Pharma R&D in a Value-based Healthcare System

THE PEER-REVIEWED FORUM FOR EVIDENCE IN BENEFIT DESIGN™
JANUARY 2009 VOLUME 2, NUMBER 1, SUPPLEMENT
©2009 Engage Healthcare Communications, LLC
www.AHDBonline.com
SUPPLEMENT
™
Proceedings from AHDB’s First
Annual Summit on Healthcare
Stakeholder Integration
The Return to Deep Science:
Pharmaceutical Research &
Development in a Value-Based
Healthcare System
AHDB0508_C1.qxp 1/12/09 7:32 PM Page C1

™ ™
Publisher
Nicholas Englezos
nick@engagehc.com
732-992-1884
Associate Publisher
Maurice Nogueira
maurice@engagehc.com
732-992-1895
National Account Manager
Cristopher Pires
Cris@engagehc.com
732.992.1896
Editorial Director
Dalia Buffery
dalia@AHDBonline.com
732-992-1889
Associate Editor
Dawn Lagrosa
732-992-1892
Senior Production Manager
Lynn Hamilton
Business Manager
Blanche Marchitto
President
Brian F. Tyburski
brian@engagehc.com
Editor-in-Chief
Robert E. Henry
rhenry@AHDBonline.com
732-992-1885
American Health & Drug Benefits is founded
on the concept that health and drug benefits
have undergone a transformation: the
econometric value of a drug is of equal
importance to clinical outcomes as it is to
serving as the basis for securing coverage in
formularies and drug benefit designs. Benefit
designs are greatly affected by numerous
clinical, business, and policy conditions.
This publication provides benefit design
decision makers the integrated industry
information they require to devise formula-
ries and drug benefit designs that stand up
to today’s special healthcare delivery and
business needs.
Contact Information:
For reprints, subscription information, and
editorial queries, please contact:
editorial@AHDBonline.com
T: 732-992-1880
F: 732-992-1881
Mission Statement
This supplement has been supported by funding from Eli Lilly and
Company. Commercial supporter did not influence the content.
AHDB0508
The Return to Deep Science: Pharmaceutical Research
& Development in a Value-Based Healthcare System
S5 Introduction: The Joy of Collegiality in the Return to Deep Science
Robert E. Henry
S6 Challenges in Drug Development: 100 Years of Diabetes Management
Thomas McCarter, MD, FACP; Keri Cooper; Alicia Mettimano
S10 The Role of New Healthcare Technologies in a National Wellness
Strategy
Robert K. Smoldt, BS, MBA
S16 Value-Based Benefit: The Concept, the Reality, and the Challenge
Gary M. Owens, MD
S21 Employers’ Perspective on New Technologies in Healthcare
F. Randy Vogenberg, RPh, PhD
S26 Employers’ Perspective on Value in Healthcare Innovation
Wayne M. Lednar, MD, PhD
S3January 2009 www.AHDBonline.com
Continued on page S4
AHDB0508_3-4.qxp 1/12/09 7:36 PM Page 3

S4 AMERICAN HEALTH & DRUG BENEFITS January 2009 Supplement
™ ™
Editorial assistance was provided by Norman L. Johnson, MD,
and Loretta Fala.
AHDB0508
S30 Value-Based Purchasing: Impact on Pharma
Lawton Robert Burns, PhD, MBA
S36 The New, Risk-Averse World of Regulation and Reimbursement
Kip Piper, MA, CHE
S41 Evidence Standards in the Era of Comparative Effectiveness
Nirav R. Shah, MD, MPH
S49 The Role of Epidemiology in New Drug Development
Jeff J. Guo, BPharm, PhD; Christina M. L. Kelton, PhD
S55 Impact of Market Trends on Drug Pipelines: The Need for
Value-Based R&D
Matthew Sarnes, PharmD
S61 Case Study: Insu-Nectin (NV 1008) for Type 2 Diabetes
Michael F. Murphy, MD, PhD
Continued
American Health & Drug Benefits, ISSN 1942-
2962 (print); ISSN 1942-2970 (online), is
published 12 times a year by Engage Health-
care Communications, LLC, 241 Forsgate
Drive, Suite 205A, Monroe Twp, NJ 08831.
Copyright © 2009 by Engage Healthcare
Communications, LLC. All rights reserved.
American Health & Drug Benefits and The
Peer-Reviewed Forum for Evidence in Benefit
Design are trademarks of Engage Healthcare
Communications, LLC. No part of this pub-
lication may be reproduced or transmitted in
any form or by any means now or hereafter
known, electronic or mechanical, including
photocopy, recording, or any informational
storage and retrieval system, without written
permission from the Publisher. Printed in the
United States of America. Address all edito-
rial correspondence to: editorial@AHDB
online. com, Telephone: 732-992-1889. Fax:
732-992-1881. American Health & Drug
Benefits, 241 Forsgate Drive, Suite 205A,
Monroe Twp, NJ 08831.
POSTMASTER: CORRESPONDENCE
REGARDING SUBSCRIPTIONS OR
CHANGE OF ADDRESS should be directed
to CIRCULATION DIRECTOR, American
Health & Drug Benefits, 241 Forsgate Drive,
Suite 205A, Monroe Twp, NJ 08831. Fax:
732-992-1881. YEARLY SUBSCRIPTION
RATES: One year: $99.00 USD; Two years:
$149.00 USD; Three years: $199.00 USD.
Permission requests to reprint all or part of any
article published in this supplement should be
addressed to REPRINT PERMISSIONS
DEPARTMENT, Engage Healthcare
Communications, LLC, 241 Forsgate Drive,
Suite 205A, Monroe Twp, NJ 08831. The
ideas and opinions expressed in American
Health & Drug Benefits do not necessarily
reflect those of the Editorial Board, the
Editors, or the Publisher. Publication of an
advertisement or other product mentioned in
American Health & Drug Benefits should not be
construed as an endorsement of the product or
the manufacturer’s claims. Readers are encour-
aged to contact the manufacturers about any
features or limitations of products mentioned.
Neither the Editors nor the Publisher assume
any responsibility for any injury and/or dam-
age to persons or property arising out of or
related to any use of the material mentioned
in this publication.
AHDB0508_3-4.qxp 1/12/09 7:36 PM Page 4

INTRODUCTION
T
his supplement contains the proceed-
ings of the First Annual American
Health & Drug Benefits Summit on
Healthcare Stakeholder Integration, which was
held in Philadelphia on October 10, 2008.
Parse the heraldic phrasing, and you will
find the implicit question: Are the cost and
regulation pressures on new drug discovery
and development prohibitive of innovation?
Look further and you will find that however
objective the editorial standards of AHDB, there is an
ongoing premise that enduring solutions to healthcare
value entail the collegial alignment of stakeholders,
that all parties to healthcare are “good,” their empow-
erment and preservation essential to the success of
healthcare. It is a matter of balancing forces to ensure
a healthcare system that serves patient interests and
remains progressive.
To gauge how risk averse is the healthcare environ-
ment, and how viable is research and development
(R&D), we convened a 1-day summit with a faculty of
luminaries from many stakeholder groups: pharmaceu-
tical R&D, epidemiology, payers, purchasers, pharma-
coeconomics, the Mayo Clinic, provider, regulatory,
and industry. We wanted the expertise from the many
spheres of influence affecting R&D to illuminate the
demands on innovation and to explore the intersection
of the forces impeding and supporting innovation.
Our hypothesis was that unilateral stakeholder agendas
in a multilateral healthcare system are a setup for a
litany of unintended consequences threatening the via-
bility of R&D infrastructure. And so we gathered this
consortium of talent to provide payers and purchasers
insight into formulary and benefit design strategies
that balance the costs of new drugs against the quality
they offer as they regulate patient access to the fruits of
drug innovation.
As the afternoon wore on, something curious
occurred. The speakers came to me independently with
deep smiles on their faces, saying they enjoyed this
meeting more than any they had attended in quite
some time. I knew what it was: a feeling of profession-
al joy. They ended the day knowing more about the
process of healthcare innovation than they
would ever have known by remaining within
their own sector. By coming out of them-
selves, by being open to the needs, data, and
propositions of the other stakeholders, they
received the gift of hope. They could see how
the healthcare system they love—and this is
their common trait, the deep love of heal-
ing—could endure and flourish, because they
were being briefed by colleagues on matters
outside their areas of expertise and could see the big
picture. They could begin to understand and appreciate
the needs of the other stakeholders, whose demands no
longer seemed random or pointless. Communication, a
civilized dialogue on the governing dynamics facing
each stakeholder group, made the difference. They
asked to be invited back for future meetings. They want
what we started on October 10, 2008, to continue. We
hope you will, too.
The net purpose of conducting this inquiry is that
we can no longer assume that the great strides made by
drug R&D will continue, any more than the massive
financial market could survive, without the support
for the governing dynamics on which it is intrinsically
based. There must be a realistic and dynamic dialogue
between payers and the bench, including all stakehold-
ers, to achieve consensus on what direction R&D
must take. Remaining insular will cause pharma/
biotech to research drugs that only occasionally meet
the needs of the entire system. This will result in head-
lines that will proclaim that the sources of new drug
development have dried up, thanks to misalignment of
stakeholder incentives.
But this outcome is not inevitable. This supplement
is dedicated to the healthcare professionals who care
enough about the curing of patients to look beyond the
interests of their own sector. We hope this spirit of mul-
tidisciplinary support will cause formulary and benefit
designs to protect the future of healthcare innovation
by rewarding value-based products and stimulating an
unrelenting discourse back to the bench to guide the
efforts of pharma as they continue to open up new
pathways to health. ■
The Joy of Collegiality in the Return
to Deep Science
Robert E. Henry, Editor-in-Chief
AHDB0508_5.qxp 1/12/09 7:37 PM Page 5

