Pharma R&D in a Value-based Healthcare System

THE PEER-REVIEWED FORUM FOR EVIDENCE IN BENEFIT DESIGN™

JANUARY 2009 VOLUME 2, NUMBER 1, SUPPLEMENT

©2009 Engage Healthcare Communications, LLCwww.AHDBonline.com

SUPPLEMENT

™

Proceedings from AHDB’s FirstAnnual Summit on HealthcareStakeholder Integration

The Return to Deep Science:Pharmaceutical Research &Development in a Value-BasedHealthcare System

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™ ™

PublisherNicholas [email protected]

Associate PublisherMaurice [email protected]

National Account ManagerCristopher [email protected]

Editorial DirectorDalia [email protected]

Associate EditorDawn Lagrosa732-992-1892

Senior Production ManagerLynn Hamilton

Business ManagerBlanche Marchitto

PresidentBrian F. [email protected]

Editor-in-ChiefRobert E. [email protected]

American Health & Drug Benefits is foundedon the concept that health and drug benefitshave undergone a transformation: theeconometric value of a drug is of equalimportance to clinical outcomes as it is toserving as the basis for securing coverage informularies and drug benefit designs. Benefitdesigns are greatly affected by numerousclinical, business, and policy conditions.

This publication provides benefit designdecision makers the integrated industryinformation they require to devise formula-ries and drug benefit designs that stand upto today’s special healthcare delivery andbusiness needs.

Contact Information:For reprints, subscription information, andeditorial queries, please contact:[email protected]

T: 732-992-1880F: 732-992-1881

Mission Statement

This supplement has been supported by funding from Eli Lilly andCompany. Commercial supporter did not influence the content.

AHDB0508

The Return to Deep Science: Pharmaceutical Research& Development in a Value-Based Healthcare System

S5 Introduction: The Joy of Collegiality in the Return to Deep Science

Robert E. Henry

S6 Challenges in Drug Development: 100 Years of Diabetes Management Thomas McCarter, MD, FACP; Keri Cooper; Alicia Mettimano

S10 The Role of New Healthcare Technologies in a National WellnessStrategy Robert K. Smoldt, BS, MBA

S16 Value-Based Benefit: The Concept, the Reality, and the ChallengeGary M. Owens, MD

S21 Employers’ Perspective on New Technologies in HealthcareF. Randy Vogenberg, RPh, PhD

S26 Employers’ Perspective on Value in Healthcare Innovation Wayne M. Lednar, MD, PhD

S3January 2009 www.AHDBonline.com

Continued on page S4

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S4 AMERICAN HEALTH & DRUG BENEFITS January 2009 Supplement


™ ™

Editorial assistance was provided by Norman L. Johnson, MD, and Loretta Fala.

AHDB0508

S30 Value-Based Purchasing: Impact on PharmaLawton Robert Burns, PhD, MBA

S36 The New, Risk-Averse World of Regulation and ReimbursementKip Piper, MA, CHE

S41 Evidence Standards in the Era of Comparative EffectivenessNirav R. Shah, MD, MPH

S49 The Role of Epidemiology in New Drug DevelopmentJeff J. Guo, BPharm, PhD; Christina M. L. Kelton, PhD

S55 Impact of Market Trends on Drug Pipelines: The Need for Value-Based R&D Matthew Sarnes, PharmD

S61 Case Study: Insu-Nectin (NV 1008) for Type 2 DiabetesMichael F. Murphy, MD, PhD

Continued

American Health & Drug Benefits, ISSN 1942-2962 (print); ISSN 1942-2970 (online), ispublished 12 times a year by Engage Health-care Communications, LLC, 241 ForsgateDrive, Suite 205A, Monroe Twp, NJ 08831.Copyright © 2009 by Engage HealthcareCommunications, LLC. All rights reserved.American Health & Drug Benefits and ThePeer-Reviewed Forum for Evidence in BenefitDesign are trademarks of Engage HealthcareCommunications, LLC. No part of this pub-lication may be reproduced or transmitted inany form or by any means now or hereafterknown, electronic or mechanical, includingphotocopy, recording, or any informationalstorage and retrieval system, without writtenpermission from the Publisher. Printed in theUnited States of America. Address all edito-rial correspondence to: editorial@AHDBonline. com, Telephone: 732-992-1889. Fax:732-992-1881. American Health & DrugBenefits, 241 Forsgate Drive, Suite 205A,Monroe Twp, NJ 08831.

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Permission requests to reprint all or part of anyarticle published in this supplement should beaddressed to REPRINT PERMISSIONSDEPARTMENT, Engage HealthcareCommunications, LLC, 241 Forsgate Drive,Suite 205A, Monroe Twp, NJ 08831. Theideas and opinions expressed in AmericanHealth & Drug Benefits do not necessarilyreflect those of the Editorial Board, theEditors, or the Publisher. Publication of anadvertisement or other product mentioned inAmerican Health & Drug Benefits should not beconstrued as an endorsement of the product orthe manufacturer’s claims. Readers are encour-aged to contact the manufacturers about anyfeatures or limitations of products mentioned.Neither the Editors nor the Publisher assumeany responsibility for any injury and/or dam-age to persons or property arising out of orrelated to any use of the material mentionedin this publication.

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INTRODUCTION

This supplement contains the proceed-ings of the First Annual AmericanHealth & Drug Benefits Summit on

Healthcare Stakeholder Integration, which washeld in Philadelphia on October 10, 2008.

Parse the heraldic phrasing, and you willfind the implicit question: Are the cost andregulation pressures on new drug discoveryand development prohibitive of innovation?Look further and you will find that howeverobjective the editorial standards of AHDB, there is anongoing premise that enduring solutions to healthcarevalue entail the collegial alignment of stakeholders,that all parties to healthcare are “good,” their empow-erment and preservation essential to the success ofhealthcare. It is a matter of balancing forces to ensurea healthcare system that serves patient interests andremains progressive.

To gauge how risk averse is the healthcare environ-ment, and how viable is research and development(R&D), we convened a 1-day summit with a faculty ofluminaries from many stakeholder groups: pharmaceu-tical R&D, epidemiology, payers, purchasers, pharma-coeconomics, the Mayo Clinic, provider, regulatory,and industry. We wanted the expertise from the manyspheres of influence affecting R&D to illuminate thedemands on innovation and to explore the intersectionof the forces impeding and supporting innovation. Our hypothesis was that unilateral stakeholder agendasin a multilateral healthcare system are a setup for alitany of unintended consequences threatening the via-bility of R&D infrastructure. And so we gathered thisconsortium of talent to provide payers and purchasersinsight into formulary and benefit design strategies that balance the costs of new drugs against the qualitythey offer as they regulate patient access to the fruits ofdrug innovation.

As the afternoon wore on, something curiousoccurred. The speakers came to me independently withdeep smiles on their faces, saying they enjoyed thismeeting more than any they had attended in quitesome time. I knew what it was: a feeling of profession-al joy. They ended the day knowing more about the

process of healthcare innovation than theywould ever have known by remaining withintheir own sector. By coming out of them-selves, by being open to the needs, data, andpropositions of the other stakeholders, theyreceived the gift of hope. They could see howthe healthcare system they love—and this istheir common trait, the deep love of heal-ing—could endure and flourish, because theywere being briefed by colleagues on matters

outside their areas of expertise and could see the bigpicture. They could begin to understand and appreciatethe needs of the other stakeholders, whose demands nolonger seemed random or pointless. Communication, acivilized dialogue on the governing dynamics facingeach stakeholder group, made the difference. Theyasked to be invited back for future meetings. They wantwhat we started on October 10, 2008, to continue. Wehope you will, too.

The net purpose of conducting this inquiry is thatwe can no longer assume that the great strides made bydrug R&D will continue, any more than the massivefinancial market could survive, without the support for the governing dynamics on which it is intrinsicallybased. There must be a realistic and dynamic dialoguebetween payers and the bench, including all stakehold-ers, to achieve consensus on what direction R&D must take. Remaining insular will cause pharma/biotech to research drugs that only occasionally meetthe needs of the entire system. This will result in head-lines that will proclaim that the sources of new drugdevelopment have dried up, thanks to misalignment ofstakeholder incentives.

But this outcome is not inevitable. This supplementis dedicated to the healthcare professionals who careenough about the curing of patients to look beyond theinterests of their own sector. We hope this spirit of mul-tidisciplinary support will cause formulary and benefitdesigns to protect the future of healthcare innovationby rewarding value-based products and stimulating anunrelenting discourse back to the bench to guide theefforts of pharma as they continue to open up newpathways to health. ■

The Joy of Collegiality in the Return to Deep ScienceRobert E. Henry, Editor-in-Chief

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The case of diabetes well illustrateshow research and innovation haveled to an increase in the understand-

ing of the disease, and the development ofextraordinary products that have changedthe lives of patients. When viewing diabetesor many other disease states through a broadhistorical lens, we are reminded of the excit-ing discoveries, achievements, and promisingpatient outcomes leading up to the twenty-first century (Table 1). We are also reminded of someof the innovations that were not as successful. Over thepast 100 years the combined efforts of healthcare stake-holders have changed diabetes from a condition thatwas uniformly fatal at diagnosis to a condition wheretoday, a person with diabetes can live a long, active,and productive life. Before 1900, a person diagnosedwith diabetes rarely lived more than 6 months withvery few surviving 2 years after diagnosis. In a medicaltextbook from 1895, Goodno and Bartlett described an11-year-old girl who had died 6 weeks after the appear-ance of her first symptom of diabetes.1 According toGoodno, diabetes was ascribed to “women who take lit-tle exercise and are given to the pleasures of the table,”and to the “well-to-do class,” whose members “eatmuch and work little.”1 Furthermore, at that time, thegeneral consensus was “wealth and culture increase theliability to diabetes 10-fold.”1 Goodno also document-ed the link of diabetes to carbohydrate metabolism,renal disease, immune dysfunction, atherosclerosis, andheart disease. He also recognized that after removal ofthe pancreas, a dog would die from diabetes.1

Through only the disciplined application of clinicalobservation, scientific method, very limited biochemi-cal laboratory analysis, and animal modeling, the secretsof this catastrophic condition were beginning tounravel. Yet with the exception of some very interest-ing and complex dietary regimens supported by littlescientific evidence, and fewer measures of improved

outcomes, there existed no real treatment forthe disease.

By 1905, Osler referred to diabetes as acondition that occurred when a “disease ofthe pancreas” prevented the formation of a“glycolytic body” produced in the “is[lets] ofLangerhans” which were embedded in thepancreas.2 Osler recognized a number ofcomplications experienced by diabeticpatients, including skin infections, eye com-

plications, renal disease, increased incidence of pneu-monia and tuberculosis, nerve damage, and impotence.Other serious complications cited were coma, whichusually was fatal within a few hours, and gangrene,which required surgery.2 Because antibiotics were notyet discovered, there was little recourse for treatingpostsurgical infection.

Insulin Discovery By the 1926 publication of Stevens’ second edition

of The Practice of Medicine, Frederick Banting’s discov-ery of insulin in 1921 had revolutionized the under-standing and treatment of diabetes. Stevens describedthe research resulting in the discovery of insulin as“separating from the islet tissue an extract which wheninjected into a diabetic animal removes hyper-glycemia…and into a healthy animal produces serioushypoglycemia.” The average survival rate for diabeteswas by then 1 to 2 years.3 The increased survival wasdue to the role of diet and insulin in daily treatment, aswell as the recognition of diabetic ketoacidosis (andassociated coma) as a condition that could be treatedwith insulin.

Although insulin played a vital role in influencingthe course of diabetes and treating diabetic coma, itsintroduction was accompanied by serious side effects,most notably, insulin shock, which in those early daysoften resulted in death. Would this innovation havesurvived in the pharmacopeia, had it been subjected tothe external environment that companies face today?Specifically, how would the US Food and DrugAdministration and regulators have viewed these earlyincidents? In today’s litigious environment, would a

Challenges in Drug Development: 100 Years of Diabetes ManagementThomas McCarter, MD, FACP; Keri Cooper; Alicia Mettimano

Dr McCarter is Chief Clinical Officer, and Ms Cooper andMs Mettimano are Research Coordinators at ExecutiveHealth Resources, Philadelphia, PA.

Thomas McCarter

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company be able to stay the course, or would insulinhave suffered a market withdrawal like many of theagents in Table 1? Would a financial environment driv-en by increasingly skittish investors reacting to eachnews story have led to such a loss of market capitaliza-tion that product withdrawal is preferable to continuedmarket risk?

In 1942, Yater defined diabetes mellitus as a primary and incurable inability of the tissues to utilizeglucose properly because of an insufficient productionof insulin, the internal secretion of the islets of Lan-gerhans of the pancreas.4 During that time, diabetestreatment was based on diet and insulin, and insulinbecame more readily available in regular- and longer-acting forms. Greater emphasis was placed on insulinregimens covering the course of the entire day, as well as on frequent urine glucose monitoring to preventglycosuria, augmented by occasional serum monitoring.At the same time, insulin-related allergic reactionscaused by animal proteins and impurities became more common, as did the insulin-induced prevalence ofhypoglycemia. Would these “allergic reactions” be tol-erated in today’s environment? Important diabetes-related components of care were emphasized, includingfoot care, and amputation for nonhealing ulcers andgangrene. Pregnancy, which once was considered virtu-ally impossible for women with diabetes, was still cau-tioned, and closer monitoring techniques were estab-lished to prevent glucose control problems and toreduce infant mortality rates.4 From the 1890s to themid-1940s, diabetes evolved from a terminal disease toa serious condition that could be successfully treatedthrough diet, insulin, and now exercise—and theexpected outcome of treatment was not only survivalbut also “normal physical and mental vigor.”4

By the publication of the sixth edition of Cecil’s ATextbook of Medicine in 1944, the connection betweendiabetes and atherosclerosis, as well as the synergybetween diabetes and infection, were more fully under-stood.5 These interactions would soon be radicallyimpacted by the widespread availability of antibiotics,and new procedures that would allow the revasculariza-tion of peripheral and coronary vascular occlusions.

Recent Developments, 1950-2000s The early 1950s through the 1990s ushered in a

number of important developments. In the 1950s,longer-acting insulins became available (the intermedi-ate-acting Lente insulin was introduced in 1950), andsulfonylureas emerged as a viable oral therapy for type2 diabetes. In 1966, the first pancreas transplant was

performed, and in 1971, the first portable glucometerbecame available.

The year 1982 marked the entry of the first humaninsulin (Humulin). The 1993 landmark DiabetesControl and Complications Trial (DCCT) demon-strated that intensive therapy to control preprandialand postprandial glucose as well as hemoglobin (Hb)A1C effectively delayed the onset and progression of complications in type 1 diabetes mellitus.6 In 1998,the United Kingdom Prospective Diabetes Study(UKPDS) shed light on how controlling glucose levelsand blood pressure could delay and prevent complica-

Challenges in Drug Development


1922—Insulin introduced, changes the world 1940s—First widespread production and availability of

antibiotics to treat associated infections1950s—Sulfonylureas introduce oral therapy for type 2 diabetes1952—Lente: longer-acting insulin1966—First pancreas transplant1971—First portable glucometer 1977—Phenformin withdrawn from market (lactic acidosis)1982—First human insulin1985—Laser retinal procedures used to prevent

blindness from diabetic retinopathy1993—Diabetes Control and Complications Trial shows that

intensive therapy delays onset and progression ofcomplications in type 1 diabetes

1994—Metformin approved by FDA1997—Rezulin approved by FDA1998—United Kingdom Prospective Diabetes Study:

controlling hyperglycemia and elevated bloodpressure can delay/prevent diabetes complicationsin type 2 diabetes

1990s—ACE inhibitors (later ARBs) provide protectionfrom diabetic nephropathy in addition to bloodpressure lowering

1998—Amaryl approved by FDA1999—Islet transplant (Edmonton protocol)1999—Precose, Avandia, Actos approved by FDA2000—Rezulin withdrawn from market2005—Byetta, Symlin approved by FDA2006—Januvia approved by FDA2006—Banting’s birthday recognized by United Nations as

World Diabetes Day; United Nations recognizesdiabetes as “global threat”

FDA indicates US Food and Drug Adminstration; ACE, angiotensin-converting enzyme; ARBs, angiotensin-receptor blockers.

Table 1 Selected Diabetes Highlights

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tions in type 2 diabetes mellitus.7 Not only did thepatients enrolled in these studies benefit from intensivecontrol over the study period, but follow-up studieshave confirmed that the period of intensive controlhad lasting effects with regard to reductions inmicrovascular complications.8,9 And 1999 marked thefirst islet transplantation,10 which was later canonizedby the Edmonton protocol.11

By 2006, the United Nations recognized diabetes asa “global threat” and announced November 14—thebirthday of Frederick Banting—as the official WorldDiabetes Day, starting in 2007. Many new agents havebecome available as primary therapy or for use in addi-tion to insulin. Agents with novel mechanisms ofaction, increasingly tolerable side-effect profiles, andthe use of combination therapy have moved the goal ofintensive control for all patients with diabetes safelyinto reach. Other medical innovations also haveimproved outcomes dramatically for diabetic patients.The availability of antihypertensive therapies led tofurther reductions in microvascular complications, andangiotensin-converting enzyme inhibitors and angio-tensin-receptor blockers were recognized specifically toprevent the progression of nephropathy. Innovations indialysis therapy, peripheral vascular procedures, cardiacprocedures, retinal laser procedures, and advancedwound care have enabled reductions in morbidity andmortality for patients with diabetes.

Diabetes Today Despite our extensive knowledge about diabetes and

the substantial strides made in managing the disease,

no cure is yet available. And although insulin, sulfony-lureas, and insulin-sensitizing agents are powerful toolsin the fight against diabetes mellitus, many patients are still not receiving optimal care: many are not beingscreened early enough, treated early enough, or moni-tored closely enough. Few patients achieve adequatecontrol of their hyperglycemia, elevated blood pressure,or lipid levels. Nor does the care they receive meet the quality indicators established for diabetes as meas-ured by HbA1C, retinal examinations, lipid panels, andmonitoring for nephropathy and neuropathy. Perhapsmost alarming is the increasing prevalence and inci-dence of diabetes, in tandem with the obesity epidemic.

Proactive approaches toward improving the outcomesof diabetes care should include early identification,early treatment, optimal control, improved monitor-ing, and meeting quality indicators. In addition, treat-ment plans should be implemented appropriately toachieve optimal outcomes. Adequate control and qual-ity care are no longer limited by the availability ofagents, but rather by the “process” limitations of ourhealthcare system, specifically the delivery system and payment systems. As DCCT and UKPDS haveshown, intensive control and the improved outcomes itgenerates can be achieved in a research environment,yet this level of control is not often achieved in otherenvironments. More and better therapies will notreduce complications effectively, unless they can bedeployed in a healthcare delivery model that enablestheir success.

Burgeoning Costs and the Challenges of Drug Development

Treating and monitoring diabetes can result in sig-nificant healthcare costs (Table 2), costs that did notexist when therapies were not available. Yet the socialcosts of increased mortality and complications havealways been present, although not as clearly delineated.A recent publication reviewed trends in diabetes carefrom 1994 to 2007 in the United States. Over thatperiod, the authors noted an increase in office visits for diabetes of 11 million, an increase in the numberof medications per patient, and a transition frommonotherapy to combination therapy. The story thatmade the lay press was that aggregate drug expenditureshad risen from $6.7 billion in 2001 to $12.5 billion in2007.12 Although the authors only analyzed the costs ofdrug therapy, these increases are concerning. But per-haps the more important question to answer is whetherthis increased investment has reduced the serious com-plications associated with diabetes. If so, we may see a

1. Before 1922, no cost 2. Insulin, first drug therapy3. Sulfonylureas and insulin-sensitizing products are

powerful tools. 4. Is success of treatment limited by availability of drugs?

Many drugs are available, but many patients are notscreened and treated early.

5. Diabetes costs very significant today:• Drugs• Testing, monitoring• Procedures

6 Do incremental benefits justify added costs?7. Is there a “ceiling”? Is there a point at which payers will

be unwilling to cover a new therapy, because the incre-mental benefit provided by that therapy does not justifythe incremental cost?

Table 2 Costs and Drug Development in Diabetes

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decrease in other costly therapies, such as kidney dial-ysis, laser retinal surgery, cardiac catheterization, coro-nary artery bypass graft surgery, or stent placement.And again, if these agents more effectively achieveadequate control, patients and society would benefitfrom longer, more productive lives for patients.

Access to healthcare does not exist unless thathealthcare is affordable. This usually means that accessto healthcare is equivalent to access to health insur-ance. This statement is equally applicable with regard toaccess to pharmaceuticals. It is important to considerthe impact of the availability of specific drugs throughpayer formularies, and through Medicare Part D con-tractor formularies for some of our most frail patients.Prior to the Part D benefit, although catastrophic care(eg, dialysis, bypass surgery) had been funded throughMedicare, the pharmaceuticals necessary to control thecomplications of diabetes were not available.

More new agents to treat diabetes have emergedsince 1995 than in the previous 100 years. Among themajor challenges ahead is determining how theseagents will be used most effectively to improve care.Another challenge is whether additional costs can bejustified, based on evidence of improved outcomes,including quality of life, longer life expectancy, anddecreased morbidity. Another question is whether bet-ter glycemic control will reduce the utilization of otherhigher-cost interventions.

An effective agent may not always be used appropri-ately to achieve optimal outcomes. Flawed implemen-tation of a treatment may have the unintended conse-quence of reflecting poorly on the therapeutic agentand on the investment in that agent. Conversely,appropriate implementation of a treatment may have apositive impact on outcomes, thereby shedding a muchdifferent light on the treatment agent and its invest-ment. We must ensure that our healthcare system con-tinues to foster new innovations to treat disease andcontinues to evolve, further enabling more productiveuse of current technologies. Have all the great discov-eries been made? Certainly not; the body of unan-swered questions will always dwarf our current knowl-edge, yet perhaps the most vital question has become,can we afford the answer? ■

KEY POINTS▲ Reviewing the history of diabetes management

affords a good illustration of the endless opportuni-ties and serious challenges facing drug develop-ment today.

