What is the purpose of health insurance? This review of basic insurance concepts provides a context for discussions about coverage of biologics.
Copyright © 2012, BioCommunications LLCOver the years, health insurance products in the United States have changed, but the essence of insurance has been the same: To protect the beneficiary from infrequent, high-cost, catastrophic events. Biologic therapies and specialty drugs — which are costly and used relatively infrequently — would seem to fit into the rubric of insurance coverage, yet insurers and plan sponsors do not universally cover them. Where coverage exists, it often involves high cost sharing, potentially shutting off access for those who could benefit from biologics.
From a business standpoint, premium costs must be controlled to make benefits available and to keep them affordable. But if the cost of biologics leads plan sponsors to place severe limitations on their coverage, then purchasers must ask themselves: What do their insurance premiums cover and what is the value of those benefits? How is the value equation changed when biologics are added? For employers, the benefits of efficient coverage — which can include reduced disability, greater productivity, and employee satisfaction — go well beyond what can be measured on a profit and loss statement.
The U.S. Census Bureau estimates that in 2010, 256 million Americans were covered by some form of health insurance. On a per capita basis, the United States spends far more than other developed nations on health-care, but by important measures — life expectancy and infant mortality, for instance — the United States lags in the overall health of the populace. This implies that insurance coverage, by itself, does not guarantee effective, efficient, or high-quality healthcare. It also suggests that purchasers of health insurance may not be getting good value for their dollars. In that regard, health insurance products that promote high-quality, appropriate care can be catalysts for change.
Most of today’s health plans depart substantially from the basic concept of insurance. Insurance spreads among many people the risk of a high-cost event that occurs predictably (albeit infrequently) in a population but rarely in an individual. Health insurance, strictly speaking, does not protect against regularly occurring, low-cost events, such as routine physicals. This was true of most indemnity plans before the era of managed care. Today’s comprehensive benefit plans, which promote population health by encouraging the use of primary care and preventive services, are not insurance in the purest sense. Arnold Kling made a distinction between insurance, which pays for treatments that are “unavoidable [or] prohibitively expensive, or for illnesses that occur relatively rarely,” and insulation, which covers “relatively low-cost services” and “treatment that is commonplace or discretionary.”
Most employer-sponsored health plans cannot deny coverage on the basis of one’s health and, thus, are not classic risk-based insurance products — they are closer to European-style universal care programs, in which healthy young adults subsidize the care of older or less healthy people.
CEO, Health Market Strategies
In the classical view of health insurance, an insurer would expect to pay for a treatment if it was covered by the policy and if the policyholder did not have the condition requiring the treatment at the time the policy was issued. If an individual had an existing (or pre-existing) condition, it would be excluded from coverage for some period of time.
But that’s not the world we live in today. The public’s expectation is that insurers should cover and pay for treatments if they contribute to better health, regardless of whether the condition existed prior to the purchase of the policy. The public’s view would be that an intervention should be paid for, regardless of whether the insurance company knew of that risk. These expectations have been transformed into public policy. Gone are the days of pre-existing condition coverage exclusions.
The implication of this change is that an insurer must accept exposure in the form of future treatment options that aren’t easily quantified.
When it comes to biologics, estimates of their cost may vary, but one thing is certain: They will be expensive. Given this reality, what can insurers be expected to do?
Insurers will probably do at least two things: They’ll try very aggressively to negotiate the price they pay for these treatments. And to the extent they can, they’ll try to extract discounts from drug manufacturers. That may be hard if only one drug manufacturer makes the treatment available. Nonetheless, that will be a tactic.
One other thing they will try to do is to make certain that the individual for whom a biologic treatment is being prescribed really needs it. The individual will undergo a lot of scrutiny and medical reviews before the insurance company writes a large check.
In a sense, the barriers to health coverage we all face and all complain about are a natural byproduct of the system we’ve insisted on. If we want expensive treatments to be available to us regardless of our health status, then we must expect that those who pay for these treatments will go the extra mile to pay only for those treatments that are absolutely necessary, and that they will try to get the best price possible.
