issue.)

Why A New Novartis Deal Is Being Closely Watched One such drug that is being closely watched is Kymriah (tisagenlecleucel), which was recently approved to treat children with an aggressive form of leukemia. Novartis is charging an eyepopping $475,000 for the gene-therapy cancer treatment, but is also touting a money-back guarantee: if a patient fails to respond in the first month, there will be no charge to Medicare or private insurers. But it remains unclear how patient response to the drug will be measured, because full details have not been released. Moreover, there is a 30-day cutoff, which can easily work in the company’s favor, since a short-term benefit is more typical among cancer patients. Moran, however, says this is in keeping with the product labeling. In general, “there is a very important question around timing,” he acknowledges. “But this represents the first full no-response contract based on a significant amount of value. I believe it’s quite unique. But yes, you have to assess each drug on its own merits. Sometimes, the endpoints aren’t as clear and so the value will be different. You have to take them on a case-by-case basis.” Meanwhile, both drugmakers and pay-

ers alike will have to grapple with consumer unrest, especially because there is skepticism that outcomes-based deals – or any sort of value-based arrangement – will lessen the burden on the American wallet.

Beneficiaries Want Lower Prices And They Want Them Now “We want lower prices for patients and we want that at the outset. These contracts don’t do that,” says David Mitchell of Patients for Affordable Drugs, a consumer advocacy group. “That’s why I don’t think there’s a lot of value for the patient at the moment. Take the deal between Amgen and Harvard Pilgrim for the cholesterol drug. If you land in the hospital with a cardiac event, then there’s a money-back guarantee. But at that point, it doesn’t do me a lot of good, does it?” Mitchell has a point. Insurers talk about contracts that can lower costs, but for the most part, insurers may use a price break to lower premiums. And a medicine that is the subject of an outcomes-based deal may yield a lower member cost share, since it’s been placed on a preferred tier. Even so, that’s not the same thing as a lower price. It’s simply too indirect for most people to appreciate. “It will take a long time to scale this and have a meaningful impact at the system level,” says PwC’s Anderson. “Valuebased deals are a component and not the silver bullet. On its own, it’s not really enough to address the pricing issue. But I don’t see it fading away, either, because the pressure to demonstrate value for a medicine is too great.” Indeed, earlier this year, the Trump administration drafted an executive order on health care that included a section on value-based arrangements and pharmaceuticals. The leaked version was vague and, so far, nothing has come of it. But it does suggest that policy-makers are eyeing the concept, even if it does little to nothing to convince Americans that drug prices will soon decline. “Right now, the playing field is not there,” says Moran, “and outcomes-based contracting is just a first crude step on the pricing journey.” IV005220 Comments: Email the editor: Nancy.Dvorin@Informa.com November 2017 | In Vivo | 5

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MARKET ACCESS: Value-Based Contracts ❚

❚ MARKET ACCESS: Digital Access

Digital Market Access: When Payment Models Change, So Will Digital Uptake BY ASHLEY YEO

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eroen Tas can reach back into experiences gleaned from two careers to analyze the state-of-play and needs of modern health care delivery systems. The Philips Healthcare chief innovation and strategy officer is addressing a large crowd at the UK King’s Fund charity, where hundreds have turned up at a Becton Dickinson & Co. -sponsored event on ideas that change health care – new takes on systems, technology and delivery as well as attitudes, inclusivity and equality. But chiefly AI, big data and how to develop and exploit the digital footprint. The financial services business is where Tas cut his teeth. “We created the infrastructure that allows you to pay with a card or a phone anywhere in the world. You’re authorized and it works,” he says. “Yet in health care, we don’t know anything.” The connected health care system goes beyond bricks and mortar to an information infrastructure where the technology is seen as ambient intelligence, and kept in the background as part of the routine environment. To understand the market access routes of the future is to understand that health care will be collaborative, based around outcomes and broader sets of issues including prediction, prevention and more investment in helping people maintain healthy behaviors (currently just 4% of spending on average). “Our job now is to craft a model of care provision that is interactive with patients and gives better outcomes for everyone,” says Tas. But because health care is not like a free market where providers compete for consumers’ favor, it may take a while for people to really get into this, he adds. Somewhat disappointingly, Tas doesn’t see it happening at scale, nor does he see the hard drive to get there. The system needs time to adjust, he says, but this 6 | In Vivo | January 2017

must happen so that health care can reap the benefits of cloud technology and accessing data that reveal the patterns that show the highest probability of an outcome – like biosensors that predict cardiac arrest 48 hours in advance based on event probability. Consumers freely use sophisticated household interfaces such as Siri (Apple), Alexa (Amazon) and Google Home, but again, in health care, the benefits are yet to be maximized.

Chronic Disease Burden Needs Different Type Of Solution And yet the case is clear. “Even the best health systems in the world are not equipped to deal with the requirements of the chronically ill and their complications,” Tas points out. “There is now more we can do to anticipate the needs of clinicians and health care staff as well as patients. Chronic disease is a 24/7 problem, yet in tackling that condition, and others, the system has not really changed fundamentally over the years. We still have a model of reimbursement that’s based around sick care,” he says. For medtech companies, this means that care is still being reimbursed around procedures – that is, for activity, Tas said in post-event comments to In Vivo. But how does that square with the continuous monitoring that some health care systems are now capable of? Tas proposes that with the ability to measure outcomes in real time, clinicians can compare population segments and understand better their patients and their specific needs, including people with multiple long-term conditions (LTCs). The findings show that GP and emergency care visits can be reduced and that health conditions do not deteriorate if more care is provided in the home setting, where patients naturally feel better. “We work with care providers and have examples

where we see costs go down by 20% to 35%,” says Tas. Building cases to show that it works requires segmenting patients in an RCT and measuring and comparing the outcomes a year later. Users will understand the benefits of predicting the impact on costs, and the system can start to be rolled out. The pharma sector also has a major interest in the ability to stratify populations and become more precise as to which patients receive therapies – and monitor their compliance – as these therapies in some cases can cost over $100,000.

