Drug warranties: A spotlight on end payers

Advanced gene, cell, and specialty therapies have the potential to transform patient lives. However, they come at a steep cost to patients, payers, and the healthcare system, with prices running into the hundreds of thousands, if not millions, of dollars. A relatively new concept known as a drug warranty is gaining traction as a means to offer some financial protection when these costly treatments do not yield their expected clinical outcomes.

This is the third in a series of articles exploring the use of warranties in a pharmaceutical environment, aimed at addressing drug manufacturers’ challenges, educating patients and end payers, and expanding awareness about the value of warranty programs to the wider healthcare system.

The end payer’s dilemma

End payers for high-cost therapies can, at times, be the patients, as mentioned earlier in our series. But in the US, where approximately half of all individuals receive their health and pharmaceutical benefits through employers — of which roughly 60% self-insure — the true financial risk typically falls on employers, insurers, and government agencies. Specifically, end payers often include:

The federal government (Medicare/Medicaid/Tricare)
State governments (Medicaid)
Medicare Advantage and Medicaid managed care organizations (MCOs)
Affordable Care Act (ACA) issuers, including individual and small group
Group insurers (Non-ACA commercial markets)
Self-insured payers (Corporations and government)
Member cost sharing

In the complex landscape of healthcare financing and pharmaceutical pricing in the US, the financial burden of high-cost therapies often falls upon the above entities and the patients they provide coverage for, either through premium payments, copays, coinsurance, or a combination of each.

Coverage for beneficiaries grows even more complex for health plans as scientific breakthroughs deliver a multitude of potential options for physicians, patients, and end payers. Healthcare spending dollars are finite, and end payers have many competing obligations across all beneficiaries.

These true payers of healthcare thus stand at a complex crossroads: Do they take on financial responsibility without any assurance for treatments that could dramatically transform a few patients’ lives if they work? Or should they stop funding them altogether as the financial risks are too great and instead fund therapies that will help many more beneficiaries?

For instance, an end payer could pay for a single advanced therapy and its administration for $5 million, which may or may not be successful, or use the same $5 million to provide needed, lower cost prescriptions to a multitude of beneficiaries.

The end payer's dilemma becomes even more pronounced in the event of therapeutic inefficacy. If a high-cost therapy does not yield its expected clinical outcome, the end payer not only bears the initial costs of the treatment, but will have to continue to pay for standard of care drugs which are also expensive year-over-year, as in some diseases like hemophilia and Duchenne muscular dystrophy where the yearly standard of care is easily $1 million or above.

For many, particularly smaller payers, the potential margin of failure is too significant; budgets are stretched thin, and limited financial reserves prevent them from absorbing such losses. Smaller payers often do not have the scale to negotiate favorable pricing or traditional value contracts that larger end payers can sometimes secure. For instance, a school system in Texas that pays for its own healthcare may not receive the same treatment options or pricing advantages as a large employer plan in Massachusetts due to its smaller risk pool and lack of negotiating power.

Additionally, the reputational risk associated with funding high-cost therapies cannot be overlooked. If a payer denies a high-cost therapy, such as a hematopoietic cell transplant (HCT) for a child, and this decision is reported by local news outlets, the backlash can be severe. Stakeholders may perceive the payer as denying necessary care, leading to public outrage and damaging their credibility. Conversely, if they choose to cover these therapies and they do not deliver expected outcomes, they may also face criticism for supporting ineffective treatments. This negative perception can create uncertainty surrounding treatment efficacy, ultimately limiting patient access to potentially life-saving options and further complicating the already challenging landscape for smaller payers.

A closer look at payer cost variability

In a recent report developed by Oliver Wyman in collaboration with Octaviant Financial, Inc., both organizations acknowledge that much of the discussion around financial expenditure for gene and cell-based therapies (GCTs) has been focused on the healthcare system at large.

There has been a lack of focus, however, on how these costs can differ dramatically across various payer types, including employers, insurers, and government agencies that bear the financial responsibility for these treatments.

With the adoption of these therapies expected to continue, so too will the substantial financial burden associated with GCTs — particularly on smaller payers, as highlighted in their analysis. This will require a proactive, data-driven approach to managing financial risk and evaluating expense recovery mechanisms, such as manufacturer-supplied drug assurance programs or warranties.

The value of therapeutic warranties for end payers

Drug warranties can serve various parties in the healthcare system. For end payers specifically, the benefits are twofold:

Financial recourse: Drug warranties can provide end payers with a safety net against the high costs associated with expensive therapies. In the event of therapeutic inefficacy, these warranties offer a mechanism for financial recovery, allowing payers to recoup some or potentially all of their expenditures. This financial protection is particularly crucial for smaller payers who may struggle to absorb the costs of expensive therapies, enabling them to participate in the market without the fear of unsustainable financial losses. Over the course of time, financial recourse also allows all end payers to keep healthcare premiums lower for all beneficiaries.

For instance, if a smaller payer loses $5 million on a high-cost therapy and subsequently has to place a patient on another $1 million per year standard of care, the financial burden could lead to increased premiums for everyone in the plan. Warranties provide a means for efficiency for health plans and their public and private sponsors, ultimately benefiting the entire healthcare system.
Greater reassurance and investment confidence: The introduction of drug warranties can significantly boost end payers' confidence in covering potentially life-altering treatments and lower prior authorization timings. As the healthcare system’s overall capacity to authorize and pay for these therapies increases, it will encourage greater investment in advanced therapies and promote a more collaborative relationship between payers and manufacturers. Together, both parties are united in their goal of expanding patient access to these transformative treatments and ultimately helping more individuals benefit from them.

Expanding patient access through collaboration

Marsh and Octaviant Financial, Inc., a recognized innovator in novel drug warranty and payment models, worked together 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. The platform is compliant with the latest CMS guidelines and state insurance regulations, allowing for 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’s precision finance platform, to bring highly competitive warranties to market.

To learn more about the financial implications of high-cost therapies on different types of commercial payers, explore the full report by Oliver Wyman and Octaviant Financial, Inc.

Closeup pharmacist hand holding medicine box in a pharmacy drugstore.

Article

Drug warranties: A spotlight on end payers

The end payer’s dilemma

A closer look at payer cost variability

The value of therapeutic warranties for end payers

Expanding patient access through collaboration

Our people

Eddie Albers

Related insights

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Drug warranties: A spotlight on end payers

The end payer’s dilemma

A closer look at payer cost variability

The value of therapeutic warranties for end payers

Expanding patient access through collaboration

Talk to us

Our people

Eddie Albers

Related insights

Drug warranties, outcome-based agreements, and barriers to costly therapies

Using drug warranties to mitigate financial risks of costly therapies

Product and clinical trials liability webinar

Four actions to mitigate rising product recall risks