T
he case of diabetes well illustrates
how research and innovation have
led to an increase in the understand-
ing of the disease, and the development of
extraordinary products that have changed
the lives of patients. When viewing diabetes
or many other disease states through a broad
historical lens, we are reminded of the excit-
ing discoveries, achievements, and promising
patient outcomes leading up to the twenty-
first century (Table 1). We are also reminded of some
of the innovations that were not as successful. Over the
past 100 years the combined efforts of healthcare stake-
holders have changed diabetes from a condition that
was uniformly fatal at diagnosis to a condition where
today, a person with diabetes can live a long, active,
and productive life. Before 1900, a person diagnosed
with diabetes rarely lived more than 6 months with
very few surviving 2 years after diagnosis. In a medical
textbook from 1895, Goodno and Bartlett described an
11-year-old girl who had died 6 weeks after the appear-
ance of her first symptom of diabetes.1
According to
Goodno, diabetes was ascribed to “women who take lit-
tle exercise and are given to the pleasures of the table,”
and to the “well-to-do class,” whose members “eat
much and work little.”1
Furthermore, at that time, the
general consensus was “wealth and culture increase the
liability to diabetes 10-fold.”1
Goodno also document-
ed the link of diabetes to carbohydrate metabolism,
renal disease, immune dysfunction, atherosclerosis, and
heart disease. He also recognized that after removal of
the pancreas, a dog would die from diabetes.1
Through only the disciplined application of clinical
observation, scientific method, very limited biochemi-
cal laboratory analysis, and animal modeling, the secrets
of this catastrophic condition were beginning to
unravel. Yet with the exception of some very interest-
ing and complex dietary regimens supported by little
scientific evidence, and fewer measures of improved
outcomes, there existed no real treatment for
the disease.
By 1905, Osler referred to diabetes as a
condition that occurred when a “disease of
the pancreas” prevented the formation of a
“glycolytic body” produced in the “is[lets] of
Langerhans” which were embedded in the
pancreas.2
Osler recognized a number of
complications experienced by diabetic
patients, including skin infections, eye com-
plications, renal disease, increased incidence of pneu-
monia and tuberculosis, nerve damage, and impotence.
Other serious complications cited were coma, which
usually was fatal within a few hours, and gangrene,
which required surgery.2
Because antibiotics were not
yet discovered, there was little recourse for treating
postsurgical infection.
Insulin Discovery
By the 1926 publication of Stevens’ second edition
of The Practice of Medicine, Frederick Banting’s discov-
ery of insulin in 1921 had revolutionized the under-
standing and treatment of diabetes. Stevens described
the research resulting in the discovery of insulin as
“separating from the islet tissue an extract which when
injected into a diabetic animal removes hyper-
glycemia…and into a healthy animal produces serious
hypoglycemia.” The average survival rate for diabetes
was by then 1 to 2 years.3
The increased survival was
due to the role of diet and insulin in daily treatment, as
well as the recognition of diabetic ketoacidosis (and
associated coma) as a condition that could be treated
with insulin.
Although insulin played a vital role in influencing
the course of diabetes and treating diabetic coma, its
introduction was accompanied by serious side effects,
most notably, insulin shock, which in those early days
often resulted in death. Would this innovation have
survived in the pharmacopeia, had it been subjected to
the external environment that companies face today?
Specifically, how would the US Food and Drug
Administration and regulators have viewed these early
incidents? In today’s litigious environment, would a
Challenges in Drug Development:
100 Years of Diabetes Management
Thomas McCarter, MD, FACP; Keri Cooper; Alicia Mettimano
Dr McCarter is Chief Clinical Officer, and Ms Cooper and
Ms Mettimano are Research Coordinators at Executive
Health Resources, Philadelphia, PA.
Thomas McCarter
AHDB0508_6-9.qxp 1/12/09 7:48 PM Page 6

company be able to stay the course, or would insulin
have suffered a market withdrawal like many of the
agents in Table 1? Would a financial environment driv-
en by increasingly skittish investors reacting to each
news story have led to such a loss of market capitaliza-
tion that product withdrawal is preferable to continued
market risk?
In 1942, Yater defined diabetes mellitus as a
primary and incurable inability of the tissues to utilize
glucose properly because of an insufficient production
of insulin, the internal secretion of the islets of Lan-
gerhans of the pancreas.4
During that time, diabetes
treatment was based on diet and insulin, and insulin
became more readily available in regular- and longer-
acting forms. Greater emphasis was placed on insulin
regimens covering the course of the entire day, as
well as on frequent urine glucose monitoring to prevent
glycosuria, augmented by occasional serum monitoring.
At the same time, insulin-related allergic reactions
caused by animal proteins and impurities became
more common, as did the insulin-induced prevalence of
hypoglycemia. Would these “allergic reactions” be tol-
erated in today’s environment? Important diabetes-
related components of care were emphasized, including
foot care, and amputation for nonhealing ulcers and
gangrene. Pregnancy, which once was considered virtu-
ally impossible for women with diabetes, was still cau-
tioned, and closer monitoring techniques were estab-
lished to prevent glucose control problems and to
reduce infant mortality rates.4
From the 1890s to the
mid-1940s, diabetes evolved from a terminal disease to
a serious condition that could be successfully treated
through diet, insulin, and now exercise—and the
expected outcome of treatment was not only survival
but also “normal physical and mental vigor.”4
By the publication of the sixth edition of Cecil’s A
Textbook of Medicine in 1944, the connection between
diabetes and atherosclerosis, as well as the synergy
between diabetes and infection, were more fully under-
stood.5
These interactions would soon be radically
impacted by the widespread availability of antibiotics,
and new procedures that would allow the revasculariza-
tion of peripheral and coronary vascular occlusions.
Recent Developments, 1950-2000s
The early 1950s through the 1990s ushered in a
number of important developments. In the 1950s,
longer-acting insulins became available (the intermedi-
ate-acting Lente insulin was introduced in 1950), and
sulfonylureas emerged as a viable oral therapy for type
2 diabetes. In 1966, the first pancreas transplant was
performed, and in 1971, the first portable glucometer
became available.
The year 1982 marked the entry of the first human
insulin (Humulin). The 1993 landmark Diabetes
Control and Complications Trial (DCCT) demon-
strated that intensive therapy to control preprandial
and postprandial glucose as well as hemoglobin (Hb)
A1C effectively delayed the onset and progression
of complications in type 1 diabetes mellitus.6
In 1998,
the United Kingdom Prospective Diabetes Study
(UKPDS) shed light on how controlling glucose levels
and blood pressure could delay and prevent complica-
Challenges in Drug Development
1922—Insulin introduced, changes the world
1940s—First widespread production and availability of
antibiotics to treat associated infections
1950s—Sulfonylureas introduce oral therapy for type 2 diabetes
1952—Lente: longer-acting insulin
1966—First pancreas transplant
1971—First portable glucometer
1977—Phenformin withdrawn from market (lactic acidosis)
1982—First human insulin
1985—Laser retinal procedures used to prevent
blindness from diabetic retinopathy
1993—Diabetes Control and Complications Trial shows that
intensive therapy delays onset and progression of
complications in type 1 diabetes
1994—Metformin approved by FDA
1997—Rezulin approved by FDA
1998—United Kingdom Prospective Diabetes Study:
controlling hyperglycemia and elevated blood
pressure can delay/prevent diabetes complications
in type 2 diabetes
1990s—ACE inhibitors (later ARBs) provide protection
from diabetic nephropathy in addition to blood
pressure lowering
1998—Amaryl approved by FDA
1999—Islet transplant (Edmonton protocol)
1999—Precose, Avandia, Actos approved by FDA
2000—Rezulin withdrawn from market
2005—Byetta, Symlin approved by FDA
2006—Januvia approved by FDA
2006—Banting’s birthday recognized by United Nations as
World Diabetes Day; United Nations recognizes
diabetes as “global threat”
FDA indicates US Food and Drug Adminstration; ACE, angiotensin-
converting enzyme; ARBs, angiotensin-receptor blockers.
Table 1 Selected Diabetes Highlights
AHDB0508_6-9.qxp 1/12/09 7:48 PM Page 7

tions in type 2 diabetes mellitus.7
Not only did the
patients enrolled in these studies benefit from intensive
control over the study period, but follow-up studies
have confirmed that the period of intensive control
had lasting effects with regard to reductions in
microvascular complications.8,9
And 1999 marked the
first islet transplantation,10
which was later canonized
by the Edmonton protocol.11
By 2006, the United Nations recognized diabetes as
a “global threat” and announced November 14—the
birthday of Frederick Banting—as the official World
Diabetes Day, starting in 2007. Many new agents have
become available as primary therapy or for use in addi-
tion to insulin. Agents with novel mechanisms of
action, increasingly tolerable side-effect profiles, and
the use of combination therapy have moved the goal of
intensive control for all patients with diabetes safely
into reach. Other medical innovations also have
improved outcomes dramatically for diabetic patients.
The availability of antihypertensive therapies led to
further reductions in microvascular complications, and
angiotensin-converting enzyme inhibitors and angio-
tensin-receptor blockers were recognized specifically to
prevent the progression of nephropathy. Innovations in
dialysis therapy, peripheral vascular procedures, cardiac
procedures, retinal laser procedures, and advanced
wound care have enabled reductions in morbidity and
mortality for patients with diabetes.
Diabetes Today
Despite our extensive knowledge about diabetes and
the substantial strides made in managing the disease,
no cure is yet available. And although insulin, sulfony-
lureas, and insulin-sensitizing agents are powerful tools
in the fight against diabetes mellitus, many patients
are still not receiving optimal care: many are not being
screened early enough, treated early enough, or moni-
tored closely enough. Few patients achieve adequate
control of their hyperglycemia, elevated blood pressure,
or lipid levels. Nor does the care they receive meet
the quality indicators established for diabetes as meas-
ured by HbA1C, retinal examinations, lipid panels, and
monitoring for nephropathy and neuropathy. Perhaps
most alarming is the increasing prevalence and inci-
dence of diabetes, in tandem with the obesity epidemic.
Proactive approaches toward improving the outcomes
of diabetes care should include early identification,
early treatment, optimal control, improved monitor-
ing, and meeting quality indicators. In addition, treat-
ment plans should be implemented appropriately to
achieve optimal outcomes. Adequate control and qual-
ity care are no longer limited by the availability of
agents, but rather by the “process” limitations of our
healthcare system, specifically the delivery system
and payment systems. As DCCT and UKPDS have
shown, intensive control and the improved outcomes it
generates can be achieved in a research environment,
yet this level of control is not often achieved in other
environments. More and better therapies will not
reduce complications effectively, unless they can be
deployed in a healthcare delivery model that enables
their success.
Burgeoning Costs and the Challenges of
Drug Development
Treating and monitoring diabetes can result in sig-
nificant healthcare costs (Table 2), costs that did not
exist when therapies were not available. Yet the social
costs of increased mortality and complications have
always been present, although not as clearly delineated.
A recent publication reviewed trends in diabetes care
from 1994 to 2007 in the United States. Over that
period, the authors noted an increase in office visits
for diabetes of 11 million, an increase in the number
of medications per patient, and a transition from
monotherapy to combination therapy. The story that
made the lay press was that aggregate drug expenditures
had risen from $6.7 billion in 2001 to $12.5 billion in
2007.12
Although the authors only analyzed the costs of
drug therapy, these increases are concerning. But per-
haps the more important question to answer is whether
this increased investment has reduced the serious com-
plications associated with diabetes. If so, we may see a
1. Before 1922, no cost
2. Insulin, first drug therapy
3. Sulfonylureas and insulin-sensitizing products are
powerful tools.
4. Is success of treatment limited by availability of drugs?
Many drugs are available, but many patients are not
screened and treated early.
5. Diabetes costs very significant today:
• Drugs
• Testing, monitoring
• Procedures
6 Do incremental benefits justify added costs?
7. Is there a “ceiling”? Is there a point at which payers will
be unwilling to cover a new therapy, because the incre-
mental benefit provided by that therapy does not justify
the incremental cost?
Table 2 Costs and Drug Development in Diabetes
AHDB0508_6-9.qxp 1/12/09 7:48 PM Page 8

