Rita E. Numerof explores what impact the use of comparative effectiveness research will have on the pharma and medical devices industries
The global pharmaceutical and medical device industry is in the midst of a redefining transformation.
Just as landmark scientific advances are accelerating the pace of innovation, rising costs and demands for affordable healthcare are challenging the economics and traditional business assumptions of the industry.
Costs of product innovation are rising as increased regulatory scrutiny is raising internal development costs, risks, and time requirements for clinical trials, while licensing and acquisition markets have become more competitive.
Markets are becoming fragmented as physicians, providers, patients, and payers look for focused solutions that have optimal efficacy and safety profiles for narrower patient populations, even as reference pricing takes hold.
The role of payer organizations is increasing as the complexity of decision-making moves further from the physician.
Traditional sales models have become more expensive and less effective.
Finally, there is much greater skepticism among key internal stakeholders (investors, regulators, payers, physicians, patients, politicians, and the public) in the integrity and soundness of the industry.
Across the world, payers are clamping down on healthcare costs by saying “no” to new products, line extensions, and of course, price increases.
Reacting to the prospect of exponentially increasing liabilities, payers of all types are demanding hard comparative clinical and health economic data to justify any change with bottom line impact.
Going forward, growth will depend on country-by-country, payer-by-payer, and patient-by-patient decisions to pursue a treatment or not, or to choose a newer, more expensive treatment vs. an older, less expensive one.
The case for economic and clinical value (ECV) will be the lynch pin for success.
Emerging trends in US healthcare delivery
Confronted with unsustainable costs and millions without health insurance, the US has been embroiled in a national debate over healthcare reform.
The issue of universal coverage was addressed in March 2010 with passage of The Patient Protection and Affordable Care Act. This is likely the first of many steps.
While virtually all stakeholders agree with the overall objective of healthcare reform—achieving better health outcomes at lower cost—there are many different views on how best to achieve it.
One important point of agreement is that the way healthcare is paid for in the US isn’t aligned with a reform objective.
The current fee-for-service system of payment doesn’t reward physicians or hospitals for improving quality and outcomes or lowering costs, but instead unintentionally encourages the inefficient use of resources and even waste.
This dynamic is putting pressure on all stakeholders to rethink their business models and challenge fundamental assumptions about their customers, their products and services, and their prices.
Underlying the development of a new business model is the need to identify a better value proposition.
The healthcare industry—from pharma, device, and diagnostic manufacturers to healthcare delivery organizations—has historically been focused on a clinical value proposition. (For more on medical devices, see Patients and medical devices: Patient-centric by design and Pharma’s evolution: From blockbusters and biologics to branded generics, medical devices and functional foods.)
New therapies must meet efficacy and safety standards to get approved.
Health outcomes on the delivery side, for the most part, have only been measured in terms of mortality and morbidity rates.
And while the industry as a whole has experienced a surge of innovation, providing more and better treatment options, these have come with increasingly higher costs.
Now costs have reached an unsustainable level, a point many would agree the US was slow to recognize.
Missing in the current fee-for-service payment method—which assigns an arbitrary economic value procedure-by-procedure—is any analysis of total economic and clinical value over a continuum of care.
This is the essence of trying to achieve better outcomes at lower cost, the objective of healthcare reform.
Amidst this tumult, a new competitive landscape is rapidly emerging.
Payers—be they institutional or individual consumer—will demand more economic and clinical value for their healthcare money and better evidence that they’re getting more value.
Healthcare providers must respond to this demand with upfront, predictable pricing and evidence of the care outcomes they will provide, all the while sustaining viable financial margins.
Going forward, innovative delivery organizations will attempt to increase market share and manage their margins by identifying and delivering a compelling economic and clinical value proposition and by determining a transparent, affordable, value-based total price for the delivery of such care.
We expect to see an increase in bundled payments and innovation in population management.
This is the landscape into which manufacturers sell their products.
The post-reform market environment
Regardless of Congressional legislative action, the wheels were already put in motion to define a new basis for competing for patients and reimbursement.
While the media focus has been on the intensity of debate in Congress, most people have failed to take note of the substantial size and number of federal grants that have been awarded in the past nine months.