Changing The Payment System – A Big Challenge The technology is proven, and the ballpark assumption is that 5% of the people represent 50% of the cost of the system. Those 5% can be identified, organized around and reimbursed for. But to get there, many elements of the system need to be reviewed and in some cases overhauled, including payments being made differently – on a per-patient basis, with reimbursement based on outcomes. “That’s a big change, but we need different approaches to help us move to a different model,” says Tas. He observes that some 2,000 key metrics are applied to ensure that reimbursement is based on quality concepts. But although valuebased care starts with – and revolves around – the patient, only 7% of the metrics are related to patient outcomes, and only 2% refer to patient-reported outcomes (PRO). This means we still have activity very much based around fee-for-service (FFS). “But flip the model and we can drive toward outcomes,” Tas explains. The value-based argument is ever more compelling. Access to data helps to create knowledge around care flows, patient stratification and achieving outcomes. For instance, digital pathology can be invivo.pharmamedtechbi.com

used to read tissue and identify the right therapy – at remote or separate locations. And in imaging and radiology, manual reports are becoming a thing of the past now that systems can apply deep learning to the images and distinguish between normal and not normal. In connected emergency care, Philips has done a project on high-risk stroke candidates in Sweden, looking at their complications, researching their backgrounds, so that if or when they need emergency care, CT scans are done rapidly and ahead of arrival in the stroke unit where the clinical staff are already primed with information about the patients. And in Alzheimer’s disease, Tas observes that good use of data may help identify the condition’s onset at up to 10 years before it becomes symptomatic, opening new doors to getting better understanding of what drives this disease. “It gives us a more quantified diagnosis. And combining precision diagnosis with digital pathology can make us amazingly precise.” As access to digital health care broadens, Philips see great potential in officebased labs in shopping malls, where cardiac surgeons, say, set up their own labs and take appointments from the passing trade, do scans and procedures, and track their patients with after care. Philips assists these doctor-entrepreneurs in operating the labs, which are basically outpatient centers owned by the surgeons. Monitoring patients remotely 24/7 has been an area of Philips expertise for several years already. Its remote eICU concept is established in the US and is now also being introduced in Europe. (Also see “Philips’ eICU telehealth system enters UK market” - Medtech Insight, July 3, 2013.) eICU means a single intensivist can look after 100 beds from behind a screen – and provide better outcomes across the patient group. System costs are lowered because key resources can be shared over a large number of beds. It helped US-based Emory Healthcare save $4.6 million in just 15 months. Meanwhile, screen- or phone-based consultations, overseen by small, remote teams, can allow for the monitoring of thousands of patients simultaneously. Remote consultations are done in a quarter of the time – which means a four-fold increase

JEROEN TAS

"We all agree that a lot of what controls health is around behaviors, and we need to address 'health'; if we continue to tweak 'sickness,' we’ll always be too late."

in consultation volumes and the chance for providers to bring in more income. Face-to-face appointments can be made on a needs basis, instead of the whole system being based on waiting and appointments. From the consumer’s point of view, this is a system ripe for disruption. Allowing remote consultations is one of many small steps that all need to be added together over time before digital health care can be said to have fully “arrived.”

US Leads By Example But it has arrived in some areas of the US, which is leading the charge. Kaiser Permanente, a payer and provider, believes the key to delivering better care is more preventive care. Banner Health, Intermountain Health Care Inc. and

Geisinger Health System are also employing digital solutions at scale. And major US employers are beginning to invest in health insurance systems that are themselves willing to invest in prevention. The result is reduced premiums, reduced costs and a healthier, more productive employee base. The US-based group CHIME (the College of Healthcare Information Management Executives) is doing a lot to drive value-based care concepts, Tas observes. CHIME is a professional association for health care CIOs in 48 countries, including the US. These are examples of the kind of momentum that will eventually drive full-scale change and uptake of digitally enabled care. It won’t happen overnight, but the incentives are clear, and were described in a January 2017 report drawn up by senior global medtech and health care officials as part of the World Economic Forum’s Value in Healthcare project, launched in June 2016. The two- to three-year, multi-stakeholder initiative, in collaboration with the Boston Consulting Group (BCG), focuses on identifying the obstacles that prevent health care systems from delivering better value and outcomes at lower cost. “There won’t be one model that works everywhere, “ says Tas. By way of example, in the UK, Philips is supporting two NHS Vanguards on new models of care delivery based around patient safety and patient outcomes. (Also see “Philips Healthcare Beats A Telehealth Pathway To The New Care Models” - Medtech Insight, March 15, 2016.) Here, as elsewhere, the broad aim is to integrate this “industrialized, more predictable way of delivering care” into more mainstream use. But it’s the personalization of such industrialized care that Philips sees as the winning concept as health care increasingly digitizes. Ultimately, patients have to take control of their own health and their health data, with appropriate guidance. In time, health care will shift from being providerled to patient-led, says Tas – but it won’t be tomorrow. He adds, “We all agree that a lot of what controls health is around behaviors, and we need to address ‘health’; if we continue to tweak ‘sickness,’ we’ll always be too late.” IV005205 January 2017 | In Vivo | 7

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MARKET ACCESS: Digital Access ❚

❚ MARKET ACCESS: Infographic

PRICING & REIMBURSEMENT A look at some of Informa Pharma Intelligence's recent research and analysis.