▲ 100 years ago, diabetes was a fatal disease. Today, aperson with diabetes can live an active, productive,and long life. Over a 100-year span, diabetes hasbeen transformed from a certain death sentence toa manageable chronic condition.

▲ Despite our extensive understanding of the disease,no cure is available today for diabetes.

▲ Insulin, sulfonylureas, and insulin-sensitizing agentsare powerful tools for controlling diabetes, but manypatients today are still not receiving appropriate careand their hyperglycemia, therefore, is not controlled.

▲ With the increasing prevalence of diabetes in tan-dem with the obesity epidemic, a greater focusmust be placed on improving outcomes.

▲ Given the significant costs of drug development, amajor question is how any new agents will be usedmost effectively to improve care.

References1. Goodno WC, Bartlett C. The Practice of Medicine. Vol. II.Philadelphia, PA: Hahnemann Press; 1895.2. Osler W. The Principles and Practice of Medicine. New York, NY: D.Appleton and Co.; 1905.3. Stevens AA. The Practice of Medicine. 2nd ed. Philadelphia, PA: WBSaunders Co; 1926.4. Yater WM. The Fundamentals of Internal Medicine. 1st ed. New York,NY: D. Appleton-Century; 1942.5. Cecil RL, ed. A Textbook of Medicine. 6th ed. Philadelphia, PA: WBSaunders; 1944.6. The Diabetes Control and Complications Trial Research Group. Theeffect of intensive treatment of diabetes on the development and pro-gression of long-term complications in insulin-dependent diabetes mel-litus. N Engl J Med. 1993;329:977-986.7. The United Kingdom Prospective Diabetes Study (UKPDS) implica-tions for the pharmacotherapy of type 2 diabetes mellitus. Exp ClinEndocrinol Diabetes. 1998;106:369-372.8. Holman RR, Paul SK, Bethel MA, et al. 10-year follow-up of intensiveglucose control in type 2 diabetes. N Engl J Med. 2008;359:1577-1589.9. The Diabetes Control and Complications Trial/Epidemiology ofDiabetes Interventions and Complications (DCCT/EDIC) StudyResearch Group. Intensive diabetes treatment and cardiovascular diseasein patients with type 1 diabetes. N Engl J Med. 2005;353:2643-2653.10. Shapiro AMJ, Lakey JRT, Ryan EA, et al. Islet transplantation inseven patients with type 1 diabetes mellitus using a glucocorticoid-freeimmunosuppressive regimen. N Engl J Med. 2000;343:230-238.11. Shapiro AMJ, Ricordi C, Hering BJ, et al. International trial of theEdmonton protocol for islet transportation. N Engl J Med. 2006;355:1318-1330.12. Alexander GC, Sehgal NL, Moloney RM, Stafford RS. Nationaltrends in treatment of type 2 diabetes mellitus, 1994-2007. Arch InternMed. 2008;168:2088-2094.

Challenges in Drug Development


We must ensure that our healthcare system continues to foster new innovations to treat disease.

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The role of new technologies in anygiven healthcare system is to createthe greatest possible value. Achieving

value is something that business people havebeen doing for a long time. What constitutesvalue? Warren Buffett once said, “Cost is what you pay. Value is what you get.” This concept can be simplified as qualityover cost:

It is widely known that even though the United Statesspends more on healthcare per person than any otherdeveloped nation, the quality of our healthcare isbelow that of a number of other countries. The reasonpeople are not getting the value in healthcare in the United States is likely because of the huge variabil-ity in the quality of care delivered and the cost orefficiency in the delivery system used in different partsof the country.

What Is Quality in Healthcare?Quality in healthcare all too often correlates with

life expectancy, particularly as depicted in media cover-age of the inadequate US healthcare. But life expectan-cy is not a reliable measure of quality of a healthcaresystem. For example, life expectancy at birth in 2003was greatest in Japan—81.8 years—compared with only77.2 years in the United States.1 Yet, the life expectan-cy of Asian-Pacific Island Americans was 81.5 years in2001, almost the same as that of the Japanese,2 eventhough these islanders have essentially the samehealthcare system as in the United States. So lifeexpectancy at birth is not a valid measure of quality inhealthcare. Rather, health prospects, including lifeexpectancy, are determined by 5 domains (Figure 1)3: • Behavioral choices• Genetic and gestational endowments

• Social circumstances• Healthcare• Environmental conditions.

The interaction of these domains is moreimportant than the isolated proportion of thedomains in determining a person’s healththroughout life.

Determining Value in HealthcareCertain measures can help determine the value of a

healthcare system. In the United States, some diseases,such as cancer, are treated more aggressively than inother countries, and the survival rate is greater than in those countries that have stricter controls over ther-apy. For example, in 2006, the 5-year survival rate forAmerican patients with breast cancer or with prostatecancer was significantly greater than in England(Figure 2).

Another yardstick is the “mortality amenable tohealthcare” that may provide a more promising appli-cation for measuring quality. This measure looks atmortalities—determined by the number of deaths per100,000 individuals—that potentially could have beenprevented with appropriate healthcare, but only forthose under age 75 years. Based on this measure, theUnited States ranks 19th among developed countries,with a rate of 110, compared with a rate of 65 forFrance.4,5 Of particular relevance is the huge variabilityamong the states in the United States. Some states didas well as the best countries: Minnesota had a rate of70, second only to France. Indeed, the 5 top US statescombined would rank fourth, with a rate of 74, com-pared with other countries. In contrast, the 5 worststates combined would have a rate of 142; Washington,DC, had a rate of 160 deaths per 100,000 population.5,6

So the United States is the home of some of the besthealthcare in the world, but there are pockets ofabsolutely inadequate healthcare within its borders.

There is significant variability in quality even with-in teaching hospitals. We can use mortality as one indi-cator. The mortality rates in US teaching hospitals as awhole are approximately 13% better than expected.But the variability among these hospitals is extreme,

The Role of New Healthcare Technologiesin a National Wellness Strategy Robert K. Smoldt, BS, MBA

Mr Smolt is Chief Administrative Officer Emeritus,Executive Director, Mayo Clinic Health Policy Center,Mayo Clinic, Rochester, MN.

QualityValue =

Cost

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with the best hospital having a 57% lower mortalityrate than expected, based on their case mix, but 1 hos-pital has a 45% worse mortality rate than expected.7

There is also extensive variability in cost. We canlook at cost in a variety of ways; it can be cost for a lineitem (eg, a magnetic resonance imaging scan or a visitto an orthopedic surgeon), but the best measure ofvalue in healthcare is cost over a span of time.

Cost-Effectiveness The Leapfrog Group is a voluntary program organ-

ized by large employers to alert the US health industrythat big leaps in healthcare safety, quality, and cus-tomer value will be recognized and rewarded.8 Amongother initiatives, Leapfrog seeks to encourage trans-parency and easy access to healthcare information, aswell as to reward hospitals that have a proven record ofhigh-quality care. Each year Leapfrog has a list of“honor roll” hospitals—teaching and community hos-pitals. Although this organization should be commend-ed for trying to improve the quality of care, they do notplace enough emphasis on the cost of healthcare andthe implications of these costs. A recent honor roll listof 50 hospitals included 39 teaching hospitals. Butcomparisons in cost should not be made betweenteaching hospitals and community hospitals; teachinghospitals will almost always have higher costs.

The Dartmouth Atlas Project uses Medicare data todocument glaring variations in how medical resourcesare distributed and used in the United States.9 TheDartmouth project measures the cost-effectiveness of aparticular medical center by cost in the last 6 monthsof life.9 The difference in this measure between themost efficient hospital ($15,800) and the least efficient($45,600) is a factor of 3. This represents a substantialdisparity, even with medical centers that are on thehonor roll and therefore are considered to be doing theright things.

Cost near the end of life is a good measure of effi-ciency, because for the average person, the majority ofhealthcare expenditures occurs at that time (Figure 3).10

In any situation, the efficient use of resources is a criti-cal issue. Using these data, the Dartmouth Project hasoften noted that integrated delivery systems are moreefficient in the use of resources, particularly those thatlook at the number of physician visits and days in theintensive care unit (ICU) per decedent in theMedicare program in the last 6 months of life.

Three of the integrated healthcare systems thatDartmouth frequently mentions are Scott White inTemple, Texas; Mayo in Rochester, Minnesota; and

Inner Mountain in Salt Lake City, Utah. When com-paring their averages with the US average as a wholeand with 2 areas that are not known to have integratedsystems, we find that the integrated systems use abouthalf the resources of the national average, and much lessthan the nonintegrated systems (Tables 1, 2).9

One of the questions is therefore—How are wegoing to be able to afford new drug and technology dis-coveries that are so important? At least part of theanswer is that we have to figure out how to get better-integrated delivery of care. Although some physiciansare part of medical teams working in actual integratedsystems, the majority of physicians in the country arenot. However, there are some independent physiciansin independent practice associations who have beenable to achieve utilization rates at good levels.


A National Wellness Strategy

Figure 1 Determinants of the Health of a Population

Figure 2 Does More Aggressive Treatment in the United StatesLead to Better Outcomes?

30%Genetics

40%Behavior

0% 30% 60% 90%

15%

5%

10%

Social circumstance

Environmentalexposures

Healthcare

Source: McGinnis JM, Williams-Russo P, Knickman JR. The case for more activepolicy attention to health promotion. Health Aff (Millwood). 2002;21:78-93.

82.8

66.7

81.1

44.3

Sources: National Audit Office. International Health Comparisons. London:United Kingdom, 2004; Commonwealth Fund. Why not the best? 2006.http://www.nao.org.uk/publications/ Int_Health_Comp.pdf.

5-year survival forbreast cancer:

US

UK

5-year survival forprostate cancer:

US

UK

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Another part of the answer is to figure out how tomotivate each of us to lead healthier lives, and how toachieve better compliance. These solutions can resultin better efficiency.

A Vision for HealthcareWhat is our vision for healthcare in the United

States? We should be looking for healthy patients andfor high-value care. The 3 essentials necessary to get tothis vision are equity, patient-centeredness, and value.

EquityEquity in healthcare involves 5 elements: basic

insurance for all; coordinated coverage with guaranteedissue; individual ownership for a lifetime; providing forthe needy; and tax equity. Everyone in the UnitedStates should have basic health insurance. Althoughsecuring health insurance can be accomplishedthrough a single-payer government system, peoplewould be better served by a coordinated private insur-ance system with guaranteed issue, such as the FederalEmployees Health Benefit (FEHB) program.11 Equity inhealthcare should provide individual ownership ofinsurance over a lifetime; and the government shouldprovide assistance to allow the needy to buy-in. Thereshould also be tax equity so the benefit would be thesame for everyone.

Examples of such models include the FEHB programand the Netherlands, which switched to such a healthplan a number of years ago. In a recent survey in sever-al European countries about satisfaction with theirhealth plan, the Netherlands’ plan received the highestsatisfaction rating.12

Patient-Centeredness Healthcare providers have to change in such a way

that we become more invested in, and more account-able for, the health of our patients, not just their illnesses. Healthcare has to become a learning organi-zation. We all make mistakes, but we have to learnfrom our mistakes by analyzing why something hap-pened and determine how to correct it. There also hasto be a learning organization, so that if a problemoccurs in a hospital and a way is found to fix it, everyhospital in the country should become aware of it, sothat if they encounter the same problem they wouldknow how to fix it. In addition, everyone needs to lookat the value equation for their own institution.

The broader use of health information technologycan be a key part of patient-centeredness. The use ofnonvisit care and virtual patient consultations is a


Table 1 Efficient Resource Use: Physician Visits with Decedent in Last 6 Months

Change from Region Number integrated average, %Integrated systems

Temple, TX 1.8Rochester, MN 2.5Salt Lake City, UT 2.1 _____

Integrated average 2.1 BaseUS average 3.3 +57Los Angeles 6.6 +214Miami 6.4 +204

ICU indicates intensive care unit.Source: The Dartmouth Atlas of Health Care. www.dartmouthatlas.org.

Table 2 Efficient Resource Use: ICU Days for Decedent inLast 6 Months

Figure 3 Life Span Health Expenditures

Permission was granted by the RAND Corporation, Santa Monica, CA. LynnJ, Adamson DM, for RAND. Living well at the end of life: adapting healthcare to serious chronic illness in old age. 2003. www.medicaring.org/educate/download/wp137.pdf. © RAND Corp. Reprinted with permission.

Birth Life span� Death

Expe

nditu

res�

Change from Region Number integrated average, %Integrated systems

Temple, TX 21.4Rochester, MN 18.4Salt Lake City, UT 17.3 _____

Integrated average 19.0 BaseUS average 29.1 +53Los Angeles 49.9 +163Miami 46.5 +145

Source: The Dartmouth Atlas of Health Care. www.dartmouthatlas.org.

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growing concept. Improving business functions isessential, but complete interoperability within andamong institutions is also crucial. However, the task isdaunting. The electronic ATM system used by every-one only deals with dollars and cents. In any givenhealthcare institution, there are a multitude of elec-tronic systems dealing with many variables, such asdiagnoses, laboratory studies, radiographs, and medica-tions. The complexity is multiplied many times overwhen interoperability between institutions is involved,let alone a countrywide network.

ValueThe third and most important element is value.

Based on the discussion above, the definition has beenrefined as:

Each of the terms can be measured, at least for the hospitalized patients.

Transparency is another component of value. Thepublic should have access to these outcomes measuresand the cost data.

According to a PricewaterhouseCoopers report,approximately 10% of the costs of medical services areattributed to the cost of litigation and defensive medi-cine, totaling nearly $210 billion annually.13 There is apronounced need for medical liability reform thatwould lower the cost of healthcare, not because of mal-practice insurance cost but as a result of practicingdefensive medicine.

The science of healthcare delivery should have moresystems engineering to improve efficiency and effec-tiveness, including changes in the way physicians aretrained and, perhaps, selected. Innovation is necessaryin research and in education, but it should be done ina manner that will increase the value of the healthcaredelivery. We want a healthy, productive workforce,because that is where the economy gets the benefit.And finally, we have to pay for value, not for quantity.

How to Pay for Medical CareA joint forum of Mayo and Dartmouth looked at a

variety of ways to change how we pay for medical care.9

Of 5 choices considered, the Medicare pay-for-per-formance (P4P) approach received the lowest score.This approach was met with criticism, because ineffi-cient providers who receive payment for a longer list ofprocess items get bigger rewards than the efficientproviders. Moreover, even if everyone participates in

these P4P process steps, you still have not changed theefficiency of the delivery system. Business professorsMichael Porter of Harvard University and ElizabethTeisberg of the University of Virginia made the pointthat, “These current [P4P] efforts...carry some risks.Most...are not actually about quality results, butprocesses. Most P4P is truly ‘pay for compliance.’Compliance to too many process standards runs the riskof inhibiting innovation by the best providers.”14

Other choices, all of which received much higherscores in the forum, included fee for service (FFS) withshared savings, FFS with outcomes reward, episode-based payment, shared decision making, and chronicdisease coordinator (ie, medical home).

Another method of measuring value in healthcare isto cross-plot the 2 value components—cost and quali-ty—case mix adjusted mortality, and the cost of health-care in the last 6 months of life. Figure 4 shows thesevalues for all teaching hospitals in the United States,with the vertical and horizontal lines representing theaverage. The hospitals that fall in quadrant D have a

Outcomes + Safety + ServiceValue =

Cost over time

Figure 4 Effectiveness and Efficiency in US Teaching Hospitals:Cost vs Mortality

The science of healthcare delivery should have more systems engineering to improveefficiency and effectiveness, including changes in the way physicians are trained and, perhaps, selected.

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worse mortality rate and higher cost (or poor effective-ness and poor efficiency); those in quadrant A havegood effectiveness and good efficiency. The 3 diamonds(gold) represent the 3 integrated systems mentionedbefore. If this comparison is done annually, with pay-ments adjusted so that hospitals that fall in quadrant Awould receive higher payments and those in quadrantD would receive lower payments, there would be agreat incentive to reduce costs and improve mortalityrates, thereby improving value.

Line-Item Pricing versus Use RateFor the past 20 years or so, the healthcare system has

been trying to address costs through line-item pricecontrols, that is, how much we are going to pay for achest x-ray, for a doctor visit, or for other medical serv-ices. But this has not worked. Emphasizing line-itemprice control takes our eyes off the ball. Instead, weshould be looking at the rate each of these items isbeing used. For example, medical team A charges a feeof $7200 for coronary angioplasty, while team B dis-counts the fee to $6500 if you agree to send all yourpatients to them; this results in a savings of about 10%.However, team B patients spend an average of 1.2 daysin the ICU compared with only 0.5 days for team Apatients, resulting in a total cost per episode of $21,000for team B compared with $18,000 for team A—anincrease of 17%. If we factor in the rate at which thisprocedure is performed, 2500 per 1 million populationfor team A versus 4400 per 1 million population forteam B, the total cost per 1 million population is $92.4 million for team B compared with $45 million forteam A—an increase of more than 100%.

This example represents actual results, with team Breflecting the US average rates and team A reflectingan integrated delivery system. This example clearlyshows that if you were to pick a team that would dis-count your line-item fee, you could actually end upincreasing your overall costs dramatically.

Thus, total cost equals the price per line item multi-plied by the number of times the line item is used:

The government and private insurers focus on price perunit. For providers, cost per item is also important, butthe cost to society as a whole is where the use ratecomes into play. The Dartmouth study shows thatacross the country, 70% to 80% of the cost per personin the United States occurs because of use-rate differ-ences, not because of the price per item.9 If you want toreduce costs, you have to address the use rate.

Fixing the Healthcare SystemNo individual component of the healthcare system

can fix the problems in our healthcare system alone.We all have to change:• The government can do its part by developing an

independent “health board” to coordinate privateinsurance options for all, providing transparencythrough information technology interoperability,and using a common billing form. It can providefinancial assistance to those in need, and supportresearch and education.

• Providers need to improve effectiveness and effi-ciency through better integration, and stress compli-ance and prevention.

• Payers and employers have to encourage prevention,compliance, and health for patients. They need toincorporate a value-based benefit design, includingchanging payment plans to reward providers whodeliver value. It is important for employers to recog-nize that medical cost is one thing, but increasingproductivity of their workers is another very impor-tant factor. In one company (Dow Chemical), theirbiggest cost was not only the lost productivity whena worker was absent because of a chronic disease butalso the lost productivity when the worker was backon the job.15 This latter factor (known as presen-teeism) accounted for 48% of the costs. So, theextent to which you can keep people from gettingsick, or getting them back to work faster and moreproductive, is where savings can really occur.

• Patients have to take an active role in preventionthrough healthier lifestyles and by improving com-pliance in chronic disease. They must recognize thatthey have a fair financial stake in healthcare, andthey have to accept the fact that they are not goingto live forever. A value-based setup was designed bythe Mayo Clinic system that has worked very well.The coinsurance was waived if patients went to their

Total cost = Price ✕ Use rate

For the past 20 years we have been trying to address costs through line-item pricecontrols. Emphasizing line-item price controltakes our eyes off the ball. Instead, we should be looking at the rate each of theseitems is being used.

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coordinating physician in each case. Hospitalizationsand readmissions were reduced; total costs were low-ered by 15% and remained down for 3 years.

• Pharmaceutical companies and medical manufactur-ers should be doing their research to achieve valueaccording to the definitions discussed above. Theyhave to evaluate what is the value of their currentproducts or the ones they are investigating. Theyshould have an open mind toward comparativeeffectiveness evaluation. They have a natural reluc-tance to do that, but costs are getting so high, theywill have to look at it.

New Goals for US Healthcare Creating and maintaining a healthy workforce is one

of the underlying goals of the Mayo Clinic system. Ahealthy workforce can make tremendous inroads at anational level toward improving overall health and pro-ductivity, and lowering costs. The making of a healthierpopulation demands knowledge at several levels. Thesystem has to know about the patients, their risks, theirhistory, and their preferences. Patients have to knowabout their role in their health and well-being and begiven the knowledge and tools to affect their health.

And, of course, the system has to be designed to deliv-er care effectively. Implementation would potentiallyinclude nonvisit tools, such as an online secure portal, orphone calls and preventive care prompts that are popu-lation based and delivered at the point of care. This shiftwill also require an adequate number and proper mix ofproviders, as well as the development of facilitiesdesigned for the new model of healthcare delivery.

The movement toward a healthier workforce and ahealthier population requires improving the technolo-gy and the systems designed to deliver care effectively,expanding the health-oriented knowledge of keyhealthcare stakeholders, and providing individuals withthe appropriate tools to improve their own health. ■

KEY POINTS▲ Many Americans may not be getting value in

healthcare because there is a huge variability in thequality and cost of healthcare delivery in differentparts of the country.

▲ The United States is the home of some of the besthealthcare in the world, but there are pockets ofabsolutely inadequate and unacceptable patient care.

▲ Patient outcomes divided by cost over a span of timeare probably the best measure of value in healthcare.

▲ If you want to reduce costs, you have to focus onuse rate, not on the price per item. Total costs are aproduct of line-item cost multiplied by use rate.

▲ Integrated delivery systems are among the mostefficient standards in the use of resources. In theUnited States, 70% to 80% of the health cost perperson occurs as a result of use-rate differences.

▲ No individual component of the healthcare systemcan fix the problems in our healthcare systemalone; we all have to change.

▲ A move toward a healthier population requiresimproved technology and effective care deliverysystems, expanding the knowledge base of keystakeholders, and giving individuals tools toimprove their health.

