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USC-Brookings Schaeffer on Health Policy

How hepatitis C is shining a light on critical gaps in payment reform

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This piece originally appeared in a February 2 Health Affairs blog post.


Since December 2013, regulatory approval of new treatments for hepatitis C have brought long simmering debates on drug pricing and value to full boil. The drugs – Gilead’s Sovaldi and successor combination treatment Harvoni, AbbVie’s Viekira Pak – represent significant steps forward for treatment in hepatitis C, demonstrating cure rates well above 90 percent in the clinical trial setting as well as greater tolerability for patients.

This unprecedented effectiveness, however, has come at a high cost, with treatment ranging from $63,000 for an eight-week course of Harvoni on the low end to above $150,000 for Sovaldi in combination with other products on the high end. This is likely to be representative of a wave of similar products coming through the drug development pipeline: highly-targeted, highly-effective, and highly-priced.

Also indicative of things to come are the steps some groups are taking to blunt the impact of increased spending on hepatitis C treatments, such as formulary adjustments or prioritized coverage for particular subsets of the hepatitis C patient community. Days after the U.S. Food and Drug Administration (FDA) approved AbbVie’s Viekira Pak in December 2014, for example, the largest pharmacy benefit management company in the United States, Express Scripts, announced that the drug regimen would be the only hepatitis C treatment on its preferred list of covered drugs. Express Scripts negotiated an undisclosed discount on the drug from AbbVie and agreed to expand access to the drug to all patients within their covered population – knocking Gilead’s Sovaldi and Harvoni off of their preferred coverage list in the process. A similar agreement between Gilead and CVS has since been announced. These types of arrangements – and the impacts they have on patient access and health spending – could become more common as high-cost drugs and medical products enter the market.

Still, there are additional means for addressing the challenges presented by high-cost, highly-effective treatments. In virtually all other aspects of health care, payment and delivery reforms are achieving a palpable shift away from volume and intensity toward patient-centered, higher value care. The ongoing debate surrounding hepatitis C treatments – and efforts like those of Express Scripts and CVS – shine a light on the relative absence of novel drug payment models in such overarching reforms. In this blog post, we consider alternative payment policies that could help to ensure that – despite their potentially high cost – breakthrough treatments are consistently delivering value to patients and that the health care system is addressing inefficiencies in the delivery and total costs of care.


Paying for Value and Outcomes


Alternative Provider Payment Models
Over the last several decades, payers and providers have taken significant steps to move coverage and reimbursement from fee-for-service (FFS) payments that incentivize higher volume and intensity to a focus on achieving better results and lower overall costs for patients. Such payment reforms have important implications for breakthrough treatments, as they allow treatment access while also ensuring care coordination and more efficient total spending.

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Bundled payments, for example, have been piloted in areas like oncology. Proposed models create a single, episode-based payment for certain components of cancer care, such as chemotherapy administration and office visits. Additionally, a care coordination fee in the form of a monthly payment could help oncologists receive reimbursements for services which are undervalued in FFS payments while also helping begin to delink the delivery of care from pharmaceutical pricing.

Expanded bundles or episodic payments could cover a broader range of services, including chemotherapy and supportive-care drugs themselves, providing even stronger incentives to reduce drug costs. Given the existing complex benefit design structures, these models are likely to only work for physician-administered drugs that are covered by medical benefits and are traditionally purchased by providers who are then reimbursed by payers after administration.

The payments are also tied to quality measures such as the use of guideline-based therapies and clinical pathways, to provide more transparency about quality and to enhance incentives to avoid undertreatment. Physicians who provide care with a total cost below the established bundle price, while still performing well on the quality metrics, would be paid more.

While these models do not directly act on the price of a novel treatment, they are designed to decrease overall costs by promoting greater care coordination, improved efficiency in supportive care and related costs, and less use of ineffective or low-value treatments through financial rewards tied to outcomes and overall cost. They are directed at provider behavior and are highly contingent on the care team’s efforts; indeed, many of these models are intended to promote more effective team-based care. While they have the potential to promote more effective use of breakthrough drugs, bundled payments may not adjust rapidly to changes in the cost of treatment.

Outcomes-Based Reimbursement
A further extension of payment reforms that shift from volume and intensity to value is tying payments for the treatment itself to outcomes or other measures of performance. Outcomes-based contracting, in which manufacturers share the risk of a treatment outcome, could help alleviate concerns that high-cost treatments actually lead to patient improvement or cures in practice. At their most basic, outcomes-based reimbursement agreements establish defined payment for defined outcomes: a manufacturer shares in the cost of failure in practice through larger rebates, discounts, or refunds if a product does not achieve the performance or outcomes goals agreed to by the payer.

These goals could include patient medication adherence, evidence-based prescribing, or clinical outcomes. The payer monitors drug performance using medical and pharmacy claims, potentially augmented by other tests or modes of data collection (such as patient-collected data or additional laboratory results). These arrangements are particularly attractive when there is lingering uncertainty about the effectiveness profile or value of a treatment in real-world settings; as the potential impact and cost of a treatment rise, so does the importance of addressing such gaps between premarket studies and actual practice.

Though not without precedent in the last decade, outcomes-based reimbursement mechanisms have been difficult to design and implement. The outcomes or performance goals established may not be easily characterized or measured, or may be influenced by factors completely outside the scope of a drug’s performance. The administrative burdens for data collection, contracting, and establishing an infrastructure capable of exchanging the clinical information necessary for payment have been high, as have the costs of setting up such a system. The incentives for providers to take part have sometimes been misaligned, driving prescribing patterns toward other products not included in the outcomes-based mechanism. Government price calculations (e.g., best price) can further complicate the financials of the arrangement.

Still, the idea is not without merit, especially when a breakthrough, potentially-curative product gains FDA approval. Hepatitis C drugs, for instance, could be prime examples of treatments that would make great use of these types of payment. With a relatively high price tag, short treatment duration (8 or 12 weeks), and a clearly-measurable outcome standard in sustained virologic response (SVR), the products would seem to avoid some obstacles to an outcomes-based payment model. Leveraging the growing integration and use of routinely collected electronic health data for real-world evidence development could further support efficient outcomes monitoring.

Further, while these types of contracts have been primarily driven by payers, new care delivery and risk-sharing models such as those seen in Accountable Care Organizations (ACOs) create stronger incentives for providers to work with manufacturers to increase effective use of a treatment, not just volume of treatment. Just as value-based payments may create “win-win” opportunities for payers and providers, they may also encourage win-win improvements in care management and adherence activities undertaken by payers and manufacturers.

Significant scientific and medical advancements over the last decade have led to truly game changing treatments and cures for some of our most life-threatening diseases – often with dramatically higher prices for innovator drugs that few can argue are sustainable in the long term. With many payment and delivery reforms already underway to substantially increase health care access and shift focus to achieving better outcomes at lower total costs, the question is no longer one of whether or not we should reform how biopharmaceutical products are financed and reimbursed, but rather one of how to design and implement these reforms in order to maximize impact for patients, increase value within the system, and safeguard further biomedical innovation.


Given the diversity of diseases and innovative treatments, no single approach will be appropriate for all settings. Individual patient or disease characteristics, the manner in which the treatment is administered, and the size of the population impacted are examples of factors that may influence which particular policy reforms may help. The options highlighted here are therefore not standalone solutions; providing breakthrough treatments will require a constellation of payment and policy efforts and a concerted collaboration on the part of all stakeholders to address the unique economic and innovation challenges within a diverse range of therapeutic areas.

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