Forecast Medicare and Medicaid share of spending on prescription drugs 2015–25 (%) 35 30 25 20 15 10 5

29%

9.8%

32%

2015

34.6%

2020 ■ Medicare

The PBM formulary fight

80%

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10%

10.1%

2025 ■ Medicaid

Formulary exclusion

of the US commercial insured population’s access to prescription drugs is controlled by 3 PBMs: ESRX, CVS and UHC

The number of products excluded from CVS Health Formulary in 2012

Listing and placement in a tiered formulary system is critical to market success

The number of products excluded from CVS Health Formulary in 2017

8 | In Vivo | November 2017

155

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0.3% of Express Scripts members had annual Rx costs greater than $50k in 2016, a 35% increase from 2014

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MARKET ACCESS: Infographic â?&#x161;

ESRX members with 2016 RX spend of $50k or more, by disease

25.6%

18.3%

(Rx $50k +)

11.6%

10.6%

(Rx $50k +)

Oncology

Multiple Sclerosis

(Rx $50k +)

Inflammatory

Hepatitis C

Health plan interest in outcomes-based contracts with manufacturers Percentage of plans expressing high interest in these disease areas 40 35 30 25 20 15 10

40%

33%

20%

28%

Hepatitis C

Oncology

18% Hemophilia

18%

15%

IBD

HIV

0% Gayle Rembold Furbert

SOURCES: In Vivo research; Datamonitor Healthcare

ÂŠ2017 Informa Business Information, Inc., an Informa company

November 2017 | In Vivo | 9

❚ MARKET ACCESS: Orphan Drugs

Orphan Drug Pricing And Reimbursement: The drug industry and patient advocacy groups have been leery about the imposition of price controls or restrictions on reimbursement for drugs that treat orphan diseases. A review of formulary data from the beginning of the century shows that there has been some pushback from payers about these high-priced drugs, but patient access has not been severely hampered to date.

BY JOSHUA COHEN Increased numbers of orphan approvals coupled with rising prices have led to greater payer sensitivity about reimbursement.

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High prices – such as the $1 million tag on now-defunct Glybera – could affect patient access, either by complete non-coverage or when cost-sharing rises to an unaffordable level for patients. So what? The decision to reimburse a million-dollar drug will depend on the drug’s value and not its price alone. Value can be measured in different ways, including cost-effectiveness, treatment of an unmet need, burden of illness and the degree of rarity of the condition being treated.

10 | In Vivo | November 2017

n 1983, the US government passed the Orphan Drug Act (ODA), which fosters development of treatments for rare diseases affecting fewer than 200,000 individuals. Available through the act are special research grants, a 50% tax credit on clinical trial costs, shorter Food and Drug Administration (FDA) approval times and a guaranteed seven years of patent exclusivity. In terms of spurring orphan drug development, the ODA has been an unequivocal success. In the decade prior to 1983 only 34 orphan drugs were licensed, whereas since 1983 the Food and Drug Administration (FDA) has approved over 500 orphan products. These have been developed and launched across numerous rare diseases, particularly in therapeutic areas with considerable unmet need (few or no treatment alternatives). Included, among others, are many different cancers, cystic fibrosis, Fabry disease, hemophilia A, lysosomal storage disorders, muscular dystrophy, Pompe disease and hereditary angioedema. Exhibit 1 shows a breakdown of the 521 approved orphan indications in the US by disease category for the 1983–2015 period.

Rising Orphan Drug Prices: Is There An Inflection Point For Payers? Given the relatively high cost of many orphan drugs and biologics, payers play a key role in facilitating patient access. Payer sensitivity to the cost of orphan drugs is rising, particularly in light of increased numbers of launches of new products in recent years. This implies more payer scrutiny prior to reimbursement. In short, regulatory approval is generally a necessary, but not a sufficient condition for reimbursement or patient access. The median prices at market entry of orphan drugs for chronic use have doubled every five years. Additionally, in the spate of two decades we have seen price tags for the most costly orphans go from $200,000 per patient per year (e.g., Cerezyme [imiglucerase], which invivo.pharmamedtechbi.com

Shutterstock: Fabio Berti

Challenges To Patient Access

treats Gaucher’s disease), to a half-million dollars (e.g., Alexion Pharmaceuticals Inc.’s Soliris [eculizumab], which treats paroxysmal nocturnal hemoglobinuria), to over $1 million (e.g., uniQure NV’s Glybera [alipogene tiparvovec], for lipoprotein lipase deficiency). Furthermore, of the top-selling 100 drugs in the US in 2016, the average cost per patient per year for an orphan was $140,443, compared with $27,756 for an average non-orphan. Express Scripts Holding Co., one of the country’s leading pharmacy benefit managers, analyzed the prices of orphan drugs on its formulary. Four orphans were priced at more than $70,000 for a 30-day supply, or $840,000 annually. An additional 29 orphan drugs were listed for at least $28,000 for a 30-day supply, or more than $336,000 a year. The higher orphan drug prices rise, the more payers indicate there may be a breaking point above which prices become too much to handle. Nonetheless, in spite of the rhetoric, payers have generally reimbursed even the priciest treatments, albeit with increasingly more restrictions. Asking whether there is an inflection point with respect to orphan drug prices may be the wrong question. Surely, the decision to reimburse a million-dollar drug will depend on the drug’s value and not its price alone. Value can be measured in different ways, including cost-effectiveness, treatment of an unmet need, burden of illness and the degree of rarity of the condition being treated. And, for a payer, an important consideration is budget impact or the number of patients being prescribed the drug times the price per patient. The budget impact of many of the priciest orphan drugs tends to be limited given the very small numbers of patients who are prescribed the drugs, particularly if one looks at it from an individual payer’s perspective. Other less expensive orphan products, however, have far more budgetary impact, due to larger numbers of patients. Novartis AG’s Gleevec (imatinib mesylate), for example, has multiple indications including chronic myeloid leukemia and gastrointestinal stromal tumors, among others, and Roche’s Rituxan (rituximab) targets non-Hodgkin’s lymphoma and rheumatoid arthritis, among other diseases.

The budget impact of many of the priciest orphan drugs tends to be limited given the very small numbers of patients who are prescribed the drugs, particularly if one looks at it from an individual payer’s perspective.