References1. OECD Factbook 2006: Economic, Environmental and SocialStatistics. Quality of life: life expectancy at birth. http://lysander.sourceoecd. org/vl=445356/cl=19/nw=1/rpsv/fact2006/10-01-01g01.htm. Accessed October 27, 2008.2. The Office of Minority Health. Asian American/Pacific IslanderProfile. www.omhrc.gov/templates/browse.aspx?lvl=2&lvlID=53. AccessedOctober 27, 2008.3. McGinnis JM, Williams-Russo P, Knickman JR. The case for moreactive policy attention to health promotion. Health Aff. 2002;21:78-93.4. Nolte E, McKee CM. Measuring the health of nations: updating anearlier analysis. Health Aff. 2008;27:58-71.5. Schoen C, Davis K, How SKH, Schoenbaum SC. US health systemperformance: a national scorecard. Health Aff (Web Exclusive),September 20, 2006:w457-w475. 6. Schoen C, How SKH, for the Commonwealth Fund. Commission ona high performance health system. National scorecard on US health system performance: complete chartpack. September 2006. www.commonwealthfund.org/usr_doc/Schoen_natscorecard_complete_chartpack_955.pdf?section=4039. Accessed October 27, 2008.7. Smoldt RK, Cortese DA. Pay-for-performance or pay for value? MayoClin Proc. 2007;82:210-213.8. The Leapfrog Group. www.leapfroggroup.org/cp. Accessed October27, 2008.9. The Dartmouth Atlas of Health Care. www.dartmouthatlas.org/.Accessed October 27, 2008.10. Lynn J, Adamson DM, for RAND. Living well at the end of life: adapt-ing health care to serious chronic illness in old age. 2003. www. medicaring.org/educate/download/wp137.pdf. Accessed October 27, 2008.11. US Office of Personnel Management. Federal Employees HealthBenefit Program. www.opm.gov/insure/HEALTH/index.asp. AccessedOctober 27, 2008.12. Ministry of Health, Welfare and Sports. Health insurance system(Netherland). www.minvws.nl/en/themes/health-insurance-system/.Accessed October 27, 2008.13. PricewaterhouseCoopers. The Factors Fueling Rising HealthcareCosts. January 2006. www.ahipbelieves.com/media/The%20Factors%20Fueling%20Rising%20Healthcare%20Costs.pdf. Accessed October27, 2008.14. Porter M, Teisberg EO. Redefining Healthcare: Creating Value-BasedCompetition on Results. Boston, Mass: Harvard Business School Press;2006.15. Collins JJ, Baase CM, Sharda CE, et al. The assessment of chronichealth conditions on work performance, absence, and total economicimpact for employers. J Occup Environ Med. 2005;47:547-557.

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The rising cost of healthcare loomslarge as a major national concern.Pharmaceuticals and the treatment of

chronic diseases are among the key drivers ofthe overall cost of healthcare. Access to careis important to all of us, and even more vitalto patients who are severely ill. Yet, currentmedical and pharmacy benefit designs maynot provide patients the appropriate accessto needed medications, and new benefitdesigns are needed. Designing a benefit that keeps thecost of medications affordable yet provides access tothose who most need these treatments is not a newconcept. We applied this concept, and continue toapply it, to some traditional pharmaceuticals.

Our path to balancing healthcare access with risingcosts has been long and problematic, and it is far fromover. Even with our best-intentioned attempts atachieving optimal results, the outcomes may not turnout as we expect. We now know more about how ben-efit design affects utilization of traditional products, andone of the major challenges before us is how to applythe lessons learned from traditional products to special-ty pharmaceuticals, including biologics, injectablemedications, and other potentially expensive agents. Iwill present current approaches, challenges, and con-siderations for moving forward on this challenge.

The good news, according to a 2008 KaiserFoundation study, is that this year’s increase in healthinsurance cost was relatively small—a 5% increasefrom last year’s cost.1 The bad news, however, over-shadows the good news. On average, workers have paid$3354 in out-of-pocket fees to cover their healthcareinsurance premiums compared with $1543 in 1999.1

Employers, too, are paying more—the average employ-er contribution in 2008 was $9325, up from $4247 in1999.1 In addition, employees are getting less for theirmoney, particularly as deductibles and copaymentsincrease.

In 2007, an estimated 10% of all employees paid at

least a $1000 deductible; in 2008, that per-centage climbed to 18% and to a startling35% for workers at small companies (3-199employees).1 To put these soaring costs inperspective—during the past decade, wageshave increased by 34%, while healthcarecosts have climbed up by more than 200%.2

This “affordability gap”2 is one of the majordilemmas we need to confront.

Why Value-Based Benefit?And the costs of healthcare continue to rise.

Insurance premiums rose 8.6% between 1996 and2005.3 The second major concern is that the quality ofthe care delivered in the United States is rather poorwhen measured against most other industrialized coun-tries. Results of a 2003 study indicated that on average,only 50% of the time recommended medical care isdelivered to people in the United States.4 A funda-mental health policy issue facing us today is how toorganize and finance the healthcare system to achievehigh value, where value equals quality for the cost. Thefocus should not be on saving money but rather on howto achieve the most value for the dollars spent.

Distribution is another important issue: how do wesubsidize care for low-income people efficiently? Howdo we make sure we provide care for seriously illpatients who cannot afford healthcare or even the out-of-pocket costs associated with their insurance cover-age? There are several ways to approach these issues.Cost-oriented strategies include higher cost-sharingand copays for brand-name drugs. Quality-orientedstrategies include pay-for-performance and diseasemanagement programs. These 2 approaches sometimesconflict with each other, and yet both are subject to thecomplexities of finding return on investment (ROI).Some disease management programs, although contro-versial and costly, have brought value to managingchronic illnesses. Measuring outcomes for some ofthese programs is difficult, because quality measures arelinked to the behavior of the patient, as well as to thepatient’s pattern of taking medications and seeking pre-ventive care.

Value-Based Benefit: The Concept,the Reality, and the ChallengeGary M. Owens, MD

Dr Owens is President, Gary Owens Associates, Glen Mills, PA.

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Between 2000 and 2005, the average copay forpreferred drugs in 3-tier formularies rose 69%—from$13 to $22—and the average copay for nonpreferreddrugs rose 106%—from $17 to $35.5 Moreover, con-sumers do not respond to cost-sharing the way econo-mists would like. Providing free drugs to those in needmay be helpful in some ways, but it also presentsproblems and challenges. A 1986 study showed thatwhen consumers’ copayments were raised, theyreduced the use of valuable pharmaceuticals, preven-tive services, and even life-saving treatments.6 In addi-tion, cost-sharing did not selectively reduce inappro-priate hospitalizations.6

In a value-based insurance design (VBID), cost-shar-ing is utilized, but there is a clinically oriented approachto mitigating the adverse health consequences of highout-of-pocket expenses.7 VBID helps to offset thepotential for both underuse and overuse of healthcareservices, by encouraging the use of services when clini-cal benefits exceed the cost and discouraging the use ofservices when the benefits do not justify the costs.Simply put, the premise of VBID is to reduce the copay,or keep it low, for high-value services that are for high-value patients, treatments, or outcomes.7-9 VBID hasbecome the subject of several articles in the lay pressrecently, and it continues to gain momentum (Table 1).

VBID no doubt has merits, but it also has limita-tions. A particularly noteworthy VBID analysis was published in early 2008 by Chernew and col-leagues.9 The study identified a large employer whoreduced copayment rates for 5 drug classes—(1)angiotensin-converting enzyme (ACEs) inhibitors andangiotensin receptor blockers (ARB), (2) beta-block-ers, (3) antidiabetes agents, (4) statins, and (5)steroids.8 Generic drugs cost was reduced to zero copay.Preferred drugs were reduced to 50% of their usualcopay (from $25 to $12.50), as were nonpreferreddrugs (from $45 to $22.50).9

The study intervention was implemented byActiveHealth Management (AHM), which identifiedconsumers who would benefit from medications butwere not currently using any; individuals with con-traindications to these classes were excluded from thestudy. The investigators tracked adherence to recom-mended regimens by calculating the medication pos-session ratio (MPR), based on 1 or 2 interventions—disease management and reduced copay. An employergroup of similar size and demographics that had beenused for one of AHM’s disease management programswas used as the control. The study included a pre- andpostintervention cohort for each of the drug classes,

including individuals who either had used a medicationin 1 or more of the 5 categories in the study within 3months from January 1 of either 2004 or 2005, andthose who were identified by AHM as being an appro-priate candidate for a medication in 1 of the 5 studycategories.9

Results showed that compared with a controlemployer that used the same disease management pro-gram, adherence to medications in the value-basedintervention increased for 4 of the 5 drug classes,thereby reducing the nonadherence rate by 7% to14%. Based on the effects size for the MPR analysis,adherence was most profound for diabetes medica-tions.9 A lower copay resulted in a 13.2% increase inMPR for those taking diabetes medications.9 For thebeta-blockers, there was no change in the disease man-agement group and a modest increase of 9.5% with thecombination of disease management and reducedcopay. The ACE inhibitor/ARB category showed amodest MPR increase (8.2%), followed by statins, witha 7.1% increase. As for steroids, the control groupactually outperformed the experimental group, with anonsignificant 2.7% take-up.9

Implementation of the VBID involved a number ofcosts in that study. Captured as one of these costs was the increased use of high-value services, which isactually a positive factor. There was also a greater


Value-Based Benefit

• Higher copays lead to lower spending • Therefore copays will rise• VBID allows firms to mitigate deleterious consequences

of higher cost-sharing:Enables low copay to achieve cost target in a moreefficient mannerPart of any strategy to improve quality or decrease costs

• VBID cannot be perfect, but imperfect may be betterthan nonexistent

VBID indicates value-based insurance design.

Table 1 Value-Based Insurance Design Benefits

The premise of VBID is to reduce the copay, or keep it low, for high-value services that are for high-value patients, treatments, or outcomes.

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employer share of spending for services that would havebeen used anyway; but this is only a cost from the per-spective of the employer. And, of course, there wereadministrative costs associated with disease manage-ment and other interventions.9

Financing for the VBID was generated by increasingcosts for other services, particularly low-value services,and by passing costs to employees in other ways, suchas higher copayments. Although this particular studywas not intended to measure the impact of offsets, aVBID has the potential to lower costs because of feweradverse events. It also has the potential to contributeto gains in productivity, assuming that productivityincreases when patients adhere to taking medicationsas recommended.

One conclusion from this study is that medical sav-ings do not fully offset employer spending. Yet, the actof doing the right thing from a medical perspective mayhave untold societal benefit. The study further con-cluded that measuring increased productivity costsmight help improve ROI, and that increasing copay-ments on low-value services could finance greateraccess to high-value services. But perhaps the mostimportant way to improve ROI is to target adherencebased on subgroup, demographic, ethnicity, income,and other key parameters.

In summary, in the value-based benefit for prescrip-tion drugs, a higher copay has been shown to lead tolower spending, but such lower spending is not neces-

sarily linked to items worthy of lower spending. Andbecause an increased copay leads to lower spending,copayments will likely continue to rise in response.VBID allows employers and insurance companies tomitigate some of the deleterious consequences of high-er cost-sharing and may help them to achieve cost tar-gets in a more efficient manner.

Although VBID has shown relatively modest gains,and it is far from perfect, it remains an important partof any strategy to improve quality or decrease costs.

Can Value-Based Benefit Design Be Applied toSpecialty Medications?

In recent years, biotechnology drugs (biologics)have seen tremendous growth. Currently, there aremore than 200 biotechnology drugs on the market andmore than 600 in development. Spending on thesedrugs has likewise surged over the past 2 decades. In1990, an estimated $5 billion was spent on biologicdrugs, and in 2008 a projected $75 billion would havebeen spent on these products.10-13 Proportionately, bio-logic drug spending pales in comparison to hospitalcosts and professional provider costs, and it only rep-resents about one fifth of all drug spending. Still, itrepresents a rapidly growing cost sector (Table 2).These increasing costs may have a profound rippleeffect on health plans.

In 2007, the spending for specialty pharmaceuticalswas responsible for an estimated 11.4% of total phar-macy costs.13 This means that almost 90% of the totalpharmacy spending is still used for traditional pharma-ceuticals. In part, as a result of the conversion of somany blockbuster drugs to generics in 2007, specialtypharmaceuticals drove one third of the total pharmacyspending trends that year. The year-over-year specialtytrend was 12.3%. The top 3 categories in 2007 for spe-cialty pharmacy spending were autoimmune diseases,cancer, and multiple sclerosis.13

Chronic condition Medication examples Estimated cost/year, $Hepatitis C Pegasys, PEGINTRON, Infergen 30,000Multiple sclerosis Betaseron, Avonex, Copaxone 12,000-15,000Breast Cancer Docetaxel, Adriamycin, Herceptin, Tykerb 12,000-50,000Non–small-cell lung cancer Docetaxel, Carboplatin, Avastin 20,000-60,000Rheumatoid arthritis Enbrel, Remicaid, Humira, Kineret, Rituxan 15,000-20,000Pulmonary hypertension Flolan, Tracleer, Remodulin 65,000-100,000Gaucher’s disease Cerezyme, Zavesca 150,000-250,000Sources: Medco Health Solutions. 2008 Drug Trend Report. http://medco.mediaroom.com/file.php/162/2008+DRUG+TREND+REPORT.pdf; SpecialtyPharmacy News. 2006;3(10):6-7.

Table 2 Examples of Disease-Specific Drug Costs

In 2007, the spending for specialty pharmaceuticals was responsible for an estimated 11.4% of total pharmacy costs.

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In discussing potential approaches for applyingvalue-based design to specialty pharmaceuticals, ourgoal will be to think about how to maximize the valueof biologics and to challenge payers, manufacturers,providers, and consumers to be open to value-basedcoverage design. At the same time, we have toacknowledge the limitations of value-based design, asevidenced by its previous application to traditionalpharmaceuticals. It is also vital to recognize who thestakeholders are within this value proposition.

When considering value-based benefit designs,patients are the most important of the key stakehold-ers. Patients need care, they seek care, and they need tohave access to care. But several other stakeholders arealso important. Health plans are responsible for build-ing the benefit design, administering it, and justifyingwhy it should be implemented. Employers need tocome up with the best way to spend their resources inorder to get the best outcomes. And providers want tohave access to the treatments they need when theyneed them for their patients. In addition, pharmacybenefit managers and specialty pharmacies have a stakein value-based design because they are ultimatelycharged with administering the benefit. The interplayof these key stakeholders is essential to developing andimplementing an effective value-based design.

Health plans recognize that new biotechnologydrugs and new uses of existing drugs are creating revo-lutionary treatment advances. Drug coverage is themost visible benefit and the one most widely sought byhealth plan members. Coverage of drugs is absolutelyessential for any health benefit plan and its members. Itis also essential to keep health plans affordable and toavert creating access problems for members who mostneed care. Improving the management of biotech drugsis also a necessary component of a well-run health plan.

A number of changes and moving targets presentchallenges for specialty pharmaceuticals. New benefitdesigns are emerging to allow better management ofbiotechnology drugs. Alternate distribution channels,such as specialty pharmacies with either mandatory orvoluntary programs, may provide solutions and help tomanage unit costs. And although member involvementand cost-sharing are important, neither can become abarrier to healthcare access.

The influx of new biologics also means that healthplans must be able to manage drugs that are adminis-tered in offices and outpatient centers. In addition,more sophisticated techniques will be necessary tomanage utilization. Older benefit designs were not con-structed to provide access and manage the cost of

biologics in a dynamic fashion. They included eitherno patient cost-sharing or a percentage of drug-costcoinsurance on all products. With the new biologicagents, access for health plan members is a major prob-lem if the out-of-pocket cost is excessive, as is gettingthese drugs to members.

Decisions must be made as to whether the new bio-logics will be covered under the medical benefit or thepharmacy benefit. And although incentives for physi-cians have driven utilization of some products, manag-ing these incentives is a delicate balancing act. Patientaccess issues will be a factor with the new therapies,and determining the appropriate out-of-pocket amountwill require careful consideration. Saving 30% on acancer drug may produce a negligible value if the mem-ber’s medical services are 5 times greater than the costof the drug. Decisions springing from a “penny wise andpound foolish” philosophy can sometimes backfire.

Value Equation for Biotechnology DrugsDeveloping value-based strategies for specialty

agents involves several important steps: 1. It is important to define and understand the benefits

of biologic agents for a specific population by con-ducting basic research. At the same time, it is impor-tant to recognize that although new technologies areexciting, they are also expensive. And just because anovel technology exists, does not mean it is worththe investment it demands.

2. We have to define the appropriate levels of cost-sharing for biologics. This also requires research to help define the effect of cost-sharing on theappropriate use of biologic agents. We can build on the findings of previous research on the impactof lowering copayments on the uptake of medica-tions for a specific disease. And once we haveevidence as to which out-of-pocket amount is effec-tive for a specific disease state, and a better under-


Value-Based Benefit

Decisions must be made as to whether the new biologics will be covered under themedical benefit or the pharmacy benefit.Patient access issues will be a factor with the new therapies, and determining theappropriate out-of-pocket amount will require careful consideration.

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standing of the differences from one disease toanother, we can tailor cost-sharing strategies accord-ing to these differences.

3. We must define the new value equation. This willinvolve identifying which patients should continueto use biologics, and how long they remain usingthose therapies. It also involves verifying turnoverrates in candidates for biologics, with the healthplan and with the employer group. Conducting a fairevaluation of the biologics is a must-do. We need toroll up our sleeves and invest the time and resourcesto develop strategies that would benefit multiplestakeholders.

4. We have to develop new benefit designs that incor-porate value for key stakeholders, including man-aged care organizations, employers, and patients, andensure appropriate access to needed therapies. Aninteresting approach is the implementation of bene-fit-based copayments. In this model, the patient’scopay amount is based on the clinical need and theexpected therapeutic benefit. The new value equa-tion can be reflected through premium pricing andcopay structure. Health plan members will beexpected to pay more for some products and haverelatively open access to others.In conclusion, changes in benefit design and policy

must be evidence-driven and dynamic. At the sametime, benefit changes must be considered in the con-text of the big picture, reflecting both pharmacy andmedical expenditures. Basic research and other strate-gies are needed to prove the clinical and economicvalue of specialty pharmaceuticals in different diseasestates, different treatment durations, and differentpatients. Additional research, the growing body of lit-erature, and the collaboration of stakeholders will bringus closer to understanding the needs of chronically illpatients and creating effective value-based benefitstrategies for them. The challenge for all stakeholderswill be to meet the needs of the patient, the healthplan, and the plan sponsor. ■

KEY POINTS▲ Although value-based benefit design has shown rel-

atively modest gains and is subject to limitations, itremains an important part of any healthcare strate-gy aimed at improving quality.

▲ A major challenge is to determine how we can use the lessons learned from traditional pharmacy ben-efit designs and apply them to biologics, including injectables and other specialty pharmaceuticals.

▲ Developing and implementing an effective benefitdesign requires the interplay of all key stakehold-ers—patients, health plans, providers, employers,pharmacy benefit managers, and specialty pharmacies.

▲ Health plan members will be expected to pay morefor some products and have relatively open accessto other products.

▲ Research is needed to prove the clinical and eco-nomic value of specialty pharmaceuticals in differ-ent disease states, different treatment durations,and different patients.

References1. The Kaiser Family Foundation/Health Research and EducationalTrust. Employer health benefits: 2008 summary of findings. http://ehbs.kff.org/images/abstract/7791.pdf. Accessed November 20, 2008.2. Carroll J. Erosion of employer-sponsored health care: bad for every-one. Managed Care. 2007;16:18-22, 28-29. 3. The Kaiser Family Foundation/Health Research and EducationalTrust. Employer health benefits: 2008 summary of findings. Exhibit 3.5:Average monthly employee premium contributions and percent of totalpremium paid by employees, by coverage type, 1988-2005. http://www.kff.org/insurance/7031/print-sec3.cfm. Accessed November 20, 2008.4. McGlynn A, Asch SM, Adams J. The quality of healthcare deliveredto adults in the United States. N Engl J Med. 2003;348:2635-2645.5. The Kaiser Family Foundation. Trends and indicators in the changinghealth care marketplace. Section 4; Exhibit 4.11: Average copaymentsfor generic drugs, preferred drugs, nonpreferred drugs, and four-tier drugs,2000-2005. http://www.kff.org/insurance/7031/ti2004-4-11.cfm. AccessedNovember 11, 2008. 6. Siu AL, Sonnenberg FA, Manning WG, et al. Inappropriate use ofhospitals in a randomized trial of health insurance plans. N Engl J Med.1986;315:1259-1266.7. Fendrick AM, Chernew M. Value-based insurance design: aligningincentives to bridge the divide between quality improvement and costcontainment. Am J Manag Care. 2006;12(suppl):SP5-SP10. 8. Chernew ME, Rosen AB, Fendrick AM. Value-based insurancedesign. Health Aff (Millwood). 2007;26:w195-w1203. Epub 2007 Jan 30.9. Chernew ME, Shah MR, Wegh A, et al. Impact of decreasing copay-ments on medication adherence within a disease management environ-ment. Health Aff (Millwood). 2008;27:103-112. 10. Blue Cross Blue Shield Medical Cost Trend Report 2007. Nationalhealthcare expenditure projection 2002-2015. http://www.bcbs.com/blueresources/mcrg/2007/2007-medical-cost-reference-guide-2.pdf.Accessed December 4, 2008. 11. Drug Benefit Trends. 2007;19(7):6-7.12. Medco Health Solutions. 2007 Drug Trend Report. http://medco.mediaroom.com/file.php/129/2007+DRUG+TREND+REPORT.pdf.Accessed December 4, 2008.13. Medco Health Solutions. 2008 Drug Trend Report. http://medco.mediaroom.com/file.php/162/2008+DRUG+TREND+REPORT.pdf.Accessed November 20, 2008.


Changes in benefit design and policy must beevidence-driven and dynamic. At the sametime, benefit changes must be considered inthe context of the big picture, reflecting bothpharmacy and medical expenditures.