decrease in other costly therapies, such as kidney dial-
ysis, laser retinal surgery, cardiac catheterization, coro-
nary artery bypass graft surgery, or stent placement.
And again, if these agents more effectively achieve
adequate control, patients and society would benefit
from longer, more productive lives for patients.
Access to healthcare does not exist unless that
healthcare is affordable. This usually means that access
to healthcare is equivalent to access to health insur-
ance. This statement is equally applicable with regard to
access to pharmaceuticals. It is important to consider
the impact of the availability of specific drugs through
payer formularies, and through Medicare Part D con-
tractor formularies for some of our most frail patients.
Prior to the Part D benefit, although catastrophic care
(eg, dialysis, bypass surgery) had been funded through
Medicare, the pharmaceuticals necessary to control the
complications of diabetes were not available.
More new agents to treat diabetes have emerged
since 1995 than in the previous 100 years. Among the
major challenges ahead is determining how these
agents will be used most effectively to improve care.
Another challenge is whether additional costs can be
justified, based on evidence of improved outcomes,
including quality of life, longer life expectancy, and
decreased morbidity. Another question is whether bet-
ter glycemic control will reduce the utilization of other
higher-cost interventions.
An effective agent may not always be used appropri-
ately to achieve optimal outcomes. Flawed implemen-
tation of a treatment may have the unintended conse-
quence of reflecting poorly on the therapeutic agent
and on the investment in that agent. Conversely,
appropriate implementation of a treatment may have a
positive impact on outcomes, thereby shedding a much
different light on the treatment agent and its invest-
ment. We must ensure that our healthcare system con-
tinues to foster new innovations to treat disease and
continues to evolve, further enabling more productive
use of current technologies. Have all the great discov-
eries been made? Certainly not; the body of unan-
swered questions will always dwarf our current knowl-
edge, yet perhaps the most vital question has become,
can we afford the answer? ■
KEY POINTS
▲ Reviewing the history of diabetes management
affords a good illustration of the endless opportuni-
ties and serious challenges facing drug develop-
ment today.
▲ 100 years ago, diabetes was a fatal disease. Today, a
person with diabetes can live an active, productive,
and long life. Over a 100-year span, diabetes has
been transformed from a certain death sentence to
a manageable chronic condition.
▲ Despite our extensive understanding of the disease,
no cure is available today for diabetes.
▲ Insulin, sulfonylureas, and insulin-sensitizing agents
are powerful tools for controlling diabetes, but many
patients today are still not receiving appropriate care
and their hyperglycemia, therefore, is not controlled.
▲ With the increasing prevalence of diabetes in tan-
dem with the obesity epidemic, a greater focus
must be placed on improving outcomes.
▲ Given the significant costs of drug development, a
major question is how any new agents will be used
most effectively to improve care.
References
1. Goodno WC, Bartlett C. The Practice of Medicine. Vol. II.
Philadelphia, PA: Hahnemann Press; 1895.
2. Osler W. The Principles and Practice of Medicine. New York, NY: D.
Appleton and Co.; 1905.
3. Stevens AA. The Practice of Medicine. 2nd ed. Philadelphia, PA: WB
Saunders Co; 1926.
4. Yater WM. The Fundamentals of Internal Medicine. 1st ed. New York,
NY: D. Appleton-Century; 1942.
5. Cecil RL, ed. A Textbook of Medicine. 6th ed. Philadelphia, PA: WB
Saunders; 1944.
6. The Diabetes Control and Complications Trial Research Group. The
effect of intensive treatment of diabetes on the development and pro-
gression of long-term complications in insulin-dependent diabetes mel-
litus. N Engl J Med. 1993;329:977-986.
7. The United Kingdom Prospective Diabetes Study (UKPDS) implica-
tions for the pharmacotherapy of type 2 diabetes mellitus. Exp Clin
Endocrinol Diabetes. 1998;106:369-372.
8. Holman RR, Paul SK, Bethel MA, et al. 10-year follow-up of intensive
glucose control in type 2 diabetes. N Engl J Med. 2008;359:1577-1589.
9. The Diabetes Control and Complications Trial/Epidemiology of
Diabetes Interventions and Complications (DCCT/EDIC) Study
Research Group. Intensive diabetes treatment and cardiovascular disease
in patients with type 1 diabetes. N Engl J Med. 2005;353:2643-2653.
10. Shapiro AMJ, Lakey JRT, Ryan EA, et al. Islet transplantation in
seven patients with type 1 diabetes mellitus using a glucocorticoid-free
immunosuppressive regimen. N Engl J Med. 2000;343:230-238.
11. Shapiro AMJ, Ricordi C, Hering BJ, et al. International trial of the
Edmonton protocol for islet transportation. N Engl J Med. 2006;355:
1318-1330.
12. Alexander GC, Sehgal NL, Moloney RM, Stafford RS. National
trends in treatment of type 2 diabetes mellitus, 1994-2007. Arch Intern
Med. 2008;168:2088-2094.
Challenges in Drug Development
We must ensure that our healthcare
system continues to foster new innovations
to treat disease.
AHDB0508_6-9.qxp 1/12/09 7:48 PM Page 9

T
he role of new technologies in any
given healthcare system is to create
the greatest possible value. Achieving
value is something that business people have
been doing for a long time. What constitutes
value? Warren Buffett once said, “Cost
is what you pay. Value is what you get.”
This concept can be simplified as quality
over cost:
It is widely known that even though the United States
spends more on healthcare per person than any other
developed nation, the quality of our healthcare is
below that of a number of other countries. The reason
people are not getting the value in healthcare in
the United States is likely because of the huge variabil-
ity in the quality of care delivered and the cost or
efficiency in the delivery system used in different parts
of the country.
What Is Quality in Healthcare?
Quality in healthcare all too often correlates with
life expectancy, particularly as depicted in media cover-
age of the inadequate US healthcare. But life expectan-
cy is not a reliable measure of quality of a healthcare
system. For example, life expectancy at birth in 2003
was greatest in Japan—81.8 years—compared with only
77.2 years in the United States.1
Yet, the life expectan-
cy of Asian-Pacific Island Americans was 81.5 years in
2001, almost the same as that of the Japanese,2
even
though these islanders have essentially the same
healthcare system as in the United States. So life
expectancy at birth is not a valid measure of quality in
healthcare. Rather, health prospects, including life
expectancy, are determined by 5 domains (Figure 1)3
:
• Behavioral choices
• Genetic and gestational endowments
• Social circumstances
• Healthcare
• Environmental conditions.
The interaction of these domains is more
important than the isolated proportion of the
domains in determining a person’s health
throughout life.
Determining Value in Healthcare
Certain measures can help determine the value of a
healthcare system. In the United States, some diseases,
such as cancer, are treated more aggressively than in
other countries, and the survival rate is greater than
in those countries that have stricter controls over ther-
apy. For example, in 2006, the 5-year survival rate for
American patients with breast cancer or with prostate
cancer was significantly greater than in England
(Figure 2).
Another yardstick is the “mortality amenable to
healthcare” that may provide a more promising appli-
cation for measuring quality. This measure looks at
mortalities—determined by the number of deaths per
100,000 individuals—that potentially could have been
prevented with appropriate healthcare, but only for
those under age 75 years. Based on this measure, the
United States ranks 19th among developed countries,
with a rate of 110, compared with a rate of 65 for
France.4,5
Of particular relevance is the huge variability
among the states in the United States. Some states did
as well as the best countries: Minnesota had a rate of
70, second only to France. Indeed, the 5 top US states
combined would rank fourth, with a rate of 74, com-
pared with other countries. In contrast, the 5 worst
states combined would have a rate of 142; Washington,
DC, had a rate of 160 deaths per 100,000 population.5,6
So the United States is the home of some of the best
healthcare in the world, but there are pockets of
absolutely inadequate healthcare within its borders.
There is significant variability in quality even with-
in teaching hospitals. We can use mortality as one indi-
cator. The mortality rates in US teaching hospitals as a
whole are approximately 13% better than expected.
But the variability among these hospitals is extreme,
The Role of New Healthcare Technologies
in a National Wellness Strategy
Robert K. Smoldt, BS, MBA
Mr Smolt is Chief Administrative Officer Emeritus,
Executive Director, Mayo Clinic Health Policy Center,
Mayo Clinic, Rochester, MN.
Quality
Value =
Cost
AHDB0508_10-15.qxp 1/12/09 7:50 PM Page 10

