Realizing the Value of FDA-Approved Therapies

We included 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. We did not include generic drugs, herbal therapies or durable medical equipment.

Estimated Future Spending on Innovative Therapy

Wall Street projections of U.S. sales of innovative therapies have often proved to be high; analysts tend to be bullish about the sector they cover. As with any growth industry, particular innovative therapies may have huge potential sales, but they might not even get FDA approval or may have much more limited application than hoped. We used projections of innovative therapy sales as one source for our estimates.

We reviewed the cost of individual innovative therapies from these projections and the diseases targeted by the therapy. Using medical opinion we estimated the portion of each that would be used for the commercial population. Dividing the projected 2011 commercial sales by the projected 2011 aggregate commercially insured population produces a per-capita cost for innovative therapy.

We compared the results produced for 2005 from the Wall Street projects to the results from our health claims database analysis. We adjusted the results slightly for the optimism inherent in Wall Street. We believe the resulting projected costs for 2011 are a somewhat more conservative projection of expected costs.

Estimated Future Medical Costs

We used Milliman's Health Cost Guidelines (HCGs) to estimate current medical costs for a typical employer population. The HCGs are an extensive claims cost database containing detailed average charge and utilization experience and fee schedules for roughly 60 benefit categories. The estimates presented by the HCGs include current innovative therapies in the market.

We applied annual trends, starting at 10% for 2006 declining to 7% for 2011, to the 2005 HCG figures to project per-capita costs to 2011 for total medical services excluding the innovative therapies described above. We assumed a similar trend in per-capita costs for prescription drugs.

Modeling Benefit Designs

The costs borne by individuals or insurers for any medical treatment depend not just on the price, but also on the benefit design. This section describes how we modeled different benefits.

A large number of innovative therapies are administered by a physician in the doctor's office or in a hospital outpatient setting. As such they have traditionally been covered under the hospital or medical portion of a typical private commercial payer's insurance policy. There is a trend towards moving these drugs to the pharmacy benefit so as to take advantage of the deep discounts typically offered by a pharmacy benefit manager or specialty pharmacy.

We created two baseline models from the HCGs to allow for the traditional as well as "carve out" benefit designs. The first model assumed that innovative therapies would continue to be covered as a medical expense. The second model assumed that all innovative therapies would become part of a three-tier pharmacy benefit with the innovative therapies covered under the 3rd tier and having the highest cost sharing.

After our 2011 cost models were developed, we then crafted "progressive" and "regressive" benefit designs that have the same expected PMPM claim costs and therefore would be considered actuarial equivalent from the payer point of view. The HCGs contain standard actuarial tools that we used to determine the impact of various levels and kinds of cost sharing.

We did not consider payer administrative costs in our projections.

APPENDIX

A comprehensive major medical plan provides coverage for inpatient and outpatient hospital care, physician care and other medical care such as radiology and laboratory. In the case of a comprehensive major medical plan, the total annual cost sharing will depend on the other services the patient uses. We show the drug cost sharing under various alternative plans for a person using a drug that costs $1,500 per month.