The media, public (patients), policymakers, payers and health care providers have all voiced concerns about the rise in orphan drug prices, and in particular the high prices of orphan products that are not considered novel; for instance, nonorphan generics used for one indication but prescribed off-label for a rare disease. Such generics can be transformed into profit-makers with much higher prices than those applied to the generics, should the sponsoring firm go through the approval process and obtain a supplemental orphan indication. It should be emphasized, however, that the majority of recently approved orphan products are novel entities – NMEs or biologics – and so this is where our focus is. Without health insurance, the high prices of many orphan drugs would severely limit access to them as only a small number of patients can pay the list prices. Without access, the original intent of the ODA – to expand access – is undermined. Accordingly, the federal government’s General Accounting Office will soon investigate orphan drug pricing. (Also see “Orphan Drug Act: Congressional, FDA, NORD Reviews Come Amid Pricing Debate” - Pink Sheet, March 7, 2017.) The government’s investigation will shine an unwelcome spotlight on pricing practices. However, if history is an indicator, drug companies will continue to price drugs in accordance with what the market will bear, and the government is unlikely to step in and halt price increases. In the absence of price controls, downward pricing pressure will come from more market competition as more orphans are entering already existing therapeutic classes (e.g., non-small cell lung cancer, chronic myeloid leukemia, hereditary angioedema). And, there are a growing number of small-molecule generics as well as large-molecule biosimilars in the orphan space.

Payers Respond To Rising Orphan Drug Costs Previous studies have shown that insured patients in the US face relatively few outright denials of access to orphan drugs. Payers cover the bulk of the costs of orphan drugs for insured patients, with many drug companies operating patient assistance programs to help offset November 2017 | In Vivo | 11

invivo.pharmaintelligence.informa.com

MARKET ACCESS: Orphan Drugs ❚

❚ MARKET ACCESS: Orphan Drugs Exhibit 1

Approved US Orphan Indications, 1983–2015

Oncology

150

Other

Neurology

Metabolism

Hematology Cardiovascular/ Respiratory

Endocrinology

Poisoning/Overdose

Ophthamology

Infectious/Immunology

Gastrointestinal

Note: N=521

invivo.pharmaintelligence.informa.com

SOURCE: Giannuzzi et al. Orphan medical products in Europe and the United States to cover needs of patients with rare diseases: an increased common effort is to be foreseen. Orphanet J Rare Dis 2017;12(1):64

a portion of the costs for uninsured or underinsured patients. But, as payers feel the cost pressure of more patients being prescribed costlier orphan drugs, they may ask people to pay more out of pocket or place other restrictions on access. In a forthcoming study to be published in Expert Opinion on Orphan Drugs, we examined patient access to orphan drugs approved between 2000 and 2016 in the US. To assess patient access, we identified regulatory approvals of orphan drugs in the US during that period. To investigate coverage we reviewed formulary data from 20 leading commercial insurers in the US. Most payers employ the following four-tier structure in their formularies, in which the higher the tier the higher the patient cost-sharing: • Tier 1: generic drugs • Tier 2: preferred brand-name drugs • Tier 3: non-preferred brand-name drugs 12 | In Vivo | November 2017

• Tier 4 (“specialty tier”) for so-called specialty drugs: specialty drugs are defined by the Centers for Medicare and Medicaid Services as therapeutic agents costing more than $600 per patient per month. In addition to coverage decisions and tiered formularies, payers can influence orphan drug utilization by employing management tools such as prior authorization, quantity limits and step therapy. Prior authorization requirements create an administrative barrier to accessing an orphan drug’s on- or off-label uses. A patient or health care provider must request coverage of the drug and then await the payer’s approval of coverage. Step therapy establishes a sequential course of recommended treatments for a disease in which a less costly drug (likely a non-orphan) must be tried before coverage of the newer, more costly drug is approved. Quantity limits set explicit criteria for the quantity of a drug that will be covered during a given period of time. Between 2000 and 2016, 138 novel

orphans (new molecular entities and biologics) were approved. Seventy-three percent of orphan approvals are outpatient (self-administered) drugs that fall under the pharmacy benefit, and 27% are physician-administered that are included in the medical benefit. Outpatient drugs are generally subject to more intensive formulary management than physicianadministered drugs. Only a small number of orphan drugs (5) are not covered by any payer. And, more than one-third of the orphan approvals (46) are covered by all payers. The median payer covers 93% of orphan approvals. (See Exhibit 2.) The percentage of orphan drugs in the lowest patient co-payment tiers is 30%. All products in the lowest co-payment tier are generic. Seventy percent of the orphan approvals are either in the highest specialty (co-insurance or percentage of the cost of the medicine to the payer) or highest co-payment (fixed amount per prescription) tier. Overall, about 50% of all orphan approvals were assigned invivo.pharmamedtechbi.com

Exhibit 2

Comparing Results From Orphan Drug Formulary Analyses

Orphan Drug Formulary Analyses

Faden and Huskamp (2010)

Cohen and Felix (2014)

Cohen and Awatin (forthcoming)

% OF DRUGS COVERED*

95%

93%

% OF DRUGS IN EITHER SPECIALTY TIER OR TIER 3**

65%

70%

75%

STUDY

% OF DRUGS TAGGED WITH PRIOR AUTHORIZATION

40%

45%

% OF DRUGS TAGGED WITH QUANTITY LIMITS

10%

12%

15%

% OF DRUGS TAGGED WITH STEP THERAPY

Cohen JP, Felix A. Are payers treating orphan drugs differently? J Market Access Health Policy 2014;2:1–5. Cohen JP, Awatin J. Barriers to patient access to orphan drugs. Expert Opinion on Orphan Drugs [forthcoming].

