It has been well established that the growth of specialty pharmaceuticals, which today represent approximately 40% of the United States pharmaceutical market, has been accompanied by greater spending by hospitals on inpatient drugs. (Alliance, 2017) (NORC, 2016). In part, this shift may coincide with greater numbers of hospital and physician-administered therapies for rare and difficult-to-treat diseases. Analyses of US drug spending on inpatient drugs have found that annual spending has increased at up to twice the rate of prescription drugs in some recent years. (NORC, 2016.)
But are the systems of reimbursement for inpatient care designed to address these costs? Because many hospital environments are reimbursed via bundled payment methods, innovator companies selling to hospitals must address a completely different set of challenges from prescription pharmaceuticals – in particular, previously determined, fixed payments for hospital stays, and in some international markets, capped annual budgets that limit overall spending on such products.
The most common scenario of payment in hospitals, globally, is the use of Diagnosis Related Groups (DRG) to pay a predetermined amount for an entire patient discharge, which reflects the primary diagnoses and procedures provided to the patient. But DRG systems create obvious disincentives for adoption of promising new therapies and diagnostics, since hospitals often cannot cover their additional costs. Starting with the US in 2000, special pathways to address the high additive costs of new innovative drugs were developed in a number of DRG payment systems. (106th Congress, 2000.) England, Germany and France all subsequently implemented systems of add-on payment for certain inpatient innovations as part of their DRG-type systems.
Drugs that achieve supplemental payment are often indicated for rare or severe diseases. Other sources have noted the variation and lack of transparency in health technology assessments (HTAs) by country, which can lead to delays in reimbursement and patient access for new drugs. (Akehurst, 2017.) Variability may even be greater for hospital-based therapies.
This chapter describes the special pathways established for high-cost, specialty drug products in the United States, Germany, France, and England along with recent developments that directly impact the evidence portfolios that manufacturers need to anticipate to succeed in today’s markets.
In the United States, the cost of Medicare inpatient care is covered by a patient’s DRG payment for each admission, in approximately 80% of hospitals. Because DRGs pay for admissions with a pre-determined, bundled payment that is calculated from prior year data, there is a time lag in the update to payments for new innovations. Hence, new innovations may struggle to gain adoption until DRG payment rates for admissions reflect the added costs of the drug. For small volume therapies used in selected patients, it is quite possible the DRG rates for large volume conditions will never adjust upward sufficiently to compensate their costs.
Section 533 of the Medicare, Medicaid, and SCHIP Beneﬁts Improvement and Protection Act of 2000 (BIPA) mandated that Medicare implement an add-on payment to adequately cover the costs of new innovations introduced in the hospital setting. (106th Congress, 2000.) The core concept of the US legislation was to create a bridge for promising innovations to receive add-on payment to the DRG payment, while Medicare collected data on the overall costs of admissions so it could then make a permanent assignment to an appropriately-paying DRG.
While the original statute simply requires Medicare to pay additionally for qualified new drugs, it does not specify the exact criteria for eligibility. This was refined in 2001 when CMS used its authority under the statute to provide the process and criteria for new technology add-on payments (NTAP). (CMS, 2001.) CMS deliberately established a high bar for eligibility.
Additional modifications to the statute were implemented under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) which amended the NTAP criteria to include the threshold described below. (Medicare Modernization Act, 2003.) The current eligibility criteria are:
- the technology must be new;
- the medical service or technology must be costly such that the DRG rate otherwise applicable to discharges involving the medical service or technology is determined to be inadequate; and
- the service or technology must demonstrate a substantial clinical improvement over existing services or technologies for Medicare beneficiaries. (Centers for Medicare & Medicaid Sevices, 2018.)
“New” under the CMS rules means within two to three years following market introduction, (Centers for Medicare and Medicaid Services, 2001) and a specific code has been assigned to identify the service. (Centers for Medicare & Medicaid Sevices, 2018.) (Centers for Medicare and Medicaid Services, 2001.) Technologies that are substantially similar to older technologies are not considered new.