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An employer’s perspective on theapplication of new technologies inhealthcare over the next few years

will be greatly influenced by the currentbusiness environment. The current econom-ic downturn is resulting in significant behav-ior changes by employers and by employees.

Impact of Increased Cost-Sharing:Reduced Demand for Healthcare

In the past several years, employer cost-shifting ofhealthcare has been implemented by cost-sharingmethods such as copayments, deductibles, and coinsur-ance. This trend has been widely reported and docu-mented by major pharmacy benefit managers (PBM)and other reports, such as Express Scripts,1 Medco,2

CVS Caremark,3 and the Takeda Report.4 The cost-sharing trend is also true for self-insured employeesunder the Employee Retirement Income Security Actof 19745 plans and for those fully insured under state-approved health insurance programs, medical and/orpharmacy.

The impact of these cost-sharing tactics, resultingfrom the continued cost escalation of healthcare overthe past 10 years, is exacerbated by the current ecnom-ic downturn. Consequently we now are seeing adecrease in the utilization of healthcare benefits.People are beginning to put off seeing physicians.6

They elect not to have laboratory tests done or not tohave prescriptions filled. In some cases, employees areeven choosing not to take a benefit from their employ-er or to enroll in a health plan, because they cannotafford their share of the premium cost, let alone thecost-sharing.6

These trends have resulted in an immediate andrapid decrease in demand for healthcare services,whereas, until recently, there has always been a steady increase in demand for healthcare services.

As reported in September 2008 in the Wall Street Journal,6 data released by IMSHealth show a decrease in the number ofprescriptions being filled at retail pharmaciesin the United States during the first 2 quar-ters of 2008—the first negative quarters inmore than a decade. Compared with thesame periods in 2007, the number of pre-scriptions filled in the first quarter of 2008decreased by 0.5% and in the second quarter

by 1.97%.6

As also reported in that Wall Street Journal article,the research firm D2Hawkeye recently conducted ananalysis of claims from 250,000 people in several dozenmid-Atlantic employer health plans.6 Their findingsalso show that people are cutting back on healthcare,even though they have coverage. There were declinesin the use of healthcare in several areas of preventiveor nonacute care, even when there is no change in ben-efits or employee cost-sharing. For example, an 18.6%drop was reported in knee replacement surgery in theyear before March 2008, while the number of Papsmears fell by 6%, and the number of prescriptionsfilled for antidepressants dropped 29%.6

In a 2008 survey by the Kaiser Family Foundation,increasing numbers of Americans reported problemspaying medical bills.7 And during the past year, 36% of Kaiser Permanente members have delayed medicalcare, 31% have skipped a test or treatment, and 27%decided not to have a prescription filled, all due to cost (Figure).7

This decline is also true in medical visits, with abouta 10% decrease in medical visits and follow-up visits. Inone practice in Tennessee, patient visits were down10% to 15%, even though 90% of the patients havesome form of insurance.8 A major problem is gettingpatients to come back for tests to check their diabetesor to act on referrals to specialists. When there is elec-tive surgery or other procedures involved, patients aredeferring taking action. They are willing to live withthe pain or the inconvenience that a particular ailmentmay be causing them as a way to save money duringthis economic downturn.8

Employers’ Perspective on New Technologies in HealthcareF. Randy Vogenberg, RPh, PhD

Dr Vogenberg is Chief Strategic Officer with Employer-basedPharmaceutical Strategies, LLC, Cranston, RI, and SeniorScholar, Department of Health Policy, Thomas JeffersonUniversity, Jefferson Medical School, Philadelphia, PA.

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Unexpected Opportunities: Preventive Care Initiatives This grim reality may nevertheless present an oppor-

tunity to make the most of recent service shortcomings.For many years there have been double-digit, year-over-year increases in premiums, and the increase for2009 is anticipated to be between 6% and 12%.9,10

Employers have been asking all along, “What am I get-ting for my healthcare spending?” But now, they aregetting more and more aggressive about wanting toknow what they are getting for the money they arespending, and they want real answers.

Why should employers invest dollars in healthcarerather than in other places that may result in betterreturn on investment or be more valuable in other waysto their organization? And not just in the bottom linebut also in medical benefits? Employers are not hearingmajor complaints about Medicare, notwithstandingthat it is headed for bankruptcy. Medicare benefits areless generous than large employer plans, for the mostpart, and Medicare Part B premiums will not increasein 2009.11 Part D costs seem to be leveling out, with noreal changes, except for the doughnut hole, and thathas less impact than expected. In the employer’s mind,there seems to be a sort of disconnect.

However, the employer space is seeing a relativelyrapid growth of wellness and preventive care initiatives.

The current economic downturn could present anopportunity to demonstrate short- and long-term valueof well-developed wellness and prevention programs.

The behavior changes that result from preventiveand wellness programs can provide positive health andeconomic benefits to the employer as well as theemployee. This begins to form a partnership betweenthe employer and the employee rather than a pater-nalistic relationship or an entitlement. Clearly, there also is some societal payback by an employerthrough an investment in these programs. From anemployer’s perspective, this situation involves morethan just the employees; their home environment isalso important. Their spouses and children also needto be involved. This reorientation of the approach tohealthcare has to be proactive to positively influencebehavioral rather than reactive changes. Although itneed not be aggressively proactive, it has to be proac-tive versus reactive.

New TechnologiesA robust technology pipeline is going to explode

between 2010 and 2020.12 Although the Centers forMedicare & Medicaid Services (CMS) is very muchaware of this, they do not know what they are going todo about it in terms of the developing costs associatedwith it. In view of the current dynamic economic envi-ronment, it is important to examine what it means fornew technologies, particularly in the drug and devicearenas. This includes the appropriateness of the tech-nology being used, a utilization factor as opposed to justthe unit price or cost of these new agents.

There has been much interest in biotechnology (orbiologics) recently, but there are other genomic prod-ucts and nanotechnology products that will be follow-ing behind that comprise that very robust pipeline.These products will take up an increasing share of drugexpenditures during the 2010-2020 timeframe. It isnecessary to refocus some of our time and attentionbeyond just the issue of increased price. Price is clearlysignificant when looking at a $100,000 biotech productcompared with a $100 typical traditional drug. Thiswill require a different approach for benefit design andcoverage, and for deciding how the use of these newtechnologies fits into wellness and preventive carestrategies that are in the marketplace.

It is also important to remember that these newtechnologies will not always be used in isolation.Utilizing multiple technologies is not necessarily bad ifthey are part of the most appropriate treatment thatwill yield the best outcomes for patients, even with the

Figure Impact of Economy on Healthcare

36%29%

31%24%

27%23%

22%19%

12%8%

47%42%

Put off or postponed get-ting healthcare you need

Skipped recommendedmedical test or treatment

Didn’t fill a prescription

Cut pills or skipped dosesof medicine

Had problems gettingmental healthcare

Did any of the above

Percent of total who say they or a family member have done each of the following in the past year because of cost

October 2008

April 2008

Source: Key Findings: Kaiser Health Tracking Poll: Election 2008—October2008. (#7832) The Henry J. Kaiser Family Foundation, October 2008.Reprinted with permission from the Henry J. Kaiser Family Foundation. TheKaiser Family Foundation is a nonprofit private operating foundation, based inMenlo Park, California, dedicated to producing and communicating the bestpossible-information, research, and analysis on health issues.

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higher costs associated with the use of these new tech-nologies. Multiple technology utilizations are, and willcontinue to be, a significant part of the healthcarearmamentarium. For example, the treatment of breastcancer does not just use drugs. Biotechnology-baseddiagnostics is used to determine if a biologic drug is anoption or the best option in a given patient, supple-mented by imaging techniques. It is the combination ofall of these factors that has to be considered whenexamining the technology pipeline. As we movetoward personalized medicine, we will find that there istremendous innovation in diagnostics and imaging, justas in pharmaceuticals.

One major difference among health innovation sec-tors is that in the drug development pipeline, pharma-ceuticals may take 10 to 14 years before they can belaunched. In contrast, the pipeline to develop andlaunch a diagnostic product is measured in months.With some companies, the product technology innova-tion cycle is around 14 to 18 months, very rapidturnover compared with what we are accustomed towith pharmaceuticals.

Will the Rapid Changes Stimulate Efficiency? Many manufacturers are beginning to look at bio-

logics—especially oncolytics—as a salvation, becauseof the competition in the small-molecule market.However, there probably is no safe haven, because ofthe current radical changes in the healthcare system.We are going to be reevaluating everything we measureby a totally new method. What we think may worktoday—the kind of units we plug into our equations—may be totally different in another month. Our com-parisons may change or even disappear because of therapid changes in healthcare that we see week by weekor even day by day. So the question of making biolog-ics accessible to fit a standard pharmacoeconomicsmodel may be off the table, and companies that aremaking a 180-degree turn in their pipelines are notnecessarily going to help themselves in the long run.

This is probably counterintuitive to what most peo-ple would say. And it has implications for health plans,for employers of any size—large, self-insured compa-nies, or small, “mom and pop” companies that have tobuy an insurance plan. Businesses of all sizes and typesseem to be acting in a similar fashion in addressingtheir health plans or medical service organizations, andwe have not seen this before.

The question is, “How are we going to make the sys-tem more efficient?” This includes not only the biolog-ics, but all other elements of the system. How will we

determine where our dollars are going, and whether weare getting value for our expenditures?

Specialty PharmacySpecialty pharmacies that have developed in the

past 10 to 15 years represent an interesting area aswell. In 2004, most of the growth of specialty pharma-cies was fueled by CMS, including drugs that shouldnot have been included, because they did not fit theoften accepted definition of specialty drugs. A keyproblem with employers has been helping them under-stand what is meant by “specialty drugs.” The meaningor list of specialty drugs is different for every employerand for every PBM. So we really do not know what a specialty drug is. Biologics and nanotech productscan be readily defined, but not specialty drugs.However defined, specialty drugs have become a majorelement in the costs to the healthcare system.According to Medco’s 2008 Drug Trend Report, thecost of specialty drugs represents a significant portionof the total prescription care dollar, accounting for10.4% of pharmacy plan spending in 2006 and 11.4%in 2007.2 Specialty pharmacy spending increased12.3% in 2007 compared with the 16.1% increase in2006. In 2007, increase in drug price was the largestcomponent of spending growth (8.4% of the overallincrease), while utilization increased 3.9%, exceedingthe utilization growth of 1.6% for all prescriptiondrugs.2 These costs are only for specialty drugs pur-chased under the pharmacy benefit. For many plans,40% to 70% of specialty drug spending may be billedunder the medical benefit.

What Are the Actual Costs?In determining actual costs, it is necessary to look at

who is really touching the patient, because each timesomeone touches the patient, it costs more money.That is our system, paying on volume. That is thehealth system that has been discussed in the medicalliterature, in Health Affairs, and in the health policyworld. The question that has been going on for 10 yearsnow is, “What is the value of disease management?What exactly is the value proposition?” Right now itgenerally is not viewed as a positive value proposition,with very few exceptions. This question is now beingraised about specialty pharmacies. There is no questionthat there really are special requirements for this cate-gory of products. But there are questions about how farwe need to go and what we are getting back for them.What is the value proposition that is based on what thespecialty pharmacy, not the drug, is trying to offer?

New Technologies in Healthcare

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System Integration Is KeyIt is essential to integrate these different types of

providers. To control costs, it is necessary to have coor-dinated care. The miscommunication that is occurringwithin the healthcare vendor community is verysignificant. A common finding with a lot of largeremployers is that they are paying for the same servicesmultiple times because of the lack of coordination of information.

The concept of provider integration is rather like agateway philosophy, even more so than the medicalhome. Electronic prescribing (e-prescribing) can pro-vide better transfer of information to help in thisprocess. There is a rather low threshold to achieve thisand get the bureaucratic apparatus moving. So it islikely that we will be seeing this approach shortly. And we may see different delivery models begin toevolve, such as we have seen in CVS Caremark,MinuteClinic, and Walgreens. It will be necessary tobegin to integrate the different services for the differentkinds of care we need to ultimately lower the cost,without sacrificing quality. The cost-quality-access par-adigm discussed these days comes to the forefront,which raises the questions of who is involved withthese technologies, who is paying for them, and wheredoes the employer fit in as the ultimate payer for serv-ices rendered.

Some Medicaid programs are becoming easier tomanage, because there are more patients leaving theprograms, resulting in lower drug costs. Drug manage-ment in these programs is becoming much simplersince up to 90% of the drugs used are generics in thispatient population. Some 35 states have a budget crisis,technically close to bankruptcy. Healthcare represents35% to 40% of their typical budget, so something hasto be done to constrain costs. They cannot just letthings go on the way they are. What they are doing insome states is to consider or have a generic-only for-mulary; no brand drugs. However, this presents a prob-lem with specialty drugs, since there are no generics. If

we are going to move into the generic mindset, asopposed to branded products and new technology, andpayers are not willing to pay for these innovations, howis that going to affect our decision process?

Another phenomenon is the transition after anacute event in a hospital to some point of outside care,such as nursing home, rehabilitation center, or homehealth. How do you make sure that all possibleinformation is available, such as medical records andelectronic health records? The concept of disease man-agement as a means to control costs has been consid-ered. However, only 3 studies evaluating large popula-tion-based interventions have been conducted.13 Forpatients who require the use of biologics, the role ofdisease management remains questionable.13 We cur-rently have no reasonable way to coordinate this care,so we are going to see the business of healthcare beingtransformed in many different directions. We will befacing some form of value-based decision, whether acost-based decision or some other mechanism. Ofcourse, cost will be a big element in the equation. Inthe “business and benefits” literature, what we see isnothing but general discussion about cost issues. We donot see other factors that are necessary to consider.From the research and development (R&D) process, itis going to be a challenge to determine how to getbeyond the simple focus on unit cost.

Cost Measures There are models available that avoid the unit-cost

mentality. The problem is getting that model base intoa product so it offers what is wanted and needed by theemployers and the health plan, and by extension, theproviders. The biggest barrier has been acceptance byproviders. Whatever is done, none of the stakeholderscan be ignored. From an R&D pipeline perspective, itis necessary to look at the utility measures. Quality oflife as a measure is not going to work. It has not workedbefore, it is not well accepted in the business commu-nity, and it is very controversial as a measure in the pri-vate versus public sector benefits world. What is need-ed is something that is reliable and provides a validindication of how these treatments compare head-to-head, so the tough decisions that have to be made canbe made by informed stakeholders. As one example,providers are not going to advocate something they donot believe in or get paid for, and that the patient willnot be able to pay for.

One approach used in many other developed coun-tries is comparative effectiveness.14,15 This approachinvolves the evaluation and comparison of the

To control costs, it is necessary to have coordinated care. A common finding withlarge employers is that they are paying for thesame services multiple times because of a lackof coordination of information.

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New Technologies in Healthcare

implications and outcomes of 2 or more healthcarestrategies that address a particular medical condition.In its fullest extent, this would include both clinicaland cost evaluations of alternative medical interven-tions for a given scenario, and make comparisons acrossmedications, devices, and procedures. The ClinicalAntipsychotics Trials for Intervention Effectivenessstudy is an example of a comparative effectiveness trialinvolving a head-to-head comparison of antipsychoticagents.16 Because pharmaceutical companies tradition-ally do not conduct this type of study, it was conductedunder the auspices of the National Institutes of Health.Comparative effectiveness research is not limited tomedication comparison. For example, watchful waitingversus surgery is an acceptable alternative in the treat-ment of prostate cancer and represents a form of com-parative effectiveness research.

Return on HealthAll this argues for coming back to a return on health

(ROH) as an investment measure that incorporates thenew technology. We are looking for an integration ofservices that may achieve the enhanced clinical outputswe are seeking. That is a big challenge, and it is not justa simple R&D equation. Melding the concept of ROHalong with true integration of services that are current-ly disparate into an aggregated system that functionsproperly with exchange of information on a real-timebasis is where we need to be headed. Then, this has tobe linked with products that will be coming throughthe R&D pipeline, whether pharmaceutical products ordiagnostics, and with the improved ROH care providedby the different providers in the service community. ■

KEY POINTS▲ For the first time in decades, patients are deferring

taking action on their health. They postpone tak-ing care of their ailments because they cannotafford it or as a way to save money during the cur-rent economic downturn.

▲ One opportunity that may be lurking from this cur-rent economic downturn is a greater emphasis onprevention initiatives.

▲ Why should employers invest dollars in healthcarerather than in other places that may result in betterreturn on investment or be more valuable in otherways to their organization?

▲ Reorientation of the approach to healthcare has to be proactive to positively generate behavioralchanges.

▲ Utilizing multiple technologies is not necessarilybad if it is part of the most appropriate treatmentthat will yield the best outcomes or return onhealth measure for patients, even with the highercosts associated with the use of these new tech-nologies.

▲ To control costs, it is necessary to have coordinat-ed, integrated care.

▲ It is a continuing challenge to determine how toget beyond the simple focus on unit-cost used byhealthcare purchasing decision makers.

References1. Express Script. Research study findings: optimizing the copayment dif-ferential: impact on generic-fill rate. http://www.express-scripts.com/industryresearch/outcomes/onlinepublications/study/optimizingcopaydiff.pdf. Accessed November 3, 2008.2. Medco Health Solutions, Inc. 2008 Drug Trend Report. http://medco.mediaroom.com/index.php?s=64&cat=5. Accessed November 3, 2008.3. CVS Caremark. CVS Caremark corporation F3Q08 (qtr end 09/27/08)earning call transcript. October 30, 2008. http:// seekingalpha.com/article/103044-cvs-caremark-corporation-f3q08-qtr-end-09-27-08-earnings-call-transcript?page=-1&find=costs. Accessed November 3, 2008.4. Pharmacy Benefit Management Institute. Prescription drug benefitcost and plan design report. 2007 edition. Takeda Pharmaceuticals.2007. http://www.pbmi.com/2007report/pdfs/2007_Cost_and_Plan_Design_Report.pdf. Accessed November 3, 2008. 5. US Department of Labor. Health plans & benefits: Employee Retire-ment Income Security Act—ERISA. http://www.dol.gov/dol/topic/health-plans/erisa.htm. Accessed November 3, 2008. 6. Fuhrmans V. Consumers cut health spending as economic downturntakes tool. Wall Street J. September 22, 2008. http://online.wsj.com/article/SB122204987056661845.html. Accessed October 29, 2008.7. Kaiser Family Foundation. Kaiser Health Tracking Poll: Election2008. Issue 11, October 2008. http://www.kff.org/kaiserpolls/upload/7832.pdf. Accessed November 3, 2008. 8. Saul S. In sour economy, some scale back on medications. New York Times. October 21, 2008. http://www.nytimes.com/2008/10/22/business/22drug.html?_r=2&hp&oref=slogin&oref=slogin. AccessedNovember 3, 2008.9. Fuhrmans V. Worplace health premiums continue climb but rateslows. Wall Street J. September 24, 2008. http://online.wsj.com/article/SB122221225991369069.html. Accessed December 3, 2008.10. Murphy T. Health care costs expected to rise 10 percent in 2009.Seattle Post-Intelligencer. August 11, 2008. http://seatlepi.nwsource.com/business/374545_healthcosts12.html. Accessed December 3, 2008.11. Kaiser Family Foundation. Employer Health Benefits 2008 AnnualSurvey. http://ehbs.kff.org/. Accessed November 3, 2008.12. Kober S. The evolution of specialty pharmacy. Biotech Healthcare.2008;4:50-51.13. Mattke S, Seid M, Ma S. Evidence for the effect of disease manage-ment: is $1 billion a year a good investment? Am J Manag Care.2007;13:670-676.14. Butcher L. Comparative effectiveness research: what path do wetake? Biotech Healthcare. 2008;4:27-31.15. Library of Congress. http://thomas.loc.gov/cgi-bin/query/F?c110:1:./temp/~c110JFEl3G:e1187. Accessed October 22, 2008.16. Stroup TS, McEvoy JP, Swartz MS, et al. The National Institute ofMental Health Clinical Antipsychotic Trials of InterventionEffectiveness (CATIE) project: schizophrenia trial design and protocoldevelopment. Schizophr Bull. 2003;29:15-31.

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The underlying thought process foremployers or health plan sponsorslikely includes the question, “Is there

an incentive for employers to seek innova-tion?” With the rapid changes in the currenteconomic situation, this is a challenge forpeople who are trying to have access tohealthcare, and for employers who providethe funds for health benefits.

Value as Functional ImpactsBusiness goals. What is meant by value for employ-

ers, and what impact does it have on business goals?Any description today probably will change dynami-cally, even in a few months. How employers help theiremployees by providing access to benefits is critical notonly for good patient care but also for the economy.

Monetary and functional impacts. It is familiar to people in healthcare that employers usually valueinvestments in monetary terms. But even more impor-tant than dollars are the functional impacts. In clini-cal terms, the important question is whether thepatient got better. This is more than just an exercise of enumerating utilization and unit cost. If we spend a lot of money and no one gets better, what have we achieved?

From an employer’s point of view, it is desirable tohave clinical and functional outcomes defined, mea-sured, and improving. For the working person, thefunctional outcome would be getting over the illnessand getting well enough to return to work.

As costs increase, employers are going to expectfinancial impact, in “cashable” terms, on their returnfor what they spend on medical care. In other words,real dollar returns. If promises are made in disease man-agement, for example, about savings that come fromimproved care management, employers are going toask, “And where are those dollars going, becausethey’re not coming back to me.”

For equipment, uptime is a concept manufacturers

often use to assess productivity. Idle machinesdo not help them make money.

