Realizing the Value of FDA-Approved Therapies

We estimate that new innovative therapies will add approximately $5.00 PMPM in new costs and continued growth of existing products will add approximately $4.80, totaling $9.80 PMPM. However, the $9.80 PMPM payer cost assumes relatively low cost sharing by the member. Given the trend toward increases in cost sharing, some portion of this $9.80 PMPM will likely be borne by patients. The new therapies will add approximately $14.5 billion dollars in expenses for the commercial population. Additional amounts will flow through Medicare, Medicaid and other programs, or will be implicit in hospital-based services. The elderly will likely incur a high portion of the cost of these therapies, because Medicare beneficiaries tend to have more significant medical needs. However, the age impact of innovative therapies will depend on the clinical effectiveness characteristics of yet to be developed therapies.

Many innovative therapies are already in use, and we expect an increase in utilization of these products. We estimate that the cost of existing innovative therapies will increase by about 35% from 2006 to 2011. This increase reflects both a continuation of drug price inflation along with increased use of existing innovative therapies.

We estimate total innovative therapy spending (all payers including Medicare and Medicaid) to reach above $100 billion by 2011, up from about $55 billion in 2005. The 2005 number represents about 3% of the projected 2005 national healthcare expenditure of over $2 trillion /3. We note that the high dollar sales projections appearing in stock market news items about particular firms may not consider the likelihood that some investigational products will not reach market.

The Challenge of Regressive Benefit Designs

"Regressive" /4 benefit designs require patients needing expensive care to bear a disproportionate amount of the cost. By contrast, most employers seek to attract employees by maintaining "Progressive" benefit designs that insulate very sick employees or their dependents from high costs. Innovative therapies have a cost and are often used to treat people with serious conditions. Providing progressive benefit designs that protect the individual from the costs of innovative therapies poses a challenge to underwriters, consultants, actuaries and human resource experts.

While the aggregate costs of innovative therapies seem manageable over the next several years, the cost to treat individuals with innovative therapies can be expensive. Many innovative therapies are expected to cost $20,000 per patient per year or more. This poses special issues for individuals because certain cost sharing mechanisms, such as unlimited member cost sharing or low annual benefit limits for prescriptions, could make innovative therapies unaffordable.

A typical prescription drug benefit might have the following structure:

1st Tier: Low cost sharing for generic drugs (typically, under $20 per filled prescription)

2nd Tier: Higher cost sharing for preferred brand drugs

3rd Tier: Highest cost sharing for innovative therapies and non-preferred brand drugs (subject to medical necessity review and approval)

The structure's goal is to provide financial incentives to encourage patients to use generic drugs and avoid higher-cost drugs. Depending on the details, this structure can be progressive or regressive.

High cost sharing for certain drugs creates a regressive structure because of the large out-of-pocket expense for a seriously ill patient. For example, the following prescription benefit structure poses a particular problem for patients requiring expensive innovative therapy:

1st Tier: $15 Copay (generics)

2nd Tier: $30 Copay (preferred brand)

3rd Tier: 25% Coinsurance (innovative therapies and non-preferred brands)

A patient that requires an $18,000 innovative therapy would pay 25% of $18,000, or $4,500, with the above benefit. This cost sharing amount is unaffordable for many patients. Depending on the details of their policy, members with seemingly generous insurance coverage can have large out-of-pocket obligations for medical costs including innovative therapies.

In an effort to control costs and offer lower-cost insurance, some payers offer coverage with unlimited member cost sharing, such as the 25% coinsurance for the 3rd tier, as in the above example. Another cost control technique with similar impact is to limit annual drug coverage to some amount such as $10,000.

Although we did not model the impact of innovative therapies on Medicare, we note that the Medicare Part D benefit provides significant coverage after reaching the 2007 annual patient out-of-pocket limit of $3,850 on all covered drugs. Low-income beneficiaries will receive a more generous benefit with less cost sharing. However, some infused or injectable therapies may be paid under the Part B benefit and subject to unlimited 20% coinsurance.

Benefit Solutions

Fortunately, benefit design can be altered to accommodate both the added cost of FDA-approved innovative therapies and the need to control cost. Benefit managers can make choices to control costs and provide valuable innovative therapies.

The following table compares the projected national average costs of selected benefits for 2011.