with the best hospital having a 57% lower mortality
rate than expected, based on their case mix, but 1 hos-
pital has a 45% worse mortality rate than expected.7
There is also extensive variability in cost. We can
look at cost in a variety of ways; it can be cost for a line
item (eg, a magnetic resonance imaging scan or a visit
to an orthopedic surgeon), but the best measure of
value in healthcare is cost over a span of time.
Cost-Effectiveness
The Leapfrog Group is a voluntary program organ-
ized by large employers to alert the US health industry
that big leaps in healthcare safety, quality, and cus-
tomer value will be recognized and rewarded.8
Among
other initiatives, Leapfrog seeks to encourage trans-
parency and easy access to healthcare information, as
well as to reward hospitals that have a proven record of
high-quality care. Each year Leapfrog has a list of
“honor roll” hospitals—teaching and community hos-
pitals. Although this organization should be commend-
ed for trying to improve the quality of care, they do not
place enough emphasis on the cost of healthcare and
the implications of these costs. A recent honor roll list
of 50 hospitals included 39 teaching hospitals. But
comparisons in cost should not be made between
teaching hospitals and community hospitals; teaching
hospitals will almost always have higher costs.
The Dartmouth Atlas Project uses Medicare data to
document glaring variations in how medical resources
are distributed and used in the United States.9
The
Dartmouth project measures the cost-effectiveness of a
particular medical center by cost in the last 6 months
of life.9
The difference in this measure between the
most efficient hospital ($15,800) and the least efficient
($45,600) is a factor of 3. This represents a substantial
disparity, even with medical centers that are on the
honor roll and therefore are considered to be doing the
right things.
Cost near the end of life is a good measure of effi-
ciency, because for the average person, the majority of
healthcare expenditures occurs at that time (Figure 3).10
In any situation, the efficient use of resources is a criti-
cal issue. Using these data, the Dartmouth Project has
often noted that integrated delivery systems are more
efficient in the use of resources, particularly those that
look at the number of physician visits and days in the
intensive care unit (ICU) per decedent in the
Medicare program in the last 6 months of life.
Three of the integrated healthcare systems that
Dartmouth frequently mentions are Scott White in
Temple, Texas; Mayo in Rochester, Minnesota; and
Inner Mountain in Salt Lake City, Utah. When com-
paring their averages with the US average as a whole
and with 2 areas that are not known to have integrated
systems, we find that the integrated systems use about
half the resources of the national average, and much less
than the nonintegrated systems (Tables 1, 2).9
One of the questions is therefore—How are we
going to be able to afford new drug and technology dis-
coveries that are so important? At least part of the
answer is that we have to figure out how to get better-
integrated delivery of care. Although some physicians
are part of medical teams working in actual integrated
systems, the majority of physicians in the country are
not. However, there are some independent physicians
in independent practice associations who have been
able to achieve utilization rates at good levels.
A National Wellness Strategy
Figure 1 Determinants of the Health of a Population
Figure 2 Does More Aggressive Treatment in the United States
Lead to Better Outcomes?
30%
Genetics
40%
Behavior
0% 30% 60% 90%
15%
5%
10%
Social circumstance
Environmental
exposures
Healthcare
Source: McGinnis JM, Williams-Russo P, Knickman JR. The case for more active
policy attention to health promotion. Health Aff (Millwood). 2002;21:78-93.
82.8
66.7
81.1
44.3
Sources: National Audit Office. International Health Comparisons. London:
United Kingdom, 2004; Commonwealth Fund. Why not the best? 2006.
http://www.nao.org.uk/publications/ Int_Health_Comp.pdf.
5-year survival for
breast cancer:
US
UK
5-year survival for
prostate cancer:
US
UK
AHDB0508_10-15.qxp 1/12/09 7:50 PM Page 11

Another part of the answer is to figure out how to
motivate each of us to lead healthier lives, and how to
achieve better compliance. These solutions can result
in better efficiency.
A Vision for Healthcare
What is our vision for healthcare in the United
States? We should be looking for healthy patients and
for high-value care. The 3 essentials necessary to get to
this vision are equity, patient-centeredness, and value.
Equity
Equity in healthcare involves 5 elements: basic
insurance for all; coordinated coverage with guaranteed
issue; individual ownership for a lifetime; providing for
the needy; and tax equity. Everyone in the United
States should have basic health insurance. Although
securing health insurance can be accomplished
through a single-payer government system, people
would be better served by a coordinated private insur-
ance system with guaranteed issue, such as the Federal
Employees Health Benefit (FEHB) program.11
Equity in
healthcare should provide individual ownership of
insurance over a lifetime; and the government should
provide assistance to allow the needy to buy-in. There
should also be tax equity so the benefit would be the
same for everyone.
Examples of such models include the FEHB program
and the Netherlands, which switched to such a health
plan a number of years ago. In a recent survey in sever-
al European countries about satisfaction with their
health plan, the Netherlands’ plan received the highest
satisfaction rating.12
Patient-Centeredness
Healthcare providers have to change in such a way
that we become more invested in, and more account-
able for, the health of our patients, not just their
illnesses. Healthcare has to become a learning organi-
zation. We all make mistakes, but we have to learn
from our mistakes by analyzing why something hap-
pened and determine how to correct it. There also has
to be a learning organization, so that if a problem
occurs in a hospital and a way is found to fix it, every
hospital in the country should become aware of it, so
that if they encounter the same problem they would
know how to fix it. In addition, everyone needs to look
at the value equation for their own institution.
The broader use of health information technology
can be a key part of patient-centeredness. The use of
nonvisit care and virtual patient consultations is a
Table 1 Efficient Resource Use: Physician Visits with
Decedent in Last 6 Months
Change from
Region Number integrated average, %
Integrated systems
Temple, TX 1.8
Rochester, MN 2.5
Salt Lake City, UT 2.1 _____
Integrated average 2.1 Base
US average 3.3 +57
Los Angeles 6.6 +214
Miami 6.4 +204
ICU indicates intensive care unit.
Source: The Dartmouth Atlas of Health Care. www.dartmouthatlas.org.
Table 2 Efficient Resource Use: ICU Days for Decedent in
Last 6 Months
Figure 3 Life Span Health Expenditures
Permission was granted by the RAND Corporation, Santa Monica, CA. Lynn
J, Adamson DM, for RAND. Living well at the end of life: adapting health
care to serious chronic illness in old age. 2003. www.medicaring.org/educate/
download/wp137.pdf. © RAND Corp. Reprinted with permission.
Birth Life span Death
Expenditures
Change from
Region Number integrated average, %
Integrated systems
Temple, TX 21.4
Rochester, MN 18.4
Salt Lake City, UT 17.3 _____
Integrated average 19.0 Base
US average 29.1 +53
Los Angeles 49.9 +163
Miami 46.5 +145
Source: The Dartmouth Atlas of Health Care. www.dartmouthatlas.org.
AHDB0508_10-15.qxp 1/12/09 7:50 PM Page 12

growing concept. Improving business functions is
essential, but complete interoperability within and
among institutions is also crucial. However, the task is
daunting. The electronic ATM system used by every-
one only deals with dollars and cents. In any given
healthcare institution, there are a multitude of elec-
tronic systems dealing with many variables, such as
diagnoses, laboratory studies, radiographs, and medica-
tions. The complexity is multiplied many times over
when interoperability between institutions is involved,
let alone a countrywide network.
Value
The third and most important element is value.
Based on the discussion above, the definition has been
refined as:
Each of the terms can be measured, at least for the
hospitalized patients.
Transparency is another component of value. The
public should have access to these outcomes measures
and the cost data.
According to a PricewaterhouseCoopers report,
approximately 10% of the costs of medical services are
attributed to the cost of litigation and defensive medi-
cine, totaling nearly $210 billion annually.13
There is a
pronounced need for medical liability reform that
would lower the cost of healthcare, not because of mal-
practice insurance cost but as a result of practicing
defensive medicine.
The science of healthcare delivery should have more
systems engineering to improve efficiency and effec-
tiveness, including changes in the way physicians are
trained and, perhaps, selected. Innovation is necessary
in research and in education, but it should be done in
a manner that will increase the value of the healthcare
delivery. We want a healthy, productive workforce,
because that is where the economy gets the benefit.
And finally, we have to pay for value, not for quantity.
How to Pay for Medical Care
A joint forum of Mayo and Dartmouth looked at a
variety of ways to change how we pay for medical care.9
Of 5 choices considered, the Medicare pay-for-per-
formance (P4P) approach received the lowest score.
This approach was met with criticism, because ineffi-
cient providers who receive payment for a longer list of
process items get bigger rewards than the efficient
providers. Moreover, even if everyone participates in
these P4P process steps, you still have not changed the
efficiency of the delivery system. Business professors
Michael Porter of Harvard University and Elizabeth
Teisberg of the University of Virginia made the point
that, “These current [P4P] efforts...carry some risks.
Most...are not actually about quality results, but
processes. Most P4P is truly ‘pay for compliance.’
Compliance to too many process standards runs the risk
of inhibiting innovation by the best providers.”14
Other choices, all of which received much higher
scores in the forum, included fee for service (FFS) with
shared savings, FFS with outcomes reward, episode-
based payment, shared decision making, and chronic
disease coordinator (ie, medical home).
Another method of measuring value in healthcare is
to cross-plot the 2 value components—cost and quali-
ty—case mix adjusted mortality, and the cost of health-
care in the last 6 months of life. Figure 4 shows these
values for all teaching hospitals in the United States,
with the vertical and horizontal lines representing the
average. The hospitals that fall in quadrant D have a
Outcomes + Safety + Service
Value =
Cost over time
Figure 4 Effectiveness and Efficiency in US Teaching Hospitals:
Cost vs Mortality
The science of healthcare delivery should
have more systems engineering to improve
efficiency and effectiveness, including
changes in the way physicians are trained
and, perhaps, selected.
AHDB0508_10-15.qxp 1/12/09 7:50 PM Page 13

worse mortality rate and higher cost (or poor effective-
ness and poor efficiency); those in quadrant A have
good effectiveness and good efficiency. The 3 diamonds
(gold) represent the 3 integrated systems mentioned
before. If this comparison is done annually, with pay-
ments adjusted so that hospitals that fall in quadrant A
would receive higher payments and those in quadrant
D would receive lower payments, there would be a
great incentive to reduce costs and improve mortality
rates, thereby improving value.
Line-Item Pricing versus Use Rate
For the past 20 years or so, the healthcare system has
been trying to address costs through line-item price
controls, that is, how much we are going to pay for a
chest x-ray, for a doctor visit, or for other medical serv-
ices. But this has not worked. Emphasizing line-item
price control takes our eyes off the ball. Instead, we
should be looking at the rate each of these items is
being used. For example, medical team A charges a fee
of $7200 for coronary angioplasty, while team B dis-
counts the fee to $6500 if you agree to send all your
patients to them; this results in a savings of about 10%.
However, team B patients spend an average of 1.2 days
in the ICU compared with only 0.5 days for team A
patients, resulting in a total cost per episode of $21,000
for team B compared with $18,000 for team A—an
increase of 17%. If we factor in the rate at which this
procedure is performed, 2500 per 1 million population
for team A versus 4400 per 1 million population for
team B, the total cost per 1 million population is
$92.4 million for team B compared with $45 million for
team A—an increase of more than 100%.
This example represents actual results, with team B
reflecting the US average rates and team A reflecting
an integrated delivery system. This example clearly
shows that if you were to pick a team that would dis-
count your line-item fee, you could actually end up
increasing your overall costs dramatically.
Thus, total cost equals the price per line item multi-
plied by the number of times the line item is used:
The government and private insurers focus on price per
unit. For providers, cost per item is also important, but
the cost to society as a whole is where the use rate
comes into play. The Dartmouth study shows that
across the country, 70% to 80% of the cost per person
in the United States occurs because of use-rate differ-
ences, not because of the price per item.9
If you want to
reduce costs, you have to address the use rate.
Fixing the Healthcare System
No individual component of the healthcare system
can fix the problems in our healthcare system alone.
We all have to change:
• The government can do its part by developing an
independent “health board” to coordinate private
insurance options for all, providing transparency
through information technology interoperability,
and using a common billing form. It can provide
financial assistance to those in need, and support
research and education.
• Providers need to improve effectiveness and effi-
ciency through better integration, and stress compli-
ance and prevention.
• Payers and employers have to encourage prevention,
compliance, and health for patients. They need to
incorporate a value-based benefit design, including
changing payment plans to reward providers who
deliver value. It is important for employers to recog-
nize that medical cost is one thing, but increasing
productivity of their workers is another very impor-
tant factor. In one company (Dow Chemical), their
biggest cost was not only the lost productivity when
a worker was absent because of a chronic disease but
also the lost productivity when the worker was back
on the job.15
This latter factor (known as presen-
teeism) accounted for 48% of the costs. So, the
extent to which you can keep people from getting
sick, or getting them back to work faster and more
productive, is where savings can really occur.
• Patients have to take an active role in prevention
through healthier lifestyles and by improving com-
pliance in chronic disease. They must recognize that
they have a fair financial stake in healthcare, and
they have to accept the fact that they are not going
to live forever. A value-based setup was designed by
the Mayo Clinic system that has worked very well.
The coinsurance was waived if patients went to their
Total cost = Price ✕ Use rate
For the past 20 years we have been trying
to address costs through line-item price
controls. Emphasizing line-item price control
takes our eyes off the ball. Instead, we
should be looking at the rate each of these
items is being used.
AHDB0508_10-15.qxp 1/12/09 7:50 PM Page 14