Healthcare may help if it affects the fullbenefit of people’s uptime. Health servicevendors have been liberal in their promisesin the past. Many elements of the supplychain are ready to take credit for whateversuccessful changes may have occurred. Thepharmacy benefit managers may be takingcredit for the medication selection and for-

mulary management; the health plans, for their diseasemanagement; the company’s internal medical depart-ment, for the way it interacts with the employees; orthe benefit directors, for the cost-effective benefitsdesign they have constructed. However, few of the dol-lars produced as estimated “savings” ever find their wayback into the company. The savings have to be demon-strable and recoverable to the employer to achievecredibility. So, in the future there is going to have to bea transparency in these financial claims, to sustain con-tinued employer interest.

Unit cost vs increased impact. A reality foremployers, which they find difficult to rationalize inhealthcare, is that in the business world, when a newproduct is introduced to the market, for example, anelectronic product, over time the cost the company isable to sell that product for does not go up but rathergoes down. So, the natural history for employers withthe products they sell is to expect a lower price onfuture units sold. Ongoing profitability is derived fromincreased efficiency, decreased waste, and improvedquality. However, when employers look at their inter-nal sourcing, their purchasing world, one of the veryfew purchases that goes up in price year after year ishealthcare. It keeps getting more expensive. That isquite different from any other purchase that employersmake, and they are having a tough time understandingthe cause.

With resources limited, innovation in medicine maybe a means to continue patient access to novel thera-pies. We should all expect that choices will need to bemade about spending: if more is spent on innovation,less will need to be spent in other areas of current

Employers’ Perspective on Value inHealthcare InnovationWayne M. Lednar, MD, PhD

Dr Lednar is Global Chief Medical Officer and Director,Integrated Health Services, DuPont, Wilmington, DE.

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healthcare expenditure, yet done in a way that does notcompromise quality of care.

New is not always better. Medical innovators aswell as patients believe that if a product is newly intro-duced, it must be better than what is already available.It is important to understand that the most recentproduct introduction is not necessarily the best prod-uct, nor an innovative one. The product may be, andprobably will be, more expensive. It almost certainlywill be marketed as a great enhancement, but in reali-ty we have to be honest about what constitutes “bet-ter.” “Better” should be demonstrable and communi-cated with transparency to patients and payers.

Unmanaged variation is erosive. An important sta-tistical principle is that variation is absolutely erosive. Itis erosive to quality, it is erosive to value, and it is notan excuse for innovation. In a business with a manufac-turing line, if 15 of every 100 elements produced weredefective and had to be discarded, the performance ofthat line would be judged to be “sick.” If it continuedvery long, the company would go out of business. Yet, inthe delivery of medical care services, we tolerate clini-cal variation that we can measure and tolerate. In actu-ality, this is hurting quality and increasing cost. Wehave to address this issue and do a better job at deliver-ing medical care in the future, or we are going to beheld accountable for running an inferior system. Web-accessible performance scorecarding will make this issuepublic and affect patient and payer buying decisions.

It is very important to understand what clinical vari-ation is. That is where innovation can help. How do weknow if we are getting innovation from a business per-spective? In medicine, we tend to think about a diag-nostic or a therapeutic view. Although it may be anadvantage to have, if the remainder of the care chainremains mediocre and performs poorly, it is not a trueinnovation to have a small niche element of the carecontinuum get a little bit better. That represents only asmall, incremental improvement in the current state.

Functional InnovationEnd-to-end solution. From the employer’s perspec-

tive, what is needed is an end-to-end solution. Thehealthcare delivery process goes from the patient, tothe primary care physician, to the specialist, to thediagnostic provider, and at times to specialized serviceproviders in hospitals. Bills are submitted to insuranceproviders, discharges may be made to rehabilitationfacilities or hospices, and the patient recovers andresumes his or her activities of daily living (optimally).This is an end-to-end situation. An approach that con-

fines attention to limited compartments of the health-care delivery system will miss important opportunitiesfor improvement in patient impact, cost, and quality.

Reverse disease process. In medicine, innovation isoften thought of as developing an improved diagnostictechnique or finding a better therapy for a given dis-ease. The more innovative approach, however, wouldbe to prevent the disease from ever occurring. An evenmore innovative approach would answer the question,“How can we reverse the disease process?” Not just slowit down or stop the clinical pathologic progression, butactually reverse it? That would be true innovation.

Impact produced. Innovation in a traditional busi-ness model is typically framed in terms of the size of thepatient population or the premium price that can becharged and, therefore, the profitability per unit sold.Another way to think of where to innovate, given theemployer’s interest in functional impact, is to look atwhere there is a need and determine what success thisnew innovation would have in helping patients getbetter. In other words, market segmentation producedby impact. Instead of segmenting the market based ondemographics (eg, many older people who will need alot of medication), let us think about it in terms of dis-ease category—the impact that the innovative productwould have on that disease and its functional loss.

Sustainable behavior changes. An approach thatcould use some innovation—but may not be of muchinterest to the people who develop new medications—is developing ways to produce sustainable changes inpatient behavior. The effectiveness of traditionalhealth education and health messaging has been limit-ed and often short-lived.

The issue of medical innovation in behavior tendsto be an orphan issue, where we need much better help than we are getting right now. Our former or cur-rent approach toward health education seems to betrying to come up with a health “infogram” to give topatients and hope they follow it. But maybe we needto go to a different source of expertise to help with the problem. There are experts in changing people’smindsets about what they value and how they behave.


Value in Healthcare Innovation

An even more innovative approach wouldanswer the question, “How can we reverse the disease process?”

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We can change what people value, what people wantto be like, if we get the right expertise. However, itseems unlikely that this expertise is to be found in themedical hallways.

Cost-effective personalized medicine. At themoment, we are giving a lot of people medicines,spending a lot of money on those medicines, and get-ting only a marginal return and impact for them.Essentially, we treat many to help a few, and the systemis running out of money. Personalized medicine maybetter tailor patient needs, increasing the likelihood forbenefit and treatment. There will be future tools to bet-ter connect the patient’s needs with available medica-tions, enabling a better match between the patient andthe medication best able to achieve optimal response.

Site-specific therapy. We have innovative ways todeliver medication directly to the diseased tissue, aprocess that promises to be more efficient. By keepingthe therapy localized at the tissue site, there are fewerand milder systemic side effects. We will probably beable to treat with less medicine and get better results.Both factors will allow patients to get back to worksooner, thus providing a functional impact.

Involve payers. Innovation is good, but not just forthe sake of being innovative. In the business world, if aresearch and development team comes up with aninnovative product without defined customer need andinterest, the innovation likely will stumble. In medicalinnovation, all too often there is a tendency not toinvolve patients or those who pay the bills, the employ-ers, in thinking about the agenda for innovation. Butthe research and development team should not just talkwith the subspecialists in medicine, it has to get theperspective of the people who are going to be treatedand those who pay the bills. In business, that is calledthe voice of the customer.

How long must patients wait for evidence-basedmedicine? The use of new, evidence-based medicineprovides the clinician with the latest clinically provenadvances or innovations in medicine, enabling their

expeditious use in daily clinical practice. At least thatis the theory. In practice, the time lag from when theinnovation is published in the medical literature, withthe supporting evidence, until it is used broadly indaily clinical practice is 17 years. This represents a dis-appointment of the first order. If there are goodreasons why the length of time to adopt these thera-pies is so long, every effort should be taken to under-stand what is causing the delay and determine how toreduce it. A reasonable goal would be to shorten thetime from publication of evidence-based innovationsto adoption in daily clinical practice from 17 years to 17 months, allowing the physician to apply theseadvances in medicine with confidence and patients to benefit.

The Future EnvironmentNo more money. Keeping in mind the economic

environment that lies ahead, it is important that med-ical innovators be aware that the money supply is notendless. The pockets are not bottomless, and the year-on-year increases in spending cannot be sustained. Atthis rate we are going to run out of money, at whichpoint medical innovation will stall. Patients may findthat their financial status will dictate their choices, andthey may decide that they cannot afford plans withgreater benefits. They may cut back, with a possibledetrimental effect on their health.

Dependency ratio. Dependency ratio is a conceptthat not too many people think about, or even knowabout. But you can be sure that their employers thinkabout it a lot. A company has a workforce—the num-ber of employees in the company. That workforcemakes products that can be sold, producing revenue.Out of that revenue, the company has to pay the bills.Some of it goes to pay the costs of running the business,and some of it pays for the healthcare benefits that theemployer offers. The employer is paying the largershare of the costs of these benefits, and that may be asmuch as 60% to 80% of the total healthcare cost.

The dependency ratio affects the profitability gener-ated by an employee, which has to be sufficient to meetthe costs of the business, including the cost to theemployer paying for healthcare, not only for the indi-vidual employee but also for his or her family and thecompany’s retirees. Workforces are decreasing in sizeand retirees are living longer. It is not hard to see thatthis trend will require some way to increase the pro-ductivity and profitability derived by the efforts ofevery working person in this country to be able to con-tinue to offer and pay for healthcare benefits.

Personalized medicine may better tailorpatient needs, increasing the likelihood forbenefit and treatment. There will be futuretools to better connect the patient’s needswith available medications.

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“Me too” medications. When we think about theamount of money spent in the whole healthcare sector, there is not any room for more “me too” med-ications that are just duplicates of drugs in an alreadycrowded class.

Medical errors. The environment surroundingmedical mistakes is changing. The costs associated witherrors in medical procedures, errors that should neverhappen, represent a significant burden on the health-care system and patients. Recently, there has beenincreasing transparency to the public including Web-accessible performance scorecards. As patients begin tounderstand these data, they will make informed choicesand find continuing preventable errors and iatrogenicinjury unacceptable.

Risk-based approaches. If we consider the wholeaspect of risk-based approaches to therapy, where theremay be a differential response to medication, lookingfor the patterns of medication use and response will benecessary if we are to optimize the therapeutic benefit.This is where epidemiology and pharmacoepidemiolo-gy could be helpful. How similar or different is thetherapeutic response in a group of family members whoshare the same genetic pool and the same environ-ment? Personal lifestyle contributes to disease risk.Patients, too, are payers. With actionable information,patients will seek to actively manage their risks, ini-tially through participation in procedures and use ofmedication and later through selection of well-per-forming providers.

Innovate to Achieve Health in Employer PlanEmployers think of value regarding health benefits,

and where innovations can best be applied in helpingtheir employees, their families, and retirees, if involved.They want to have an impact in helping people get bet-ter and stay better, whether it is an employee whoneeds to work, a student who needs to be able to be inschool and learn, or an older person who needs to

remain living independently with a high quality of lifein later years. The concept of functional outcomes can be a strong driver for innovation with demonstra-ble benefit. ■

KEY POINTS▲ The type of health benefits employers offer their

employees is critical not only for patient care butalso for the economy.

▲ Employers’ perspective on value in healthcareinvolves functional outcomes—clinical outcomesand care process improvement. If employers spendmoney on healthcare and the employee is not get-ting better, that is not indicative of value.

▲ A new product does not necessarily mean better orinnovative. It is very important to think aboutwhat “better” is in drug innovation. The producthas to have a function other than being new.

▲ True innovation in medicine will be disease pre-vention rather than disease treatment.

▲ We treat many to help a few, and the system is run-ning out of money.

▲ Innovators of new therapies should talk to thosewho are going to be treated and those who pay the bills. In business, that is called the voice of the customer.


Value in Healthcare Innovation

Patients, too, are payers. With actionableinformation, patients will seek to activelymanage their risks, initially throughparticipation in procedures and use ofmedication and later through selection of well-performing providers.

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The healthcare system in the UnitedStates has become more turbulentwith the current economic crisis. In

view of the credit crunch, purchasers of careare looking for ways to cut expenses and/orget the most value for their money. In thissense, purchasers of care are not differentfrom anyone else. Indeed, it may be evenmore critical for them because of risingnational expenditures, the lack of successfrom prior efforts to contain the rate of increase inthese expenditures, and the difficulty in determiningthe value from healthcare spending.

One potential way to increase value is through inno-vation in products or processes, which may improvehealth status, worker productivity, and ultimately eco-nomic output. The pharmaceutical companies play alarge part in the healthcare system, providing a signifi-cant portion of therapeutic efforts through their prod-ucts and innovation. What is the impact of value-basedpurchasing on pharmaceutical companies?

Healthcare Value Chain It is important to start by looking at the healthcare

value chain, who or what makes up the healthcare sys-tem that plays such an important part in our lives andour economy. A typical healthcare system involves 3major players—payers, providers, and producers. Thereare also 2 sets of intermediaries—fiscal (the insurers)and product (the distributors).

The payers include the government (Medicare,Medicaid, the Veterans Administration, and the De -partment of Defense); employers, with large accountsor small groups; individuals (through premiums or out-of-pocket payments); and, of course, philanthropy.Providers consist of hospitals and hospital systems,physicians and clinics, nursing homes, home health

services, pharmacies, and complementaryand alternative medicine. Producers (or sup-pliers) include companies that manufacturepharmaceutical agents, biologics, devices,medical-surgical supplies, capital equipment,and information technologies.

The fiscal intermediaries consist of theinsurers, including hospital, medical, workdisability, and vi sion/dental forms, managedcare organizations (MCOs), consumer-

directed plans, and pharmacy benefit managers. Thedistributors include the wholesalers, general distribu-tors, mail-order distributors, and group purchasingorganizations.

Controlling the FlowsThere are 2 flows across the value chain: the flow of

money and the flow of innovation. The money flowsfrom the payers to the providers and then to the pro-ducers, handled through the intermediaries with eachtaking their cut. Innovation and technology are devel-oped primarily in the producer section and flows in theopposite direction from the money. These 2 flows meetin the middle with the providers. We ask the hospitalsand physicians to balance the 2 flows. There is no cen-tralized rationing of budget like there is in the UnitedKingdom. There is decentralized rationing at the bed-side, at the point of care on a daily basis by physiciansworking in specific hospitals. They are the ones thatbalance the money with the innovation.

That is the way the healthcare system worked until2000. In 2000, a new party emerged—the patient.Until then, patients played the sick role, being passiveand dependent, letting the system decide what to dowith them. Now patients are courted by all parties innumerous ways. Payers encourage patients to partici-pate in wellness programs, to take an active role intheir healthcare, and to assume some financial riskthrough cost-sharing. Insurers encourage the use ofconsumer-driven health plans and personal healthrecords, and may provide financial services for patients.Hospitals and physicians market to patients throughtheir Web sites, and may court consumers through bou-

Value-Based Purchasing: Impact on PharmaLawton Robert Burns, PhD, MBA

Dr Burns is James Joo-Jin Kim Professor, Professor ofHealth Care Management, and Chair, Health CareManagement Department, Wharton Center for HealthManagement and Economics, The Wharton School,University of Pennsylvania, Philadelphia, PA.

Burns_x.qxp:Cover 1/12/09 5:06 PM Page S30


Value-Based Purchasing

tique medicine or concierge services. Pharmacy chainsnow likewise court consumers through retail clinics.Suppliers seek to entice patients with direct-to-con-sumer advertising and personalized medicine. However,consumerism efforts have a long way to go to resurrectthe previously moribund patients and get them to be anactive consumer in healthcare.

How Much Money Is Involved, and Who Gets It?As already mentioned, the money flows from the

payers to the other participants in the total healthcaresystem. How much money is involved, and where doesit actually go? Who gets what amount? The Centers forMedicare & Medicaid Services (CMS) stated thatnational health expenditures (NHEs) totaled nearly $2trillion in 2005 (Table).1 The bulk of the money, 70.7 %,went to the providers (numbers 1-5 in the Table).

A different picture emerges if we look at NHE dataover time (Figure).1,2 In 2000, CMS published data onhealthcare expenditures accounted for by the top 3spending categories (hospitals, physicians, retail drugs)looking at the 3 top spenders from 1980 to 2000, withestimates for 2010. The trend data showed that hospi-tal costs declined almost linearly, from 39.8% of thetotal NHE in 1980 to 30.8% in 2000.1 Over the sameperiod, costs for retail pharma almost doubled (from4.7% to 8.9%), while physician costs remained essen-tially the same. CMS estimates indicated that thesetrends would continue at least to 2010.2

The opposite trends in hospital and pharma costs arepossibly the result of a “substitution effect,” wherebyprescribed pharmaceuticals take the place of moreexpensive hospitalizations. However, the pharma trendline only counts retail pharma. It does not factor ininstitutional pharma (including biologics), whichaccounts for at least 10% of total pharmaceuticalspending. It also does not include mechanical devices,which represent a rising percentage of health spending.Mechanical devices are buried in hospital costs. If wetake the institutional drugs, biologics, and mechanicaldevices out of the hospital costs and put them in phar-ma, the estimated hospital and pharma lines wouldconverge by 2010. What does that mean to pharma? Asa cost item, and thus as a target for cost containment,pharma would stick out even more than before.

Shortly after the CMS figures and estimates werepublished, it became evident that the projections from2000 to 2010 were not going to happen. Pharma andhospital costs as a percentage of NHE leveled offbetween 2000-2005, with 2005 hospital costs remain-ing at 30.8%, and retail pharma costs increasing only to

10.1%. As projected, physician costs remained un -changed at 21.2%.1

Why didn’t hospital costs continue to drop?Hospitals learned to play a smothering defense with

Table Who Gets the Money: $1988 billion in 2005

ExpenseNHE, in $ billions

NHE,%

1. Hospitals 612 30.8

2. Physicians 421 21.2

3. Other professional services 57 2.9

4. Nursing home care 122 6.1

5. Dental, home health, personalhealthcare

192 9.7

6. Retail sale of medical products 259 13.0

Prescription drugs 201 10.1

Durable medical equipment 24 1.2

Medical, nondurables 34 1.7

7. Program administration and private insurance

143 7.2

8. Other* 184 9.3*Other includes government public health activities, research, and structuresand equipment.NHE indicates national health expenditure.Source: National Health Expenditures According to Type of Expenditure, 1960-2005. www.infoplease.com/ipa/A0922551.html.

Figure National Health Spending, by Category, 1980-2010

45

40

35

30

25

20

15

10

5

0

Natio

nal h

ealth

exp

endi

ture

s, %

Spending1980 1990 2000 2005 2010

HospitalsPhysiciansRetail Pharma

39.8

35.2

30.8 30.828.0

18.6

22.1 21.3 21.2 21.0

4.7 5.68.9

10.1

14.0

The dotted lines indicate CMS’s estimates up to 2010. Sources: National Health Expenditures According to Type of Expenditure:1960-2005. www.infoplease.com/ipa/A0922551.html; National HealthExpenditure Projections 2007-2017. www.cms.hhs.gov/NationalHealthExpendData/Downloads/proj2007.pdf.



MCOs. They figured out how to counterbalance man-aged care’s market penetration with their own marketpower, built up through a decade of mergers and hospi-tal system formation. They also capitalized on the reim-bursement opportunity to make a lot of money per-forming procedures and treating high-severity cases,and went on a building spree to take advantage of thesefactors. Why did pharma flatten out? That is in part theresult of research and development pipeline problems,the increase in the use of generics, and the recent lossof patents. As a result, all 3 elements are in a more orless holding state, and the lines are not converging.

Stakeholders and SpendingHow are hospitals responding to the higher portion

of spending due to technology, biologics, and medicaldevices? Approximately one half of hospital costs arelabor (largely nursing),3 nearly one third are “productsand service.” That is code for supply chain expenses,which includes outsource services, products, logistics,internal distribution, and inventories. Hospitals finallyhave realized that these expenses are where they needto look to cut costs.

Supply chain management has not typically beenpart of hospital cost-containment efforts. Only in thepast few years has there been a growing recognitionthat hospitals need to manage their supply chain. Manyapproaches can be used in the management of the sup-ply chain, including the well-recognized use of con-signments, vendor entry protocols, standardization/solesource purchasing, group purchasing across the system,the use of price ceilings, capitation or tiered systems,and trialing. Two newer methods are gain-sharing pro-grams and the use of value analysis and new technolo-gy committees.

In gain-sharing programs, hospitals work togetherwith physicians to reduce their expenditures in certainclinical areas, such as cardiology or orthopedics. If thehospitals can document that they are saving money,they will split their savings with the physicians, sharingthe gains made by cutting costs.

A recent article looked at the effects of gain-sharingprograms involving the placement of coronary stents inpatients with coronary artery disease.4 In these gain-sharing arrangements, physicians received cash pay-ments for helping hospitals reduce spending. Thesearrangements were approved by the US Department ofHealth and Human Services, Office of InspectorGeneral. Costs per patient were reduced by 7.4% ingain-sharing hospitals compared with other hospitals.Of the total savings, 91% came from lower prices forthe stents and the other 9% savings came from lowerutilization.4 Despite concerns about quality and access,available data suggest that neither was reduced.

If we apply gain-sharing to drugs, savings come fromreducing the prices that manufacturers set (primarily)and increasing the efficiency of hospital operations (sec-ondarily). The principal mechanism by which gain-sharing generates these savings is by getting hospitalsand physicians to jointly negotiate price with the man-ufacturers. It is a profit-loss case for the manufacturers.

Value analysis and new technology committees havebeen established in about half of US hospitals. Theirfunction is to evaluate all new technology coming infrom the producers. They try to determine just how goodthe technology is, how valid the claims for its therapeu-tic benefit are, and if it is worth the price being charged.

Bundled Payment Another trend is toward bundled payment. The US

government expressed interest in this approach in the1990s by funding the Medicare Heart Center BypassDemonstration. Hospitals collaborated with physiciansand actually reduced costs with this approach. Thegovernment sought to extend the program in the late1990s to other procedures but encountered oppositionin Congress, where the effort stalled. The MedicarePayment Advisory Commission (MedPAC) is now try-ing to revive the program. In its June 2008 report toCongress, “Reforming the Delivery System,”5 MedPACtellingly included 2 chapters on “Examining Hospital-Physician Collaborative Relationships” and “A Path toBundled Payment Around a Hospitalization.”