Funded with over $1 billion by the 2009 Economic Stimulus bill, the funding schedule for Comparative Effectiveness Research (CER) has been particularly aggressive. (For more on CER, see ‘How to build value through comparative effectiveness research’ and ‘Health data and comparative effectiveness’.)
Equally aggressive and significant funding is going to Electronic Medical Record (EMR) grants focused on meaningful use of information technology, meaning the collection and utilization of CER data to develop better outcomes and reduce costs.
As the lead payer in the market, CMS has demonstrated its capability to dramatically impact change in healthcare without Congressional approval.
DRGs were first implemented as pilot programs in the State of New Jersey in 1980.
By 1983, the decision was made to implement DRGs in hospitals nationwide.
Private payers followed suit, creating the fee-for-service payment system that is seen as a problem today.
CMS is now faced with an even more serious economic challenge.
Regardless of what happens in Congress, HHS is unlikely to stand by and pilot CMS into bankruptcy.
It is a safe bet that HHS will take action to achieve fiscal and quality objectives.
In fact, the outline of where policy is headed is already clear through the CER and EMR grants awarded.
The impact of CER
In 2008, AHRQ published a list of the nation’s 10 most expensive medical conditions.
Cancer, as an example, was third at $70 billion.
Like any other financially stressed organization, CMS is certain to focus cost effectiveness efforts on its biggest cost drivers.
Will CMS use CER to achieve cost effectiveness? The answer is clear in this series of CMS announcements.
In April 2006 CMS issued this guidance: “Cost effectiveness is not a factor CMS considers in making coverage decisions. In other words, the cost of a particular technology is not relevant to the determination of whether it improves outcomes or should be covered.”
In January 2009, AHRQ reports its review of CT colonography as a screening tool for colon cancer, finding that it does not compare favorably to alternative treatments from a clinical/economic perspective.
In February 2009, CMS posts a proposed decision memo rejecting coverage of CT colonography that reads in part, “If we determine that CT colonography is clinically effective, then we would need to determine if it is cost effective.”
In March 2009, conversations with CMS staff confirm that CMS is very interested in using cost effectiveness to drive coverage decisions.
CMS has historically been a mechanism of payer industry change, DRGs being a case in point.
As CMS uses CER to challenge cost effectiveness and make coverage decisions, the private payer industry is likely to follow suit.
The implications for care delivery organizations are very clear: development of predictive care paths and changing quality metrics.
CER is not restricted to research into what products work best; it also includes research into what treatment protocols work best.
Existing care protocols will come under scrutiny and may be increasingly un-reimbursable.
The expectation will be the elimination of variation in practice patterns based on better information about the costs, risks, and benefits of alternative treatments.
In other words, reimbursement will depend on repeatable care delivery along an evidence-based care path that meets both economic and clinical value expectations.
And part of this will be identifying which products work best under what circumstances.
At this point, the industry is still in the early stages of addressing the strategic and operational implications of the new environment.
With ECV emerging as a dominant basis for competition globally, healthcare product companies must rethink key business decision-making processes, such as new product development, portfolio management, demand forecasting, and the development of new commercial models.
Correspondingly, this is creating new demand for market research, analytics and trend analysis that goes beyond what traditional marketing services functions have delivered.
Rita E. Numerof is president of Numerof & Associates, Inc.
For everything related to the medical devices industry, join the sector’s other key players at Medical Device/Diagnostics Marketing & Brand Excellence on Nov 22-23 in Berlin.
For more on marketing and market access, join the sector’s key players at Sales & Marketing Excellence Latin America on October 20-21 in Miami, Sales & Marketing Excellence Russia CIS on October 24-25 in Moscow, 3rd Annual Market Access Canada on November 1-3 and eMarketing Canada on November 8-9 in Toronto, and Marketing Europe on November 22-23 in Berlin.
For all the latest business analysis and insight for the pharma industry, sign up to eyeforpharma’s newsletters.
30% of pharma executives expect business as usual, as they admit to expecting blockbuster-type...
Lucy Brake speaks to Mike Rea, CEO of IDEA Pharma, about how he believes real world evidence...
Dr Jean-Michel Cosséry, the new UK managing director and vice president for its Northern Europe hub...