Demonstrating inadequate payment involves a formula for the applicable DRG payment groups, based on the lesser of 75% of the standardised amount increased to reflect the difference between costs and charges, or 75% of one standard deviation beyond the geometric mean standardised charge for all cases to which the new technology is assigned. (Centers for Medicare & Medicaid Sevices, 2018.) Cost thresholds for each MS-DRG are published annually in Table 10 of each year’s IPPS (inpatient payment prospective payment system) final rule.
Determining substantial clinical improvement under the Medicare definition can be somewhat challenging. Technologies are considered eligible if:
- The drug offers a treatment option for a patient population unresponsive to, or ineligible for, currently available treatments.
- Use of the drug significantly improves clinical outcomes for a patient population as compared to currently available treatments. (Centers for Medicare and Medicaid Services, 2001.)
- Applicants must submit data to CMS verifying that the average charge per case exceeds the MS-DRG cost threshold. CMS makes add-on payments only for individual cases that are more costly:
- The additional payment is capped at 50% of the additional cost of the technology.
- Cases receive less add-on payment if the case costs less than MS-DRG payment amount plus 50% of the cost of the technology. (Centers for Medicare & Medicaid Sevices, 2018.)
As the NTAP legislation approaches the end of its second decade, there is some debate as to whether it has had any true impact, with only a very small volume of drug products deemed eligible. By September 30, 2007, 28 applications had been received, eight had been approved – and only one of these was a drug product, drotrecogin alpha (activated) protein for treatment of severe sepsis associated with acute organ dysfunction. (Bockstedt, 2010.) In 2018, there are five drugs approved for New Technology Add-on Payments. (CMS, 2015.) (AdvaMed, 2016.) (CMS, 2017.)
The drugs approved for NTAP in FY 2018 are:
- Defitelio® – a treatment for severe hepatic veno-occlusive disease after hematopoietic stem cell transplantation (HSCT). Idarucizumab – for the reversal of anticoagulant effects of dabigatran.
- Vistogard™ – to treat an overdose of certain cancer medicines (capecitabine or fluorouracil).
- ZINPLAVA™ – to reduce recurrence of Clostridium difficile infection (CDI).
- Stelara® – for moderate or severe plaque psoriasis.
Medicaid reimbursement of hospital care varies by state, with some states applying a bundled, DRG system known as the All Patient Reﬁned – Diagnosis Related Groupings, APR-DRG and others relying on a per diem or fee-for-service model. (Henry J Kaiser Family Foundation, 2012.) As of April 2014, 36 states rely on DRGs and 10 states use per diem rates for inpatient hospital services. The remaining states use other approaches, such as a per stay payment or cost-based reimbursement. (MACPAC, 2016.)
Each state government determines the amount of payment. Unlike commercial or Medicare plans, the payments are often considered to be below the cost of care. (Reinhardt, 2009.)
Alongside the system of reimbursement for hospitals is the outpatient 340b drug discounting programme, which provides hospitals with access to discounted drugs for low income patients. This programme has been criticised as providing hospitals with undue financial margins, without any mandate to pass on savings to patients (GAO Report on 340b Discounts, 2011). Hence, it may help hospitals offset disproportionately low Medicaid payments for admissions, but it does not help support manufacturer introductions of innovations in that setting.
Private Commercial Payers
Under commercial plans, payment for inpatient pharmaceuticals can also be bundled with no separate payment, although generally commercial payment rates are higher than Medicare rates. Alternatively, private payers may reimburse hospitals based on “discounted charges” which help compensate a proportion of the charges per service. In a hospital outpatient context, approximately 54% of commercial lives are reimbursed based on a percentage of charges. (Magellan Rx Management, 2016 Seventh Edition.)
