Breaking down the value of a drug warranty model for a smaller payer
For some gene and cell therapies (GCTs), the cost of a single treatment can top $4 million, (excluding hospital and other fees). At the same time, GCTs may offer potentially life-altering, even life-saving, treatments — if patients and payers can afford them.
When a therapy commands such a steep price, patients and payers want as much assurance as possible that the treatment will work. Yet, as with many medical treatments, not every GCT will yield a successful clinical outcome every time.
So, what happens financially when a given GCT does not yield the hoped-for results for a particular patient?
In those cases of clinical inefficacy, drug warranties are emerging as a potential solution for the financial risk. Oliver Wyman Actuarial and Octaviant Financial examined some of the financial implications of GCTs among various payers under a drug warranty model.
Their findings have significant implications for patients, payers (particularly smaller ones), and pharmaceutical manufacturers, who are eager to help reduce barriers to patient access, differentiate their brands, and accelerate treatment adoption.
This is the fourth in our series of articles exploring the use of warranties in a pharmaceutical environment, aimed at addressing drug manufacturers’ challenges, educating patients and end payers, and expanding awareness about the value of warranty programs to the wider healthcare system.
A brief overview of the Oliver Wyman/Octaviant study
One of the key findings from the study was that payer size matters when it comes to high-cost GCTs.
The analysis* found that smaller payers tend to have less predictable financial outcomes — meaning that total healthcare plan costs can vary tremendously if just one beneficiary requires significantly expensive care. While smaller plans face proportionally greater volatility and uncertainty in cost outcomes, health plans with larger populations can absorb this risk more efficiently. As a result, smaller payers may tend to feel less confident about taking on the financial risk associated with GCTs.
Yet these smaller payers — defined in the model as having fewer than 250 employees and less than $50 million in annual revenue — represent 47% of the US workforce.
Examining financial risk for a smaller payer
Let’s consider the financial implications for a hypothetical, small payer.
Sunshine Public School District, a small, self-insured payer with a total healthcare budget of $20 million that provides healthcare benefits to teachers, administrative employees, and eligible retirees, has a teacher beneficiary with a diagnosis of sickle cell disease (SCD), an indication that is not covered by the district’s stop-loss policy.
Sunshine became aware of an innovative gene therapy for SCD that could potentially transform this beneficiary’s life. The district would like to provide the beneficiary with access — but it costs $3 million.
In this case, the GCT has a 95% clinical effectiveness rate. As a small payer, Sunshine faces significant financial risk (15% of their healthcare budget) if the treatment does not deliver its expected outcome, which could mean numerous hospitalizations and emergency care costs for the beneficiary, and a loss of productivity in all aspects of life. While they do not assume that the patient is going to be in the 5% margin of clinical inefficacy, they realize the potential is there.
Consider the potential cost savings associated with a warranty
Some GCTs could replace high-cost standard therapies, such as in the case of severe hemophilia, where lifetime treatment costs can exceed $10 million. A successful GCT that costs $3 million could save around $7 million in lifetime cost. However, if it fails, the $3 million for the GCT would add to the total cost, making it $13 million — 30% more than would have been expected without the GCT.
Even when no alternative care exists, payers often face pressure to authorize GCTs, making cost minimization critical. For instance, if a payer has 10 patients with sickle cell disease eligible for GCTs at $3 million per dose, the total spend would be $30 million. Statistically, 10% (or one patient) is likely to fail therapy. Without a warranty, the expected cost remains $30 million; with a warranty, it drops to about $27 million.
How the drug assurance program works
After deciding to cover the treatment, Sunshine has the option to choose between two GCTs on the market, both 95% effective. The only difference is that Drug A comes with a warranty from the pharmaceutical company.
Key warranty features include:
- Clear, predefined terms: In this case, the manufacturer promises a reduction in vaso-occlusive crises (VOCs), the painful events that define sickle cell disease, by at least 50% within the first year of treatment.
- Ongoing monitoring and data collection: The school district collaborates with healthcare providers and the warranty administrator to track the beneficiary’s health outcomes, reporting on crisis frequency and severity.
- Significant financial remuneration: If the beneficiary experiences less than a 50% reduction in crises, the manufacturer agrees to return a portion of the treatment costs (up to 50%, or $1.5 million in this case).
How the warranty would work in practice:
- After 12 months, the beneficiary’s healthcare team reports that crises have only decreased by 20%. The school district submits a claim to the warranty administrator.
- The warranty administrator reviews the data and, if the promised clinical performance of the therapy was not met, pays a claim to Sunshine in the amount of $1.5 million.
- If the treatment is effective, no payment is triggered, but the warranty provides the district with reassurance that the investment was justified.
Without the warranty, Sunshine would bear the full cost of the high-priced treatment regardless of its effectiveness, adding significant financial strain to its health plan.
With the warranty, if the treatment does not deliver intended outcomes, the manufacturer may absorb some of the financial risk. This arrangement helps the district in this example balance risk and cost, delivering better resource allocation.
This benefits both the district and the pharmaceutical manufacturer, for different reasons:
Potential benefits to the school district include:
- Cost control: The district minimizes financial risk, and the strain on its budget, if the treatment does not work as intended. The $1.5 million paid by the warranty policy can be reallocated to the healthcare costs of other plan beneficiaries and keeping overall premiums lower.
- Peace of mind: The plan and its beneficiaries are reassured that the treatment’s effectiveness is backed by a warranty.
- Improved patient outcomes: Having a warranty attached to the sale of the drug may incentivize more small payers to take on the financial risk associated with GCTs.
Potential benefits to the pharmaceutical manufacturer include:
- Enhanced patient access and adoption: Offering performance warranties that allow for payers to obtain financial recourse in the case of clinical inefficacy can help position your treatment as a preferred choice and facilitate more widespread authorization.
- Differentiation: Through a strong value proposition, backed by financial recourse if therapies underperform, you can encourage more payers to choose your treatment over a drug that does not have a warranty.
- Risk management and ongoing innovation: By implementing well-structured, compliant warranties that leverage insurance strategies alongside advanced therapies, you can enhance your reputation in the market and potentially boost sales for your therapy over others, allowing your organization to continue to develop breakthrough treatments.