Increasing payer access through drug warranties

Advanced gene, cell, and specialty therapies have the potential to transform patient lives. However, these promising treatments come at a steep cost to patients, payers, and the broader healthcare system, with prices exceeding hundreds of thousands, if not several millions, of dollars.

Imagine the loss and frustration when a therapy fails to deliver its intended medical outcome to a patient — with no recourse to the end payer. The repercussions ripple across the healthcare ecosystem, from the patient who has not received the expected effects of treatment, to the end payer on the hook for the therapy (such as a self-funded employer plan, fully insured plan, or stop loss carrier), to the drug manufacturer’s overall brand.

In 2023, we saw seven FDA approvals of cellular and gene therapy products, and we can expect twice that many in 2024. In fact, the Alliance for Regenerative Medicine foresees 2024 being a potentially unprecedented year for US approvals. Unfortunately, the price of these drugs is as undeniable as their medical benefits, with one report estimating annual costs averaging over $20 billion per year.

As more of these extremely high-cost, specialty therapies go to market, potential patients and other end payers are looking for assurance from pharmaceutical manufacturers that their therapies will deliver on their clinical promises. Widespread adoption of these drugs also depends on them being seen as cost-effective. By addressing the concerns around a drug’s durability for end payers, manufacturers can dramatically increase patient access.

A relatively new concept known as a drug warranty is gaining traction to help remedy this costly scenario by distinguishing a manufacturer’s product in the market, addressing the need for financial recourse for end payers, and reducing the barriers to access that patients face. Although their design will vary based on the therapy and manufacturer, drug warranties typically guarantee that if a particular clinical or health outcome is not achieved during a prespecified time, the manufacturer will reimburse the end payer up to the full cost of therapy.

Who are the end payers for a therapeutic warranty?

The end payer is the party that bears true financial risk. It could be the patient, a stop loss/reinsurance carrier, a self-insured employer group, a traditional health insurance company, or a government-based plan like Medicaid or Medicare.

By providing a means of financial recourse to patients and end payers, pharmaceutical manufacturers can increase adoption of therapies, strengthen patient outcomes, and yield significant savings to end payers and the healthcare system.

Drug warranty programs in action

Suppose a patient takes a gene therapy for sickle cell disease (SCD). One of the prime objectives of treatment — and indeed the primary endpoint of clinical trials in SCD — is the reduction in the number of vaso-occlusive crises (VOCS), which are painful blood vessel blockages that can lead to acute chest syndrome, stroke, jaundice, and heart failure. A simple warranty for such a therapy could provide a reduction in the number of VOCs experienced by a patient over a period of time. If a reduction in VOCs did not occur, the payer would receive a warranty payout for all or a portion of the cost of the gene therapy. For obvious reasons, the reduction in VOCs is an important outcome for a patient, but it is also important for payers because each VOC that results in a hospitalization or disease progression equates to a higher cost episode of care.

Warranty program basics

Although each warranty will have its own terms unique to each drug, most programs follow a three- or five-year term and outline the following:

The duration of the warranty
The specific circumstances that trigger payment
- Therapeutic failure if the drug does not work as intended
- Discontinuation of use if a patient decides to stop taking the drug
The total amount being reimbursed

Therapeutic warranty programs must adhere to the latest Centers for Medicare and Medicaid Services (CMS) rules and state insurance regulations. In recent years, CMS has encouraged the adoption of value-based agreements (VBAs), innovative payment plans, and warranty solutions to:

Outline how warranties impact best price calculations.
Create more flexibility for providers and payers.
Drive adoption of potentially life-altering drugs.

A therapeutic warranty may not be an effective risk management tool for every pharmaceutical manufacturer or every therapeutic they offer. Before employing a warranty strategy, manufacturers should thoroughly develop a business case for its use: How will offering a warranty benefit the patient, the end payer, and the manufacturer’s brand?

Once a decision is made to explore a warranty strategy, it is crucial to partner with an expert advisor that not only understands the regulatory and legal parameters of a warranty, but also how to efficiently price and operationalize an effective warranty program. With their help, drug manufacturers can create a customized warranty that outlines the duration of the program, defines the conditions that trigger payment back to the end payer, as well as the amount of the warranty payout.

What are best price calculations?

Under CMS rules, manufacturers are required to report the best price they offer for their therapies. This best price is the lowest price at which a manufacturer sells their therapy to any purchaser, including wholesalers, retailers, and other direct purchasers — net of any rebates, price concessions, or other inducements. The purpose of this requirement is to ensure that Medicaid programs receive the benefit of the lowest price available in the market, and to make high-cost therapies more available and affordable to a larger pool of patients.

Drug warranties versus outcomes-based agreements

Therapeutic warranty solutions largely differ from other market access tools, such as VBAs and outcomes-based agreements (OBAs). Unlike drug warranties that establish agreements directly between manufacturers and end payers, VBAs and OBAs are typically between manufacturers and intermediaries, such as administrative services organizations or pharmacy benefit managers. The intermediary — essentially a third-party payer — works to negotiate the terms of the agreement between itself and the manufacturer.

