Paying for a cure remains a challenge in the current health system. The U.S. health care market is characterized by a mixture of public and private payers and dominance of employment-based insurance models. There is no universal care coverage –– instead, it is a multi-payer system of care delivery, embedded with a number of inefficiencies that make it vulnerable to market failure.
In recent years, we have witnessed remarkable technological advances in precision medicine and curative therapies for hard-to-treat diseases. These curative therapies not only improve patient survival but may lower overall health care costs by eliminating frequent clinic visits, hospitalizations, and surgeries, as well as the need for long-term therapies. These therapies are also likely to lead to wider societal gains, including higher quality of life for patients. Examples of these one-time curative therapies include novel drugs for hepatitis C, gene therapies for rare diseases, and chimeric antigen receptor (CAR) T-cell therapy, a new form of immunotherapy that reengineers patients’ cells to fight cancer.
Despite the efficacy of these treatments, as well as their potential social and economic value, the costs are high: treatment to cure hepatitis C can cost up to $94,5001; the price for CAR-T cell therapy is $373,000 to treat large B-cell lymphoma, a common type of non-Hodgkin lymphoma2; and the newest gene therapy to treat spinal muscular atrophy is the costliest drug on record, with a $2.1 million price tag3.
Paying for a cure remains a challenge in the current health system. The U.S. health care market is characterized by a mixture of public and private payers and dominance of employment-based insurance models. There is no universal care coverage –– instead, it is a multi-payer system of care delivery, embedded with a number of inefficiencies that make it vulnerable to market failure. An economic framework is used to evaluate three health system features that contribute to this market failure for curative therapies: high-upfront costs, reimbursement policies, and transitory insurance relationships.
The first feature contributing to this market failure is the high up-front costs of curative treatments. The coverage of medical services decided by health insurance plans, and plans may restrict or deny treatments. Ultimately, health plan affordability determines overall access to health care, and so the financial incentives embedded in the health system do not always promote practices to improve the population’s health or access to expensive treatment.
This was the case with the approval of Sovaldi (Sofosbuvir) in late 2013, one of the first curative treatments for hepatitis C to enter the market. When multiplied by the prevalence of the disease, the total cost burden to any health plan – whether public or private – was substantial and perceived by many health plans to be prohibitive. Due to the high treatment cost and disease prevalence, many insurance plans put restrictions on payments for treatment to ration access4.
This failure to treat reflects an inefficiency in the market. In nearly all other industries, the price of a product is set at which sellers are willing to sell and buyers are willing to purchase. But in health care, insurers do not set the price for treatment or provide the care, and therefore are not involved in the direct supplier to consumer transaction5. The presence of a third party here (the health plan) distorts the fundamental relationship necessary to meet ideal market conditions. Payers are reluctant to increase budgets to afford higher priced drugs since they bear all financial risk. Incentives in this case are driven by the initial cost of therapy – not on downstream societal or economic gains.
The second feature is healthcare reimbursement, including how we pay for, and value, care. The current reimbursement structure creates a classic principle-agent problem: the payer (the agent) makes treatment decisions on behalf of the patient (principle), however the patient has no influence on the payer’s decision-making process6.
National coverage decisions for reimbursement of novel treatments fail to keep up with the approval of breakthrough medical technologies and increasing costs for new therapies, which negatively impacts patient access7. The principle-agent problem is evident here, as payers make reimbursement decisions on behalf of patients, although these decisions may not be in the patient’s best interest. For example, Medicare’s reimbursement policy for CAR-T cell therapy underestimates hospital costs of inpatient care. The cost of therapy is only one portion of the total cost of treatment: Medicare payments fail to cover other inpatient expenses, including hospitalization stay and care for treating toxic side-effects. As a result, fewer hospitals may be willing to provide this high-value curative therapy.