coordinating physician in each case. Hospitalizations
and readmissions were reduced; total costs were low-
ered by 15% and remained down for 3 years.
• Pharmaceutical companies and medical manufactur-
ers should be doing their research to achieve value
according to the definitions discussed above. They
have to evaluate what is the value of their current
products or the ones they are investigating. They
should have an open mind toward comparative
effectiveness evaluation. They have a natural reluc-
tance to do that, but costs are getting so high, they
will have to look at it.
New Goals for US Healthcare
Creating and maintaining a healthy workforce is one
of the underlying goals of the Mayo Clinic system. A
healthy workforce can make tremendous inroads at a
national level toward improving overall health and pro-
ductivity, and lowering costs. The making of a healthier
population demands knowledge at several levels. The
system has to know about the patients, their risks, their
history, and their preferences. Patients have to know
about their role in their health and well-being and be
given the knowledge and tools to affect their health.
And, of course, the system has to be designed to deliv-
er care effectively. Implementation would potentially
include nonvisit tools, such as an online secure portal, or
phone calls and preventive care prompts that are popu-
lation based and delivered at the point of care. This shift
will also require an adequate number and proper mix of
providers, as well as the development of facilities
designed for the new model of healthcare delivery.
The movement toward a healthier workforce and a
healthier population requires improving the technolo-
gy and the systems designed to deliver care effectively,
expanding the health-oriented knowledge of key
healthcare stakeholders, and providing individuals with
the appropriate tools to improve their own health. ■
KEY POINTS
▲ Many Americans may not be getting value in
healthcare because there is a huge variability in the
quality and cost of healthcare delivery in different
parts of the country.
▲ The United States is the home of some of the best
healthcare in the world, but there are pockets of
absolutely inadequate and unacceptable patient care.
▲ Patient outcomes divided by cost over a span of time
are probably the best measure of value in healthcare.
▲ If you want to reduce costs, you have to focus on
use rate, not on the price per item. Total costs are a
product of line-item cost multiplied by use rate.
▲ Integrated delivery systems are among the most
efficient standards in the use of resources. In the
United States, 70% to 80% of the health cost per
person occurs as a result of use-rate differences.
▲ No individual component of the healthcare system
can fix the problems in our healthcare system
alone; we all have to change.
▲ A move toward a healthier population requires
improved technology and effective care delivery
systems, expanding the knowledge base of key
stakeholders, and giving individuals tools to
improve their health.
References
1. OECD Factbook 2006: Economic, Environmental and Social
Statistics. Quality of life: life expectancy at birth. http://lysander.
sourceoecd. org/vl=445356/cl=19/nw=1/rpsv/fact2006/10-01-01g01.
htm. Accessed October 27, 2008.
2. The Office of Minority Health. Asian American/Pacific Islander
Profile. www.omhrc.gov/templates/browse.aspx?lvl=2&lvlID=53. Accessed
October 27, 2008.
3. McGinnis JM, Williams-Russo P, Knickman JR. The case for more
active policy attention to health promotion. Health Aff. 2002;21:78-93.
4. Nolte E, McKee CM. Measuring the health of nations: updating an
earlier analysis. Health Aff. 2008;27:58-71.
5. Schoen C, Davis K, How SKH, Schoenbaum SC. US health system
performance: a national scorecard. Health Aff (Web Exclusive),
September 20, 2006:w457-w475.
6. Schoen C, How SKH, for the Commonwealth Fund. Commission on
a high performance health system. National scorecard on US health
system performance: complete chartpack. September 2006. www.com
monwealthfund.org/usr_doc/Schoen_natscorecard_complete_chart
pack_955.pdf?section=4039. Accessed October 27, 2008.
7. Smoldt RK, Cortese DA. Pay-for-performance or pay for value? Mayo
Clin Proc. 2007;82:210-213.
8. The Leapfrog Group. www.leapfroggroup.org/cp. Accessed October
27, 2008.
9. The Dartmouth Atlas of Health Care. www.dartmouthatlas.org/.
Accessed October 27, 2008.
10. Lynn J, Adamson DM, for RAND. Living well at the end of life: adapt-
ing health care to serious chronic illness in old age. 2003. www. medicaring.
org/educate/download/wp137.pdf. Accessed October 27, 2008.
11. US Office of Personnel Management. Federal Employees Health
Benefit Program. www.opm.gov/insure/HEALTH/index.asp. Accessed
October 27, 2008.
12. Ministry of Health, Welfare and Sports. Health insurance system
(Netherland). www.minvws.nl/en/themes/health-insurance-system/.
Accessed October 27, 2008.
13. PricewaterhouseCoopers. The Factors Fueling Rising Healthcare
Costs. January 2006. www.ahipbelieves.com/media/The%20Factors%
20Fueling%20Rising%20Healthcare%20Costs.pdf. Accessed October
27, 2008.
14. Porter M, Teisberg EO. Redefining Healthcare: Creating Value-Based
Competition on Results. Boston, Mass: Harvard Business School Press;
2006.
15. Collins JJ, Baase CM, Sharda CE, et al. The assessment of chronic
health conditions on work performance, absence, and total economic
impact for employers. J Occup Environ Med. 2005;47:547-557.
AHDB0508_10-15.qxp 1/12/09 7:50 PM Page 15

T
he rising cost of healthcare looms
large as a major national concern.
Pharmaceuticals and the treatment of
chronic diseases are among the key drivers of
the overall cost of healthcare. Access to care
is important to all of us, and even more vital
to patients who are severely ill. Yet, current
medical and pharmacy benefit designs may
not provide patients the appropriate access
to needed medications, and new benefit
designs are needed. Designing a benefit that keeps the
cost of medications affordable yet provides access to
those who most need these treatments is not a new
concept. We applied this concept, and continue to
apply it, to some traditional pharmaceuticals.
Our path to balancing healthcare access with rising
costs has been long and problematic, and it is far from
over. Even with our best-intentioned attempts at
achieving optimal results, the outcomes may not turn
out as we expect. We now know more about how ben-
efit design affects utilization of traditional products, and
one of the major challenges before us is how to apply
the lessons learned from traditional products to special-
ty pharmaceuticals, including biologics, injectable
medications, and other potentially expensive agents. I
will present current approaches, challenges, and con-
siderations for moving forward on this challenge.
The good news, according to a 2008 Kaiser
Foundation study, is that this year’s increase in health
insurance cost was relatively small—a 5% increase
from last year’s cost.1
The bad news, however, over-
shadows the good news. On average, workers have paid
$3354 in out-of-pocket fees to cover their healthcare
insurance premiums compared with $1543 in 1999.1
Employers, too, are paying more—the average employ-
er contribution in 2008 was $9325, up from $4247 in
1999.1
In addition, employees are getting less for their
money, particularly as deductibles and copayments
increase.
In 2007, an estimated 10% of all employees paid at
least a $1000 deductible; in 2008, that per-
centage climbed to 18% and to a startling
35% for workers at small companies (3-199
employees).1
To put these soaring costs in
perspective—during the past decade, wages
have increased by 34%, while healthcare
costs have climbed up by more than 200%.2
This “affordability gap”2
is one of the major
dilemmas we need to confront.
Why Value-Based Benefit?
And the costs of healthcare continue to rise.
Insurance premiums rose 8.6% between 1996 and
2005.3
The second major concern is that the quality of
the care delivered in the United States is rather poor
when measured against most other industrialized coun-
tries. Results of a 2003 study indicated that on average,
only 50% of the time recommended medical care is
delivered to people in the United States.4
A funda-
mental health policy issue facing us today is how to
organize and finance the healthcare system to achieve
high value, where value equals quality for the cost. The
focus should not be on saving money but rather on how
to achieve the most value for the dollars spent.
Distribution is another important issue: how do we
subsidize care for low-income people efficiently? How
do we make sure we provide care for seriously ill
patients who cannot afford healthcare or even the out-
of-pocket costs associated with their insurance cover-
age? There are several ways to approach these issues.
Cost-oriented strategies include higher cost-sharing
and copays for brand-name drugs. Quality-oriented
strategies include pay-for-performance and disease
management programs. These 2 approaches sometimes
conflict with each other, and yet both are subject to the
complexities of finding return on investment (ROI).
Some disease management programs, although contro-
versial and costly, have brought value to managing
chronic illnesses. Measuring outcomes for some of
these programs is difficult, because quality measures are
linked to the behavior of the patient, as well as to the
patient’s pattern of taking medications and seeking pre-
ventive care.
Value-Based Benefit: The Concept,
the Reality, and the Challenge
Gary M. Owens, MD
Dr Owens is President, Gary Owens Associates,
Glen Mills, PA.
AHDB0508_16-20qxp 1/12/09 7:52 PM Page 16