In bundled payment, Medicare Parts A and B arecombined into 1 lump sum, given to the hospitals andphysicians, who then have to figure out how to split it.Going back to our balancing act, hospitals and physi-cians have to determine how to balance the innovativetechnologies and supplies they receive from the pro-ducers with the budgeted bundled payment limit set bythe purchasers. They already have bundled payment forend-stage renal disease. Thus, hospitals and physicians

Supply chain management has not typicallybeen part of hospital cost-containment efforts.Only in the past few years has there been agrowing recognition that hospitals need tomanage their supply chain.




work together to control costs and actively consider thevalue of all of the inputs used in the hospital—the pro-cedures, the drugs, the devices, the biologics, and theother kinds of therapy. This will force a conscious con-sideration of the relative value of trading off one inputfor another. The newest demonstration planned is theAcute Care Episode, which involves a bundled pay-ment for cardiovascular and orthopedic procedures.

Impact on Manufacturers What impact does all this have on pharmaceutical

manufacturers? That is going to be the question overthe next decade. There has been a very subtle shift inthe sale of drugs away from the retail market to theinstitutional market. From 1990 to 2003, retail saleshave dropped from 88% to 73% of the total market.Whether they are biologics, institutional drugs, ordrugs that have to be infused, this means that moresales will be going into the institutional setting, wherepurchasers are trying to get hospitals and physicians tocollaborate and figure out how to balance the moneyand technology flows through gain-sharing, bundledpayment, or other programs. This is the threat facingthe device and pharmaceutical companies.

Push Toward Price TransparencyAt the same time, there has been a push to make

pricing more transparent. This push began in 2005with the Hospital Price Reporting and Disclosure Actunder the Medicare program.6 In 2007, a successful law-suit against the government required the publication ofMedicare’s fees to physicians in many states as well.This is intended to help patients make decisions andfuel the consumerism movement. There is currently abill in Congress called the Medical Device Trans -parency Act, part of the Health Care PriceTransparency Promotion Act of 2007,7 that wouldextend transparency to medical devices and requireCMS to publish the median prices of all cardiovascularand orthopedic devices on a quarterly basis. The pro-posed legislation is controversial and not necessarilywith merit.8 Nevertheless, price transparency is afoot,designed to aid disclosure of price and computations ofvalue. Value can be defined as:

Value = Quality Price

For now, transparency is directed only at providers.However, there is a movement to have it extend toproduct suppliers in the healthcare system.

Value-Based Purchasing Another approach to controlling costs is called

value-based purchasing (VBP). While there are a num-ber of VBP programs, a major effort is pay-for-perform-ance (P4P) programs. In October 2008, CMS beganthe policy of maintaining a list of never-pay events,that is, no reimbursement for certain hospital-acquiredconditions.9 If a patient suffers an injury or infectionwhile in the hospital, the hospital is not reimbursed fortreating the condition. This gives the hospitals anadded incentive to reduce infections. Many hospitalsare developing programs aimed at reducing these typeof incidents, especially hospital-related infections. P4Pprograms have little effect on pharmaceutical compa-nies for now. There may be an upside for drug compa-nies if they can find a drug to substitute for other ther-apies that may help reduce the incidence of infections.

Other Cost-Saving Approaches Several organizations other than insurers and the gov-

ernment are pushing for P4P. Bridges to Excellence (BTE)and the Leapfrog Group are catalysts for change in health-care and have been active for the past 5 to 7 years.

BTE has provided a novel experience in healthcare,demonstrating an impact on improving quality out-comes and lowering costs simultaneously. BTE rewardsindividual physicians and practices for reengineeringthe way they deliver care and demonstrating better out-come in patients with chronic conditions. Their newpayment model—called “Prometheus”—for episodes ofcare is scheduled to launch in January 2009 in 2 differ-ent markets in the United States. Prometheus is a bun-dled-payment approach in the private sector similar tothat of Medicare. What effect will episodes of care haveon product manufacturers? If there is a budgetedamount of money, it is going to force some dialogamong the recipients of these bundled payments todetermine the appropriate mix of inputs. The LeapfrogGroup has designed a program rewarding hospitals thatare top performers in effectiveness and efficiency for 5specific procedures.

There has been a very subtle shift in the sale of drugs away from the retail market to theinstitutional market. From 1990 to 2003, retailsales have dropped from 88% to 73% of thetotal market.



Comparative Effectiveness AnalysisAnother innovative approach to cost containment

in healthcare is comparative clinical effectiveness(CCE). CCE compares the effectiveness of 2 or moredifferent therapies for the same condition, 2 or moredifferent manufacturers of the same drug, or 2 or moredifferent producers of the same implant, and asks if oneis better than the other? Does the drug deliver highervalue than the procedure? Is drug A better than drug B?Is device A better than device B?

There is global interest in the concept of compara-tive effectiveness, with several organizations alreadyusing this type of analysis to evaluate products in theUnited Kingdom (National Institute for ClinicalHealth & Effectiveness), Australia, New Zealand, andFinland. In the United States, the Agency forHealthcare Research and Quality (AHRQ) was estab-lished in 2003 under section 1013 of the MedicareModernization Act.10 This act authorized the AHRQto evaluate and synthesize available scientific evidenceconcerning the comparative effectiveness of productsand services.

For obvious reasons, manufacturers, including phar-ma, are reluctant to conduct head-to-head comparativeeffectiveness studies with other similar products, espe-cially when that is not necessary to gain the approval oftheir product. That may explain why 2 major compar-ative effectiveness studies were carried out under theauspices of the government—the Clinical Anti -psychotic Trials of Intervention Effectiveness(CATIE)11 and the Antihypertensive and Lipid-Lowering Treatment to Prevent Heart Attack Trial(ALLHAT).12 CATIE compared higher-cost atypicalantipsychotic drugs with conventional drugs, and ALL-HAT compared low-cost diuretic drugs with 3 newer,and more costly, blood pressure–lowering drugs.

There are huge financial and clinical implicationsfor doing this kind of research. A number of major hos-pitals have become involved in comparative effective-

ness studies. The University of Pennsylvania conductsmeta-analyses of the literature pertaining to clinicaltrials in each product area, and then decides what willbe done in-house with the different products and/orwhether a drug/product will be used. A number of van-guard systems are going in this direction as well.

What are the implications of comparative effective-ness for the payers, who will have to pay for all this?New products and technologies are currently pass-through items until we get more bundled payments.Payers will be able to look at the results and decidewhat the tradeoffs are in the very expensive categories(drug, biologic, device) for a specific disease. Payerswill take a more global perspective on technologyinstead of segregating the various expenditures likeCMS does.

In 2006, Health Affairs published a very importantarticle on developing a CCE center by the formeradministrator (Gail Wilensky) of the Health Care Fi -nancial Administration (HCFA, now CMS).13 Can wecompile a network of information, a clearinghouse,showing how well these products and therapies work incomparison with each other? Wilensky advocated thatit should be done, perhaps with some support from thegovernment. Not surprisingly, the journal also ran arebuttal in the same issue by 2 executives from Johnson& Johnson who said to hold off on this, advising not togo so fast.14 They said that it was necessary to look atthe implications of this effort on technological innova-tion and progress and that there was an ongoing debateabout comparative effectiveness.

Today there is a growing interest in forming this typeof national data network, based on comparative effec-tiveness information, and that interest is global inscope. Denmark already has a health data network andthe UK system is expected by 2012.

The ultimate goal is to evaluate the clinical and eco-nomic performance of drug and device therapies, whichhave been a rapidly growing part of healthcare costs.That is what the future is going to be, and it is going tohave a major implication for innovation in the health-care field. ■

KEY POINTS▲ One potential way to increase value is through

innovation in products or processes.▲ There is decentralized rationing at the bedside, at

the point of care on a daily basis by physiciansworking in specific hospitals, and they do the bal-ancing of the money and the technology.

The ultimate goal is to evaluate the clinicaland economic performance of drug and devicetherapies, which have been a rapidly growingpart of healthcare costs. That is what thefuture is going to be, and it is going to have amajor implication for innovation in healthcare.




▲ The principal way gain-sharing works is for hospi-tals and physicians to get together to talk to themanufacturers and negotiate the prices down.

▲ In bundled payment, Medicare Parts A and B arecombined into a lump sum, given to the hospitalsand physicians, who then have to figure out how tosplit it.

▲ Payers will be able to look at the results of compar-ative effectiveness analyses and decide what thetradeoffs are in the very expensive categories for aspecific disease.

References1. National Health Expenditures According to Type of Expenditure,1960-2005. http://www.infoplease.com/ipa/A0922551.html. AccessedNovember 13, 2008. 2. Centers for Medicare & Medicaid Services. National HealthExpenditure Projections 2007-2017. http://www.cms.hhs.gov/NationalHealthExpendData/Downloads/proj2007.pdf. Accessed November 13, 2008.3. MedPAC. Report to the Congress, 2004. Chapter 7: Composition of thehospital market basket. http://www.medpac.gov/publications/congressional_reports/Jun04DataBookSec7.pdf. Accessed November 10, 2008.4. Ketcham JD, Furukawa MF. Hospital-physician gainsharing in cardi-ology. Health Aff (Millwood). 2008;27:803-812.5. MedPAC. Report to the Congress: Reforming the Delivery System.

June 2008. http://www.medpac.gov/documents/Jun08_EntireReport.pdf.Accessed November 13, 2008.6. GovTrack.us. S. 1827: Hospital Price Reporting and Disclosure Act of2005. http://www.govtrack.us/congress/bill.xpd?bill=s109-1827. AccessedNovember 20, 2008.7. GovTrack.us. H.R. 1666: Healthcare Price Transparency PromotionAct of 2007. http://www.govtrack.us/congress/bill.xpd?bill=h110-1666.Accessed November 13, 2008. 8. Pauly MV, Burns LR. Price transparency for medical devices. HealthAff (Millwood) 2008;27:1544-1553.9. O’Reilly KB. Medicare’s no-pay events: coping with the complica-tions. AMNews. July 14, 2008. http://www.ama-assn.org/amednews/2008/07/14/prsa0714.htm. Accessed November 11, 2008. 10. Agency for Healthcare Research and Quality. Effective HealthcareProgram. Medicare Modernization Act of 2003. http://effectivehealthcare.ahrq.gov/aboutUs.cfm?abouttype=program#MMA. Accessed November10, 2008. 11. Stroup TS, McEvoy JP, Swartz MS, et al. The National Institute ofMental Health Clinical Antipsychotic Trials of Intervention Effec -tiveness (CATIE) project: schizophrenia trial design and protocol devel-opment. Schizophr Bull. 2003;29:15-31.12. ALLHAT Officers and Coordinators for the ALLHAT CollaborativeResearch Group. Major outcomes in high-risk hypertensive patients ran-domized to angiotensin-converting enzyme inhibitor or calcium channelblocker vs diuretic: The Antihypertensive and Lipid-Lowering Treatmentto Prevent Heart Attack Trial (ALLHAT). JAMA. 2002;288:2981-2997.13. Wilensky GR. Developing a center for comparative effectivenessinformation. Health Aff (Millwood). 2006;25:w572-w585.14. Buto K, Juhn P. Can a center for comparative effectiveness informa-tion succeed? Perspective from a healthcare company. Health Aff(Millwood). 2006;25:w586-w588.



Healthcare is expected to be a majorplatform for the Obama administra-tion in 2009 and beyond. One of the

priorities of the new administration willlikely be to reauthorize and expand the StateChildren’s Health Insurance Program(SCHIP), which expires at the end of March2009. Other potential policy changesinclude government negotiation of Medi -care Part D prices directly with drug manu-facturers, and new legislation to allow alternative ver-sions of biologic drugs (biosimilars). Expansion of fed-erally funded comparative effectiveness research mayalso be on the table in 2009.

Healthcare policy involves so many moving targets,moving parts, and moving players that it can be diffi-cult to make sense of what is happening, and howchanges in policy influence government programs andthe overall marketplace. The role of government inhealthcare—as a purchaser, regulator, and payer—hasbeen increasing in recent years, and will likely expandconsiderably over the next 2 years. Many new demandsare being placed on the public sector, challenging poli-cymakers and business leaders to think differently toadapt and thrive in the current environment.

With a new administration and an evolving envi-ronment, this probably is a good time for all healthcarestakeholders to adapt, by reshaping their mindset andestablishing new approaches to value-based innova-tion, particularly in a marketplace increasingly influ-enced or governed by federal and state-level policies.

Risk-Averse Environment: Blurring the BoundariesIn recent years, the US Food and Drug Ad -

ministration (FDA) has quietly, gradually, and unin-tentionally evolved to operate from the mindset of apayer. The FDA now tends to scrutinize and restrict orslow the entry of new products based on the presenceof alternative products. Traditionally, the FDA evaluat-

ed the safety and efficacy of products with theunderstanding that more would be knownabout a product once it came to market. Inrecent years, however, the FDA has becomeincreasingly more risk averse. The currentFDA environment involves more questions, ahigher degree of scrutiny, and a raised level ofexpectations before a drug is approved for itsfirst indication.

But it is not just the FDA that is riskaverse. With the Internet access to news, the 24-hourcable news cycles, and other media coverage, we areenmeshed in a culture that fosters risk aversion. TheFDA is under tremendous pressure and faces very visi-ble media exposure. To say that assessing risk is difficultis an understatement. If the risk of a serious adverseevent for a product moves from 10 incidents in a billionto 100 incidents in a billion, incidents are still rare. Yetthis statistic may be picked up in the media as a 1000%increase in adverse events, and the story gets magnifiedthrough repetition, taking on a life of its own. In addi-tion to these pressures, the FDA has had an increasedturnover in top positions, perhaps another sign ofmounting pressures and workload issues that are con-fronting the agency. Observers of the FDA also private-ly report low morale among the agency’s career staff.

Today, Congress, the courts, and the White HouseOffice of Management and Budget are far less deferen-tial to the FDA than they had been in years past. TheObama administration may push for more collabora-tion between the FDA and the Centers for Medicare &Medicaid Services (CMS). The role of CMS as a pur-chaser, payer, and regulator has become increasinglyblurred in recent years. Confronted by overwhelmingfiscal and political challenges, CMS is particularlydaunted by Medicare’s budget problems. CMS’sMedicare coverage decisions have the power to drivethe rest of the market. The “good news, bad news” hereis that if Medicare does something great, the rest of themarket often follows; if it does something not so great,the others follow, too.

Medicare has always been a political animal, withCongress often playing micromanager. Medicare is also

The New, Risk-Averse World of Regulationand ReimbursementKip Piper, MA, CHE

Mr Piper is President, Health Results Group, LLC,Washington, DC, and Senior Counselor, Fleishman-Hillard,Inc. He writes the blog piperreport.com.

Piper.qxp:Cover 1/12/09 4:52 PM Page S36

fiscally unsustainable, doubly so in today’s dauntingeconomic climate. There is a risk that Medicare cover-age decision-making will become politicized and budg-et driven.

Sharp subcultures exist within the FDA and CMS,and communication within each agency and betweenthe 2 agencies is rarely fluid. These fractures in com-munication make it difficult for the agencies to respondand adapt to major change. Like the FDA, CMS hasbecome more risk averse in recent years.

CMS has been struggling with how to react to andwithin the marketplace. Although Congress setsdetailed statutes for Medicare reimbursement, coverageremains a complex issue. CMS must rely heavily oncontractors for the day-to-day administration of Medi -care, but it does not administer Medicaid. The latter isadministered by the states, and they operate it underbroad, albeit complex, parameters. CMS sometimes en -counters conflicts in dealing with the states. Congressroutinely adds new requirements and new expectations,resulting in a demanding workload for CMS. Of the5000 CMS employees, at any time only 6 to 8 are polit-ical appointees, and even these are not always filled. Byvirtue of being so outnumbered, the handful of politi-cal appointees may not be able to exert much controlover CMS on a day-to-day basis. They will have tofocus sharply to have their priorities addressed.

Repeal of Medicare Noninterference ClauseThe Medicare Modernization Act prohibits the

Department of Health and Human Services (HHS)from negotiating drug prices in the Medicare Part Ddrug benefit. In the new Congress, repeal of this restric-tion is likely. Under current federal law, the drug pric-ing under Medicare Part D is negotiated between thedrug manufacturers and the individual Part D prescrip-tion drug plans. One ideological theory in Washingtonis the assumption that if the federal government nego-tiates Part D prices, it would save much money.However, negotiation requires that both parties be ableto walk away. If one party cannot walk because its prod-uct represents 80% of its market share, and the otherparty cannot walk because it is the only product of thatkind on the market, an impasse can result, renderingnegotiation a myth, not a reality.

Federal negotiation would not save additional dol-lars unless the federal government creates a nationalMedicare formulary to drive market share in exchangefor steep discounts. Different formulary models areavailable. Medicare could adopt a commercial-like for-mulary, Medicaid-like preferred drug lists, or, worse, a

highly restricted formulary like that used by theVeterans Health Administration.

Although a national formulary for Part D could savemoney, it also has serious drawbacks. CMS may savemoney in Medicare Part D, only to have to spend it inMedicare Part A or Part B. The federal government’srole as drug regulator (via FDA) and largest payer (viaCMS) would undoubtedly blur, with politics and budg-ets in the driver seat.

In the federal government, there are things that savemoney and things that are intended to save money, andthese are very different things. Some of what is intend-ed to save money does not always do so. In federalbudgeting, it does not matter whether it saved moneyor not; that item is scored as “saving money.” This mayproduce a desired effect for proponents of “savingmoney on this side so you can spend it elsewhere.”There is a danger, however, that the focus would revertto unit price—a misleading indicator. And then, justwhen advances are being made to recognize the impor-tance of the supply chain and value-based designs, thisfocus on unit price represents a move back into thesilo—a regression versus a progression. It is importantto recognize that federal negotiation may delay orderail advances toward value-based approaches becauseof the potential urge to focus too narrowly on budgetsand unit prices.

Medicare and Medicaid RebatesA growing interest in Congress is to extend

Medicaid’s best price to Medicare Part D drugs used bydual-eligible individuals and to Medicaid managed careorganizations. A dual-eligible individual is someonewho is enrolled in both Medicare and Medicaid. In thefuture, there will be an inexorable draw to increaserebates across the board. As the biggest buyer, govern-ment is looking for absolute rock-bottom prices, partic-ularly if the dollars saved can be spent on somethingelse, such as physician rate increases or expansion ofSCHIP. However, when dual-eligible individuals movedfrom the Medicaid drug benefit to Medicare Part D, theMedicaid rebate did not move with them. Nor did thesupplemental rebates negotiated by many states. The

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In the federal government, there are things thatsave money and things that are intended tosave money, and these are very different.


commercial drug plans participating in Part D are notable to negotiate the kind of rebates states receive underthe Medicaid best price law. If Congress extends thebest price law to drugs used by dual-eligible individualsenrolled in Part D, you should assume that the govern-ment will eventually require minimum rebates through-out Part D. However, extending Medicaid best price toMedicare Part D could, at least for a time, substitute fora national Medicare formulary.

Because government is the biggest buyer, it will lookfor the lowest price or regulate prices to deal with thecurrent critical budget situation. Reauthorizing andexpanding the SCHIP program will cost an estimated$35 to $50 billion. Fixing Medicare’s physician pay-ment system could cost $250 billion or more. It isinevitable that something will have to be done to findthe dollars to support high-priority policy and pro-grams. The government may respond to the budget cri-sis by regulating Medicare and Medicaid prices. Suchregulations would, of course, have the unintendedimpact of tightening innovation and forestalling newproducts in the marketplace.

Public Plan in Medicare Part DPresident-Elect Obama and Democrats on Capitol

Hill are proposing a government-run Medicare Part Dplan. (Unlike Medicare Part A and Part B, Part D doesnot have a fee-for-service, unmanaged alternative.)Beneficiaries could then opt to get their Medicare drugcoverage from a publicly run plan rather than from aprivate plan. This would require the involvement ofCMS in setting up a formulary and benefit design, tasksthat are now largely delegated to the private drug plans.Many people could be defaulted into a government-runplan, and many advocates would likely steer benefits tothis plan. The public plan would appeal to people whodo not, for whatever reason, trust the private sector andprefer to deal with the government. The governmentwould take on more direct, hands-on power in the mar-ketplace. Negotiating with the government is far morecomplex and potentially perilous than with privateorganizations.

Understanding the New World: Putting It in ContextTo understand trends and complexities that shape

the healthcare environment, it is useful to know howand why policy and government programs haveevolved over the years. I find 3 table games—checkers,poker, chess—suitable metaphors for key stages of thisevolution. Note that “game” is not being used in apejorative sense here.

Checkers: The 1970s and 1980s. In the 1970s and1980s, the game was checkers. It was not as easy as tic-tac-toe. Business was very linear and very direct. (Somebusinesses and Wall Street prefer to operate withinstraight lines.) You played the board in a straight line.You came out with a product, you set a price, you nego-tiated with this group or that group, you sold your prod-uct, and so forth. The trend was direct entry. Youentered your piece and turned it into a more powerfulpiece. It was easier to play the game back then as longas you had financing, and reasonably smart people. Therisks were fairly low, and the rewards were consistentand reasonably easy to predict.

Poker: The 1990s. In the 1990s, you were nolonger playing checkers. You were now playing poker.There was a certain amount of luck to the poker game.You were not really playing your cards as much as youwere playing the other player. But the game was farfrom transparent. No one else could see your cards. Noone else knew what remained in the deck. The gamewas all about bluster, bets, and playing the table. Therewere also quite a few side deals, contracts, trade agree-ments, and a multitude of finance arrangements thatinvolved distributors, across the supply chain andacross institutional lines. Succeeding at the gameinvolved placing bets and getting other players to movethe cash. The business side of the game was complex,and some great products emerged during this time.

