Hospital Impact—Reimbursement models a roadblock to biosimilar adoption

Jason Moore

With a global market forecast to reach $30 billion by 2020, and multiple products slated to be introduced in the near future, biosimilars of market-leading therapeutics are a reality in the U.S. and beyond.

Yet a new analysis suggests today’s biosimilar reimbursement model could be a major obstacle to broad adoption.  

To date, the Food and Drug Administration has approved five biosimilars in the U.S. since March 2015. Though only two biosimilars have hit the market, as Chemistry World reports, FDA guidance has been well-received on such key issues as biosimilarity requirements, naming and interchangeability. In addition, the U.S. Supreme Court recently ruled (PDF) that biosimilar products can be marketed as soon as they are FDA-approved, as long as there are no injunctions against the biosimilar company from any pending patent litigation brought by the reference product manufacturer.

However, to spur adoption, payers may need to explore alternative or potentially differential payment models to ensure providers do not sacrifice profits when adopting biosimilars.

John Reddan
John Reddan

According to a Navigant analysis, en masse adoption of biosimilar alternatives to a single innovator brand such as Remicade could decrease annual profits by as much as $100 million across physician offices and 340B and outpatient hospital infusion suites nationwide. Why? While Medicare offers a differential reimbursement model that’s higher for biosimilars, commercial payers do not, leading to reduced profits for most providers.

Under the existing structure, providers are reimbursed for innovator biologic use with an additional percentage of the product price added to cover acquisition, storage and dispensing costs associated with delivering care. This typically ranges from a Medicare-mandated 6% of the drug’s average sales price (ASP) under Medicare coverage to a more robust 9%-10% reimbursement from typical commercial plans. The result of payment as a fixed percentage of ASP is a financial disincentive for providers to favor biosimilar products.

Medicare recognized this disincentive and mandated reimbursement at ASP plus 6% of the innovator’s price for physicians dispensing biosimilars. But commercial payers, which represent the majority of billings for most U.S. providers, have yet to broadly follow suit.

Eric Snyder

For example, for an infused innovator product priced at $1,000 per unit dose and a biosimilar priced at a 15% discount, use and reimbursement of the biosimilar alternative would lead to the following average gross profit losses:

  • 340B hospitals: $78 per dose
  • Outpatient hospitals: $42 per dose
  • Physician offices: $8 per dose

These losses can add up: Individual providers with 50 patients on therapy could lose as much as $50,000 per year—an amount that would grow with additional adoption of biosimilars coming to market.

Biosimilar adoption is likely to continue in integrated delivery networks and accountable care organizations where providers receive a fixed case-rate for care, regardless of therapy choice. For example, Kaiser Permanente reported moving 93-95% of its pediatric market share of filgrastim from the innovator biologic to a biosimilar, according to the publication Biosimilar Development.

However, broader provider adoption will likely remain limited by the reimbursement environment, with a subset of providers currently able to realize a net margin improvement through biosimilar usage. Physician offices and outpatient providers would need greater than 50% of their reimbursement through Medicare to be incentivized to adopt biosimilars—this amount jumps to more than 75% for 340B hospitals due to the substantial purchasing discounts they receive through the Department of Health and Human Services. However, the average provider has just 16% of its patients covered by Medicare, according to the Kaiser Family Foundation.

While pharmacy benefit managers and payers are taking high-profile stances on expensive biologics, payers haven’t been willing to fully exclude branded agents from formularies or force providers to switch stable patients to biosimilars.

A middle ground for payers and providers

There are two noteworthy scenarios in which the use of biosimilars in lieu of the innovator biologic is more financially beneficial for both payers and providers:

  1. Fixed reimbursement model: Under this model, payers “capitate” the cost of the drug by paying a fixed amount regardless of whether the innovator or biosimilar was administered, thereby eliminating the financial incentive for providers to use the more expensive innovator drug. In this case, providers realize the value of lowering their acquisition cost, while payers reduce their drug spend by reimbursing less than they currently pay for the innovator and more than they pay for the biosimilar.
  2. Differential reimbursement model: Like Medicare’s approach, a differential model offers more favorable reimbursement rates to incent biosimilar product choice by providers. Yet, only about 3% of commercial payers currently use the differential model, according to (PDF) Magellan Rx Management.

For either reimbursement model to be a viable option, there must be a “middle ground” for payers and providers, whereas payers realize cost savings while still providing financial incentives for providers to adopt biosimilars. Navigant’s analysis shows that if payers increase the incentive for a biosimilar by 4 percentage points, this would alter the relative margin for physician offices and remove the financial disincentive of using a biosimilar. Hospitals would require a more significant incentive, such as ASP plus 16 percentage points.

Biosimilars have the potential to reduce overall treatment costs without negatively impacting outcomes, but the current reimbursement model for these therapies presents a major obstacle to broader adoption. While broad U.S. regulation that enables substitution and interchangeability of biosimilars may be helpful, the near-term adoption of biosimilars is likely to be driven by those responsible for the drug spend—most notably, commercial payers and pharmacy benefit managers.

Though it may be possible for insurers to influence biosimilar uptake through restrictive formularies and benefit design, getting providers on board will require longer-term commercial reimbursement models that align hospital and physician incentives with those of the payer.

Jason Moore, a director in Navigant’s San Francisco office, has more than 15 years of experience advising life sciences teams on strategic options and leading corporate planning within the biopharmaceutical and med tech industries.
 
John Reddan has more than 25 years of experience in the life sciences industry, including more than 10 years in management consulting and hands-on leadership roles with specialty and pharmacy benefit management companies.
 
Eric Snyder, a director in Navigant’s New York office, has spent the last 13 years supporting life sciences companies and their investors unlock value through portfolio strategy, new product planning and competitive differentiation.