2017 was a watershed year, yielding approval and launch of the first of an anticipated wave of gene and genetically-engineered cell therapies. These innovative treatments hold the promise of a durable cure for a wide range of rare to more common conditions, from blindness and blood disorders to treatment of Alzheimer’s and hyperlipidemia. Along with the clinical innovation comes a hefty price tag. In May 2019, Zolgensma launched at $2.1 million for a one-time drug to gain the distinction as the most expensive drug ever.¹

But gene therapies create multiple financing challenges for U.S. health care payers beyond their price tag. Identifying and addressing these hurdles is critical to fostering an environment of sustainable coverage and reimbursement. Consistent with the introduction of disruptive technologies, innovative solutions are rising to address concerns.

The insights into reimbursement of gene therapies presented in this article explore challenges and potential solutions based on the U.S. healthcare landscape. While not directly applicable to other nations, risks and solutions identified here may be a starting point for exploration of short and long-term sustainability discussions for other countries.

Overview of the Financial Challenges

Payers are confronted with a robust pipeline of genetically-engineered cell and gene therapies with over 700 products in development for over 180 indications. Estimates are that as many as 60 or more therapies will be approved for the US market by the end of 2030.² Many of these treatments target an unmet need, providing clinically meaningful treatment for conditions that previously had no treatments or at least no disease-modifying treatments. While these breakthrough treatments may yield long-term medical and societal cost off-sets, they will undoubtedly carry a high upfront cost and exacerbate financing challenges for payers.

At least three major financing challenges exist for payers.

Payment timing – Most treatments for chronic conditions are administered and paid for over time in periodic, mostly monthly, increments as prescriptions are filled. And, the benefits of these treatments accrue over time as well, coupling in some respects, the treatment cost with the benefit derived. Durable gene and cell therapies are administered one time and accrue benefits over time, creating a mismatch between cost and the benefit derived.

Two concerns derive from this. The first is planning for and absorbing the high one-time cost. For some payers, this is feasible, but for others, particularly smaller payers, unexpected high cost treatments can disrupt the income statement. The second concern is related to patient mobility. The payer that reimbursed the high cost treatment may not see the benefit of cost off-sets over time if the member moves to another health plan. The acquiring payer reaps the benefit, without the cost, creating an imbalance. Granted, that imbalance may be corrected over time. As more patients are treated with gene therapies, the likelihood increases that the initial payer will enroll a member that was treated by another plan. This assumes that other plans are covering and reimbursing gene therapies. And, for the most part, the payer will need to take this on faith, because there is no systematic means for them to know of the prior treatment.

Performance uncertainty – Inherent in the high cost of gene therapies is the promise of a durable cure. Uncertainty regarding real-world clinical efficacy and long-term durability of the therapeutic benefit presents challenges for payers. This is a particular concern as current treatments have been studied in relatively small numbers of patients over a relatively short period of time. There is a real concern that after some period, payers will be facing additional costs for treatment or retreatment. 

Actuarial risk – The uncertainty of predicting the number of patients receiving a cell or gene therapy during a given benefit cycle introduces risk to plan design and premium pricing. This is exacerbated since the new therapies treat rarer conditions. If the plan overestimates the impact, they may price such that they are not competitive in a market. If they underestimate, they may not be able to cover their costs. More importantly, these treatments may result in volatility in the income statement.

The final concern, adverse selection, is not unique to gene therapies but has ramifications as payers define their coverage policies. Adverse selection occurs when plans attract a disproportionate share of sicker members or in this case, patients eligible for gene therapies. This may occur if one plan covers the treatment or covers it more generously than other plans in the market. Adverse selection ultimately leads to higher costs and premiums, making the plan less competitive.

Payers Experience Gene Therapies Differently

The impact of high cost gene therapies and the tools they employ vary by payer segment and size. Most payers can be segmented into 4 groups, risk-bearing self-insured employers, insurers and Managed Care Organizations (MCOs), Medicare and government-stewarded health systems, and Medicaid. Payers face different challenges depending on their size, financial strength and regulations that govern their operations.

The scale of national insurers and Federal Medicare plans with millions of members reduces the impact of actuarial risk to their plan. Further, these plans have the means to absorb the impact of high one-time costs. But, nearly half of the roughly 400 payers in the US spread their risk over less than 50,000 lives.³ For self-insured employers, a 50,000-life plan is a large plan. 61% of covered workers are enrolled in a self-insured employer plan and many of these plans are enroll 5,000 lives or less.⁴

Employer self-insured plans are able to define what is covered or not covered by their plan. Most plans cover FDA approved therapies, with the exception of some categories like cosmetic treatments. Plan sponsors can choose not to cover medical or prescription drug charges for gene therapy whether the therapy has received FDA approval or not. Without new solutions to address the concerns posed by gene therapies, coverage and reimbursement may be stifled.

