Comparative Effectiveness Research - Threat or Opportunity

The Obama administration is promising major health care reform, and this time … unlike all the times before since the creation of Medicare more than 40 years ago … the promises seem likely to be kept. We’ll see. What is most interesting to me is that of all the reform elements that have been proposed – broadened insurance coverage, mandatory electronic health records, a public insurance option to compete with private insurers, radiology benefits management, a defined approval path for biosimilars, a deepened commitment to so-called “personalized medicine”, etc. - the one causing the most anxiety to life science companies seems to be “comparative effectiveness research”.

The commitment to comparative effectiveness research (lets call it CER) has already been made. The February economic stimulus package contained $1.1 billion for CER. The 15 person council to set priorities and coordinate the commitment of that money was appointed March 18. And it is hard to argue that better knowledge about the relative merits of different medical therapies isn’t a good thing. So why is it that the formal CER policy statements of the key trade associations are so guardedly supportive, and the private communications of many industry heavies are clearly negative?

It is not as if we don’t already compare one therapy to another in clinical research all the time. Every controlled clinical trial involves such a comparison, and FDA increasingly wants to see active controls – best available therapy – rather than placebo controls. Insurers, too, in their coverage decisions, ask to see therapeutic outcomes as they compare to alternatives already covered. In the established processes for securing market entry and initial utilization, CER is already the coin of the realm.

The perceived threat is that the new CER initiative … which focuses on comparative outcomes in clinical practice (as opposed to clinical trials) … will extend the utilization of clinical research results in at least two ways:

1. To withdraw insurance coverage of an approved therapy when research indicates the relative superiority of another; and
2. To inject structural consideration of relative cost into the coverage process.

Both of these extensions envision more or less “global” CER findings: one therapy revealed to be superior to another as a general rule. Both would rightly be considered substantial threats by industry, and both would be strenuously opposed using well-defined and frankly shopworn arguments about the proper relative roles of physicians and payers (clinical choices ought to be the exclusive realm of the physician, medicine is an art not a science), and the proper utilization of cost-effectiveness data (none - you can’t put a price on human life).

But the fact is that worry about administrative restrictions on therapy choice by insurers and the injection of cost considerations into coverage decisions, and any momentum that either of those initiatives might in fact have (a lot for insurer restrictions on therapy choices, very little so far for cost as a critical element in limiting coverage) long predates the current vogue for CER. Those dynamics continue independent of the level of CER spending, or any formal commitment to a CER initiative.

The real import of the CER initiative is more subtle and far reaching than is reflected in industry’s conventional response – CER can be a critical enabler of the realization of the promise of personalized medicine: the right treatment for the right patient at the right time. I look to Clayton Christenson’s formulation in his challenging recent book The Innovator’s Prescription: A Disruptive Solution for Health Care (McGraw-Hill, 2009). Christenson charts the ongoing evolution of medicine from intuitive (decisions based upon the experience, special skills and intuition of highly-trained physicians) through empirical (decisions based upon validated statistical probabilities) toward precision (evidence-based determinations that are 100% accurate). The advent of precision medicine is largely enabled by genomics, proteomics and molecular diagnostics – variables and tools that are providing great insight into why some medicines work for some people and not others and how we can identify which medicine will work for a particular patient.

CER moves therapy selection – even absent genetic determinants - toward the precision medicine model. It isn’t the blunt instrument industry seems to imagine – obliterating established markets with large-scale studies. It is ultimately a highly refined tool, providing insight as to the circumstances under which one therapy is preferable to another: What are the characteristics of the patients helped by Option A? What were the circumstances under which they did best? And when and for whom was Option B better? It is, viewed this way, a piece of Christenson’s disruptive solution. Paired with reliable patient evaluation tools and diagnostics, CER can provide the knowledge to enable lesser-trained professionals to achieve better clinical outcomes at lower cost. Just what the doctor ordered … and an enormous opportunity for industry. I'll address the nature of that opportunity in a subsequent post.

Reimbursement analysis and planning can help build value for your life science startup

Capital is scarce in the current financial climate, and needs to be conserved. There is no money for a startup to spend on “like to haves” – it all need to be committed to “need to haves”. Early investment in reimbursement analysis and planning seems like a luxury under these circumstances. Besides, given the scarcity of VC money for new investments, you’ll likely be partnering with an established company that has in-house reimbursement expertise. And with the disappearance of the IPO as an exit strategy, you don’t plan to ever have to bring your technology all the way to the market – an acquirer will be doing that, and they’ll take care of reimbursement when the time comes, won’t they?

Perhaps that is true… if you’re really lucky … and if you’re willing to sell your interest at a discount. The thought process exemplified by the preceding paragraph is, in reality, a recipe for coming out on the short end of any deal – giving away a good piece of what you’ve worked long and hard to create. I would argue that a prudent investment in sound reimbursement analysis and planning is one of the very best and most important investments a young life science startup can make, irrespective of your financing and exit strategy. My argument can be summarized in three general points.

