The current reimbursement system in the United States discourages some forms of health care innovation. An example of this is the development of new antibiotics that are not needed now but may become available in the future. A subscription-based pricing model can solve this problem.
Standard ways of reimbursing innovation can create disincentives for the development of high-value innovations in healthcare. One remedy is the development of “Netflix-like” subscription models that involve paying a subscription fee to access drugs and treatments. Such models are already in use in the UK, Australia and Sweden.
Consider antibiotics. Saving lives by developing new antibiotics should be good business, especially since the threat of drug-resistant microbes creates a constant demand for new drugs. But it’s not. New antibiotics have to compete with cheap generics, which keep prices low for most clinical applications. Moreover, with no obvious superiority over existing drugs here and now, new antibiotics cannot command a higher price, although they may be very valuable in the future when they are needed to treat pathogens that are resistant to prevailing therapies.
Individual patients and health plans also underestimate the new antibiotics. That’s because they don’t consider the public health impact of protecting the population at large from drug-resistant germs when deciding the price they’re willing to pay.
Low prices make antibiotics seem like a bad bet, so many pharmaceutical companies refuse to develop them, despite their obvious long-term value to patients and society. The consequence is a very thin pipeline of potential new antibiotics.
The Pasteur Act, now under consideration in the US Congress, proposes to incentivize the development of new antibiotics through a subscription model. Such pricing models are likely to become an increasingly important feature in the healthcare sector to drive valuable innovation and improve access to new treatments, especially those – such as gene therapies – that come with very high price tags.
To make subscription models work better in healthcare, innovators and leaders can do at least three things:
1. Be clear about the purpose.
Subscription models are available in two variants. The first supports the creation of a valuable option, such as antibiotics, held in reserve against the rise of drug-resistant pathogens. The second extends access to high-cost treatment to populations that may otherwise be priced out of the market. The state of Louisiana has used this second type of subscription model to create access to hepatitis C antiviral drugs for its Medicaid and incarcerated population.
Each model depends on a different type of trust. The opt-in model only works if subscribers—public and private payers—believe that the new treatments they pay for upfront will work as advertised. Part of the opposition to Pasteur’s Law arose from the fear that subscription payments could be spent on worse drugs. Increasing confidence in the value of the option is key to making this subscription model acceptable to governments, payers and providers.
Access models begin with a treatment that everyone already agrees is valuable to patients and seeks to make available to the widest possible patient population. Essentially, in exchange for a subscription fee, the drug company agrees to provide the drug at a low unit price. The trust issue here is different. The drug company must believe that the subscriber can deliver a patient population that would otherwise be unattainable with conventional pricing.
2. Be patient in negotiations.
Both types of subscription models are applications of a common pricing strategy that economists call a two-part tariff, in which the price consists of two parts: a subscription fee and a unit fee. This strategy is familiar to anyone who has been to a bar with a high cover charge but relatively low drink prices or a health club with a membership fee and a small extra charge for a workout. A high cover or membership fee guarantees the company revenue regardless of the amount of drinks consumed or exercise classes attended. A low unit charge encourages people to drink or exercise more.
Two-part tariffs offer several advantages. In the case of new antibiotics, they allow drug manufacturers to profit even though payers and providers hold the drug in reserve. A two-part pricing strategy can also increase market size compared to traditional volume-per-dose pricing.
Negotiating subscription fees is difficult, however, because fees determine how value is divided between innovators and users. Too high a subscription fee allows drug makers to capture even higher profits than they could with conventional pricing. An overly aggressive take-it-or-leave-it offer from a large buyer, on the other hand, can leave drugmakers with lower profits than under conventional pricing.
Agreeing on some principles in advance can facilitate successful negotiations on subscription fees. For example, the parties may establish limits on the use of bargaining advantages. Such forbearance can take the form of rules or understandings that tie subscription revenue to some percentage of what it might be under traditional pricing. Alternatively, the parties may agree to share equally the additional value created by the subscription model.
3. Alignment with professional and social norms.
Our research on innovation found that potentially valuable innovations in the healthcare sector can be met with indifference or even disdain by providers and society at large if they do not meet professional and social norms. Particularly provocative are new clinical or business practices that are perceived as promoting financial interest at the expense of ethical duties and obligations. An example of this is the national backlash against health maintenance organizations (HMOs) in the United States in the 1990s, when HMOs were so unpopular that they were routinely cast as villains in popular entertainment.
There were similar reactions to the subscription models. Some of the most effective opposition to Pasteur’s Law has come from doctors who see the plan as ethically dubious because, they say, it furthers the financial interests of drug companies at the expense of patients.
In contrast, Louisiana’s access model is widely seen as providing life-saving drugs to people who otherwise could not afford them. As such, it has been lauded by Scott Gottlieb, former commissioner of the Food and Drug Administration, and many others as a way to reduce health care disparities.
Subscription models will be adopted to the extent that providers and the public perceive them as promoting treatment and health goals. Payers and innovators would do well to keep this lesson in mind when designing their models.
The United States is a country of exceptional innovative capacity. The challenge for the health sector is to use this capacity to make health care both better and cheaper. New ways to compensate for innovation, such as subscription models, play an important role in addressing this challenge.