The system of discounted charges has been criticised as providing hospitals with excessive margins for dispensing and prescribing drugs, both physician administered and prescription. One recent study found average hospital mark-ups for 20 leading drugs of 487%. (Moran Company, 2017.) When compared to the reported costs for those same cases, the authors found the average hospital reimbursement by the commercial payers was 252% above costs.
Thus the commercial payer methods of reimbursement may provide an avenue of payment that helps offset losses for the same drugs used for other patients whose DRG-based reimbursement shifts risk onto the hospital. The net impact of these two very different systems of payment likely means a phenomena of “cost shifting” which occurs regularly within hospitals, where the revenue for certain commercially insured patients helps to balance a hospital’s books for capped reimbursement under DRG systems, both public and private.1
With European Union or national drug regulatory approval, a drug can be adopted by German hospitals. In 2011, the Act on the Reform of the Market for Medical Products (Arzneimittelmarkt-Neuordnungsgesetz, AMNOG) mandated a G-BA (Gemeinsame Bundesausschuss, or Joint Federal Committee) review prior to local Statutory Health Insurance (SHI) reimbursement for all new drugs. The German Ministry of Health is the highest authority in German healthcare, but the G-BA is the highest authority of the joint self-administration of physicians, hospitals and SHIs. The G-BA has a key role in the assignment of premium drug pricing. Otherwise the new therapy is reimbursed at the level of the standard therapy.
Clinical evidence presented in the AMNOG dossier is usually the same evidence used for regulatory drug approval. The G-BA, with the support of the IQWiG (Institute for Quality and Efficiency in Health Care), subsequently analyses the potential additional patient benefit based on the following parameters:
- Clinical: Mortality; Morbidity; Quality of Life; and Side Effects.
- Duration of therapy.
- Dosage and cost of drug/yearly therapy cost, if applicable.
- Size of target patient group based on clear definition of indication.
- Any additional/accompanying health services needed with the new therapy.
The AMNOG dossier evaluation and subsequent discussion in the G-BA, including hearings of experts from the industry, physicians’ and patients’ associations, has a fixed timeframe of six months. (Joint Federal Committe (G-BA), 2017.)
Hospital adoption initially depends on clinicians, but long-term adoption depends on adequate reimbursement. Larger university hospitals may adopt new drugs to ensure the availability of an innovative therapy to patients in need, before reimbursement is established. Long-term, all types of hospitals need to achieve cost-covering reimbursement via the German DRG system.
Hospital Payment under G-DRGs and NUB Innovation Payment
The German DRG system (G-DRG) for hospital payment was based primarily on the Australian Refined DRG system, with a number of modifications, including the possibility of both short term and permanent supplemental add-on payments for certain therapies.
One G-DRG payment usually covers all costs of a patient’s hospital stay, including treatment, drugs, and devices. Hospitals must also follow annual hospital budgets, which are calculated according to the annual case mix.
Permanent implementation of new (and higher) tariffs for innovative drugs into the DRG system takes at least three years. Temporary bridge funding is possible for new hospital drugs under the NUB Innovation Clause (Neue Untersuchungs- und Behandlungsmethoden) NUB funding must be applied for each year, by each hospital using the new drug. (Cornelia Henschke, 2013.) To qualify, drugs have to fulfil the following criteria (InEK Institute for Remuneration System in the Hospital, 2016 to 2018):
- not properly reimbursed via existing coding and fees;
- have been used for less than four years in German hospitals; and
- cause significant additional costs for the hospital stay.
InEK (Institut für das Entgeltsystem Im Krankenhaus), the agency that administers the German DRG system, has never published a threshold for determining “additional cost” but a commonly known unofficial threshold has been an incremental cost of €500 per case.
Hospitals apply individually for NUB funding through the InEK. Once approved, NUB status allows each hospital to negotiate one-year supplemental fees with local Statutory Health Insurance (SHI) funds. (IGES, 2018.) Each hospital must reapply for each NUB supplement, annually, and products are typically eligible for up to four years.