*Refers to median payer; **Specialty tier refers to highest patient cost-sharing tier (co-insurance or percentage of the cost of a medicine), whereas tier 3 refers to non-preferred drugs (highest co-payment or fixed amount per prescription). SOURCE: In Vivo research

Exhibit 3

Orphan Drug Expenditures As Percentage Of Total Prescription Drug Spending, 2007-2018 10

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

% of Total Rx Spending SOURCE: Divino V, DeKoven M, Kleinrock M, et al. Orphan drug expenditures in the United States: a historical and prospective analysis, 2007–2018. Health Affairs 2016;35(9):1588–1594

co-insurance tiers. Given the relatively high per-patient costs of orphan drugs, co-insurance constitutes a greater outof-pocket cost burden to patients than co-payments. Depending on the payer,

the levels of co-payment tiers range from $50 to $90, and the levels of co-insurance tiers range from 15% to 30%. There is moderate use of prior authorization for orphan drugs. The median

Faden L, Huskamp H. Medicare Part D coverage and reimbursement of orphan drugs. In: Rare Diseases and Orphan Products: Accelerating Research and Development. Field M, Boat T, editors. Institute of Medicine Committee on Accelerating Rare Diseases Research and Orphan Product Development. Washington, DC: National Academies Press, 2010.

payer tags 45% of orphans with prior authorization. This represents much higher use of prior authorization than for nonorphan drugs. There is limited use of quantity limits. The median payer assigns quantity limits to 15% of orphans. This represents higher use of quantity limits than for non-orphan drugs. Notably, none of the payers use step therapy as a utilization management tool for orphan drugs. That we observed no use of step therapy suggests possible pushback in recent years by patient advocates and others who consider this particular condition of reimbursement as especially restrictive. We presume a higher payer coverage rate improves patient access, whereas a higher use of conditions of reimbursement and/or a higher tier placement rate pose barriers to access. There have only been a few similarly comprehensive studies of coverage and reimbursement of orphan drugs. (See box.) Though non-coverage of orphan drugs is still uncommon, coverage denials have increased substantially in recent years; • Patient cost-sharing has gone up with most orphan drugs occupying the highest patient cost-share tier, the exception being generic drugs; • Use of prior authorization has increased significantly; November 2017 | In Vivo | 13

invivo.pharmaintelligence.informa.com

MARKET ACCESS: Orphan Drugs ❚

❚ MARKET ACCESS: Orphan Drugs

invivo.pharmaintelligence.informa.com

• Use of quantity limits is up slightly, but still limited; • Use of step therapy is lower and is in fact non-existent for this set of orphan drugs.

Concerns that

Payer Policies Misguided?

growth in orphan

Ten years ago the conventional wisdom among policy-makers was that because orphan drugs target small populations their impact on the pharmacy budget was limited. It was thought therefore that payers would not subject orphans to the same kind of scrutiny as they do non-orphan drugs. Payers may now be looking at orphans somewhat differently in light of more approvals and a trend toward higher per-unit prices. As noted, we see signs of increased numbers of payer restrictions on coverage, which have resulted in some outright formulary exclusions and widespread imposition of conditions of reimbursement, such as prior authorization and quantity limits. There is also a trend toward higher patient cost-sharing. In this context, payers have continued the shift from fixed co-payments per prescription to “co-insurance” for most novel orphan drugs, which has raised patient cost-sharing considerably. Generally, the per-patient costs of orphan drugs exceed those of non-orphan drugs. This often implies relatively inferior cost-effectiveness estimates for most orphan drugs. This could explain the trend toward more restrictions on reimbursement. It is unknown, however, precisely how payers are reaching their decisions to apply more restrictive formulary management for orphans. If the decision criteria emphasize cost-effectiveness at the expense of other criteria, payers may want to reconsider. This is particularly relevant given the growth in orphan drug expenditures is expected to slow. (See Exhibit 3.) Moreover, the overall impact of orphan drugs on each individual payer’s drug budget is still relatively small. Concerns that growth in orphan drug expenditures may lead to unsustainable drug disbursements do not appear to be justified. Specifically, when payers examine orphan product characteristics to support reimbursement decisions, the criteria ought to go well beyond cost-effectiveness given that orphan drugs offer distinctive value, measured in terms of their: 14 | In Vivo | November 2017

drug expenditures may lead to unsustainable drug disbursements do not appear to be justified.

• Targeting rare and relatively severe diseases (e.g., high burden of illness); • Addressing unmet need (e.g., relative lack of availability of treatment alternatives for most orphan products). While more intensive orphan drug formulary management may appear to be a rational means toward cost containment, one should not ignore that availability and access to certain orphan medicines are important to reduce morbidity and mortality of many rare diseases. For instance, until the recent availability of pirfenidone, a lung transplant was the only treatment option for patients with idiopathic pulmonary fibrosis, a rare disease with a 50% chance of survival at three years.

prices have led to greater payer sensitivity with respect to reimbursement. High prices may impede patient access, either when a drug is not covered (and the patient must pay in full) or when costsharing rises to an unaffordable level. Almost all single-source orphan drugs occupy the highest patient cost-share tier (co-insurance). There is also a trend toward more restrictions imposed by payers on orphan drug reimbursement, such as prior authorization and quantity limits. Nevertheless, growth in US orphan drug spending is expected to plateau. In this respect, the discussion of whether an inflection point is reached when prices go above a certain point may be a red herring. Besides cost-effectiveness and budget impact, payer considerations should include the value of orphan drugs, measured in terms of the nature of the disease being targeted (burden of illness, degree of rarity) and whether the drug adequately addresses an unmet need. Assessing the value of drugs for rare diseases that affect a handful of patients is no easy feat. The Institute for Clinical and Economic Review is working on an approach that could be used as a starting point for discussions between payers and manufacturers over pricing. The approach will adapt ICER’s current value framework to suit the unique circumstances around orphan products. Because orphan drugs often have higher prices than non-orphans, they usually would not meet commonly accepted costeffectiveness thresholds that are used in valuing other drugs. (Also see “Orphan Drug Pricing Heading To Negotiating Table in US?” - Pink Sheet, June 5, 2017.) In the case of Glybera – the $1 million orphan – clearly the drug’s value was insufficient as demand floundered leading to a marketing withdrawal. Other very expensive orphans, such as Soliris, have met unmet need and therefore succeeded as high-value products.