Insurance companies can make this work, but the important thing to realize is that they’re no longer in the business of insurance. Insurance companies are now in the business of paying for healthcare. The public may think of it as insurance, but it’s really not. One of the tradeoffs for getting universal access to insurance coverage is added scrutiny of healthcare expenses.
Jim Parker, an Indianapolis-based healthcare consultant, is the former president of Anthem Blue Cross and Blue Shield of Maine.
In the United States, employment-based health insurance has been the dominant source of healthcare coverage for decades. Today, according to the U.S. Census Bureau, 169 million Americans have employment-based health insurance ( Figure ). However, economic factors, higher health insurance premiums, and the migration of retiree outpatient prescription drug benefits to Medicare Part D have precipitated a gradual decline in the breadth of employer-based health coverage. The recession of 2007–2009 and the slow recovery that has followed have exacerbated this trend, and the creation of health-care exchanges under the Patient Protection and Accountable Care Act (ACA) may do the same.
Employer-based health coverage trend
Percentage of U.S. population covered by employer-based health insurance
Source: U.S. Census Bureau 2011
Still, employment-based health insurance is — and under the ACA will continue to be — a substantial component of the U.S. healthcare system. In strong economic times, when companies compete for highly skilled workers, employers view the provision of healthcare as a recruiting tool. But what do employers and employees want from health coverage? Employers, beneficiaries and other stakeholders seem to have differing perceptions about what health insurance is — and is not.
Health was long regarded as uninsurable because of two perceived problems: adverse selection and moral hazard. Adverse selection holds that the people most likely to buy health insurance are the people most likely to use it, and the amount people are willing to buy is directly related to the amount they will use. Moral hazard is the phenomenon by which the mere presence of insurance is thought to promote inefficient, if not “immoral,” behavior that results in unnecessary use of health benefits. Actuarially speaking, moral hazard occurs on two levels — when first-dollar coverage is provided and when out-of-pocket maximums are reached.
Moral hazard has been the subject of great debate since the emergence of comprehensive benefit plans. These plans were envisioned as a way to avoid downstream medical costs by providing benefits for prescription drugs and preventive care. To control costs and minimize moral hazard, incentives to use primary care and to fill prescriptions were coupled with tight controls on specialist access and costly procedures. The managed care backlash of the late 1990s led to the elimination of many utilization controls employed in these plans, but comprehensive coverage remained. As a result, enrollees today have access to most services or products — as long as they are willing to pay for them through high copayments or coinsurance.
Cost sharing is often invoked as a means for employers to keep health insurance affordable. The first major study to look at the effects of cost sharing — and one that is commonly cited as a reason for using cost sharing to counter moral hazard — is the Rand Health Insurance Experiment (HIE), conducted from 1974 to 1982. Intended to determine if Medicaid should employ cost sharing, HIE enrolled about 2,000 families who earned less than $25,000 per year ($126,829 in 2012 dollars). Families were randomized to receive free care or coinsurance programs at rates of 25, 50, or 95 percent.
HIE demonstrated that demand for healthcare is elastic — that is, responsive to changes in price: The less a family paid, the more healthcare it used. There was little variation in elasticity from service to service. Elasticity appeared to be related to income, with poorer families most likely to reduce healthcare consumption. Most of this reduction took the form of failure to see a healthcare professional in the first place. Participants, unable to distinguish between essential and non-essential health services, simply reduced their consumption in general. The requirement that they share more of the cost was associated with decreased use of preventive care and inappropriate use of emergency departments and antibiotics, but it did not affect hospital admissions. As to whether cost sharing discouraged the use of ineffective healthcare services while promoting the use of effective ones, the HIE demonstrated that it did not.
Because Rand HIE showed that cost sharing reduces medical spending, many employers and insurers embraced it during the 1980s — deploying the now-familiar tools of managed care: copayments, coinsurance, and deductibles. It was reasoned that these tools would reduce employer costs and mitigate the potential for moral hazard even as employer offerings shifted from indemnity products to HMOs with more comprehensive benefit packages.