Chess: Today’s New Environment. Today, the mar-ketplace dynamic has evolved into a chess game. Thisgame is as removed from checkers and linear business asyou can get. The chess game applies to all stakeholders,whether government, employer, health plan, or others.The total number of possible molecules in the universeis 10, with 28 zeroes after it. The number of uniquelydifferent chess games possible is 10, with 120 zeroesafter it. But as any chess player can tell you, you do nothave to know all that. You have to be able to movemultiple pieces in combination to achieve your objec-tives. You must play offense and defense, strategy andtactics, all simultaneously. You have to think multiplemoves ahead, adapting to the moves of the other play-er. You have to understand that every move you makein the market counts, and you may have to make somesacrifices.

The game of chess is completely transparent. Andyou’re not really playing the player. You’re playing theboard, and you’re playing your pieces to accomplish aspecific set of goals—goals that often change during the



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game. You have to improve the value of the pieces onthe chess board and the power of your pieces to accom-plish your main objectives. This current chess environ-ment is maddening to many people on many levels. Itrequires balancing finance, compliance, and managedmarket factors with regulatory issues and public policy,and working with new players—advocacy groups, influ-encers, and, most important, government—who maynot have been in your mix before. You now have to putyourself into the mindset of government, providers,hospitals, and payers. The game requires moves andcountermoves in combination, and a great deal ofgive and take.

Innovation in the Different GamesWhat do these metaphors mean (Figure 1) in terms

of innovation and how is innovation applied? In the1970s and 1980s, innovation was modest. As in check-ers, the thinking and business were linear and direct,easy to learn and play, with relative low investment andlow risk. This stage was marked by occasional leaps inresearch and new technologies, with clear and consis-tent results.

By the 1990s, you played the player, not the cards inyour hand, just as in poker. The risk was scalable andmoderate, with potential for high rewards. The gamewas opaque and included very aggressive moves, partic-ularly on the part of the pharmaceutical industry.However, in the government world, you can throwyour weight around only so many times. The 1990swere marked by innovation in pricing, in marketing,and in side deals within the supply chain. But, withsome notable exceptions, they were not marked byinnovation in value.

Today, as in chess, you must play a transparent game.This requires thinking ahead, anticipation, position-ing, and adaptation. Every move counts. Working withboardroom members, the C-suite, and the governmentrequires taking a certain amount of risk and thinkingabout how you move things in combination. It involvesinnovation and new ways to move the environment toachieve your objectives, whether you are the govern-ment, manufacturers, payers, or advocacy groups. Youare also starting to see a lot more unexpected collabo-ration and partnering to allow leveraging differenttypes of moves in the marketplace.

Keeping the FocusToday you have to make a conscious effort to put on

the thinking cap of the chess player. It may require youto forget what you learned in the past. Stop yourself in

your tracks and focus on long-term, value-based inno-vation by reminding yourself the following questions:Am I thinking ahead? Am I moving all my pieces incombination to meet the intended objectives? In mywork, am I increasing the value of what I have, or not?What can I do to make sure that every move I makecounts for something? How am I coordinating theprocess to make sure my colleagues or other depart-ments are moving the pieces in the same direction anddoing what they are supposed to be doing? What arethe other players doing? Are they playing an aggressivegame? How sophisticated are the other players? Am Iputting myself in the mindset of the key decision mak-ers, and do I have an understanding of the currentdynamics, and the pressures and cross-pressures theyface, and what they need?

If you integrate these important points at all times, youare on the right track, and you are making a concertedeffort to focus on long-term, value-based innovation.

Figure 1 Innovation in the Different Games

Figure 2 Transformation in a Nutshell: Then and Now

Source: Health Results Group, LLC.

Source: Health Results Group, LLC.

• Increase value andposition of products

• Risk taking, thinking,investment, partner-ing to advance andshow value

• Modest innovation• Slow but steady play• Occasional leaps

• Innovation in pricing,marketing, deals

• Aggressive play

1980s 1990s Today� �

This Is Now…

• Public sector as driver, buyer

• Value of products

• Payers and purchasers(demand-side players)

• Transparent prices

• Rule-driven business practices

• Research, data, policy, persuasion

That Was Then…

• Private sector as driver, buyer

• Novelty of products

• Physicians and manufacturers(supply-side players)

• Opaque prices

• Market-driven business practices

• Sales, marketing, advertising

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Transformation A number of major trends characterize the transfor-

mation from the past environment to the present(Figure 2). In the past, the private sector was the driv-er and the buyer of drug benefits. Now, the public sec-tor is the principal driver and the buyer. Before, thenovelty of products was a catalyst for developing andbringing products into the marketplace, with the even-tual caveat that new did not always mean better oreven clinically different. Now, the value of productsand services is a vital qualifier. Government, employ-ers, health plans, and pharmacy benefit managers eachexpect a different aspect of value, and the value propo-sition is taking center stage.

In the past, physicians and manufacturers from thesupply side made most of the decisions. Huge invest-ments were made on programs targeted to influencephysicians. Now, payers (health plans, drug plans) andpurchasers (CMS, states, and large employers) from thedemand side of the market are the movers and shakers.(As an aside, employers do not like being called payers;nor do CMS or state Medicaid agencies like the payertitle. Employers, Medicare, and Medicaid are more aptlydescribed as the purchasers who hire the payers—healthplans, pharmacy benefit managers.) Physicians are notmaking the same decisions they once made. Their influ-ence has atrophied dramatically. There is still a need toinfluence certain physicians, including key opinionleaders, those in government, and those in think tanks,but there is a less intense focus on general prescribers.

Another major shift is that prices and quality used tobe completely opaque but now are increasingly trans-parent. Business practices were formerly market driven,but today they are rule driven, governed by an array offederal and state statutes and regulations. And finally,in the past, market persuasion was generated by sales,marketing, and advertising. Today, the thrust has shift-ed to research, policy, and data—and although thesetools are also effective forms of persuasion, they repre-sent a departure from approaches used in the past.

Steps toward Value-Based Innovation Understanding these dynamics is an essential step

toward moving forward and generating value. Anotherkey step is to get inside the mind of those in the publicsector. Remember that decision makers are often onthe demand side, not the supply side. This trend maynot be happening yet across the board, but it is rapidlygaining traction.

Keep in mind that the game has fundamentallychanged to chess, and it is not going back to checkers

or poker. To generate value and support innovation inthe long-term, we all have to adapt to and foster inno-vation within the current risk-averse, regulation-driv-en, policy-centric environment.

The current push for evidence-based medicine facil-itates and powers the breadth and depth of today’s chessgame. We have to continue to invest in evidence,develop tools for it, and find ways to help physicianschange how they practice. But knowledge in and ofitself does not change behavior. Evidence is fueled byresearch, and research has to be actionable. To make theinvestment worthwhile, several criteria are important atthe outset. Research must be relevant to key decisionmakers; timely (data completed 5 years from now has novalue to what should have been done 5 years ago);translated in a way that matters to them; disseminatedthrough a multitude of vehicles, then reinforced andtied to reimbursement or other actionable tools. ■

KEY POINTS▲ Healthcare policy involves so many moving targets,

moving parts, and moving players that it can bedifficult to make sense of it all.

▲ The Centers for Medicare & Medicaid Servicesfaces overwhelming fiscal and political challenges,and its role as a purchaser, payer, and regulator hasbecome increasingly blurred.

▲ Federal negotiation may delay or derail advancestoward value-based approaches because of itspotential to focus too narrowly on budget demandsand unit prices.

▲ The new policy environment demands that allhealthcare stakeholders adapt to the new environ-ment by reshaping their mindset and by establish-ing new approaches to value-based innovation.

▲ Today’s tools for innovation are focused onresearch, policy, and data. There is also a shifttoward transparency of pricing, quality, and busi-ness practices.

▲ Research must be relevant to key decision makers;timely; translated in a way that matters to them;disseminated through a multitude of vehicles, thenreinforced and tied to reimbursement or otheractionable tools.

▲ The political game has fundamentally changed tochess, and it is not going back to checkers or poker.To generate value and support innovation, we allhave to adapt to and foster innovation within thecurrent risk-averse, regulation-driven, policy-centricenvironment.



Legislation introduced in the US Senateon July 31, 2008, promoted the forma-tion of a nonprofit corporation charged

with conducting comparative effectivenessresearch in the field of medicine. Accordingto the Senate bill, the term “comparativeeffectiveness research” is defined as “researchevaluating and comparing the implicationsand outcomes of 2 or more healthcare strate-gies to address a particular medical condi-tion.” The objectives of this research include reviewingexisting medical evidence and allowing the appropriatedissemination of information on the best ways to treatmedical conditions.

What Constitutes Medical Evidence?What constitutes medical evidence, and what deter-

mines the validity of the evidence to evaluate compara-tive effectiveness? There are several methods to evaluateand grade the various forms of medical evidence. Tounderstand clinical research today, we need to under-stand observational studies, experimental studies, andmeta-analyses, all of which may constitute comparativeeffectiveness research. Understanding these designs inthe context of their strengths and limitations is necessaryto be able to evaluate whether the conclusions of a cer-tain study are appropriate or not.

The following story is an example of how the nature ofevidence has changed in medicine. A wave of Asiaticcholera hit England in the mid-19th century, with anespecially severe outbreak in the Soho section of London1854.1 Previously, Soho had suffered only a few, seeming-ly isolated cases, but on the night of August 31, 1854,what Dr John Snow later called “the most terrible out-break of cholera which ever occurred in the kingdom”broke out. Within 3 days, more than 120 people living inor around the Broad Street area of Soho died, and thenumber of deaths escalated to 500 in less than 2 weeks. DrSnow, a surgeon and a pioneer in epidemiology, speculat-

ed that the cholera was spread by contaminat-ed water.

His research, consisting of interviews withthe families of the victims, led him to a waterpump on the corner of Broad Street andCambridge Street, at the epicenter of theepidemic. A microscopic examination of awater sample from the pump revealed “white,flocculent particles.” Convinced that thiswas the source of infection, he showed his

findings to the Board of Guardians of St. James’ Parish,the parish containing the pump. Although doubtinghis story, they agreed to remove the handle of the pumpas an experiment. When this was done, the spread ofcholera essentially stopped. This observational study isan early example of what constituted medical evidence.

Despite these dramatic results, no one believed DrSnow. After careful inquiry by the Board of Health afew months later, their report concluded, “We see noreason to adopt this belief.”2

Types of Medical StudiesSince the mid-19th century, the creation of medical

evidence has become much more sophisticated, usingmethods that range from descriptive studies, such ascase studies, to randomized controlled trials (RCTs), aswell as an entire spectrum in between (Figure 1).Different types of results can be obtained from the dif-ferent types of studies. Case studies, the descriptive andexploratory studies, can be considered hypothesis gen-erating, whereas the experimental studies, especiallyRCTs, can be considered hypothesis testing. This clas-sification addresses the underlying nature of the dataobtained and their potential for bias.

When there are different types of studies, it ishuman nature to want to grade them according to whatis good, and why is it good, and what is bad, and why isit bad. In the early 1990s, an evidence pyramid wasdeveloped to distinguish specific evidence levels(Figure 2). Level 1, which included the RCT, was con-sidered to be the gold standard, representing the besttype of data available. Lower levels included variousgrades of observational studies, down at the lowest lev-

Evidence Standards in the Era ofComparative EffectivenessNirav R. Shah, MD, MPH

Dr Shah is Assistant Professor of Medicine, New YorkUniversity, NY, and Associate Investigator, Center forHealth Research, Geisinger Health, Danville, PA.

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els, to validation studies and anecdotal evidence (basicobservations). In 1996, the US Preventive ServicesTask Force (USPSTF) formalized these levels of evi-dence by evaluating them and assigning grades to each,with grade I being a properly controlled and properlyRCT.3 Thereafter, grade I became the gold standard,against which everything else is compared (Table 1).

Observational StudiesWhat exactly are observational studies? As the

name suggests, in observational studies nothing is beingdone to patients; what is being observed is what hap-pens in a natural experiment or through routine clini-

cal care (Figure 1). For example, if 50 patients receivedrug A as part of their routine care, and as part of theirformulary, and 50 other patients receive drug B in thesame class, this could be considered a cohort study. Thepatients are being given different medications, but in the course of routine care. Thus, in an observation-al study the patient is merely observed and no treat-ment intervention is involved as part of the studydesign itself.

An interventional study, such as a quasi-experimen-tal trial or an RCT, includes intervention in the patient’streatment specifically for the purpose of research.Therefore, in interventional experimental studiescausality can be established, unlike in observationalstudies, where all that can be established is an associa-tion, not causality. That difference is very important.When there is only an association, as in a case-controlstudy, we cannot conclude that a specific interventioncauses a specific result. We can only say that a specificintervention is associated with a specific result.

In addition, observational studies are subject to biasresulting from misclassification, confounding, andselection. One type of observational trial is a historicalcontrol trial (HCT), in which a study arm treated andfollowed prospectively is compared with an arm assem-bled from previous studies or previous patient records.In 1982, Sacks and colleagues conducted an extensivecomparison of 50 RCTs and 56 HCTs involving 6 dif-ferent therapies.4 Of the 56 HCTs, 44 (79%) found theactive therapy better than the control regimen, butonly 10 of 50 RCTs (20%) found that. For each thera-py, the discrepancy in results between RCTs and HCTsof the same therapy was primarily because of outcomedifferences in the control groups, with patients in theHCT control groups generally doing worse than thosein the RCT control groups. This study suggested that“biases in patient selection may irretrievably weightthe outcome of HCTs in favor of new therapies.”4 Thismajor flaw often is related to the improved standard ofcare in the interim between the historical arm and theintervention arm. Even if nothing was done, thepatients studied later would do better than the patientsstudied earlier.

RCT the Gold StandardAs a result of that study, HCTs were deemed unequiv-

ocally flawed. These flaws were generalized to all obser-vational studies, resulting in the mistrust of case-controland cohort studies. The value of the RCT rose relativeto observational studies to become the gold standard.

An example of why a gold standard is necessary is

Figure 1 Types of Medical Evidence

Figure 2 Evidence Pyramid

Source: AIDA. Levels of evidence for clinical application. http://www.2aida.org/aida/graphics/pyramid-evidence.gif.

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Evidence Standards

seen with the Nurses’ Health Study (NHS), a large,prospective cohort study that evaluated a number ofoutcomes in cancer and cardiovascular disease (CVD)with relation to hormone replacement therapy (HRT).An RCT with similar study populations and end pointswas also conducted, and is known as the Women’sHealth Initiative (WHI). The results from these 2studies matched on 4 of 5 study criteria.5 The resultsregarding HRT use matched for risk of breast cancer,colorectal cancer, pulmonary embolism, and stroke.However, the NHS’s findings suggested a strong pro-tective effect of HRT for CVD, while the WHI’s find-ings showed a possibility of a harmful effect.

This difference resulted from the design differencein the studies. The NHS did not include silent myocar-dial infarction (MI) in its design, whereas the WHIcaptured silent MIs by their study design. TheFramingham study, also an observational study,obtained electrocardiograms (ECGs) and detectedsilent MIs, and their results matched those of the WHIstudy.6 The Framingham study determined that onethird of MIs are asymptomatic in women. If the under-counting of silent MIs were corrected for, the cardio-vascular findings in the observational NHS would havebeen the same as in the randomized WHI study.

Comparing Observational Studies with RCTsA study by Concato and colleagues evaluated 99

reports for 5 clinical topics and calculated summaryestimates and 95% confidence intervals (CIs) on thebasis of data from 55 RCTs and 44 observational stud-ies.7 In 4 clinical categories, findings from several of theRCTs contradicted one another. In contrast, none ofthe results of the observational trials contradicted oneanother. This study indicated that RCTs may not indi-vidually provide the best answer for a given clinicalquestion, while a body of evidence derived from well-conducted cohort or case-control studies may give abetter (ie, generalizable) answer.

Therefore, although an RCT may get the “correct”answer, that answer may relate to a select populationand may not hold true for the general population. Infact, meta-analyses of observational studies can get thesame answer or a better answer than meta-analyses ofRCTs on the same clinical question. RCTs tend toshow more heterogeneity than observational studies.Based on these conclusions, if an observational study isdone well, one can get answers comparable with thosefrom a randomized trial.

Over the years, the USPSTF grades of evidence haveevolved, and the resulting revised Oxford levels have,

in fact, given a systematic review of RCTs with homo-geneity as the level 1a recommendation, followed bythe individual RCT with a narrow CI (Table 2).8

Meta-AnalysisA meta-analysis consists of the application of a well-

defined protocol to critically evaluate and then use sta-tistical methods to combine the results of previouslyconducted research. A meta-analysis provides a quanti-tative summary of the overall treatment effects, reveal-ing differences among studies, and explaining discrep-ancies of results and facilitating hypotheses of interac-tions. It is also valuable as a guide for future research.9

An example of the value of meta-analyses for clini-cal practice involves the use of thrombolytics inpatients with MI. In 1959, in the first RCT of throm-bolytics for MI, streptokinase was administered to 23patients, showing a strong beneficial effect for throm-bolytics in treating MIs.10,11 But it was not statisticallysignificant.

Through the 1960s and the 1970s, more than 2500patients had been randomized across 10 studies. If a

Level1a: SR of RCTs with homogeneity1b: Individual RCT (with narrow CI)2a: SR of cohort studies with homogeneity2b: Individual cohort study (or low-quality RCT)2c: “Outcomes” research, ecological studies3a: SR of case-control studies with homogeneity3b: Individual case-control study4: Case series (and poor quality case-control/cohort studies)5: Expert opinion

CI indicates confidence interval; RCT, randomized controlled trial; SR, systematic review.Source: Centre for Evidence-Based Medicine. Levels of evidence. www.cebm.net/levels_of_evidence.asp.

Table 2 Revised Oxford Levels of Evidence

GradeI: One properly randomized controlled trialII-1: Controlled trials without randomizationII-2: Cohort or case-control studiesII-3: Multiple time seriesIII: Opinions, case reports, or reports of expert committees

USPSTF indicates United States Preventive Services Task Force.Source: United States Preventive Services Task Force. Guide to ClinicalPreventive Services: Report of the US Preventive Services Task Force. 2nd ed.Baltimore, MD: Williams & Wilkins; 1996.

Table 1 USPSTF Grades of Evidence

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meta-analysis of these 10 studies had been completed,the results would have demonstrated a significant ben-eficial effect of thrombolytics in acute MI. At the time,however, the meta-analysis techniques had not beendeveloped. By the 1990s, more than 48,000 patientshad been involved in 70 RCTs, with nearly 25,000patients receiving placebo and not thrombolytics.Many would have lived if they had received a throm-bolytic, and probably would have, had a meta-analysisbeen done pooling these studies in the 1970s(Figure 3).12 The real value of meta-analysis is in help-ing to obtain an answer when there are multiple studiesthat, because of funding or other issues, are too smalland underpowered to establish a valid association.

As a result of the lack of appropriate meta-analyses,thrombolytics were not even mentioned in textbooksin the 1960s, and were mentioned only as an experi-mental treatment well into the 1970s, referred to asexperimental until the middle 1980s, after more than20,000 patients had been randomized. Thrombolytictherapy for MI was not considered routine until 1985.This research misstep exemplifies how textbooks canbe as much as 20 years too late in getting valuableinformation to the point of care.

Performing a Meta-AnalysisA number of important steps must be taken when

developing, conducting, and writing a meta-analysis.This process starts with formulating a good studyquestion, setting inclusion and exclusion criteria todetermine which studies can be included, conducting athorough literature search, extracting the data from the published articles, and then pooling the results, if applicable.

A good study question defines the patient popula-tion (disease or condition involved; the stage or sever-ity; and demographic characteristics, eg, age, gender);the type of intervention or exposure, including dose,duration, timing, and route of administration; the typeof comparison, absence of treatment, placebo, or alter-native therapy; and the outcomes, dichotomous or con-tinuous, and the type (eg, mortality, morbidity, qualityof life). This is the basis of what is known as PICO—patients, interventions, comparisons, outcomes.

PICO and Meta-AnalysisWhat we get out of a meta-analysis is only as good as

what goes in. An illustrative example of an inadequatemeta-analysis that had eventual negative results on aspecific therapy is Nissen and Wolski’s analysis ofrosiglitazone.13 The problem with this meta-analysis

started with the study question: “Therefore we per-formed a meta-analysis of trials comparing rosiglitazonewith placebo or active comparators to assess the effectof this agent on cardiovascular events.”13

This is an inadequate PICO question, because itdoes not define the patients; it does not mentionwhether they had diabetes; the intervention used wasrosiglitazone, but dose and duration were not adequate-ly defined; other than placebo, the comparison groupsare not actually listed. One must assume that the activecomparators were those intended to treat diabetes. Theterm “cardiovascular events” is very nebulous. It couldmean cardiovascular death; it could mean MI, definedin any number of different ways, from ECG to clinicalcriteria to enzyme criteria.

In conducting a meta-analysis, the next step afterthe study question is to set inclusion and exclusion cri-

Figure 3 Value of Meta-Analysis

RCTs indicates randomized controlled trials.Source: Lau J, Antman EM, Jimenez-Silva J, et al. Cumulative meta-analysis oftherapeutic trials for myocardial infarction. N Engl J Med. 1992;327:248-254.

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Evidence Standards

teria, describing specifically what kind of studies arebeing searched, what kind of data to collect, the demo-graphics of the study, the sample size, and what kinds ofstudies will not be included in the analysis.

In the rosiglitazone study, 42 trials met the prede-fined inclusion criteria, which required a treatmentduration of more than 24 weeks in all groups. The dura-tion of the 42 trials varied from 24 weeks to 208 weeks(the latter in the A Diabetes Outcome ProgressionTrial [ADOPT]). Comparing the results of a 24-weekstudy with results from a 4-year study raises questionsabout the validity of the comparison.13

In the studies included, rosiglitazone, and rosiglita-zone in combination with other agents, were comparedwith anything else. Thus, rosiglitazone was comparedwith metformin, other antidiabetic drugs, insulin, andplacebo, and all of them were included in the samemeta-analysis.

