Use warranties, not outcomes-based agreements, to make payers whole when a gene therapy fails

Emad Samad

Published online March 9, 2023 at STAT+
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I couldn’t answer his second question. A large upfront payment for a single-dose therapy that might not work was something the health care system couldn’t bear.

Later that fall, the Food and Drug Administration approved Sovaldi, a small-molecule cure for hepatitis C priced at $84,000 for a multi-week course of treatment. Despite providing the health care system with immense value by avoiding the high-cost complications of late stage hepatitis C, Sovaldi’s price caused panic and outrage across the country, leading to a Congressional investigation into Gilead’s pricing practices and the subpoena of more than 20,000 pages of internal corporate documents by a Senate committee.

CMS Rule Changes and The Payer’s Dilemma

A handful of gene therapies are now on the market, primarily for ultra-rare diseases. Yet there has been no substantial move on the part of manufacturers to change the commercialization patterns around these expensive therapies. As a category, gene therapies become less commercially viable with every approval of a multi-million-dollar single-dose therapy as the number of patients eligible for such treatments increase and payers are forced to make decisions on which therapies to prioritize with limited dollars.

Manufacturers have complained that statutory rules set by the Centers for Medicare and Medicaid Services around drug pricing has hampered their ability to innovate. But CMS has not been idle.

Right behind affordability, the greatest concern for payers of gene therapies is their durability. A recent survey commissioned by Octaviant Financial, the company I cofounded, queried large and small commercial and public plans covering 84 million lives. Payers revealed they have zero tolerance for therapeutic failure no matter how statistically low the risk is. They said that if a company is charging millions of dollars for a gene therapy and making claims of durability, it must stand by the efficacy of its therapy and provide a performance guarantee.

They also said that if one of two competing gene therapies offers a warranty, the terms of the warranty could be a tiebreaker for authorization, all else being equal between the two therapies.

The use of warranties makes sense to me. So it’s perplexing that gene therapy companies are using so-called outcomes-based agreements (OBAs) to provide refunds to risk-bearing payers instead of taking advantage of newer strategies made available through CMS’s 2020 rules.

A major weakness of outcomes-based agreements is that rebate dollars are tightly controlled by pharmaceutical companies because they are treated as a concession to price and must be reported to the U.S. government to be averaged into the price the government pays for that drug, referred to in the industry as “best price.” Simplistically, if a manufacturer gives a $2 million refund to a payer for a $2 million therapy that fails, the manufacturer must report $0 for that sale.

Because of the tension introduced with best price, traditional OBAs rarely provide meaningful remuneration to payers, rendering them highly inefficient in providing financial recourse to payers when a therapy fails.

An often-overlooked component of OBAs is that they can lead to disparate patient access to expensive therapies. Those who belong to smaller self-funded payers struggle to gain access, since their plans do not have the scale to negotiate steeper rebates with manufacturers and decide not to cover the therapy as a result of projected costs and risks remaining too high.

Some outcomes-based agreements are engineered to pay out rarely, if ever. For instance, a biotech company could proclaim that its OBA will pay 100% back to the payer if the therapy fails within two years of therapy, but the failures during clinical trials were experienced in year three. Payers are realizing the devil is truly in the details when it comes to these agreements. Yet many market access teams at gene therapy companies continue to rely on decades-old rebating tactics like OBAs as if they are rolling out small molecule drugs.

In contrast, larger pharmaceutical companies and a handful of innovative gene therapy companies are taking a taskforce-oriented approach — leveraging market access, finance, legal, health economic outcomes, corporate risk, and government affairs teams — to evaluate and offer warranties for drug launches as allowed by CMS’s new rules.

Therapeutic warranties are insurance-based instruments funded by manufacturers that provide recourse to the warranty holder if a product does not meet predefined expectations. Unlike most outcomes-based agreements, which end up in the hands of middlemen, the warranty holder — in this case the entity that makes the decision to use the therapy and pays the bill — is entitled to the complete amount guaranteed by the manufacturer as stipulated in the warranty policy.

According to the new rules, the premium paid by the manufacturer to a third-party for a warranty program would be held against the best price, however the payout of the warranty — which could be in the millions — would not be held against it when the manufacturer complies with the new rules. This makes complete sense given the underpinnings of warranty programs and how the insurance industry actually operates.

An actuarial model is used to derive the warranty premium given three dimensions of the policy: duration of the warranty coverage, a benefit trigger, and the amount refunded to the payer if the benefit is triggered. The model considers the total addressable patient population and allows for manufacturers to consider the sporadic nature of rare disease risk and adequately compensate the minority of payers who may experience therapeutic failure as defined by the benefit trigger. The resulting premium is usually a fraction of the potential payout for a multi-million-dollar therapy, making well-structured warranty programs astonishingly capital efficient to comparable outcomes-based approaches for gene therapies.

In a competitive market, a warranty would be a major differentiator and accelerate commercial performance because payers would be more comfortable providing coverage for a gene therapy with a robust performance guarantee. A gene therapy manufacturer facing competition within an indication could even offer a warranty and a rebate, while the competition depletes rebate dollars by reserving them for OBAs that payers know are worthless. By issuing a single or a handful of warranties across all payers, manufacturers avoid the hand-to-hand combat they conduct with payers and their intermediaries over OBAs — saving valuable time for patients.

Conclusion

It may be too late for late-stage gene therapy companies relying on business-as-usual to avoid public backlash and outright market failure for cavalier approaches to gene therapy commercialization. The leadership of gene therapy companies still formulating commercial strategies should realize that sophisticated gene therapies require an equally sophisticated approach to market access and reimbursement. Look at it this way: even if a million dollar gene therapy is 92% effective, every payer lives in the 8% margin of failure.

Payers are already nervous about high price tags for gene therapies, and gene therapy companies that offer dubious to no performance guarantees will only further undermine market confidence.

Offering warranties is just one of several strategies gene therapy makers should employ to ensure open and full access to their products.