Take-home Messages

IV005214

The Orphan Drug Act of 1983 has successfully induced development of hundreds of orphan disease treatments, although its future is somewhat uncertain because the orphan drug tax credit would be eliminated under the GOP’s tax reform plan. To date, increased numbers of orphan approvals coupled with rising per-unit

Joshua Cohen, PhD (Joshua.Parsons.Cohen@gmail.com), is a health care analyst with expertise in prescription drug pricing and reimbursement policy, patient access to biopharmaceuticals, comparative effectiveness research and prescription-to-OTC switching. invivo.pharmamedtechbi.com

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❚ MARKET ACCESS: Medtech Strategies

Options For Medtechs In A Value-Based Care World

Shutterstock: Tatiana Popova

Driven by increasingly costconscious payers, health care is shifting from a volume-based model to “value-based care,” now the latest buzzword. In response, the medical device industry has started employing new commercial strategies.

BY HARRY LIU AND BRAHADEESH CHANDRASEKARAN Medtronic recently inked a value-based contract with Aetna. If patients switch from multiple daily insulin injections to Medtronic’s insulin pump and outcome targets are not met, Medtronic will rebate Aetna.

invivo.pharmaintelligence.informa.com

On the surface, this type of agreement suggests that the device industry is entering an era of new commercial and reimbursement models. Or is this partnership an outlier? In either case, how should device companies adapt? So what? Market access + quality care + affordability is now the ubiquitous equation that health care solutions providers are seeking to calculate and leverage. For them, crucially, it is now a case of where do they fit and what options do they have if – or rather when – value-based care gains momentum? 16 | In Vivo | November 2017

lmost everyone has a definition of value and it’s not likely that all definitions will be the same. To the question “What is value?” we would argue that it is the perceived worth of a product or service relative to the cost of purchasing that product or service. The sources of value often vary across different clients. We cannot over-emphasize the importance of health care providers in product commercialization. The extent of a medical technology’s diffusion depends on the value it can generate for providers by reducing procedure time, enhancing one’s reputation and patient or procedure volume, improving operational efficiency and boosting the bottom line. (See Exhibit 1.) A hospital might wish to adopt a technology if it increases procedure throughput, operating room utilization and stature among referring physicians and patients. The sources of value for payers are different, and coverage determination by payers can make or break a product’s commercialization strategy. In the constant, unenviable tension payers face between ensuring patient access to advanced technologies and their fiduciary obligation to contain ever-expanding health care costs, any viable commercialization strategy must focus on the two sources of value for payers: clinical outcome improvement and cost reduction. Payers perceive little value in costly innovations that improve patient outcomes only marginally. Private payers even differ from public payers in how they define value. Private payers focus more on the bottom line and public payers focus more on value from a societal perspective. The latter is frequently measured by quality-adjusted life years (QALY), an outcome that may make no economic sense to a private payer. If patients or providers really want a technology, payers may cover it, but only when patients or providers have the option to switch payers. invivo.pharmamedtechbi.com

Acceptance by patients depends on whether a technology appeals to patients’ values: better patient usability and improved clinical outcomes. Patients may not see value in a product feature that helps providers but does not improve usability or clinical outcomes for themselves. Yet experience tells us that patients have little influence on medical care decisions, which are often made by providers or payers, unless a consumer product is involved.

Solution-Based Commercial Models Are The Future He who has the gold makes the rules: it is payers that drive the emergence of new commercial models. Device manufacturers have responded by offering solutions rather than just products. For example, when the Medicare program in the US implemented bundled payment models for total knee and hip replacements (TKR and THR), some manufacturers began offering implantrelated services to help hospitals manage bundled payment risk and meet quality targets such as complication and hospital readmission rates. In the process of adapting to the new payment environment, two types of solutions emerge: provider-oriented solutions and payer-oriented solutions. Provider-Oriented Solutions Facing the new payment models imposed by payers, providers are under pressure to control costs, meet quality targets,

negotiate adequate payments, improve operating efficiency, maintain and raise their reputations, and increase patient volume. So solutions designed to help providers must address at least one of these imperatives. Responding to the emerging needs of providers, many device companies started offering add-on services that may not tie to a specific product or device, such as patient engagement tools, data analytics and consulting services. (See Exhibit 2.) For example, Stryker Corp., a company with annual sales in 2016 of $11.3 billion (39% in orthopedic products), recently acquired consultancies in orthopedics and now offers Performance Solutions. This service targets physicians and hospitals and helps them succeed under new payment models through data analytics, care delivery standardization, quality improvement and profitability maximization. Johnson & Johnson, which has an annual revenue of $25.1 billion in its medical device segment in 2016 (37% in orthopedics), started offering its CareAdvantage program in early 2017, which helps providers develop care pathways in multiple therapeutic areas, engage patients, and improve the operational efficiency of operating rooms and the supply chain. (Also see “J&J Ups The Tempo In The March Toward Value-based Health Care” - In Vivo, February 2017.) Another heavyweight in orthopedics, Zimmer Biomet Holdings Inc., with a

revenue of $7.7 billion in 2016, provides similar services, called Signature Solutions, but with an emphasis on patient engagement and education. Another potential solution integrates services with devices. For example, the Cath Lab Management Services offered by Medtronic PLC currently serve nearly 140 hospitals worldwide. The services help hospitals manage cardiovascular suites, such as by providing medical technology and infrastructure; managing inventory, scheduling and operating room turnover; and developing care pathways. One key feature of the program is that it operates independently from Medtronic’s cardiology device division: the catheter labs under management do not necessarily use Medtronic’s products. Smith & Nephew PLC’s Syncera program is another example of integration of products and services, utilizing a low-cost model that operates under a separate brand name. The program offers to cost-conscious hospitals two clinically established implant devices – Genesis II Total Knee System and Synergy & Reflection Total Hip System – at cheaper prices. To lower costs, Syncera provides a package of services tied to the implants – helping hospitals set up infrastructure, evaluating inventory needs, connecting the system to an automated supply chain, training hospital staff and offering continuous technical support – rather than keeping a sales representative in the operating room.

