Biologics Beware

A new study says biologics are at the top of payers' lists for cost containment efforts.
Jun 01, 2004

Biologics and specialty pharmaceuticals, which typically target small patient populations, have historically necessitated a high per-patient cost to justify their R&D investment and expensive manufacturing and packaging processes.

But many in the industry are doing unintentional, but nonetheless significant, damage to their companies by perpetuating the belief that these features create a unique set of rules for their products. While that may have been the case in the past, recent market developments have created a different landscape. Still, many companies are not sufficiently taking into account what has changed, and nowhere is it more dangerous than during the development of payer coverage and reimbursement strategies.

In earlier Pharmaceutical Executive articles ("Show Us the Value," September 2003, and "Raising the Bar," November 2002), we forecast an aggressive shift in managed markets' policies, predicting they would demand that pharma companies develop and market products that deliver healthcare value commensurate with their cost. Extensive research conducted by The Bruckner Group ( has measured a similar and increasingly critical tone in payer attitudes and strategies toward coverage of specialty pharmaceutical products. Unfortunately, the managed market strategies many companies are pursuing for their biologicals do not sufficiently recognize the subtle but unmistakable changes and fail to fully understand their markets and their markets' needs.

Too Much of a Good Thing It's understandable that a history of success has led many companies to retain beliefs that have only recently been superceded by market shifts. In 1982, when human insulin was introduced as the first biotech product, and for many years following, payers saw biologics as a panacea, an opportunity to finally treat patients with chronic, progressive diseases. Those first treatments delivered excellent value even at high cost, in part because they addressed specific and targeted needs:

  • diseases with relatively small patient populations (under 20,000), such as Gaucher's disease, which lacked alternative treatments
  • chronic diseases (like hepatitis C and multiple sclerosis) that might be put into remission or possibly even cured
  • diseases (such as cancer and AIDS) that require rescue therapies and critical care.

Typically, a biological was welcome as either the only option available with a reasonable threshold of efficacy, or as a third-line or rescue therapy in the most refractory cases. Given that the patient populations qualifying for these treatments were relatively small, extremely sick, or both, their high cost—from $10,000 to $100,000 annually per patient—did not preclude usage.

The US healthcare system was also far less value- and outcomes-driven in the 1980s and '90s than in the present environment. Furthermore, because biologics are often delivered by injection or IV and require more medical oversight, they were typically paid for out of the payers' general medical benefit. By avoiding the intense scrutiny of payers' comparatively smaller pharmaceutical budget, growth of biologic use was relatively unimpeded.

Current Realities Fast forward to 2004. Biological products have exploded into the medical therapeutic market: approximately 120 are available and 90 more are on the way. Biologics are now approved for widespread diseases such as psoriasis and rheumatoid arthritis, which affect millions of sufferers. Biologics are treating much wider patient populations than anticipated at an annual cost of $22 billion. According to AdvancePCS, up to 5 percent of a managed care organization's patients are prescribed biologic products. With an annual growth rate of 20 percent (twice as fast as that for pharmaceutical expenditures and three times as fast as overall healthcare) payers are targeting specialty drugs for greater scrutiny and cost control not for their failure to deliver, but because of their success.

In the last few years, biologics have gradually moved from the medical expenditure budget (where they constituted only 1–2 percent) to the drug expenditure budget (where it is a much more substantial 15 percent). The shift has created a new and obvious cost-cutting target for desperate healthcare insurers. Few in the biotech industry seem to fully understand the implications of having their products scrutinized for pharmacoeconomic robustness, forcing them to compete alongside a wide array of management options and treatment pathways. Regardless of the fact that these products offer something unique and are the result of biotech's high-risk R&D, payers are not willing to accept those noble pursuits as a reason for reimbursing their high cost.

Most pharma companies now understand that managed care organizations (MCOs) and pharmacy benefit managers (PBMs), in search of greater healthcare value, have changed the basis for how they make coverage decisions for new treatments. Under outcomes-based access (OBA), new treatments seeking to gain a high level of coverage must demonstrate compelling pharmacoeconomic value to receive preferred formulary inclusion or a robust position in a disease management program.

Since OBA became the decision making paradigm, it has driven the success (and failure) of many new drugs. It's not overstating matters to say that in most pharma companies OBA is driving decisions regarding product development, corporate development, marketing, and sales. But the biotech sector seems to still be lagging on this matter for a variety of reasons.

On the Chopping Block In The Bruckner Group's 2003 study, payers consistently indicated that biologics are at the top of their lists for future cost-containment efforts. They see it as necessary because they experience a significant gap between biologics' costs—including acquisition, drug delivery, and additional medical testing—and the pharmacoeconomic value provided. AdvancePCS has publicly forecast that it is working to reduce biological expenditures by 30 percent.

Perhaps payer attitudes toward biologics are best summarized by a pharmacy director from a leading MCO, who stated in the study: "I cannot continue to spend $3 million dollars to treat 150 patients, only to find the 30 patients that will get three months of relief and the 10 that end up with expensive liver problems. It just doesn't make sense."

Payers are extremely concerned with noncompliance and early treatment termination resulting from the difficult dosing schedules, side effects, and safety issues associated with many biologicals. For example, in a recent BGI Academic Collaboration Program study of more than 1,000 gastroenterologists (in collaboration with Sean Hurley, MD, and Eric Lawitz, MD, both of Brooke Army Medical Center, and presented at 2004 Digestive Disease Week), The Bruckner Group found that 12 percent of hepatitis C patients who initiated a biological drug therapy do not complete it. Payers experience heavy losses when patients who initiate high-cost therapy discontinue it early or skip doses. The cost is not only monetary, but, more important, there is a simultaneous drop in healthcare outcomes and overall treatment value.

To improve biologicals' outcomes and value, companies need to provide additional support and educational initiatives, as well as side-effect management that will improve compliance and help patients complete therapy. A 2002 study at Northwestern University has shown an active intervention program for hepatitis C patients can decrease the treatment drop-out rate from 10 percent to 3 percent. Such programs create a clear path for companies to work with payers for mutual benefit, creating programs that solidify the biologicals' value proposition.

Yet as matters stand, payers clearly believe that the high cost of biologics will most often exceed any direct monetary benefit gained from using them. This doesn't mean that payers will set aside cost considerations when assessing biological therapeutics. In fact, they do just the opposite. Payers are making aggressive choices, relying on evidence-based disease management and pharmacoeconomics to minimize their losses. For example, they continue to seek out evidence that the management of a chronic disease by a biologic will keep the disease in check, alleviating high medical and emergency costs.

That approach leaves biotech companies facing the same issues as pharma—the need to produce sound, comparative value propositions for their products, backed by solid, rigorous proof. Biotech companies that fail to meet this standard are likely to encounter the same intense resistance and resulting revenue loss as Biogen did with its latest product, Amevive (alafacept).

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