New Approach Needed to Finance Expensive Specialty Drugs

Report finds suppliers could spur investment through methods that include equipment leases or supplier-financed credit.

Stakeholders in specialty pharmacy may need to explore new approaches to finance the growing trend of high cost pharmaceuticals and vaccines, according to recent analysis by the RAND Corporation.

As other industries commonly encourage supplier investment through initiatives such as equipment leases or supplier-financed credit, the report notes that health systems should adopt similar methodology. For example, instead of paying for the cost of a treatment upfront, a health system could issue debt instruments structured as bonds, mortgages, or lines of credit with varying terms and interest rates to the manufacturer.

There is currently precedent in health care for these practices, such as when hospitals lease high priced equipment or when a supplier offers an arrangement to help finance the upfront cost.

"So it's not far-fetched for pharmaceutical companies to offer payers financial arrangements to ease some of the upfront costs," lead author and managing director of RAND Health Advisory Services Soeren Mattke said.

Spending on prescription drugs is estimated to increase in the retail space by $227 billion between 2010 and 2020, as the average cost of a specialty prescription grew 17%, to $2860, in 2013 as a result of increased utilization and more expensive products.

The factor playing the largest role in the anticipated spending growth is the increased use of prescription drugs by 32 million people projected to be newly insured by 2019. These individuals will be armed with more generous benefits that limit out-of-pocket spending.

Manufacturers have subsequently responded to the growing demand for specialty medications, which comprise more than 50% of the pharmaceutical pipeline. In 2013, specialty products accounted for 15 of the 27 novel new drugs approved by the FDA.

With breakthrough specialty therapies growing in prominence, new methods to pay for these drugs may be necessary, according to the report.

"Pharmaceutical companies are focusing on highly targeted medicines to treat rarer conditions and smaller numbers of patients," Mattke said.

In conditions such as hepatitis C in which a number of potential cures have emerged, companies must turn a profit from their research and development investment over a shorter period of time.

"In order to get to a blockbuster, drug companies may need to charge $100,000 per course of treatment and give a medication to 10,000 people," Mattke said. "In this scenario, you have a drug that is highly effective, a good value for the money, and yet you have payers saying that they cannot afford it because of the front-loaded nature of the cost."

For example, Sovaldi, with its highly publicized $1000-per pill cost, could potentially pay for itself within a decade in savings from decreased hospital stays and liver transplant costs.

"So stretch those payments over the time period in which the savings would materialize," Mattke noted.

These financial schemes do carry come hurdles, however, as companies need to show real-world outcomes that mirror clinical trial results in order to receive full payment. In cases where a treatment doesn’t live up to expectations, repayment would drop accordingly, the study indicated. In these instances, a neutral third party could design and evaluate the payment arrangement to determine the effectiveness of the drug on actual patients.

These arrangements could be ideal in countries with national health systems or with stable insurance coverage, but could be more problematic in the US system in which patients change health plans frequently.

"It's possible, in theory, in the United States if you have a transfer mechanism," Mattke said. "If I get cleared from hepatitis C from one insurer, the debt would have to travel with me to my next insurer."