If a patient qualifies for reimbursement for a therapy that did not work as intended under the terms of the VBA or OBA, payment takes the form of a performance rebate. However, due to the involvement of intermediaries, the rebate often does not fully cascade down to the end payer, despite being the entity taking on true and total financial risk.

Pharmaceutical manufacturers tend to strictly control possible rebate amounts, as these dollars are considered a concession to pricing and must be reported to the US government, where they are factored into the CMS best price calculation. This reality makes it even less likely that end payers will be fully reimbursed for the risk they are assuming — if at all.

Further, since these agreements are negotiated individually with only a handful of intermediaries servicing a minority of end payers, many potential patients may struggle to access these expensive therapies because their payer has no recourse if the treatment fails. Smaller and/or self-insured plans, particularly, may not have the ability to negotiate a rebate aligned with their risk tolerance, ultimately deciding not to cover the drug.

Drug warranties, on the other hand, are oriented directly between the manufacturer and end payer. As the payouts are not held against CMS best price, pharmaceutical manufacturers are better able to provide payers with meaningful remuneration to the right counterparty. There is only one warranty on the drug, simplifying contracting by eliminating the need to manage months of negotiations once a drug is approved and the label is known. The warranty accompanies every sale of the therapy, allowing all end payers to benefit from it, regardless of their bargaining power. By offering a warranty on their therapy, pharmaceutical manufacturers can increase the chances that payers both large and small may include the drug on their plans, in turn expanding access to more patients.

Existing barriers to access for payers and patients

Efforts to improve affordability, streamline reimbursement processes, increase awareness about therapeutic warranties, and expand access to specialty therapies are crucial to ensure that patients can benefit from these life-altering treatments. Currently, the most significant roadblocks to accessing specialty therapies for patients and payers include:

Affordability: As the number of available high-cost treatments grows, end payers must decide which therapies to prioritize, given limited budgets. The upfront costs associated with treatment put strain on the end payers responsible for footing the bill if the treatment does not work. Even if a million-dollar gene therapy is 95% effective, end payers cannot ignore the 5% margin of failure for medicine that costs hundreds of thousands of dollars or more.
Durability: Although advanced therapies are typically priced based on the reasonable assumption that they will provide long-term benefits to patients, many are approved after relatively short clinical trials. Therefore, it can be difficult to know if benefits will be long-term. According to a survey of small and large commercial and public plans covering 84 million people, payers increasingly demand a performance guarantee. Even if the risk of therapeutic failure is extremely low, payers do not want to take on this risk alone, or at all, for a drug that costs them millions of dollars.

A trifold solution for patients, payers, and manufacturers

Introducing a comprehensive drug warranty program is an opportunity to benefit the following parties in substantial ways:

Patients: By offering performance guarantees, manufacturers take responsibility for the quality and efficacy of their products with meaningful reimbursement options. This setup not only encourages patient trust and confidence in the medication, but also helps alleviate the financial burdens associated with ineffective treatments. Therapeutic warranties can contribute to increased medication adherence and compliance, improved health outcomes, and greater patient satisfaction.
End payers: Taking on the financial risk associated with a million-dollar dose of treatment can be an untenable option for payers. Warranties may offer payers meaningful financial recourse in the event of therapeutic failure. The financial protection gives them more confidence and reassurance when covering potentially life-altering therapies, equipped with a robust performance guarantee.
Manufacturers: Warranty programs help manufacturers increase patient access and adoption of expensive therapies. By providing assurance to payers that therapies will deliver on their clinical objectives and offering financial recourse if they fall short, warranties can influence payer behavior and establish a superior value proposition from their peers. Payers will be more apt to provide coverage for a therapy with a robust performance guarantee than one without. A well-structured and compliant warranty, in conjunction with advanced therapies, mitigates risks by leveraging insurance strategies and helps motivate manufacturers to continue developing innovative solutions.

Expanding patient access through partnership

Marsh and Octaviant Financial, Inc., a recognized innovator in novel drug warranty and payment models, joined forces in 2023 to create a specialized warranty platform that enables pharmaceutical companies to expand patient access to their life-changing gene, cell, and specialty therapies.

Together, the Marsh and Octaviant warranty platform can support pharmaceutical manufacturers in developing customized therapeutic warranty solutions from concept to execution. Through our partnership, we ensure compliance with the latest CMS guidelines and state insurance regulations, allowing for meaningful reimbursement of the therapy. In addition to the warranties, the Marsh/Octaviant program provides clients access to strategic insights and proprietary tools, such as therapeutic actuarial services and Octaviant’sprecision finance platform, to bring highly competitive warranties to market.

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Increasing payer access through drug warranties

Increasing payer access through drug warranties