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US healthcare payers turn to reimbursement to contain costs

US healthcare payers turn to reimbursement to contain costs


With overall healthcare spending set to continue rising, payers are implementing cost containment measures, increasing the importance of developing a robust and flexible pricing and reimbursement (P&R) strategy. In formulating and adapting a P&R strategy, it is vital for drug developers to understand how P&R fits into the US healthcare market, and to identify the different types of P&R controls.
Last Updated: 27-Aug-2010

In the , the two most important payers are the Center for Medicare and Medicaid Services (CMS) and private payers. Therefore, it is becoming increasingly important for drug developers to set up P&R policy tracking and to implement P&R strategy that is capable of rapidly responding to changes in the P&R environment.

The introduction of Medicare Part D in January 2006 highlights the importance of such measures. Part D is set to revolutionize the drugs market, since it gives Medicare patients extensive access to drugs in the out-patient setting for the first time. Therefore, it is vital for drug developers to understand both the structure of Part D and potential issues resulting from its roll-out. 

By being readily responsive to changes in the P&R environment, drug companies can act quickly and gain the greatest return on investment, as well as implementing damage-control strategies. R&D is costly: the for the Study of Drug Development has estimated that the average cost to successfully develop a new drug is $802 million. Therefore, there is significant financial risk with the development process, making it vital that drug developers maximize revenue from drugs that are successfully approved.

There have been a number of issues with the introduction of Part D that impact P&R, including the complexity of the scheme and the lack of patient coverage between $2,250 and $5,100 (the 'donut hole'). Additionally, the fact that the government has farmed out Part D to private insurers has created a stir, with some commentators believing that this has meant that the government has relinquished the opportunity for federally-negotiated drug discounts. These factors are all set to impact drug P&R, requiring drugs companies to assess the environment and act quickly.

For example, strong competition between private plans for Part D provision plus relatively restrictive formularies will keep prices low, limiting the profit margin, as well as incentivizing the development of innovative drugs.

Focus on reimbursement controls

In addition to maintaining a responsive P&R tracking strategy, drug developers should also ensure they understand the relevant P&R controls used in the US, so that companies can determine how best to position their products based on these controls.

To this end, correctly pricing a drug on launch and then keeping it at the optimal price throughout its lifecycle is integral to ensuring a strong return on investment. Due to the free market nature of the healthcare system in the , the market has not adopted the European approach of utilizing direct pricing controls such as explicitly implementing a reference pricing policy. Instead, it has favored utilizing reimbursement controls. Although there has been some discussion over implementing more explicit reference pricing in the , this is unlikely to happen in the short term. 

Modulating the drug's price while it is on the market is of great importance to ensure that it maintains market share. A range of market factors impact market share, including competition, indication expansion and reformulations. However, there are a number of P&R strategies that drug manufacturers can adopt to limit negative market impacts and support robust sales throughout the product's lifecycle. For example, an important strategy is to use pharmacoeconomic data to support increased adoption of a drug. 

Reimbursement controls play a more significant role in payer cost containment. There are a wide variety of reimbursement controls in use, of which tiered patient co-pay, the use of positive and negative lists, prior authorization, and step therapy or fail first are most commonly used for cost containment.

These controls can be split into those that restrict patient access to medications (e.g. prior authorization and step therapy or fail first) and those that allow patients to choose whichever therapy they want, although patient choice is guided significantly by the level of cost associated with obtaining a specific therapy. There are problems with these tools. For example, there are concerns that high costs and reduced convenience may restrict patient compliance and increase overall healthcare provision costs as a result of increased patient visits to hospitals and physicians.

Ultimately, drug developers operating in the market should look to prioritize P&R as an important factor in drug development, launch and lifecycle management. The US P&R environment is complex and changeable, and to generate robust sales in this environment, drug companies should look to develop flexible and responsive P&R strategies, so they can act quickly to capitalize on changes in the environment.

An integral element in tracking and responding to P&R changes is to identify which P&R tools are currently used by payers to contain costs in the US market, and to determine which tools are likely to be used in the future in this market. By focusing on these issues, drug developers can maximize returns from an increasingly cost-conscious market.

Related research:

§          Pricing and Reimbursement in the US: Innovation and robust pharmacoeconomic analysis are key priced $11,400

§          Medicare Part D - Its impact on US drug pricing issues and role as a driver towards European style pricing mechanisms priced $5,000

§          Parallel Trade in Europe and the US: The challenges facing pharma priced $7,600