Visudyne, a drug for macular degeneration, costs $2,500–4,000 for a course of treatment. Zevalin and Bexxar, used for non-Hodgkins lymphoma, can cost more than $20,000 per dose. While all these drugs can help certain patients, reimbursement has been a problem and some insurers have refused to pay.

Most biotechnology companies have assumed that Food and Drug Administration (FDA) approval is the major hurdle; after approval an insurance company would most likely pay. But that may be changing. While most FDA-approved biotech drugs are at least partially reimbursed, the Centers for Medicare and Medicaid Services (CMS), which sets the tone for payment decisions in the private insurance market, is taking an increasingly active role in evaluating which drugs it will pay for. Medicare is reviewing its reimbursement policies for the off-label use of four colorectal cancer drugs, including Avastin, estimated to cost $4,400 monthly, and Erbitux, which costs $10,000 monthly.



Reimbursement questions began to surface after formation of CMS' Medicare Coverage Advisory Committee in 1998. The committee was the first open forum for debate on coverage says Frank Papatheofanis, chief executive of Aequitas, a San Diego-based health economics firm specializing in reimbursement strategy. "When CMS opened up and became accountable, it really forced decision makers to come up with policy that would address this shrinking budget, so part of that was truly pointing to this notion of cost-effectiveness and health technology assessment," he says.

FDA and CMS policy dictates that the agencies not take cost into account when providing payment for treatment of beneficiaries. A Congressional mandate has directed Medicare to provide reimbursement for cancer drugs used for their FDA-approved indications, even though Medicare's drug benefit isn't fully in place. CMS' administrator, Mark McClellan, a physician and economist, indicates the agency will take a greater role in assuring efficient delivery of healthcare, including prescription drugs, when the drug benefit begins in 2006. The Congressional Budget Office estimates that the new law, which was approved by Congress last year, will cost $407 billion through 2013.

Public and private payers are still making payment decisions on clinical evidence first, says Goodman. "However, to the extent that a technology poses a large cost impact on the program, it is reasonable to expect that Medicare will be very careful about specifying the indications for which it will cover a technology," he says.

Private insurers are also grappling with reimbursement. Sharon Levine, associate executive director of The Permanente Medical Group in Oakland, Calif., says her company has created a subgroup within its formulary committee to evaluate emerging biotech drugs and technologies. Levine's group is affiliated with Kaiser Permanente, the nation's largest nonprofit health plan.

Levine says Permanente is interested in working more closely with specialty pharmacists in managing biotech products. "These are unique drugs. They are often in the beginning targeted at a narrow population, and because of the cost and because of the risks they have to be handled very carefully," she says.

In 1999, regulators overruled Permanente when it tried to refuse reimbursement of Viagra because, the company argued, the heavily marketed blue pill is a "lifestyle drug," not a medical necessity. "Those issues [of utilization] are important issues, but they cannot be solved at an institutional level," she says. "It's very difficult for one healthcare organization to say, 'We're going to take on the issue of social insurance.' We tried that."



Courtesy of the Permanente Medical Group.

Sharon Levine

For more than a decade, European national health systems have been developing tools to evaluate the cost-effectiveness of new drugs, along with safety and efficacy.

"In other countries they're already exploring the relationship between cost and health impact," says Milton C. Weinstein, Henry J. Kaiser professor of health policy at Harvard University. "We haven't really confronted it, but it's getting to the point where people are beginning to ask, how much are we willing to pay?" Weinstein says he is concerned that physicians play an important role in the process. "If they don't get involved, it will be left to those who manage the bureaucracies."

In Europe there are restrictions that determine which patients are candidates for new high-tech drugs, and the restrictions differ in every country, says Papatheofanis, whose firm works with clients in Europe and Canada. "The pricing isn't significantly different and because of that there's less utilization overall," he adds. "In general the Europeans are better than we are [at] determining cost effectiveness and using cost effectiveness to guide their formulary decisions."

Doctors and patients are concerned about restrictions on payment that could lead to diminished medical care. "Certainly nobody could argue [that] there isn't a cost problem ... but you cannot deny patients a tool that their doctor needs to save their life," says Priscilla Savary, executive director of the Colorectal Cancer Network in Kensington, Md.


Genentech, the largest US biotech firm, has established an in-house health economics group that is preparing for the day when financially based health outcomes may be required for reimbursement. "I would say it's definitely moving in that direction," says Steven Lo, senior director of oncology marketing at the South San Francisco-based company.

Lo says that if pharmacoeconomic data is to become part of future reimbursement schemes, he hopes Medicare and private insurers formulate a clear policy so all manufacturers can know what is expected of them. "McClellan has said we need to migrate toward that, but we would love to see some kind of guidance specific to oncology products," says Lo.

Currently few people use biotech drugs so they are not budget busters, even though they can carry a price tag of more than $20,000 for a single dose, says Lo. "You can get sticker shock, but impact on the healthcare system can probably be debated." He notes that Genentech's products, and many biotech treatments, are targeted to treat specific conditions, and specialized diagnostic tools can help identify the patients who will benefit from treatment. Better diagnostics may lead to a strong case when it comes to reimbursement, he adds.

However, biotech firms should still be more proactive in preparing for reimbursement reviews, says Papatheofanis. After winning FDA approval for a drug, most companies automatically apply for a new code with the Healthcare Common Procedure Coding System (HCPCS), which determines the proper use of new technology so providers can get paid. Some drugs, he says, could piggyback on existing codes, sparing biotech firms delays and the cost of seeking a new code.

Companies can also run into problems if insurers adopt a tight coverage policy on a product, reimbursing only for select patient populations or indications. Papatheofanis suggests biotech companies take a greater role in crafting specific language to be used in coverage guidelines for their drugs. Just as biotech companies stage mock FDA panel hearings to prepare their cases, his firm brings in former Medicare medical directors and insurers to help biotech companies formulate reimbursement strategies.

Goodman says biotech companies need to assess the payment landscape even while drugs are being developed. Reimbursement scenarios could dictate the manner in which a drug should be delivered, who should deliver it, or even how it is packaged, he says. Pricing is another area in which biotech companies could prepare better for reimbursement reviews, says Papatheofanis. Traditionally, drug makers have justified price by presenting a formula based on their own investment to develop and manufacture the drug. "What we're seeing more and more is, that's not a sufficient justification," he says. "What payers are looking for is value, and value is more and more being described as cost effectiveness."

A biotech firm should justify its price compared to other drugs on the market, says Papatheofanis. "They can formulate pricing bands vis a vis cost-effectiveness rather than the traditional formulation of price. It's more sophisticated, but it is what payers are looking to." Smaller companies usually lack the in-house staff to gather and assess data for reimbursement purposes, he says, driving many to ultimately partner with larger firms.

Biotech companies may eventually need to collect economic data along with standard efficacy and safety information during clinical trials, consultants say. That would add significantly to the already high cost of trials and require companies to carefully assess the information they need to collect in the development process.

Eric Schmidt, a biotech analyst at SG Cowen in New York, says, "Even two years ago there was an assumption that if a company succeeded in getting FDA approval for a product, it was going to meet with a receptive reimbursement environment. That's clearly not the case anymore."

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