In the years that followed, dozens of studies of the effects of cost-sharing tools within the pharmacy benefit corroborated the HIE findings. An analysis by Goldman of 132 studies determined that a 10 percent increase in copayments or coinsurance resulted in a 2–6 percent drop in prescription drug use or expenditures. Some of these reductions appeared to carry health consequences. Among patients with certain chronic illnesses — specifically, congestive heart failure, lipid disorders, diabetes, and schizophrenia — reductions in pharmaceutical use correlated with higher inpatient and emergency medical service use.
Goldman’s meta-analysis also revealed that elasticity depended in part on a drug’s therapeutic class and whether patients received ongoing care from a physician for the disorder. There was also evidence to suggest that, at least at the outset of treatment, cost sharing was less of a barrier among patients who were prescribed specialty drugs. This may be because of the relative lack of therapeutic options for these patients.
The distinction at the outset of treatment is important. Goldman found that cost sharing reduced utilization through three phenomena: treatment initiation, adherence, and persistence. Of the three, adherence was most often affected. The degree of utilization reduction attributable to nonadherence, in fact, was greater than the positive impact of interventions designed to keep people adherent to therapy. Thus, he concluded, “Pharmacy benefit design represents one of the most important public health tools for improving patient treatment and adherence.”
In 1968, Pauly observed that because insurance lowers the price of healthcare to consumers but not the cost of producing healthcare, moral hazard results in a loss of prosperity. Thus, he concluded, it follows that a decrease in excessive use of health services would reduce welfare loss.
Pauly’s influential paper was the catalyst for many of the tools MCOs use today to contain healthcare costs, and it led most economists to believe that healthcare expenditure growth stemmed from overconsumption of marginal care. Fifteen years later, Pauly clarified that what he had in mind was “routine physicians’ services, prescriptions, dental care, and the like” — not the serious, expensive care that accounts for most expenditures: “The relevant theory, empirical evidence, and policy analysis for moral hazard in the case of serious illness has not been developed.”
By Thomas J. Bramley, RPh, PhD
Vice President, Xcenda
Biologic therapies are a fit with the nature of insurance, which is to protect the beneficiary from high-cost, catastrophic events. What often gets lost in discussions about coverage of biologics, however, is the degree to which these interventions confer value. What do the insurer, employer, and patient gain from access to biologic therapies?
As a health economics outcomes researcher, I take a holistic view. If we look just at the cost of a biologic therapy, coverage becomes a costly endeavor. Such a narrow view doesn’t consider the potential for downstream cost offsets, such as avoidance of hospitalization or fewer ER visits. Including factors such as these is important when assessing the value of any therapy.
Thomas J. Bramley, RPh, PhD
But that’s just the economic side of the equation. In terms of humanistic outcomes, keeping people functional and productive in the workforce is an important part of the conversation as well. We see this in oncology. At one time, cancer was largely the domain of the retired population, or survival after a diagnosis was so short there really wasn’t a productivity argument to be made. Today, more and more cancer survivors are working. In an employer-based health insurance system, the holistic view can carry a lot of weight.
One of the challenges with biologics is in developing an evidence base to support their use. Third-party payers are looking for real-world evidence, and rightly so. But it takes time for real-world evidence to accrue. In the absence of that, projections about the effectiveness of a new therapy are based on clinical trials, which are conducted in an artificial environment. This is of limited use to payers, who deal with real-world utilization in a variety of settings.
One answer to the lack-of-data conundrum is the inclusion of health economic and outcomes research (HEOR) endpoints in clinical study design to better understand the potential real-world effects of a therapy. This can be useful to payers, especially when it comes to understanding a drug’s effectiveness and downstream costs.
It’s often said that current healthcare consumption levels are unsustainable. In thinking about how our healthcare financing system can make room for biologics, three actions come to mind:
Eliminate inefficient therapies. The idea of value-based insurance design holds a great deal of promise for reducing use of therapies that fail or that are ineffective in a given patient population.
Support the development of biomarkers and molecular diagnostics. Biomarkers provide strong indicators that a product will be effective. Personalized medicine approaches can help to reduce treatment failures.