Exhibit 1

Sources Of Value For Various Stakeholders

• Improved clinical outcomes

• Reduced procedure time • Improved reputation • Increased patient volume • Increased bottom line • Reduced financial risk

PAYER Coverage Determination

• Improved usability

PROVIDER Technology Adoption

Technology Acceptance

PATIENT

• Improved patient outcomes • Controlled health care cost • Increased bottom line • Reduced financial risk

November 2017 | In Vivo | 17

invivo.pharmaintelligence.informa.com

MARKET ACCESS: Medtech Strategies ❚

❚ MARKET ACCESS: Medtech Strategies Exhibit 2

Examples Of Provider-Oriented Solutions Risk Sharing Arrangements:

Add-on Services: • Johnson & Johnson’s CareAdvantage

• Bruins Biometrics’ SEM • Medtronic’s TYRX

Device Products

• Zimmer Biomet’s Signature Solutions • Stryker’s Performance Solutions

Connected Health Solutions: • Medtronic/Samsung Initiative

Product Service Integration:

• Philips’ HealthSuite Digital Platform

• Medtronic’s Cath Lab Management Services

• Verily/3M Data Platform

• Smith & Nephew’s Syncera

invivo.pharmaintelligence.informa.com

SOURCES: Rand Corp.; Frost & Sullivan

Risk sharing is a prime example of value-based care. The payments to device companies are tied to patient outcomes. Bruin Biometrics LLC, a start-up company, produces a hand-held wireless scanner that detects sub-epidermal moisture (SEM) to assess tissue damage and helps caregivers or providers prevent the formation of pressure ulcers. The company has already signed risk-sharing agreements with providers in the UK. And given that Medicare does not pay for “never events” such as Stage 3 and 4 pressure ulcers, Bruin is eager to secure FDA approval and enter the US market. Using similar arrangements, Medtronic is seeing rapid growth in its TYRX technology, a bioabsorbable antibacterial envelope that can be used for cardiac implants or implantable neurostimulators. As of June 2017, 325 hospitals had adopted the technology and signed risk-sharing agreements with Medtronic. Provider-oriented solutions also include digital platforms that connect consumer data, biometrics, imaging studies and medical records, which offer a range of capabilities for providers to manage their patient populations, implement interventions and monitor progress. These solutions can be implemented for various health care providers. The most ambitious of these efforts is Philips Healthcare’s HealthSuite Digital Platform. It aims to build an open, cloudbased digital ecosystem to encompass various sources of patient information, 18 | In Vivo | November 2017

alert providers to abnormal patient health status, facilitate interactions between patients and providers and among providers, and inform and guide managers in organizational and financial decisions. (Also see “Philips Targets Bolt-On Deals That Meet Demand At The Point Of Care” - In Vivo, September 2017.) In 2015, Philips and Netherlands-based Radboud University Nijmegen Medical Centre collaborated to develop applications linked to the online community of type 2 diabetic patients. In 2016, Philips and Christus Health unveiled population health management initiatives to address the challenges associated with alternative payment models and improve patient population health. Other players also have connected health solutions initiatives. Medtronic and Samsung Electronics Co. Ltd. collaborate to develop applications for diabetes management and chronic pain management. Google’s Verily Life Sciences LLC formed a joint venture with 3M Co. to develop population health management technology. Payer-Oriented Solutions Solutions have also been developed for payers to help them control health care costs, improve patient outcomes and reduce financial risk. (See Exhibit 3.) Depending on the scope and focus, these solutions can be device-centric, diseasecentric or patient-centric. An example of a device-centric solution is the value-based

contract between Medtronic and Aetna Inc. on Medtronic’s insulin pump. The final amount paid to Medtronic will depend on clinical outcomes of target diabetic patients. This type of solution involves use of a specific device. (Also see “Medtronic’s Deal With Aetna Heralds New Value-Based Era” - In Vivo, September 2017.) Back in 2015, Medtronic bought Diabeter, a Netherlands-based diabetes clinic and research center, to expand its capabilities in diabetes management, blurring the lines between device companies and providers. Such a move is a good example of manufacturer and provider integration. Medtronic’s new-found capability allows it to approach a payer and say, “Look, we have this new solution. We can manage your diabetic patients and you can pay us if these patients achieve pre-specified clinical outcomes.” According to Medtronic’s senior management, the company is planning to offer a solution for type 1 diabetic patients by the end of this year in the Texas area. Elsewhere, Verily Life Sciences and pharma company Sanofi are building a diabetes management platform that could potentially be offered as a diabetes solution to payers. The greatest success story related to integrating a device company with providers is Fresenius Medical Care AG & Co. KGAA, which provides dialysis care for patients with end-stage renal diseases (ESRD); its initiative is essentially a disease-centric solution to Medicare. In 1996, long before the term, “valueinvivo.pharmamedtechbi.com

based care,” was coined, Fresenius USA Inc. merged with National Medical Care’s North American dialysis businesses and formed the largest dialysis service provider and renal products manufacturer in the US. The company has had a spectacular run for more than 20 years and has created tremendous financial returns for shareholders. Fresenius is also a pioneer in patientcentric solutions: as one of the 37 ESRD Seamless Care Organizations (ESCO, one type of accountable care organization) approved by the Medicare program, Fresenius is held accountable for the clinical and financial outcomes of all Medicare ESRD beneficiaries enrolled in its ESCO. This is patient-centric care, including services not related to renal replacement therapy. Digital platforms such as Philips’ HealthSuite, if leveraged by providers, could potentially be another form of patient-centric solution for payers. Lastly, an intriguing question is, “Can device companies be integrated with a payer in the future?” Although such a move seems inconceivable at present, we’re closer to that model than we think. Fresenius’ ESCO is prototypical of such a solution. The company is subject to financial risk associated with medical care but managing such risks is what payers do. The ability to take on financial risk at the patient level would enable a device company to become an insurer.

What Options Are Available And How Should Companies Choose? A number of value-based solutions are feasible in a value-based care world, but the key is to ensure that the adopted solution enhances the economics of a company’s core competencies. If no value-based models can serve this purpose, it is not worth pursuing them in the first place. But if that is not the case, two questions arise. • Whose value are we talking about? If companies are not able to please patients, providers and payers at the same time, they must identify the major barrier to successful commercialization and then laser focus on that barrier. Identifying the major barrier determines whether companies should use a provider-oriented solution or a payer-oriented solution.

