Realizing the Value of FDA-Approved Therapies

FOREWORD

This paper examines actuarially equivalent benefit designs private payers can use to provide FDA-approved innovative therapies. We include all FDA-approved innovative therapies in our study regardless of chemical structure or mode of administration. This includes therapies administered as oral medicine, ointment, injections, infusions or inhalation. These therapies may be proteins or enzymes or other complex chemicals that may be manufactured through genetic alteration of yeast, bacteria or other organisms, or through other complex synthesis. Our analysis does not consider generic drugs, herbal therapies, devices or durable medical equipment.

Today's innovative therapies are the fruits of many recent scientific achievements and the industry is hopeful that during the next five years, additional innovative therapies will create improved treatments and enhance the quality of life for thousands of people.

New and improved medical treatments have a cost. This cost is often absorbed by the patient's health insurance program creating employer and payer concerns regarding potential rising costs. As a result, employers and other payers are concerned about increased healthcare costs. This paper considers the following questions:

• How much will innovative therapies add to costs for employers and their insurers?
• How will individuals' costs vary with coverage design?
• How can private payers use benefit designs to provide innovative therapies?

This study considers these questions with a time-line of only the next five years (2006-2011), because long term predictions regarding innovative therapy approvals are too uncertain. The authors believe that all parties interested and excited by the promise of 21st Century medicine will find this study useful and informative.

EXECUTIVE SUMMARY

Many seriously ill patients currently use innovative therapies as an essential part of their treatment. We expect Food and Drug Administration (FDA) approval of many new therapies over the next few years. In this document we use the term "innovative therapies" instead of "biotechnology products" because the latter is sometimes interpreted as applying to only injectable or infused drugs, while we include innovative therapies administered in any form. These therapies may be proteins or enzymes or other complex chemicals that may be manufactured through genetic alteration of yeast, bacteria or other organisms, or through other complex synthesis. Our analysis does not consider generic drugs, herbal therapies, devices or durable medical equipment.

Our study, funded by the Biotechnology Industry Organization (BIO), concludes that

• The costs of innovative therapies will generally not create a large cost burden relative to other costs for private healthcare payers by 2011.

• As employer and health plans struggle to control the cost of providing health care, benefit designs are moving towards limiting coverage for innovative therapies or requiring high cost sharing ("out-of-pocket" expenses) for these products.

• Private payers can generally make minor changes in their benefit designs that will assure the affordability of innovative therapies for their members.

Even though an innovative therapy can be more expensive than most current medicines, our projections suggest that, in aggregate, the costs of new innovative therapies will not create large cost burdens on the healthcare system by 2011.

In this report we focus on private commercial payers, which are usually associated with employer-based health insurance. We briefly discuss the impact of the Medicare Part D benefit structure on patient out-of-pocket costs for innovative therapies, but we do not specifically analyze the impact of innovative therapies on federal programs. We conclude that private commercial payers can expect an increase in total healthcare costs of a little over 1% due to new innovative therapies by 2011.

By 2011, the total cost for all innovative therapies (existing and new) will probably be about 6% of total private commercial payer costs. This compares to about 5% for 2006. Given the current, high annual rates of medical cost inflation, it will be hard for many payers to discern the cost increases directly related to innovative therapies.

However, we find that certain coverage and cost-sharing structures can push catastrophic costs onto individuals who require treatment with innovative therapies. Cost sharing refers to the portion of medical spending absorbed by the patient and not the insurer. For example, insurance coverage may specify that the patient will pay for 20% of certain prescription drugs.

Many of today's insurance coverage designs include a combination of copays, coinsurance and lifetime limits and were designed before FDA-approved innovative therapies were widely used. We expect that some benefit design modifications may be needed to accommodate these new therapies. The benefit modifications should be similar to previous benefit modifications that were used to adopt other new medical technologies. In addition, some of today's "consumer driven" designs can have features that can shift much of the costs of innovative therapies to the patient. Cost-neutral options exist, including redesigning benefit structures, for private payers to reduce the impact of the cost of innovative therapies.

We use the term "private commercial payer" or "payer" to refer to an employer providing health coverage or to some other non-employer plan sponsor such as a union or a Taft-Hartley group. These terms may also mean an insurance company or Health Maintenance Organization (HMO).