Between 2000 and 2005, the average copay for
preferred drugs in 3-tier formularies rose 69%—from
$13 to $22—and the average copay for nonpreferred
drugs rose 106%—from $17 to $35.5
Moreover, con-
sumers do not respond to cost-sharing the way econo-
mists would like. Providing free drugs to those in need
may be helpful in some ways, but it also presents
problems and challenges. A 1986 study showed that
when consumers’ copayments were raised, they
reduced the use of valuable pharmaceuticals, preven-
tive services, and even life-saving treatments.6
In addi-
tion, cost-sharing did not selectively reduce inappro-
priate hospitalizations.6
In a value-based insurance design (VBID), cost-shar-
ing is utilized, but there is a clinically oriented approach
to mitigating the adverse health consequences of high
out-of-pocket expenses.7
VBID helps to offset the
potential for both underuse and overuse of healthcare
services, by encouraging the use of services when clini-
cal benefits exceed the cost and discouraging the use of
services when the benefits do not justify the costs.
Simply put, the premise of VBID is to reduce the copay,
or keep it low, for high-value services that are for high-
value patients, treatments, or outcomes.7-9
VBID has
become the subject of several articles in the lay press
recently, and it continues to gain momentum (Table 1).
VBID no doubt has merits, but it also has limita-
tions. A particularly noteworthy VBID analysis
was published in early 2008 by Chernew and col-
leagues.9
The study identified a large employer who
reduced copayment rates for 5 drug classes—(1)
angiotensin-converting enzyme (ACEs) inhibitors and
angiotensin receptor blockers (ARB), (2) beta-block-
ers, (3) antidiabetes agents, (4) statins, and (5)
steroids.8
Generic drugs cost was reduced to zero copay.
Preferred drugs were reduced to 50% of their usual
copay (from $25 to $12.50), as were nonpreferred
drugs (from $45 to $22.50).9
The study intervention was implemented by
ActiveHealth Management (AHM), which identified
consumers who would benefit from medications but
were not currently using any; individuals with con-
traindications to these classes were excluded from the
study. The investigators tracked adherence to recom-
mended regimens by calculating the medication pos-
session ratio (MPR), based on 1 or 2 interventions—
disease management and reduced copay. An employer
group of similar size and demographics that had been
used for one of AHM’s disease management programs
was used as the control. The study included a pre- and
postintervention cohort for each of the drug classes,
including individuals who either had used a medication
in 1 or more of the 5 categories in the study within 3
months from January 1 of either 2004 or 2005, and
those who were identified by AHM as being an appro-
priate candidate for a medication in 1 of the 5 study
categories.9
Results showed that compared with a control
employer that used the same disease management pro-
gram, adherence to medications in the value-based
intervention increased for 4 of the 5 drug classes,
thereby reducing the nonadherence rate by 7% to
14%. Based on the effects size for the MPR analysis,
adherence was most profound for diabetes medica-
tions.9
A lower copay resulted in a 13.2% increase in
MPR for those taking diabetes medications.9
For the
beta-blockers, there was no change in the disease man-
agement group and a modest increase of 9.5% with the
combination of disease management and reduced
copay. The ACE inhibitor/ARB category showed a
modest MPR increase (8.2%), followed by statins, with
a 7.1% increase. As for steroids, the control group
actually outperformed the experimental group, with a
nonsignificant 2.7% take-up.9
Implementation of the VBID involved a number of
costs in that study. Captured as one of these costs
was the increased use of high-value services, which is
actually a positive factor. There was also a greater
Value-Based Benefit
• Higher copays lead to lower spending
• Therefore copays will rise
• VBID allows firms to mitigate deleterious consequences
of higher cost-sharing:
Enables low copay to achieve cost target in a more
efficient manner
Part of any strategy to improve quality or decrease costs
• VBID cannot be perfect, but imperfect may be better
than nonexistent
VBID indicates value-based insurance design.
Table 1 Value-Based Insurance Design Benefits
The premise of VBID is to reduce the copay,
or keep it low, for high-value services that
are for high-value patients, treatments,
or outcomes.
AHDB0508_16-20qxp 1/12/09 7:52 PM Page 17

employer share of spending for services that would have
been used anyway; but this is only a cost from the per-
spective of the employer. And, of course, there were
administrative costs associated with disease manage-
ment and other interventions.9
Financing for the VBID was generated by increasing
costs for other services, particularly low-value services,
and by passing costs to employees in other ways, such
as higher copayments. Although this particular study
was not intended to measure the impact of offsets, a
VBID has the potential to lower costs because of fewer
adverse events. It also has the potential to contribute
to gains in productivity, assuming that productivity
increases when patients adhere to taking medications
as recommended.
One conclusion from this study is that medical sav-
ings do not fully offset employer spending. Yet, the act
of doing the right thing from a medical perspective may
have untold societal benefit. The study further con-
cluded that measuring increased productivity costs
might help improve ROI, and that increasing copay-
ments on low-value services could finance greater
access to high-value services. But perhaps the most
important way to improve ROI is to target adherence
based on subgroup, demographic, ethnicity, income,
and other key parameters.
In summary, in the value-based benefit for prescrip-
tion drugs, a higher copay has been shown to lead to
lower spending, but such lower spending is not neces-
sarily linked to items worthy of lower spending. And
because an increased copay leads to lower spending,
copayments will likely continue to rise in response.
VBID allows employers and insurance companies to
mitigate some of the deleterious consequences of high-
er cost-sharing and may help them to achieve cost tar-
gets in a more efficient manner.
Although VBID has shown relatively modest gains,
and it is far from perfect, it remains an important part
of any strategy to improve quality or decrease costs.
Can Value-Based Benefit Design Be Applied to
Specialty Medications?
In recent years, biotechnology drugs (biologics)
have seen tremendous growth. Currently, there are
more than 200 biotechnology drugs on the market and
more than 600 in development. Spending on these
drugs has likewise surged over the past 2 decades. In
1990, an estimated $5 billion was spent on biologic
drugs, and in 2008 a projected $75 billion would have
been spent on these products.10-13
Proportionately, bio-
logic drug spending pales in comparison to hospital
costs and professional provider costs, and it only rep-
resents about one fifth of all drug spending. Still, it
represents a rapidly growing cost sector (Table 2).
These increasing costs may have a profound ripple
effect on health plans.
In 2007, the spending for specialty pharmaceuticals
was responsible for an estimated 11.4% of total phar-
macy costs.13
This means that almost 90% of the total
pharmacy spending is still used for traditional pharma-
ceuticals. In part, as a result of the conversion of so
many blockbuster drugs to generics in 2007, specialty
pharmaceuticals drove one third of the total pharmacy
spending trends that year. The year-over-year specialty
trend was 12.3%. The top 3 categories in 2007 for spe-
cialty pharmacy spending were autoimmune diseases,
cancer, and multiple sclerosis.13
Chronic condition Medication examples Estimated cost/year, $
Hepatitis C Pegasys, PEGINTRON, Infergen 30,000
Multiple sclerosis Betaseron, Avonex, Copaxone 12,000-15,000
Breast Cancer Docetaxel, Adriamycin, Herceptin, Tykerb 12,000-50,000
Non–small-cell lung cancer Docetaxel, Carboplatin, Avastin 20,000-60,000
Rheumatoid arthritis Enbrel, Remicaid, Humira, Kineret, Rituxan 15,000-20,000
Pulmonary hypertension Flolan, Tracleer, Remodulin 65,000-100,000
Gaucher’s disease Cerezyme, Zavesca 150,000-250,000
Sources: Medco Health Solutions. 2008 Drug Trend Report. http://medco.mediaroom.com/file.php/162/2008+DRUG+TREND+REPORT.pdf; Specialty
Pharmacy News. 2006;3(10):6-7.
Table 2 Examples of Disease-Specific Drug Costs
In 2007, the spending for specialty
pharmaceuticals was responsible for an
estimated 11.4% of total pharmacy costs.
AHDB0508_16-20qxp 1/12/09 7:52 PM Page 18

In discussing potential approaches for applying
value-based design to specialty pharmaceuticals, our
goal will be to think about how to maximize the value
of biologics and to challenge payers, manufacturers,
providers, and consumers to be open to value-based
coverage design. At the same time, we have to
acknowledge the limitations of value-based design, as
evidenced by its previous application to traditional
pharmaceuticals. It is also vital to recognize who the
stakeholders are within this value proposition.
When considering value-based benefit designs,
patients are the most important of the key stakehold-
ers. Patients need care, they seek care, and they need to
have access to care. But several other stakeholders are
also important. Health plans are responsible for build-
ing the benefit design, administering it, and justifying
why it should be implemented. Employers need to
come up with the best way to spend their resources in
order to get the best outcomes. And providers want to
have access to the treatments they need when they
need them for their patients. In addition, pharmacy
benefit managers and specialty pharmacies have a stake
in value-based design because they are ultimately
charged with administering the benefit. The interplay
of these key stakeholders is essential to developing and
implementing an effective value-based design.
Health plans recognize that new biotechnology
drugs and new uses of existing drugs are creating revo-
lutionary treatment advances. Drug coverage is the
most visible benefit and the one most widely sought by
health plan members. Coverage of drugs is absolutely
essential for any health benefit plan and its members. It
is also essential to keep health plans affordable and to
avert creating access problems for members who most
need care. Improving the management of biotech drugs
is also a necessary component of a well-run health plan.
A number of changes and moving targets present
challenges for specialty pharmaceuticals. New benefit
designs are emerging to allow better management of
biotechnology drugs. Alternate distribution channels,
such as specialty pharmacies with either mandatory or
voluntary programs, may provide solutions and help to
manage unit costs. And although member involvement
and cost-sharing are important, neither can become a
barrier to healthcare access.
The influx of new biologics also means that health
plans must be able to manage drugs that are adminis-
tered in offices and outpatient centers. In addition,
more sophisticated techniques will be necessary to
manage utilization. Older benefit designs were not con-
structed to provide access and manage the cost of
biologics in a dynamic fashion. They included either
no patient cost-sharing or a percentage of drug-cost
coinsurance on all products. With the new biologic
agents, access for health plan members is a major prob-
lem if the out-of-pocket cost is excessive, as is getting
these drugs to members.
Decisions must be made as to whether the new bio-
logics will be covered under the medical benefit or the
pharmacy benefit. And although incentives for physi-
cians have driven utilization of some products, manag-
ing these incentives is a delicate balancing act. Patient
access issues will be a factor with the new therapies,
and determining the appropriate out-of-pocket amount
will require careful consideration. Saving 30% on a
cancer drug may produce a negligible value if the mem-
ber’s medical services are 5 times greater than the cost
of the drug. Decisions springing from a “penny wise and
pound foolish” philosophy can sometimes backfire.
Value Equation for Biotechnology Drugs
Developing value-based strategies for specialty
agents involves several important steps:
1. It is important to define and understand the benefits
of biologic agents for a specific population by con-
ducting basic research. At the same time, it is impor-
tant to recognize that although new technologies are
exciting, they are also expensive. And just because a
novel technology exists, does not mean it is worth
the investment it demands.
2. We have to define the appropriate levels of cost-
sharing for biologics. This also requires research
to help define the effect of cost-sharing on the
appropriate use of biologic agents. We can build
on the findings of previous research on the impact
of lowering copayments on the uptake of medica-
tions for a specific disease. And once we have
evidence as to which out-of-pocket amount is effec-
tive for a specific disease state, and a better under-
Value-Based Benefit
Decisions must be made as to whether the
new biologics will be covered under the
medical benefit or the pharmacy benefit.
Patient access issues will be a factor with
the new therapies, and determining the
appropriate out-of-pocket amount will
require careful consideration.
AHDB0508_16-20qxp 1/12/09 7:52 PM Page 19