Exhibit 3

Examples Of Payer-Oriented Solutions Device-Centric Solutions: • Medtronic/Aetna Insulin Pump Value-Based Contract Disease-Centric Solutions: Manufacturer/ Provider Integration/Collaboration • Medtronic’s Type 1 Diabetes Solution • Verily/Sanofi Diabetes Management Platform • Fresenius Medicare Care Patient-Centric Solutions: Manufacturer/Provider Integration • Fresenius Medical Care’s ESCO • Philips’ HealthSuite Digital Platform • Verily/3M Data Platform • Verily/NHS Early Intervention Program Device Company As Payer? • Fresenius Medical Care’s ESCO – A Prototype SOURCES: Rand Corp.; Frost & Sullivan

• How do you select a specific valuebased solution? We have identified two key determinants of such a choice: the scope of product offerings and the resources or capabilities available to a company. If we chart example solutions along these two dimensions, it becomes clear that because of their limited product portfolio, small companies do not have solutions in the upper left quadrant, large companies are mostly concentrated in the upper right and only large companies can offer payer-oriented solutions, given that they have more resources and better capabilities. (See Exhibit 4.) In other words, for companies with a single product and few resources, simple arrangements with providers may be more likely to succeed. Companies with resources and a range of products may be able to build diseasecentric or even patient-centric solutions or product-service integration to gain a competitive advantage. Take the example of Bruins Biometrics’ SEM risk-sharing arrangement. The product mainly helps providers because pressure ulcer prevention may not be reimbursed by payers. The outcome, pressure ulcers, can be easily measured and observed in a relatively short time-period. Bruins is a small start-up company and does not have resources to launch initiatives like add-on services, product service integration or manufacturer/provider

integration. A risk-sharing arrangement with nursing homes or hospitals would make economic sense. In contrast, a large company like Medtronic might enter risk-sharing arrangements with providers or payers as illustrated by its contract with Aetna on insulin pumps. Moreover, Medtronic has resources and capabilities to integrate with providers, and they can be offered to payers as a solution for type 1 diabetes patients. Philips’ HealthSuite Digital Platform offers a solution to providers and to payers if the company collaborates or integrates with providers. Value-based contracting and risk sharing are contracting tools that may be used in all solutions, although risk sharing is a solution in its own right. For example, Johnson & Johnson’s CareAdvantage program has a risk-sharing option for its Orthopedic Episode of Care component. Essentially, any contract tied to outcome or performance with providers or payers can be considered a value-based contract. Typically, value-based contracting with a payer requires a large scale to be economically viable due to high costs of implementing and monitoring a contract. In contrast, a value-based contract with a provider may be much smaller in terms of the amount of money at stake. Despite all the promising value-based commercial models, companies should November 2017 | In Vivo | 19

invivo.pharmaintelligence.informa.com

MARKET ACCESS: Medtech Strategies ❚

❚ MARKET ACCESS: Medtech Strategies Exhibit 4

Framework Of Solution Selection Product Scope

■ Provider Oriented ■ Payer Oriented

Product Set Covering Multiple Diseases or Body Systems

Disease or Body System Specific Product Set

Single Product

Digital Platform Medtronic’s Type 1 Diabetes Solution

Fresenius Medical Care’s Manufacturer and Provider Integration Bruin Biometrics’ SEM Risk Sharing Arrangement

Medtronic’s Cath Lab Management Services Medtronic/Aetna Insulin Pump ValueBased Contract

Start-up Company

Large Company Resource or Capability

SOURCES: Rand Corp.; Frost & Sullivan

be cautious in executing them, especially regarding integrating with providers. Vertical integration may not work as expected. Back in the early 1990s, pharmaceutical company Merck & Co. Inc. acquired Medco Containment Services Inc., a leading pharmacy benefit manager, for $6 billion. Sensing Merck must be on to something, several pharmaceutical companies followed suit. The results were not as expected, and most of these acquisitions failed; Merck spun off Medco in 2003 after an unsuccessful decadelong “marriage.” Nevertheless, Fresenius Medical Care has succeeded spectacularly. One reason may be that Fresenius gained a dominant position in the dialysis market. A cautious approach would be to pilot test on a small scale and expand after ironing out all the kinks.

Any viable commercialization strategy must focus on the two sources of value for payers: clinical outcome improvement and cost reduction.

invivo.pharmaintelligence.informa.com

The Value-Based Train Has Left The Station But There Is Still Time Despite the hype in recent years, valuebased care is still in its infancy. Most health care is still fee-for-service based. Medicare, for example, aims to spend 50% of its payments on alternative payment (non-fee-for-service) models and 90% of its payments will be linked to quality metrics by 2018. However, it remains to be seen, how much impact these 20 | In Vivo | November 2017

Johnson & Johnson’s CareAdvantage

Philips’HealthSuite

Fresenius Medical Care’s ESCO

are driven more by administration than by surgeons. However, the program is far from reaching its original goal, due mainly to the delay in implementing Medicare’s Comprehensive Care for Joint Replacement program. The company remains committed to Syncera, but it is currently fine-tuning the program to expand its scope. New value-based models are, in its words, “slowly emerging.” While payers are increasingly engaged in cost-cutting initiatives, a counterforce is at play: providers need to attract patients by offering state-of-the-art technologies. Value-based care may align the goals of various stakeholders and will stimulate new types of innovations that are value oriented. With value-based tools and commercial models available for deployment, device companies have the potential to become more innovative and grow a stronger market presence. IV005203

reforms will have on the device industry, given that the evidence for the effectiveness of these models is not robust. Consider the example of Smith & Nephew’s Syncera. The program was designed to target the 5% to 10% of hospitals whose decisions on implants

Harry H. Liu, PhD (hliu@rand.org), is a Practice Lead in Technology and Population Health, RAND Hea lth Advisory Services, RAND Corp. in Boston and Bra hadeesh Chandrasekaran (brahadeeshc@frost.com) is a Frost & Sullivan Industry Analyst based in India. invivo.pharmamedtechbi.com