To date, oncologic drugs and antimycotics make up the majority of drugs approved for NUB. Severity of illness, demonstrated proven patient benefit and cost are the major success factors.
Following the NUB process, InEK then reviews data from “calculation” hospitals to determine the appropriate, long term G-DRG assignment based on the total cost of associated care. Hence, in order for a G-DRG assignment to be possible, a drug must be associated with a specific, definable set of G-DRGs and be used in the right hospitals.
Drug-related NUB applications, as well as approvals, have increased annually as the trend depicted below shows. Overall, applicant drugs from 2016 to 2018 have experienced a 40% success rate.
ZE Permanent Supplemental Payments
If drugs do not “fit” into the DRG structure, InEK may consider assigning a ZE (Zusatzentgelt) permanent supplemental payment. ZE payments are used for drugs with multiple DRG assignments.
ZE services are nationally designated, but issued in two forms: one with a nationally fixed reimbursement price, and a second that is locally negotiated (similar to the NUB).
Drugs are eligible for a ZE payment if they involve:
- a clearly defined procedure (with OPS code);
- are used with multiple DRGs without fixed association to any DRG; and
- represent a relevant cost for the total DRG system, especially the hospitals rendering the service.
While permanent supplemental payments slightly decreased over the past few years, negotiable ZEs for drugs are increasing. Drug related ZEs often are published as part of a list of reimbursable amounts depending on dosage (if applicable) and are reviewed annually.
In France, the High Authority on Health (Haute Autorite de Sante, HAS) review pathway is mandatory for hospital use of all new drug products. Manufacturers must submit a clinical dossier to the HAS Transparency Committee, which will analyse the severity of the pathology, the drug efficacy, the side effects, and positioning.
The HAS applies an evidence review process and assigns an appraisal of either “Improvement to Medical Services Rendered” (ASMR) for a product with a direct marketed comparator, or “Medical Services Rendered” (SMR) for novel products. The HAS appraisal assigns an ASMR or SMR rating on a five point scale, where only products with an ASM/ASMR level III or better are eligible for Liste en Sus supplemental payment.
If expected drug sales are over €20 million, a health economic review will also be likely to be required.
If the HAS review is positive, the drug can either be listed on the list for community (Homologation assurés sociaux) and/or on the list for hospitals (Homologation collectivité).
The Comité économique des produits de santé (CEPS) will review the economic dossier provided by the manufacturer:
- The CEPS will negotiate the tariff with manufacturer. Budget impact models are critical.
- For ASMR I to III, drugs are eligible for a listing on the Liste en Sus, paid in addition to the GHS.
- In some cases, some hospital pharmacies can deliver drugs to ambulatory patients for home use. These drugs are listed on the “Retrocession list”.
- Reimbursement rates will depend on the SMR level.
Each drug reviewed by the HAS CT receives an SMR or ASMR according to the clinical evidence submitted, which will determine the level of reimbursement.
- SMR (Service Medical Rendu) reviews are written for drugs that are brand new or indications that do not yet have a standard treatment protocol.
- ASMR (Amelioration de Service Medical Rendu) reviews are written for drugs that are improvements on existing medications or variations on existing treatments. (HAS Haute Autorite De Sante, 2014.)
Either review must be sufficiently favourable for the new drug to be listed on the Liste des Médicaments Remboursables (Reimbursed Drugs List), which allows the drugs to be reimbursed.
The process of adoption at a hospital level is driven by an internal technology appraisal committee and may take six months following approval of reimbursement in France. These committees include physicians, pharmacists and finance managers. Medico-economic evidence is welcomed by finance managers in order to understand incomes and costs of standard vs. new protocol.
Price negotiations are more substantial in public than in private hospitals. Typically, there is very little price negotiation with private hospitals, where acquisition prices are close to the published tariffs.
Conversely, in public hospitals, there are significant negotiations for some of the drugs listed.