standing of the differences from one disease to
another, we can tailor cost-sharing strategies accord-
ing to these differences.
3. We must define the new value equation. This will
involve identifying which patients should continue
to use biologics, and how long they remain using
those therapies. It also involves verifying turnover
rates in candidates for biologics, with the health
plan and with the employer group. Conducting a fair
evaluation of the biologics is a must-do. We need to
roll up our sleeves and invest the time and resources
to develop strategies that would benefit multiple
stakeholders.
4. We have to develop new benefit designs that incor-
porate value for key stakeholders, including man-
aged care organizations, employers, and patients, and
ensure appropriate access to needed therapies. An
interesting approach is the implementation of bene-
fit-based copayments. In this model, the patient’s
copay amount is based on the clinical need and the
expected therapeutic benefit. The new value equa-
tion can be reflected through premium pricing and
copay structure. Health plan members will be
expected to pay more for some products and have
relatively open access to others.
In conclusion, changes in benefit design and policy
must be evidence-driven and dynamic. At the same
time, benefit changes must be considered in the con-
text of the big picture, reflecting both pharmacy and
medical expenditures. Basic research and other strate-
gies are needed to prove the clinical and economic
value of specialty pharmaceuticals in different disease
states, different treatment durations, and different
patients. Additional research, the growing body of lit-
erature, and the collaboration of stakeholders will bring
us closer to understanding the needs of chronically ill
patients and creating effective value-based benefit
strategies for them. The challenge for all stakeholders
will be to meet the needs of the patient, the health
plan, and the plan sponsor. ■
KEY POINTS
▲ Although value-based benefit design has shown rel-
atively modest gains and is subject to limitations, it
remains an important part of any healthcare strate-
gy aimed at improving quality.
▲ A major challenge is to determine how we can use
the lessons learned from traditional pharmacy ben-
efit designs and apply them to biologics, including
injectables and other specialty pharmaceuticals.
▲ Developing and implementing an effective benefit
design requires the interplay of all key stakehold-
ers—patients, health plans, providers, employers,
pharmacy benefit managers, and specialty pharmacies.
▲ Health plan members will be expected to pay more
for some products and have relatively open access
to other products.
▲ Research is needed to prove the clinical and eco-
nomic value of specialty pharmaceuticals in differ-
ent disease states, different treatment durations,
and different patients.
References
1. The Kaiser Family Foundation/Health Research and Educational
Trust. Employer health benefits: 2008 summary of findings. http://ehbs.
kff.org/images/abstract/7791.pdf. Accessed November 20, 2008.
2. Carroll J. Erosion of employer-sponsored health care: bad for every-
one. Managed Care. 2007;16:18-22, 28-29.
3. The Kaiser Family Foundation/Health Research and Educational
Trust. Employer health benefits: 2008 summary of findings. Exhibit 3.5:
Average monthly employee premium contributions and percent of total
premium paid by employees, by coverage type, 1988-2005. http://www.
kff.org/insurance/7031/print-sec3.cfm. Accessed November 20, 2008.
4. McGlynn A, Asch SM, Adams J. The quality of healthcare delivered
to adults in the United States. N Engl J Med. 2003;348:2635-2645.
5. The Kaiser Family Foundation. Trends and indicators in the changing
health care marketplace. Section 4; Exhibit 4.11: Average copayments
for generic drugs, preferred drugs, nonpreferred drugs, and four-tier drugs,
2000-2005. http://www.kff.org/insurance/7031/ti2004-4-11.cfm. Accessed
November 11, 2008.
6. Siu AL, Sonnenberg FA, Manning WG, et al. Inappropriate use of
hospitals in a randomized trial of health insurance plans. N Engl J Med.
1986;315:1259-1266.
7. Fendrick AM, Chernew M. Value-based insurance design: aligning
incentives to bridge the divide between quality improvement and cost
containment. Am J Manag Care. 2006;12(suppl):SP5-SP10.
8. Chernew ME, Rosen AB, Fendrick AM. Value-based insurance
design. Health Aff (Millwood). 2007;26:w195-w1203. Epub 2007 Jan 30.
9. Chernew ME, Shah MR, Wegh A, et al. Impact of decreasing copay-
ments on medication adherence within a disease management environ-
ment. Health Aff (Millwood). 2008;27:103-112.
10. Blue Cross Blue Shield Medical Cost Trend Report 2007. National
healthcare expenditure projection 2002-2015. http://www.bcbs.com/
blueresources/mcrg/2007/2007-medical-cost-reference-guide-2.pdf.
Accessed December 4, 2008.
11. Drug Benefit Trends. 2007;19(7):6-7.
12. Medco Health Solutions. 2007 Drug Trend Report. http://medco.
mediaroom.com/file.php/129/2007+DRUG+TREND+REPORT.pdf.
Accessed December 4, 2008.
13. Medco Health Solutions. 2008 Drug Trend Report. http://medco.
mediaroom.com/file.php/162/2008+DRUG+TREND+REPORT.pdf.
Accessed November 20, 2008.
Changes in benefit design and policy must be
evidence-driven and dynamic. At the same
time, benefit changes must be considered in
the context of the big picture, reflecting both
pharmacy and medical expenditures.
AHDB0508_16-20qxp 1/12/09 7:52 PM Page 20

A
n employer’s perspective on the
application of new technologies in
healthcare over the next few years
will be greatly influenced by the current
business environment. The current econom-
ic downturn is resulting in significant behav-
ior changes by employers and by employees.
Impact of Increased Cost-Sharing:
Reduced Demand for Healthcare
In the past several years, employer cost-shifting of
healthcare has been implemented by cost-sharing
methods such as copayments, deductibles, and coinsur-
ance. This trend has been widely reported and docu-
mented by major pharmacy benefit managers (PBM)
and other reports, such as Express Scripts,1
Medco,2
CVS Caremark,3
and the Takeda Report.4
The cost-
sharing trend is also true for self-insured employees
under the Employee Retirement Income Security Act
of 19745
plans and for those fully insured under state-
approved health insurance programs, medical and/or
pharmacy.
The impact of these cost-sharing tactics, resulting
from the continued cost escalation of healthcare over
the past 10 years, is exacerbated by the current ecnom-
ic downturn. Consequently we now are seeing a
decrease in the utilization of healthcare benefits.
People are beginning to put off seeing physicians.6
They elect not to have laboratory tests done or not to
have prescriptions filled. In some cases, employees are
even choosing not to take a benefit from their employ-
er or to enroll in a health plan, because they cannot
afford their share of the premium cost, let alone the
cost-sharing.6
These trends have resulted in an immediate and
rapid decrease in demand for healthcare services,
whereas, until recently, there has always been a
steady increase in demand for healthcare services.
As reported in September 2008 in the
Wall Street Journal,6
data released by IMS
Health show a decrease in the number of
prescriptions being filled at retail pharmacies
in the United States during the first 2 quar-
ters of 2008—the first negative quarters in
more than a decade. Compared with the
same periods in 2007, the number of pre-
scriptions filled in the first quarter of 2008
decreased by 0.5% and in the second quarter
by 1.97%.6
As also reported in that Wall Street Journal article,
the research firm D2Hawkeye recently conducted an
analysis of claims from 250,000 people in several dozen
mid-Atlantic employer health plans.6
Their findings
also show that people are cutting back on healthcare,
even though they have coverage. There were declines
in the use of healthcare in several areas of preventive
or nonacute care, even when there is no change in ben-
efits or employee cost-sharing. For example, an 18.6%
drop was reported in knee replacement surgery in the
year before March 2008, while the number of Pap
smears fell by 6%, and the number of prescriptions
filled for antidepressants dropped 29%.6
In a 2008 survey by the Kaiser Family Foundation,
increasing numbers of Americans reported problems
paying medical bills.7
And during the past year, 36%
of Kaiser Permanente members have delayed medical
care, 31% have skipped a test or treatment, and 27%
decided not to have a prescription filled, all due to
cost (Figure).7
This decline is also true in medical visits, with about
a 10% decrease in medical visits and follow-up visits. In
one practice in Tennessee, patient visits were down
10% to 15%, even though 90% of the patients have
some form of insurance.8
A major problem is getting
patients to come back for tests to check their diabetes
or to act on referrals to specialists. When there is elec-
tive surgery or other procedures involved, patients are
deferring taking action. They are willing to live with
the pain or the inconvenience that a particular ailment
may be causing them as a way to save money during
this economic downturn.8
Employers’ Perspective on
New Technologies in Healthcare
F. Randy Vogenberg, RPh, PhD
Dr Vogenberg is Chief Strategic Officer with Employer-based
Pharmaceutical Strategies, LLC, Cranston, RI, and Senior
Scholar, Department of Health Policy, Thomas Jefferson
University, Jefferson Medical School, Philadelphia, PA.
AHDB0508_21-25.qxp 1/12/09 7:58 PM Page 21

