In an era of US$1,000/dose medications, a new approach may be needed to finance an emerging breed of expensive but highly effective pharmaceuticals and vaccines, according to a new Rand Corporation analysis. In other industries, it is common for suppliers to encourage customer investment — particularly for costly capital purchases such as new automobiles and machinery — through approaches such as equipment leases or supplier-financed credit. The healthcare industry could learn from such approaches.

For example, instead of paying up front for the cost of a treatment — $20 billion to vaccinate Brazil’s 203 million people against dengue fever, for example — a health system could issue debt instruments to the manufacturer. Those instruments could be structured as bonds, as mortgages, or as lines of credit. Terms and interest rates would vary.

This concept is not unprecedented, even in the healthcare industry. When hospitals need expensive equipment, they might lease it, or the supplier might offer a financial arrangement to help with the upfront cost. So it’s not far-fetched for pharmaceutical companies to use a similar approach.

Next-Generation Products Challenge Payers
New approaches to pay for healthcare may be needed because the pharmaceutical industry has turned its attention to highly targeted medicines that are very costly to develop. The resulting prices of $100,000 per course of treatment or more did not trouble payers if a drug was highly effective and offered good value for money — as long as the number of patients who are eligible for treatment remained small and the overall budgetary impact was limited, that is. Now that an increasing number of such targeted treatment for more common diseases reach the market, payers are confronted with short-term budget constraints.

(Editor’s Note: The financing problem is not limited to biopharmaceuticals.) One small-molecule drug that illustrates the tension between immediate budget concerns and the long- term value of treatment is Sovaldi (sofosbuvir). Made by Gilead Sciences, it cures a form of hepatitis C in 95% of patients — at $1,000 per pill or $84,000 for a typical course of treatment in the United States. The heavy short-term impact on healthcare budgets can put this cure out of reach. Pharmacy benefits manager Express Scripts estimates that prescription-drug spending on hepatitis C will increase 1,800% by 2017. But Sovaldi could pay for itself in about 10 years with savings from reduced hospital stays and prevented liver transplant costs.

Buyer Beware?
There are caveats to debt-financing schemes. For example, companies would have to show that real-world outcomes were as good as clinical-trial results to receive full payment. If a drug or vaccine doesn’t work as well as promised, then repayment would be lowered accordingly. A neutral third party would need to design and evaluate such payment arrangements and evaluate product effectiveness using real-world patient sampling.

Such financial arrangements could work well in countries with national health systems or at least stable insurance coverage. They would be more difficult in the United States, where patients change health plans often. In theory, it would be possible with a reliable transfer mechanism in place. For example, if a patient is cleared of hepatitis C while covered by one insurer, then the associated debt would have to travel with the patient to his or her next insurer. We are currently working on a paper to explore options for how such an approach could operate in the United States.

For Further Reading
The perspective report, Borrowing for the Cure: Debt Financing of Breakthrough Treatments, is available for free online: www.rand.org/content/dam/rand/pubs/perspectives/PE100/ PE141/RAND_PE141.pdf. The research underlying this paper was conducted by Rand Health Advisory Services, the consulting practice of Rand Health that engages in work for the private sector and produces results that are disseminated broadly in the public interest. Support was provided by Rand internal funding.

Soeren Mattke is managing director of Rand Health Advisory Services, the consulting practice of Rand Health, 20 Park Plaza #920, Boston MA 02116; 1-617-338-2059; mattke@rand.org, www.rand.org/rhas. Rand Health is the nation’s largest independent health policy research program, with a broad research portfolio that focuses on healthcare costs, quality, and public health preparedness among other topics.