Adapting Reinsurance to Relieve Biotech Bottleneck

New private reinsurance companies would finance and manage the risks associated with producers, payers, and patients
Bruce Pyenson, FSA, MAAA

MANAGED CARE June 2008. ©MediMedia USA

New private reinsurance companies would finance and manage the risks associated with producers, payers, and patients

Bruce Pyenson, FSA, MAAA

Analysts point out that as a whole, the biotechnology industry has yet to make a profit. The high cost of clinical trials, approval processes at the chronically underfunded FDA, and steep marketing expenses wipe out margins. The future may be even more difficult: The health care cost crisis makes payers reluctant to cover biotech products because of their high prices.

Patient advocates and biotech firms often express their frustration at FDA approval processes (recently, for example, Provenge for prostate cancer), but market uncertainty also afflicts the industry. Uncertain insurance coverage makes innovators worry that they will not be paid. High prices have caused payers to look very closely at biotech claims, and payment approval will not be automatic.

Most payers struggle to maintain the technical expertise about which products will work for which patients. This is a serious problem in an environment where the science is developing rapidly and products often treat relatively rare conditions.

There is a voluntary private sector solution to the biotech conundrum: the formation of new private reinsurance companies — for example, “Bio-Re” — that would finance and manage the financial and other risks of biotech producers, payers and, not incidentally, patients.

Here’s how Bio-Re would work. Health plans that choose to do so would pay an annual per-member, per-month premium to Bio-Re. In return, the reinsurer would evaluate coverage for specific biotech products and determine whether they meet evidence-based medical standards.

Bio-Re would also manage the care process, buy products in bulk, and provide the biotechnology drugs health plan members require.

This reinsurance concept would relieve health care plans of a costly administrative burden. It would improve the quality of medical care through application of evidence-based standards, and it would direct care to Centers of Excellence. It could also use financing mechanisms to provide incentives for physicians to use the right treatment, supplanting the current broken system that often contains incentives based on potential mark-up income.

Bio-Re could also reduce the cost of health care overall through innovative bulk purchase agreements. Instead of buying by the pill or injection and distributing product as specialty pharmacy benefit managers do now, a bio-reinsurer, representing 40 million patients, would offer a manufacturer $250 million for the drugs its members need. For the successful biotech bidders, this sort of forward aggregate purchasing would ensure revenue streams and speed market acceptance.

Helps plans and doctors

Health plans would realize a reduction of administration expenses, experience predictable costs, and provide higher quality care with less waste of resources. Physicians could benefit by avoiding cash-flow crunches that can happen when they buy expensive drugs but wait to be paid by the patient’s health plan.

Biotech producers would realize more predictable cash flow and greater efficiencies in marketing, and would see a lower barrier to entry for new products. All of this adds up to lower investment risk and better resources to produce better biotechnology for patients.

The author is a consulting actuary at Milliman Inc., a consulting and actuarial firm. These are his views, not necessarily those of his employer.