State Medicaid plans compete for funding with other mandated or obligated services. State governments do not generally make commitments outside their 1-2-year budget cycle. And if unanticipated costs, like the cost of a gene therapy are realized, other plan services may need to be reduced to balance the budget in a particular cycle.

Several states following the example of the Oklahoma Health Care Authority, have gained approval for state plan amendments that allow them to engage in value-based agreements. This gives the plan the opportunity to collect supplement value-based rebates if they contract with pharmaceutical companies for outcomes based agreements.

Precision Financing Solutions⁵ address specific challenges

The unique challenges of gene therapies have given rise to innovation in financing intended to alleviate some of the concerns inherent in these treatments. These are evolving as the industry evolves, but generally fall into two categories.

Value-based solutions – These solutions primarily address the risk of performance uncertainty. They involve sharing risk based on tying payment between the pharmaceutical company and the payer to indicators of value such as product performance and patient outcomes. Examples include:

Milestone-based contracts – The payer pays the agreed upon cost of the treatment at the time of administration. The pharmaceutical company refunds an agreed upon amount for non-performance if specific milestones or outcomes are not met. These contracts may be short term (one year or less) or multi-year and incorporate one or more outcome measures. This solution addresses performance uncertainty.

Performance-based annuities – This solution spreads payment over several years and ties future payment to the performance of the therapy. The payer makes a partial payment at the time of treatment. Further payments are tied in whole or in part to pre-defined outcomes or performance measures. Due to its multi-year time period, additional patient tracking, pricing regulation and accounting issues may limit its use. This solution addresses performance uncertainty and aspects of payment timing and actuarial uncertainty by spreading the payments over multiple years.

Warranty solutions – Under this model, the pharmaceutical company purchases a warranty for the product at the time of treatment. Much like a car warranty, if over time the product under performs, the warranty would kick in to cover needed treatments to address the gap in performance. This solution addresses performance uncertainty for the payer and establishes a certain price for the developer as the discount accounted for by the warranty purchase is known up-front.

Risk carve-out solutions – These solutions address actuarial risk, payment timing and performance uncertainty by carving out these patients or treatments from the plan. The plan may pay a set fee, usually per member per month, to cover the cost of managing these patients. While attractive in concept, payers generally pay a premium for shifting risk to others, making these solutions over time more costly on average than bearing the risk themselves.

Reinsurance and Stop loss – These products exist today. Reinsurance is purchased by an insurance company to pass on all or part of their risk to another insurance organization. Self-funded employers may purchase stop-loss insurance to protect against large individual claims or higher than expected claims overall. These products help payers manage actuarial risk and smooth the impact of very high cost treatments. Companies that offer reinsurance and stop loss are actively evaluating their offerings in light of these new treatments.

Orphan Reinsurer and Benefit Manager (ORBM) – The ORBM is a risk pooling, service solution proposed by MIT FoCUS⁶ to manage actuarial risk and executional challenges associated with making gene therapies available to patients, including risk pooling, contracting, reimbursement and care coordination.

Subscription⁷or capitated solutions – Under a subscription or capitated payment model, the developer would provide treatment for a set fee regardless of the number of patients treated or a set price per patient. This model is associated with more prevalent conditions like treatment of hepatitis C or hyperlipidemia. It addresses the actuarial risk by fixing costs and may address payment timing depending on the time period of the agreement.

Examples of both value-based and risk-based carveout solutions have emerged with approval of the earliest products. Although not always publicly disclosed, milestone-based and performance-based annuity agreements for cell and gene therapies are in place today. At least 4 national insurers are offering programs to their members to carve out gene therapy treatments for a per member per month charge. Another intermediary has developed the warranty approach. Finally, third party administrators are stepping up to assist pharmaceutical companies and payers with management of the data.

Conclusion

The vast majority of payers cover and reimburse gene therapies today. They are actively engaged in understanding the challenges generated by these innovative treatments and as a result, new paradigms in contracting and benefit design have resulted. As payers continue to assess this space, price and value must be linked. Payers will continue to seek and implement new solutions that ensure sustainability for all plan members as they transition payment models to address the challenges of one-time high cost gene therapy treatments. The good news is that clinical innovation is spurring reimbursement innovation in products and services to address the uncertainties inherent in coverage of gene therapies and provide new avenues to ensure sustained reimbursement.