Hospital Inpatient Payment for Drugs
French inpatient or outpatient acute hospital services are financed through a payment-per-case prospective payment system, using two related groupings. Cases are assigned to a diagnosis-related group type of classification among 700 Groupes Homogènes de Maladies (GHM), which have severity adjustment for comorbidities. A nationally fixed tariff (Groupe Homogènes de Séjours, GHS, Homogeneous Discharge Groups) is then applied to each GHM.
The GHS tariffs are used to pay public hospitals and a portion of costs in private hospitals. The GHS assignment of each patient discharge reflects a combination of diagnosis (ICD10) and procedures (CCAM) codes.
A unique feature of the French system is the tendency to pay for a large number of drugs via an add-on, supplemental payment. These drugs are listed on the Liste en Sus, which is published annually.
Unlike the US and German temporary add on payments, the Liste en Sus technically does not have a time limitation and some products can remain listed for years.
The Liste en Sus mostly includes anticancer, anti-inflammatory, auto-immune and immunoglobin drugs and is reserved for drugs that are not used uniformly for all patients in a GHS and where the cost is considered significantly higher than the applicable GHS payment.
There are five conditions that the hospitalisation council sets out for inclusion on the Liste en Sus:
- expected usage of the drug;
- evidence level appraised for the drug (assuming an ASMR above III);
- frequency of the new drug prescriptions within the GHS is below 80%;
- cost is more than 30% of the GHS tariff; and
- cost is similar to that of comparable products. (Ministère des Affaires sociales et de la Santé, 2018.)
There has been a consistent increase in the number drugs listed on the Liste en Sus and in 2018 there are 210 products eligible. However, from 2011 to 2018 the number of listed drugs increased only slightly.
In England, the Health Resource Groups (HRG) system is comprised of a case-mix payment system for all hospitals, both public and private. There is a national tariff of fixed prices for hospital admissions, reflective of averages nationwide. Each specific procedure is assigned a reference cost.
High-cost drugs and devices account for around 25% of expenditures on specialised care in England. To ensure that providers and commissioners of health services can deliver the best value of care to patients, NHS England is continuing to implement measures introduced in recent years which are designed to reduce excess spending and maximise clinical benefit.
In England, drug add-on payments are either negotiated locally with Clinical Commissioning Groups (CCGs) or designated nationally for specialised services. The High Cost Drugs List in the NHS is intended for specialised products, whose use is concentrated in a relatively small number of centres. The purpose of this list is to enable additional payment by NHS England to the hospital trust for inpatient or outpatient-dispensed, high-cost drugs. (NHS England and NHS Improvement, 2016.)
As in all markets, eligibility for separate payment depends on several requirements. Requirements for the High Cost Drugs list have historically been:
- the drug and its expected associated costs of care are disproportionately high-cost compared to the other expected costs of care within the HRG, which would affect fair reimbursement;
- there is, or is expected to be, more than £1.5 million spent or 600 cases in England per annum; and
- drugs which no longer meet the criteria, and so will not lead to systematically incorrect reimbursement of providers, will be considered for removal from the high-cost list. (Department of Health and Social Care, 2012.)
In the 2015/2016 time period, a total of 310 drugs were listed, 40 were added or altered, (NHS England and Monitor, 2014).
- For the 2016/17 list, 53 were added or altered (Monitor and NHS England, 2016), and five were removed, leaving a total of 354 drugs listed.
- For 2017/2018, 54 drugs were newly added or altered to the inpatient High Cost Drugs List. Only one drug was removed. There are 404 drugs listed. (NHS Improvement and NHS England, 2017.)
- As of April 2018, three drugs were removed from the High Cost Drugs List, and 16 new drugs were added. (NHS England, 2018.)
Though it is encouraged, prior NICE appraisal is not a requirement for listing on the High Cost Drugs list.