Unexpected Opportunities: Preventive Care Initiatives
This grim reality may nevertheless present an oppor-
tunity to make the most of recent service shortcomings.
For many years there have been double-digit, year-
over-year increases in premiums, and the increase for
2009 is anticipated to be between 6% and 12%.9,10
Employers have been asking all along, “What am I get-
ting for my healthcare spending?” But now, they are
getting more and more aggressive about wanting to
know what they are getting for the money they are
spending, and they want real answers.
Why should employers invest dollars in healthcare
rather than in other places that may result in better
return on investment or be more valuable in other ways
to their organization? And not just in the bottom line
but also in medical benefits? Employers are not hearing
major complaints about Medicare, notwithstanding
that it is headed for bankruptcy. Medicare benefits are
less generous than large employer plans, for the most
part, and Medicare Part B premiums will not increase
in 2009.11
Part D costs seem to be leveling out, with no
real changes, except for the doughnut hole, and that
has less impact than expected. In the employer’s mind,
there seems to be a sort of disconnect.
However, the employer space is seeing a relatively
rapid growth of wellness and preventive care initiatives.
The current economic downturn could present an
opportunity to demonstrate short- and long-term value
of well-developed wellness and prevention programs.
The behavior changes that result from preventive
and wellness programs can provide positive health and
economic benefits to the employer as well as the
employee. This begins to form a partnership between
the employer and the employee rather than a pater-
nalistic relationship or an entitlement. Clearly,
there also is some societal payback by an employer
through an investment in these programs. From an
employer’s perspective, this situation involves more
than just the employees; their home environment is
also important. Their spouses and children also need
to be involved. This reorientation of the approach to
healthcare has to be proactive to positively influence
behavioral rather than reactive changes. Although it
need not be aggressively proactive, it has to be proac-
tive versus reactive.
New Technologies
A robust technology pipeline is going to explode
between 2010 and 2020.12
Although the Centers for
Medicare & Medicaid Services (CMS) is very much
aware of this, they do not know what they are going to
do about it in terms of the developing costs associated
with it. In view of the current dynamic economic envi-
ronment, it is important to examine what it means for
new technologies, particularly in the drug and device
arenas. This includes the appropriateness of the tech-
nology being used, a utilization factor as opposed to just
the unit price or cost of these new agents.
There has been much interest in biotechnology (or
biologics) recently, but there are other genomic prod-
ucts and nanotechnology products that will be follow-
ing behind that comprise that very robust pipeline.
These products will take up an increasing share of drug
expenditures during the 2010-2020 timeframe. It is
necessary to refocus some of our time and attention
beyond just the issue of increased price. Price is clearly
significant when looking at a $100,000 biotech product
compared with a $100 typical traditional drug. This
will require a different approach for benefit design and
coverage, and for deciding how the use of these new
technologies fits into wellness and preventive care
strategies that are in the marketplace.
It is also important to remember that these new
technologies will not always be used in isolation.
Utilizing multiple technologies is not necessarily bad if
they are part of the most appropriate treatment that
will yield the best outcomes for patients, even with the
Figure Impact of Economy on Healthcare
36%
29%
31%
24%
27%
23%
22%
19%
12%
8%
47%
42%
Put off or postponed get-
ting healthcare you need
Skipped recommended
medical test or treatment
Didn’t fill a prescription
Cut pills or skipped doses
of medicine
Had problems getting
mental healthcare
Did any of the above
Percent of total who say they or a family member have done
each of the following in the past year because of cost
October 2008
April 2008
Source: Key Findings: Kaiser Health Tracking Poll: Election 2008—October
2008. (#7832) The Henry J. Kaiser Family Foundation, October 2008.
Reprinted with permission from the Henry J. Kaiser Family Foundation. The
Kaiser Family Foundation is a nonprofit private operating foundation, based in
Menlo Park, California, dedicated to producing and communicating the best
possible-information, research, and analysis on health issues.
AHDB0508_21-25.qxp 1/12/09 7:58 PM Page 22

higher costs associated with the use of these new tech-
nologies. Multiple technology utilizations are, and will
continue to be, a significant part of the healthcare
armamentarium. For example, the treatment of breast
cancer does not just use drugs. Biotechnology-based
diagnostics is used to determine if a biologic drug is an
option or the best option in a given patient, supple-
mented by imaging techniques. It is the combination of
all of these factors that has to be considered when
examining the technology pipeline. As we move
toward personalized medicine, we will find that there is
tremendous innovation in diagnostics and imaging, just
as in pharmaceuticals.
One major difference among health innovation sec-
tors is that in the drug development pipeline, pharma-
ceuticals may take 10 to 14 years before they can be
launched. In contrast, the pipeline to develop and
launch a diagnostic product is measured in months.
With some companies, the product technology innova-
tion cycle is around 14 to 18 months, very rapid
turnover compared with what we are accustomed to
with pharmaceuticals.
Will the Rapid Changes Stimulate Efficiency?
Many manufacturers are beginning to look at bio-
logics—especially oncolytics—as a salvation, because
of the competition in the small-molecule market.
However, there probably is no safe haven, because of
the current radical changes in the healthcare system.
We are going to be reevaluating everything we measure
by a totally new method. What we think may work
today—the kind of units we plug into our equations—
may be totally different in another month. Our com-
parisons may change or even disappear because of the
rapid changes in healthcare that we see week by week
or even day by day. So the question of making biolog-
ics accessible to fit a standard pharmacoeconomics
model may be off the table, and companies that are
making a 180-degree turn in their pipelines are not
necessarily going to help themselves in the long run.
This is probably counterintuitive to what most peo-
ple would say. And it has implications for health plans,
for employers of any size—large, self-insured compa-
nies, or small, “mom and pop” companies that have to
buy an insurance plan. Businesses of all sizes and types
seem to be acting in a similar fashion in addressing
their health plans or medical service organizations, and
we have not seen this before.
The question is, “How are we going to make the sys-
tem more efficient?” This includes not only the biolog-
ics, but all other elements of the system. How will we
determine where our dollars are going, and whether we
are getting value for our expenditures?
Specialty Pharmacy
Specialty pharmacies that have developed in the
past 10 to 15 years represent an interesting area as
well. In 2004, most of the growth of specialty pharma-
cies was fueled by CMS, including drugs that should
not have been included, because they did not fit the
often accepted definition of specialty drugs. A key
problem with employers has been helping them under-
stand what is meant by “specialty drugs.” The meaning
or list of specialty drugs is different for every employer
and for every PBM. So we really do not know what
a specialty drug is. Biologics and nanotech products
can be readily defined, but not specialty drugs.
However defined, specialty drugs have become a major
element in the costs to the healthcare system.
According to Medco’s 2008 Drug Trend Report, the
cost of specialty drugs represents a significant portion
of the total prescription care dollar, accounting for
10.4% of pharmacy plan spending in 2006 and 11.4%
in 2007.2
Specialty pharmacy spending increased
12.3% in 2007 compared with the 16.1% increase in
2006. In 2007, increase in drug price was the largest
component of spending growth (8.4% of the overall
increase), while utilization increased 3.9%, exceeding
the utilization growth of 1.6% for all prescription
drugs.2
These costs are only for specialty drugs pur-
chased under the pharmacy benefit. For many plans,
40% to 70% of specialty drug spending may be billed
under the medical benefit.
What Are the Actual Costs?
In determining actual costs, it is necessary to look at
who is really touching the patient, because each time
someone touches the patient, it costs more money.
That is our system, paying on volume. That is the
health system that has been discussed in the medical
literature, in Health Affairs, and in the health policy
world. The question that has been going on for 10 years
now is, “What is the value of disease management?
What exactly is the value proposition?” Right now it
generally is not viewed as a positive value proposition,
with very few exceptions. This question is now being
raised about specialty pharmacies. There is no question
that there really are special requirements for this cate-
gory of products. But there are questions about how far
we need to go and what we are getting back for them.
What is the value proposition that is based on what the
specialty pharmacy, not the drug, is trying to offer?
New Technologies in Healthcare
AHDB0508_21-25.qxp 1/12/09 7:58 PM Page 23

System Integration Is Key
It is essential to integrate these different types of
providers. To control costs, it is necessary to have coor-
dinated care. The miscommunication that is occurring
within the healthcare vendor community is very
significant. A common finding with a lot of larger
employers is that they are paying for the same services
multiple times because of the lack of coordination
of information.
The concept of provider integration is rather like a
gateway philosophy, even more so than the medical
home. Electronic prescribing (e-prescribing) can pro-
vide better transfer of information to help in this
process. There is a rather low threshold to achieve this
and get the bureaucratic apparatus moving. So it is
likely that we will be seeing this approach shortly.
And we may see different delivery models begin to
evolve, such as we have seen in CVS Caremark,
MinuteClinic, and Walgreens. It will be necessary to
begin to integrate the different services for the different
kinds of care we need to ultimately lower the cost,
without sacrificing quality. The cost-quality-access par-
adigm discussed these days comes to the forefront,
which raises the questions of who is involved with
these technologies, who is paying for them, and where
does the employer fit in as the ultimate payer for serv-
ices rendered.
Some Medicaid programs are becoming easier to
manage, because there are more patients leaving the
programs, resulting in lower drug costs. Drug manage-
ment in these programs is becoming much simpler
since up to 90% of the drugs used are generics in this
patient population. Some 35 states have a budget crisis,
technically close to bankruptcy. Healthcare represents
35% to 40% of their typical budget, so something has
to be done to constrain costs. They cannot just let
things go on the way they are. What they are doing in
some states is to consider or have a generic-only for-
mulary; no brand drugs. However, this presents a prob-
lem with specialty drugs, since there are no generics. If
we are going to move into the generic mindset, as
opposed to branded products and new technology, and
payers are not willing to pay for these innovations, how
is that going to affect our decision process?
Another phenomenon is the transition after an
acute event in a hospital to some point of outside care,
such as nursing home, rehabilitation center, or home
health. How do you make sure that all possible
information is available, such as medical records and
electronic health records? The concept of disease man-
agement as a means to control costs has been consid-
ered. However, only 3 studies evaluating large popula-
tion-based interventions have been conducted.13
For
patients who require the use of biologics, the role of
disease management remains questionable.13
We cur-
rently have no reasonable way to coordinate this care,
so we are going to see the business of healthcare being
transformed in many different directions. We will be
facing some form of value-based decision, whether a
cost-based decision or some other mechanism. Of
course, cost will be a big element in the equation. In
the “business and benefits” literature, what we see is
nothing but general discussion about cost issues. We do
not see other factors that are necessary to consider.
From the research and development (R&D) process, it
is going to be a challenge to determine how to get
beyond the simple focus on unit cost.
Cost Measures
There are models available that avoid the unit-cost
mentality. The problem is getting that model base into
a product so it offers what is wanted and needed by the
employers and the health plan, and by extension, the
providers. The biggest barrier has been acceptance by
providers. Whatever is done, none of the stakeholders
can be ignored. From an R&D pipeline perspective, it
is necessary to look at the utility measures. Quality of
life as a measure is not going to work. It has not worked
before, it is not well accepted in the business commu-
nity, and it is very controversial as a measure in the pri-
vate versus public sector benefits world. What is need-
ed is something that is reliable and provides a valid
indication of how these treatments compare head-to-
head, so the tough decisions that have to be made can
be made by informed stakeholders. As one example,
providers are not going to advocate something they do
not believe in or get paid for, and that the patient will
not be able to pay for.
One approach used in many other developed coun-
tries is comparative effectiveness.14,15
This approach
involves the evaluation and comparison of the
To control costs, it is necessary to have
coordinated care. A common finding with
large employers is that they are paying for the
same services multiple times because of a lack
of coordination of information.
AHDB0508_21-25.qxp 1/12/09 7:58 PM Page 24

Pharma R&D in a Value-based Healthcare System

Pharma R&D in a Value-based Healthcare System

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (16)

Destacado

Destacado (9)

Similar a Pharma R&D in a Value-based Healthcare System

Similar a Pharma R&D in a Value-based Healthcare System (20)

Pharma R&D in a Value-based Healthcare System