Encourage appropriate use. Noncompliance leads to less-than-ideal outcomes. Benefit designs that provide incentives for better adherence and appropriate utilization of biologics can be a win for everyone.
HEOR focuses on efficient healthcare delivery — not by cutting corners, but by encouraging the best-quality treatment to improve outcomes. As high-cost technologies continue to hit the market, HEOR can help insurers stay true to their mission to protect the beneficiary.
Thomas J. Bramley, RPh, PhD, has more than 10 years of HEOR experience and leads Xcenda’s Global Value Strategy Team.
What does this suggest about high-cost products and services, such as biologics and their administration? In time, studies that document clinical outcomes and productivity in people who use biologic therapies will answer this question. When a 2006 Rand study documented a relatively small drop in specialty drug use associated with higher cost sharing, it effectively separated the demand for specialty drugs from moral hazard. It makes “little or no economic sense” to deny coverage of specialty therapies to the relatively small portion of plan members who could benefit from them, the authors argued. If future studies document positive societal returns on investment, then this assertion could prove prescient. This sort of analysis will take years. Until then, stakeholders will need benchmarks for judging the value of biologics.
Without question, patient demands for coverage of so-called lifestyle drugs and physicians performing unnecessary procedures on well-insured patients helped to create the perception that moral hazard is negative. But is it? Can moral hazard be stratified into types that are efficient and inefficient? If insurance enables access to costly but potentially life-saving treatments, can this benefit business and society?
In 2003, John Nyman posited that the net effect of health insurance is increased societal welfare because patients remain productive and contribute to the economy. Nyman’s primary argument with managed care is that as it strives to reduce inefficient moral hazard, or wasteful consumption, it also reduces efficient moral hazard — the insurance-enabled consumption of healthcare that enables an ill person to receive life-saving healthcare services. In other words, some moral hazard has potential to create value for society, employers, and patients.
According to Nyman, an optimally designed health insurance policy would use cost sharing to control inefficient moral hazard, but would impose no such controls on the efficient portion of moral hazard. It might be more practical, he suggests, to construct moral hazard profiles for specific illnesses; if life-threatening, expensive-to-treat conditions are associated with efficient moral hazard, then no cost sharing should be employed for routine care or expensive procedures associated with them. This is the underlying premise of what has become known as value-based benefits design (VBBD).
A handful of early studies have indicated that VBBD can be a promising vehicle for minimizing downstream costs of chronic disease. In the most famous of these studies, Pitney Bowes saw better medication adherence among employees with diabetes, fewer emergency department visits, and a 6 percent overall cost-of-care decrease two years after moving diabetes drugs and devices to formulary tier 1.
Though the endpoints of VBBD studies have focused on accepted measures of value to purchasers, such as ER visits and costs of care, these are proxies for health status. To date, no VBBD studies have documented better health outcomes. Moreover, extending VBBD to biologics is complicated, largely because stakeholders must first agree on a definition of the value derived from their use.
What is needed is an alignment of stakeholder goals. Demonstrating a drug’s clinical performance in controlled settings will not suffice; manufacturers, payers, and purchasers will need to develop a shared definition of value and integrate corresponding endpoints into pre- and postmarketing clinical trial design. Comparative effectiveness research may answer some questions about value, as could the work of the Patient-Centered Outcomes Research Institute. The stimulation of biomarker research through improvements in market, regulatory, and legal conditions and the development of commercially viable molecular diagnostics will also help to determine the value of a biologic therapy and whether the moral hazard it creates benefits society.
Payers are becoming more sophisticated in using evidence to make coverage decisions and more engaged in the translation and dissemination of research. In time, the development of a holistic evidence base can help payers determine which biologics are consistent with the purpose of insurance.
Senior Correspondent Michael D. Dalzell contributed to the updates of this article.
This article appeared in “Biologic Therapy Management,” a 2008 continuing education supplement to B iotechnology H ealthcare . It has been updated for publication here. The commentaries herein were contributed in March 2012.