Tied to this principle-agent problem is uncertainty about the efficacy, and value, of new curative therapies8. Health insurance in the U.S. was designed to value immediate, and (easily) quantifiable outcomes that drive cost-savings, such as emergency room visits and hospitalizations. The introduction of curative therapies has shifted the conversation from short-term savings to long-term societal and economic gains – however, some of these outcomes are uncertain: individuals respond differently to treatment, and the long-term benefits that accrue throughout a patient’s lifetime are difficult to measure. Aligning value with the price of therapy based on the cost-effectiveness of a drug is also a concept that has been highly scrutinized in the U.S., and is strictly prohibited under the Affordable Care Act.
The third feature is patient behavior with regard to insurance. Most people in the U.S. have insurance on a temporary basis, meaning that whether they have insurance coverage through their employer, as individuals (such as the self-employed), or even through state Medicaid programs, coverage is only transitory. Employers may change insurance carriers for their employees as often as every year, and in most cases, employees also have the opportunity to change insurance plans through an employer. As a result, insurers are incentivized to provide only the less costly care, since they fail to benefit from potential long-term savings. This market failure is a classic example of moral hazard. The importance of the transitory connection between insurers and those insured is that insurance programs know that their responsibility for treatment of individual patients is only temporary, and if treatment can be postponed, there is a possibility that the original health plan can permanently avoid responsibility for treatment.
As many others have previously noted, new models of payment need to be implemented to realign incentives in the health care market9,10. Three alternative financing models are presented that each address one of the key market failures, while expanding patient access to curative care: annuity payments, outcomes-based agreements, and health currency.
Annuity payments. These types of payments, also referred to “leasing”, has been cited frequently as a promising strategy for paying for high-cost therapies9. Under this system, payment for treatment is made over time from the payer to the drug manufacturer, mitigating payers’ reluctance due to the high up-front costs of novel therapies. This payment model would realign payer incentives by addressing payers’ budget impact concerns, making treatment more affordable.
Outcomes-based contracting agreements. Under this strategy, financial arrangements are tied to clinical outcomes, and payment is based on whether a specific patient outcome is achieved11. In this arrangement, the clinical value of the drug is better aligned with the price, and the financial risk is shared between the payer and manufacturer. This strategy addresses payer uncertainty around the efficacy new therapies and may hasten adoption of coverage and reimbursement decisions.
Health currency. Under this strategy, the health plan pays for the cost of treatment, but if the patient switches to another insurer, the initial payer is able to receive payment from future financial savings related to the therapy. This model addresses misaligned incentives due to high patient turnover in a multi-payer system, and mitigates the risk payers take on when paying for high-cost therapies that have benefits which accrue over time12.
The current coverage decisions and financial incentives in the health care market are not aligned to promote public health. As a consequence, patient access to treatment may be delayed or denied. To address market failure for high-cost curative therapies, more than one alternative payment approach may be needed. No perfect solution exists, but, if implemented, these policies could encourage behavior that will allow markets to better achieve social objectives.
Kaiser Health News. FDA Approves New Hepatitis C Drug, Harvoni. 2014; https://khn.org/morning-breakout/marketplace-hep-c-drug-gets-approval/. Accessed June 20, 2021.
Fiorenza S, Ritchie DS, Ramsey SD, Turtle CJ, Roth JA. Value and affordability of CAR T-cell therapy in the United States. Bone Marrow Transplantation. 2020;55(9):1706-1715.
Garde Damian. Is $2.1 million too much for a drug? For affected parents, there is no debate. 2019; https://www.statnews.com/2019/06/03/is-2-1-million-too-much-for-a-drug-for-affected-parents-there-is-no-debate/. Accessed June 15, 2021.
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Snider JT, Brauer M, Kee R, et al. The potential impact of CAR T-cell treatment delays on society. Am J Manag Care. 2019;25:379-386.
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Evaluating Payment Models for High-Cost Curative Therapies. Single and Multipayer System Perspectives in England and the U.S. 2018; https://www.soa.org/globalassets/assets/Files/resources/research-report/2018/evaluating-payment-models.pdf. Accessed July 15, 2020.
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Managing Uncertainty In Drug Value: Outcomes-Based Contracting Supports Value-Based Pricing, Health Affairs Blog, January 30, 2020. DOI: 10.1377/hblog20200128.542919.
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