NHS England recommends payments for high-cost drugs excluded from National Tariff are made on the basis of a pass-through of the actual price charged to providers. A central repository of prices for excluded drugs, known as Pharmex, is currently being developed to provide robust data for effective procurement. Providers are mandated to provide Pharmex data.
An online clinical decision support tool (known as “Blueteq”) was implemented in 2015/16 as NHS England’s standard electronic contractual prior approval system, and covers a range of high-cost drugs excluded from tariff.
Starting in 2016/17, the scope of items covered has been extended to all high-cost drugs excluded from tariff where NHS England Clinical Commissioning Policies or NICE Technology Appraisals exist, or where there is variation in uptake, or significant financial risk. (NHS England, 2015.)
Cancer Drugs Fund
The Cancer Drugs Fund (CDF) was initially established in 2011 as a temporary solution to enable access to cancer drugs that are not routinely available through the NHS. The annual budget for the CDF increased annually in the initial years, but the programme continued to exceed its budget. The Fund was originally scheduled to conclude in 2014, but was later extended to the end of March 2016 and then taken over by NHS England with a new appraisal approach enacted. (NHS England.) The expanded role of NICE followed criticism of overspending on drugs with low therapeutic benefit. The new process offers managed access arrangement to new treatments, while additional evidence is collected to address clinical uncertainty. The additional evidence is used to help NICE to decide if a new treatment should be routinely funded.
NICE appraises all new systemic anti-cancer therapy drug indications expected to receive a marketing authorisation. The process aims to publish draft guidance before a drug receives marketing authorisation, with final guidance published within 90 days of marketing authorisation. The appraisal process is based on the NICE Technology Appraisal (National Institute for Health and Care Excellence, 2014), but with additional specific amendments for the Cancer Drug Fund. (National Institute for Health and Care Excellence, 2016.)
The process allows NICE to make one of three recommendations:
- Recommended for routine commissioning: “yes”.
- Not recommended for routine commissioning: “no”.
- Recommended for use within the CDF (new).
‘Recommended for use within the CDF’ can be applied for drugs for which NICE considers there to be “plausible potential” to meet the criteria for routine commissioning, but there remains significant clinical uncertainty.
For those drugs that have received either a ‘yes’ or a draft recommendation for use within the CDF, interim funding is available at the point of marketing authorisation. However, in order to receive this funding, pharmaceutical manufacturers will have to agree to the expenditure control mechanism. (NHS England, 2016.)
The CDF budget is currently fixed at £340 million. (NHS England Cancer Drugs Fund Team, 2016.) Currently 97 drugs (including drugs listed more than once for variations in indication) are listed. (NHS England, 2018.)
While there is growing attention to the costs of prescription pharmaceuticals, hospital-dispensed specialty pharmaceuticals may face increasing challenges to justify premium prices under increasingly constrained methods of hospital payment. Notably, DRG payment systems are adding tighter controls on overall drug spending and may, in some markets, be very reluctant to provide supplemental add-on payment.
In the USA, hospitals help compensate under-reimbursement for some patients via higher markups on other prescribed products. But in mostly single payer environments, such as Britain or Germany, no such cost shifting is possible.
Some systems have maintained special pathways for funding cancer drugs, specifically, which has to some extent created a safe harbour in some markets, but these pathways typically place limitations on drug prices.
In those markets in particular, manufacturers face a multi-tiered economic challenge and must prove therapeutic value, from an economic standpoint, at both societal and provider levels. Robust economic modelling, based on well-designed comparative clinical trials, has thus become a necessity for market success. In addition, for the newest generations of immune-oncology therapies, hospitals simply cannot afford acquisition of the product. In these cases, some manufacturers are obliged to negotiate direct payment agreements with insurers so that costs can be amortised over time, and in some instances, payments can be linked to therapeutic outcomes.
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The authors would like to acknowledge Jean-Manuel Toussaint, Kirstin Osthoff and Luan Phillips for their assistance in preparing this chapter.