The light bulb has become a symbol of innovation for good reason. Thomas Edison, the inventor and a cofounder of General Electric, developed — among other things — a commercially viable light bulb. When asked about his failure to produce results from research on a new type of storage battery, Edison said, “Results!… I have gotten a lot of results! I know several thousand things that won’t work.” What a wonderful way to frame the arduous work of innovation. (Edison’s innovations helped fuel the growth of GE, but GE now wants to pull the plug on its light bulb business — an interesting turn of events.) Let’s shed light on how payers pay for innovation.
1. High prices
Drug, biotech, and medtech companies often use the research-and-development costs associated with product successes and failures to justify high prices. Manufacturers and their investors need a sufficient return on their investment of millions or billions of dollars to bring a new product to market. The high prices that payers pay helps to finance — and thus encourage — innovation.
2. Clinical trials
Payers often, but unfortunately not always, cover experimental or investigational technologies (e.g., drugs, procedures, or devices) if the patient has a life-threatening diagnosis and the intervention meets several criteria: the patient has not responded successfully to medically appropriate standard therapies; the technology is under current review by the FDA and supported by compendia or at least two peer-reviewed journal articles; the trial has been approved by the institutional review board overseeing the investigation; and the patient is enrolled in the trial and not treated off protocol. The Affordable Care Act prohibits most commercial payers from denying coverage associated with clinical trials, and Medicare will pay for the routine costs of care as well as the treatment of any side effects or complications resulting from the study. Payer payment of trial-based care supports innovation.
3. Off-label uses
Prior authorization (PA) myths and misconceptions are common. Payers may feel compelled to require PA to restrict or block off-label uses of an FDA-approved drug or medical device under certain conditions (e.g., high-cost products and procedures), and implement them when the savings associated with tighter control exceeds the costs. But a more nuanced understanding of payers’ views on off-label use is helpful. Payers often turn a blind eye to off-label use and rely on physicians to do what is medically appropriate. Tacit approval of off-label use for indications, populations, or other use parameters not approved by the FDA funds the trial-and-error that leads to new discoveries and innovation.
4. New products
Clinical trials are an important but early step in generating evidence that supports innovative products. But payers really, really want real-world evidence. Use among larger populations for longer periods of time is often necessary to assess the true efficacy, safety, and cost of a product. By definition, all new products lack real-world evidence. In essence, payer coverage of new products — regardless of whether the manufacturer conducts a formal postapproval study to collect long-term data on efficacy, safety, and cost — supports the accumulation of real-world evidence and innovation.
5. Trial designs
Payer demand for greater evidence (e.g., comparative-effectiveness research) is on the rise. Increasingly, manufacturers consult payers on trial-design issues — comparators, endpoints, target populations, sample size, effect size, duration — because pushback from payers after the fact can be a very costly and time-consuming mistake. We’ve come full circle, then, as this demand for evidence increases the clinical trial costs that are reflected in higher prices. Payers are, in essence, paying more for the higher levels of evidence they demand from innovations.
Bright ideas
Payers have a love-hate relationship with new stuff. Some of it is beneficial, some of it is wasteful, and everything between. Innovation has been shown to be healthcare’s primary inflationary driver, and one way or another, payers pay for innovation. At some point, the proportion of the GDP spent on healthcare will reach a tipping point when purchasers require payers to further restrict care and associated costs. And at that point, innovation will surely slow. Just like the filaments in light bulbs, those that burn too bright don’t last long. For now, flame on.
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