First, you need to remember the value, to either investors or acquirers, of risk mitigation. Removing uncertainty from an investment proposition – “taking risk out of the deal” – will always raise enterprise value. For an innovative medical technology, reimbursement uncertainty is a major risk factor. If you can provide a compelling analysis of the reimbursement status of your product, and a clear description of the resources and activities required to achieve optimal reimbursement, you will remove a major unknown from the investment analysis and thereby raise the value of your company to any investor or acquirer. And the cost of doing the necessary analysis and developing the roadmap to reimbursement is a small fraction of the amount required to address even relatively minor issues of technology risk. In terms of return, the money is better spent on reimbursement planning.

Second, you never want to enter any negotiation with less information about a critical deal element than the other party. Superior information translates directly into a negotiating advantage. If a potential investor or acquirer knows more than you do about the reimbursement issues relevant to your technology, you will be at a profound disadvantage in the discussion of valuation. If you have the information advantage, the negotiating leverage shifts to you. (That is why theoretical discussions of the efficiency of markets always include the assumption of equal information.) A full and complete understanding of the reimbursement status of your own technology is essential to assuring that you enter any negotiation in the strongest possible position, and – properly employed - will yield a significant return.

Third, the ability to demonstrate command of reimbursement issues relevant to your technology is an important element in establishing the credibility and excellence of your management team – and thereby helps to build an investor’s or acquirer’s confidence in the work the team has already done and its ability to continue to lead. You are asking people to make a substantial investment in the future success of work you have begun. Failure to understand and begin to address an issue widely recognized as critical to success is an error of omission that can only reflect poorly on a management teams overall performance.

I am not advocating the need to take on a heavy continuing reimbursement planning cost early in the technology development cycle. You want and need a level of resources committed to reimbursement that is appropriate to the progress you have made in defining your product and advancing your technology, as well as to the generality or specificity at which issues can be addressed. The investment can and should be measured and prudent – after all, capital is scarce and needs to be conserved. If you spend your money wisely, however, some of it will be spent on assuring that you understand the reimbursement issues raised by your technology and on developing a plan to address them.

If reimbursement is so important … why do so many companies address it so half-heartedly and so late?

Everyone knows how important reimbursement analysis and planning is to the success of innovative life science products – devices, diagnostics, pharmaceuticals and biologics. Ask any venture capitalist, private equity investor, strategic marketing analyst, or C-level executive; go to any new technology conference or seminar. The story is consistent and near universal: reimbursement is a critical success variable – if not the single most critical, then certainly one of the top two or three; reimbursement uncertainty is widely recognized as a principal barrier to the clinical adoption and commercial success of innovative medical technologies.

Yet despite the depth and breadth of the belief in the centrality of reimbursement to commercial success, the same respondents will likely acknowledge that most young life science companies fail to make adequate or timely investments to analyze their reimbursement obstacles and/or opportunities, or to plan to address them. How can we explain this disjunction between the widespread recognition of a critical strategic issue and the frequent failure to address it effectively?

Each case is unique, with its own narrative and combination of contributing factors. But some of those factors may be observed across many cases, and help to provide the core of a general explanation for the failure of young life science companies to do timely and effective reimbursement analysis and planning. Three such factors deserve special mention:

Financial and personnel resource constraints common to life science startups demand that management make choices among competing demands; the payoff from investment in reimbursement analysis and planning seems distant, while investments in basic science, product design, prototype manufacturing, supply chain logic and/or other product development issues yield immediate returns in the form of milestone achievement and the ability to move a linear step-by-step development process forward; as a result, deferring the reimbursement investment is often the “obvious” option; the belief is that investment in reimbursement will pay off in the marketplace, but that it doesn’t build enterprise value along the way;

Reimbursement is often viewed as a modular function, largely independent of other strategic and operational activities, that can be “dropped into” a company without substantially affecting or being affected by other critical functional areas; this view creates license to begin thinking about reimbursement “when we’ve gotten past our critical technical challenges” or “once we have our clinical program well defined” or “once our next round of funding comes through and we have the financial capacity to make new hires”, etc.; companies believe that dealing with reimbursement can be delayed because there is no perceived cost to delay – so long as there is payment available for the product when it finally comes to market; and

For the first-generation leadership of many life science companies, those with primarily technical or clinical training and background, the vocabulary of reimbursement comprises an impenetrable foreign language, and the mechanics of our systems for medical technology reimbursement are illogically complex; the truth of these perceptions is irrelevant; true or not, they have the effect of reinforcing the tendency to defer dealing with reimbursement issues in favor of other issues that are in the decision makers’ areas of personal expertise and comfort; no one enjoys dealing with an issue that “thinking about … makes my head hurt” or “I need to have explained over again time after time, and can’t seem to ever retain…” (these are real comments from clients about reimbursement planning!); it is easy, in that situation, to let the subject slide, to convince yourself that you can deal with it later.

The truth is that deferring reimbursement analysis and planning is far more expensive than addressing it early on. Early investment in reimbursement yields enormous long-term payback in terms of total product development cost and time to revenue as well as potential short-term benefits in enterprise valuation. The notion that reimbursement can be dealt with as a discrete and independent module is flatly wrong. Reimbursement issues cannot adequately be addressed unless reimbursement strategy is understood as integral to every stage of corporate business, product development and clinical strategy. I’ll expand on these points in subsequent blog postings. But the takeaway should be clear: for young life science companies, deferring reimbursement analysis and planning for technologies under development can be an extremely costly strategic error.