One would argue that for this meta-analysis, rosigli-tazone should have been studied only in patients withdiabetes (ie, the US Food and Drug Administration[FDA] indication for the drug) or patients withoutdiabetes, not compared across these 2 very differentgroups of patients. The Diabetes Reduction Approach-es with Ramipril and Rosiglitazone Medications(DREAM) study was a large RCT of patients who wereclassified as prediabetic—those at high risk for dia-betes and other related conditions, but they did nothave diabetes according to standard criteria. DREAMprovided half of the data for the meta-analysis. So, this meta-analysis compared patients with and withoutdiabetes,13 and it is not hard to believe that rosiglita-zone would have different effects on these 2 differentpopulations.

Finally, trials were included that did not define themain outcome of interest. All the studies included inthis meta-analysis, with the exception of DREAM, didnot define MI or cause of death.13

Of the 48 trials initially examined in the meta-analysis, 6 were excluded because they did not reportany MIs or deaths from cardiovascular causes. Whenstudies are excluded from a meta-analysis, the reasonfor exclusion must be clearly stated, and it is not justi-fiable to exclude a study simply because it did not haveany events. Statistical techniques are available to han-dle this situation (eg, adding 0.5 to each cell of a 2 ✕ 2table), allowing the study to be considered, and not dis-counted as in this meta-analysis. Exclusions of this typehave the potential for biasing the results.

In addition to shortcomings in setting the inclusionand exclusion criteria, there also were problems with

how the data were abstracted from the studies. Whenthe odds ratios are recalculated using the data providedin the article, the results are significantly different fromthe numbers published in this specific article. A revisedPDF was posted later, correcting some but not all ofthese errors.

In pooling the results in a meta-analysis, there arestandard techniques for interpreting differencesbetween studies; one is the Cochran’s Q statistic, whichis simply a chi-square test. The standard method is to use P <.2 as the cutoff to indicate homogeneity, notthe lack of heterogeneity, and P <.1 was used in thisarticle. Furthermore, fixed-effects models have fallenout of favor when it comes to meta-analysis, becausethey can give artificially “significant” estimates relativeto a random-effects model. In practice, the random-effects models will give slightly wider CIs than a fixed-effects model.

This type of inappropriate analysis and subsequentpublication can result in a major impact on the use ofthe specific drug. As is well known, US sales of rosigli-tazone fell 22% in the second quarter of 2007, follow-ing the May publication of the meta-analysis and anadditional 48% decrease in sales during the third quar-ter of 2007, representing a drop in sales of nearly 60%overall; nearly 70% of changes in rosiglitazone pre-scribing was the result of physicians switching patientsto another therapy.14,15

Reassessing the Meta-AnalysisSince that meta-analysis was published in the New

England Journal of Medicine, multiple articles have nowbeen published on the problems with the study, show-ing that if a random-effects model was used instead of afixed-effects model, the P value of .05 that was report-ed and published was not significant. These paperswere published in late 2007 and early 2008 in severalprestigious journals.16-19

As a result of the Nissen and Wolski meta-analysis,13

the FDA performed its own meta-analysis,20 using 42trials, but 14 of which were different from those used inthe original meta-analysis.20 This fact contradicts the

Textbooks can be as much as 20 years too late in getting valuable information to the point of care.

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principle of a systematic review: if the same criteria areused, the same pool of studies should be obtained. Forthe FDA meta-analysis, only patients with type 2 dia-betes were included. Subgroup analyses found a higher

risk of adverse events with rosiglitazone only inpatients who were older, had heart failure, or tooknitrates or angiotensin-converting enzyme (ACE)inhibitors. Inconsistencies across subgroups (particular-ly in trials without insulin) suggest that the ischemiceffect of rosiglitazone varies considerably and that addi-tional confirmation is needed to determine if the over-all effect is the result of effects in identifiable sub-groups. Other than these subgroups, the findings werenonsignificant.

The FDA panel concluded that there are subgroupswhere there may be harm, but overall it was negligibleharm. The panel recommended that rosiglitazoneremain on the market, but with additional labelingabout these results.

A relatively simple way to decide if a meta-analysisis valid and useful is the use of a resource known as aQuality of Reporting of Meta-analyses (QUOROM)checklist. In 1996, a QUOROM conference was con-vened to address standards aimed at improving thequality of conducting and reporting of meta-analyses ofclinical RCTs.21 The result of this conference was theQUOROM statement, a checklist, and a flow diagram.The checklist outlines the conference’s recommendedway to present the abstract, introduction, methods,results, and discussion sections of a report of a meta-analysis. This checklist contains 18 items that everymeta-analysis should include in their description.

Of these 18 items, Nissen and Wolski followed only4. Of note, the New England Journal of Medicine doesnot require the QUOROM checklist for meta-analysis,whereas other major journals, such as the Lancet, BMJ,Annals of Internal Medicine, and JAMA require it.

Observational Studies versus RCTsThus, a certain degree of skepticism should be main-

tained with regard to meta-analyses. Although RCTsare considered the gold standard, well-done observa-tional studies are actually very good if done using stan-dard guidelines, and can provide evidence that is notavailable from RCTs, such as adverse events. It isbecoming clear that RCTs are not the best way to lookfor adverse events with a given drug, because these aregenerally too short in duration and with too few sub-jects. A large, well-conducted, long-term prospectiveobservational study can capture adverse events andmonitor safety signals for a given drug.

Comparative Effectiveness ResearchThe most recent topic of interest on everybody’s

mind is comparative effectiveness research, which

Comparative Effectiveness Research Act of 2008As mentioned previously, legislation recently introduced

in the Senate would create a nonprofit corporation to reviewevidence and produce information on the best ways to treathealth conditions. The Comparative Effectiveness ResearchAct of 2008 (S 3408) was submitted July 31, 2008, byFinance Committee Chairman Senator Max Baucus (D,Montana) and Budget Committee Chairman Kent Conrad(D, North Dakota).1

The bill authorizes the establishment of a nonprofit cor-poration, to be known as the “Health Care ComparativeEffectiveness Research Institute.” This institute will be nei-ther an agency nor establishment of the US government. Itwill be funded through the Comparative EffectivenessResearch Trust Fund.

As stated in the bill, “The purpose of the Institute is toimprove health care delivered to individuals in the UnitedStates by advancing the quality and thoroughness of evi-dence concerning the manner in which diseases, disorders,and other health conditions can effectively and appropriate-ly be prevented, diagnosed, treated, and managed clinicallythrough research and evidence synthesis, and the dissemina-tion of research findings with respect to the relative out-comes, effectiveness, and appropriateness of the medicaltreatments, services, and items described in subsection(a)(2)(B).”

Subsection (a)(2)(B): Medical treatments, services, anditems described:

The medical treatments, services, and items describedin this subparagraph are health care interventions,protocols for treatment, procedures, medical devices,diagnostic tools, pharmaceuticals (including drugs andbiologicals), and any other processes or items beingused in the treatment and diagnosis of, or preventionof illness or injury in, patients.The nongovernment-affiliated Health Care Comparative

Effectiveness Research Institute would work with expertsand stakeholders to prioritize interventions and services tobe studied. The research would be conducted by public andprivate organizations approved by the institute’s board ofdirectors (which would include physicians, patients, andpharmaceutical and medical device manufacturers).

1. http://thomas.loc.gov/cgi-bin/query/D?c110:2:./temp/~c110wrYNz2.Accessed October 22, 2008.

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Evidence Standards

sometimes has been described as just a sexy term forcost-effectiveness studies, but is indeed much morethan that. As defined earlier, “comparative effective-ness research” means research evaluating and compar-ing the implications and outcomes of 2 or more health-care strategies to address a particular medical condi-tion. This refers to clinical and cost evaluations ofmedical interventions relative to available alternativesfor a given scenario and includes comparisons acrossmedications, devices, and procedures.

But although comparative effectiveness refers toclinical and cost evaluations, it is more focused oncomparing alternatives for a given scenario. Previously,RCTs would have a placebo control arm, but it isbecoming more difficult to do that from an ethical per-spective. Studies involving subjects with diabetes can-not ethically compare a diabetes medication with aplacebo. Instead, a diabetes medication must be com-pared with an active comparator drug that is known tobe effective, such as metformin or a sulfonylurea.

Comparative effectiveness research does not onlyinvolve medication comparison. For example, thealternative of watchful waiting versus surgery forprostate cancer is a form of comparative effectivenessresearch. Also, comparative effectiveness researchspans a number of study types, from RCTs to observa-tional studies.

Types of Comparative Effectiveness ResearchA good example of comparative effectiveness

research is an RCT that was conducted by the National Institutes of Health (NIH) is the ClinicalAntipsychotics Trials for Intervention Effectiveness(CATIE), which was a very large comparative effec-tiveness randomized trial comparing head-to-head useof olanzapine versus risperidone versus ziprasidone.22

Because the pharmaceutical companies would not con-duct this head-to-head study, the NIH stepped in andcommissioned the study.

Another type of comparative effectiveness researchis currently in progress at Geisinger Health Center inDanville, Pennsylvania. Geisinger has very large data-bases of patients who are taking ACE inhibitors orangiotensin receptor blockers (ARBs). Using clinicalelectronic health record (EHR) data, retrospectivecohort studies can be created, comparing patients whowere started on ACE inhibitors in 2001 with patientsstarted on ARBs in 2001, and following them until2008. Using EHRs, virtual clinical trials or randomizeddatabase studies can be conducted that in essencemimic the results of RCTs that would never be done.

This is especially valuable for elderly patients andpatients with multiple comorbid conditions, who usu-ally would not be included in clinical trials. In thefuture, activities of this type, for example, by the HMOResearch Network (HMORN) (http://hmoresearchnetwork.org) will prove valuable. This network hascreated a virtual data warehouse to allow researchacross all member institutions, which includes nearly15 million patients. The Agency for HealthcareResearch and Quality has funded a cardiovascularresearch network and a cancer research network usingthe HMORN settings.

Future of Comparative Effectiveness ResearchAs a result, comparative effectiveness studies have

started to reconsider how evidence is graded. Instead ofrelying on a simple one-dimensional “this is good, thisis bad” hierarchy of RCTs to observational studies, withRCTs at the top and observational studies at thebottom of the pyramid, the USPSTF is starting to rec-ommend looking at studies based on 2 dimensions—considering not only the certainty of net benefits but

Figure 4 Circle of Evidence

RCT indicates randomized controlled trial. Reprinted with permission from Walach H, Falkenberg T, Fønnebø V, et al.Circular instead of hierarchical: methodological principles for the evaluation ofcomplex interventions. BMC Med Res Methodol. 2006;6:29.

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also the magnitude of net benefits, and the actual eval-uation of studies based on both axes to obtain grades forobservational studies and randomized trials.23

On this basis, a small case-control study that showedsuch a huge net benefit and was well designed and welldone could get a high grade. In contrast, there could beRCTs that get a low grade using this new grid. As thesystem gets more sophisticated, it may be that not onlythe magnitude and certainty of net benefit will be con-sidered but also the grading of adverse events, harm,and cost-effectiveness, using similar grids.

Moving forward, maybe we should not speak of a tri-angle or pyramid of evidence but possibly a circle ofevidence with all types of data, efficacy, effectiveness,safety, comparative effectiveness, addressed by all typesof studies, observational as well as RCTs (Figure 4).24 ■

KEY POINTS▲ The term “comparative effectiveness research” is

defined as research evaluating and comparing theoutcomes of 2 or more strategies to address a partic-ular medical condition.

▲ Case studies can be considered to be hypothesisgenerating; experimental studies, especially ran-domized controlled trials, can be consideredhypothesis testing.

▲ In interventional experimental studies, causalitycan be established. In observational studies, all thatcan be established is an association, not causality.

▲ Thrombolytic therapy for myocardial infarction wasnot considered routine until 1985, because a meta-analysis had not been developed earlier.

▲ The real value of meta-analysis is in helping toobtain an answer when there are multiple studiesthat are too small and underpowered to establish avalid association because of funding or other issues.

▲ A large, well-conducted, long-term, prospective,observational study can capture adverse events andmonitor safety signals for a given drug.

References1. Summers J. Broad Street pump outbreak. http://www.ph.ucla.edu/EPI/snow/broadstreetpump.html. Accessed October 16, 2008.2. Committee for Scientific Enquiry. Parliamentary Papers. 1854-5:21-49.3. US Preventive Services Task Force. Guide to Clinical PreventiveServices: Report of the US Preventive Services Task Force. 2nd ed.Baltimore, MD: Williams & Wilkins; 1996.4. Sacks H, Chalmers TC, Smith H Jr. Randomized versus historicalcontrols for clinical trials. Am J Med. 1982;72:233-240.

5. Col NF, Pauker SG. The discrepancy between observational studiesand randomized trials of menopausal hormone therapy: did expectationsshape experience? Ann Intern Med. 2003;139:923-929.6. Lerner DJ, Kannel WB. Patterns of coronary heart disease morbidityand mortality in the sexes: a 26-year follow-up of the Framingham pop-ulation. Am Heart J. 1986;111:383-390.7. Concato J, Shah N, Horwitz RI. Randomized, controlled trials, obser-vational studies, and the hierarchy of research designs. N Engl J Med.2000;342:1887-1892.8. Centre for Evidence-Based Medicine. Levels of evidence. http://www.cebm.net/levels_of_evidence.asp. Accessed October 17, 2008.9. Jones JB, Blecker S, Shah NR. Meta-analysis 101: what you want toknow in the era of comparative effectiveness. American Health and DrugBenefits. 2008;1(3):38-43.10. Fletcher AP, Alkjaersig N, Sherry S. The maintenance of a sustainedthrombolytic state in man. I. Induction and effects. J Clin Invest.1959;38:1096-1110.11. Fletcher AP, Sherry S, Alkjaersig N, et al. The maintenance of a sus-tained thrombolytic state in man. II. Clinical observations on patientswith myocardial infarction and other thromboembolic disorders. J ClinInvest. 1959;38:1111-1119.12. Lau J, Antman EM, Jimenez-Silva J, et al. Cumulative meta-analy-sis of therapeutic trials for myocardial infarction. N Engl J Med.1992;327:248-254.13. Nissen SE, Wolski K. Effect of rosiglitazone on the risk of myocar-dial infarction and death from cardiovascular causes. N Engl J Med.2007;356:2457-2471.14. GlaxoSmithKline. GSK reports second quarter EPS of 24.0p, up11% CER (3% reported). Share buy-back programme increased to £12billion. July 27, 2007. http://www.gsk.com/investors/reports/gsk_q22007/q22007.pdf. Accessed October 17, 2008.15. GlaxoSmithKline. GSK reports third quarter EPS of 23.7p.Significant new Operational Excellence programme announced.October 24, 2007. http://www.gsk.com/investors/reports/gsk_q32007/q32007.pdf. Accessed October 17, 2008.16. Shuster JJ, Jones LS, Salmon DA. Fixed vs random effects meta-analysis in rare event studies: the rosiglitazone link with myocardialinfarction and cardiac death. Stat Med. 2007;26:4375-4385.17. Hernandez AV, Walker E, Ioannidis JP, Kattan MW. Challenges inmeta-analysis of randomized clinical trials for rare harmful cardiovascu-lar events: the case of rosiglitazone. Am Heart J. 2008;156:23-30.18. Diamond GA, Bax L, Kaul S. Uncertain effects of rosiglitazone onthe risk for myocardial infarction and cardiovascular death. Ann InternMed. 2007;147:578-581.19. Dahabreh IJ, Economopoulos K. Meta-analysis of rare events: anupdate and sensitivity analysis of cardiovascular events in randomizedtrials of rosiglitazone. Clin Trials. 2008;5:116-120.20. Mele J; US Food and Drug Administration. Avandia (rosiglitazonemaleate) GlaxoSmithKline NDA 21-071 Supplement 022. FDA Meta-analysis. July 30, 2007. www.fda.gov/ohrms/dockets/ac/07/slides/2007-4308s1-05-fda-mele.ppt. Accessed October 20, 2008.21. Moher D, Cook DJ, Eastwood S, et al. Improving the quality ofreports of meta-analyses of randomised controlled trials: the QUOROMstatement. Quality of Reporting of Meta-analyses. Lancet. 1999;354:1896-1900.22. Stroup TS, McEvoy JP, Swartz MS, et al. The National Institute ofMental Health Clinical Antipsychotic Trials of InterventionEffectiveness (CATIE) project: schizophrenia trial design and protocoldevelopment. Schizophr Bull. 2003;29:15-31.23. US Senate Committee on Finance. Baucus-Conrad Proposal CanImprove Quality, Lower Costs Throughout American Health CareSystem. August 1, 2008. http://finance.senate.gov/press/Bpress/2008press/prb080108.pdf. Accessed October 19, 2008.24. Walach H, Falkenberg T, Fønnebø V, et al. Circular instead of hier-archical: methodological principles for the evaluation of complex inter-ventions. BMC Med Res Methodol. 2006;6:29.

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January 2009 www.AHDBonline.com S49

New drug development is a lengthy,complex process that begins withbasic scientific discovery and ends

with a commercially viable product.Potential drugs undergo animal testing aswell as 3 phases of clinical trials. They aretracked after marketing to determine anypotential adverse clinical outcomes associat-ed with their use. Despite the high failurerate at each stage of the process, many pharmaceuticaland biotechnology companies, large and small, partici-pate in drug development, along with support firms,such as contract research organizations that can designand implement clinical trial studies as well as guide thepharmaceutical firms through a maze of regulations.The drug companies’ motivation is a large profit fortheir most successful new drugs. The US governmentcurrently grants pharmaceutical companies patents fortheir innovations that allow them to charge monopolyprices and obtain monopoly profits for the commerciallife of the patents.

Public Funding, RegulationsWhile private sector efforts tend to be the most vis-

ible part of the drug research and development (R&D)process, a significant amount of early-stage R&D workin the United States is publicly funded, primarilythrough the National Institutes of Health (NIH). TheNIH’s efforts focus on the identification and validationof molecular drug targets (primarily proteins) thatmight serve as receptors for new drug products. In addi-tion, the NIH currently funds several centers for high-throughput screening of molecular compounds againsttargets. This early-stage development work requiresspecialized technologies and very skilled and special-ized chemists, and is extremely costly; private firms arereluctant to undertake it. After specific targets anddrug compounds have been identified, the risk:return

ratio becomes sufficiently favorable toencourage pharmaceutical and biotechnolo-gy companies to become involved.1

The public sector also heavily regulates thepharmaceutical industry, indirectly affectingthe rate of private innovation. The 1983Orphan Drug Act provides R&D tax creditsand awards exclusivity for the first product ina class for a 7-year period if the target popula-

tion is less than 200,000. The success of this legislationis demonstrated in that nearly half of all pipeline drugsin biotechnology companies are for orphan indications.2

The 1984 Hatch-Waxman Act gave the US Foodand Drug Administration (FDA) the authority toaccept abbreviated applications from generic manufac-turers for products equivalent to an already patenteddrug. This legislation allowed the FDA to shorten theperiod between patent expiration and generic drugentry from 3 to 4 years before 1984, to 1 to 3 months inthe 1990s. This act ensures consumer access to medica-tions long after initial patents expire. In 1986, Congressenacted the Federal Technology Transfer Act, whichestablished cooperative R&D agreements between fed-eral research laboratories and private developers.

The FDA Modernization Act of 1997 helps to accel-erate the drug review process by reducing or simplifyingmany of the regulatory obligations imposed on drugmanufacturers. The Patent Term Guarantee AuthorityAct of 1999 requires the US Patent and TrademarkOffice to compensate firms for delays of more than 3years in processing patents. The Best Pharmaceuticalsfor Children Act of 2002 gives drug companies a 6-month patent extension if they test the safety of theirdrugs in children.3

Drug InnovationDrug innovations have improved longevity and qual-

ity of life. Between 1993 and 2003, the FDA approvedmore than 300 new drugs, biologics, and vaccines formore than 150 conditions.4 Findings from a study con-ducted between 1982 and 2001 show that new medi-cines play a significant role in the life expectancy gainsmade in the United States and around the world.5 The

The Role of Epidemiology in New Drug DevelopmentJeff J. Guo, BPharm, PhD; Christina M. L. Kelton, PhD

Dr Guo is Associate Professor of Pharmacoepidemiology andPharmacoeconomics, University of Cincinnati College ofPharmacy, OH; Dr Kelton is Professor of Economics,University of Cincinnati College of Business, OH.

Jeff J. Guo

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study found that new medicines generated 40% of the2-year gain in life expectancy in 52 countries between1986 and 2000.5

Since the mid-1990s, when researchers developed anew wave of medicines to treat HIV/AIDS, the USdeath rate from AIDS dropped by about 70%.6 Andnew drugs account for 50% to 60% of the increase in 6-year cancer survival rates since 1975.7

Epidemiology Guides Drug InnovationEpidemiology underlies the choices that the private

sector and the public sector are making in their specif-ic drug-development decisions. Whether useful to thedrug companies in pursuing their profit goal or engagedby the federal government to pursue public healthobjectives, epidemiology guides resource use, influenc-ing the array of medicines that are available now or willbe available in the future. We describe private and pub-lic sector response to 4 epidemiologic trends: 1. An aging population in the United States2. Emerging diseases with no known treatment3. Increasing diagnoses of chronic diseases requiring

long-term use of medications4. Improved epidemiologic research methods allowing

better risk-benefit calculations pre- and postmarket-ing of pharmaceuticals.

The Aging Baby Boom Population The elderly population in the United States

accounts for a large share of prescription drug use. Thiselderly group has experienced considerably fastergrowth than the population as a whole as the

post–World War II baby boomers join the ranks of indi-viduals aged 65 years and older (Figure 1). Partly as aresult of these demographics, per capita prescriptionuse has increased by more than 2 prescriptions annual-ly in the past decade.8 It is projected that the elderlypopulation will increase from 35 million in 2000 tomore than 70 million in 2030,9 and with it likely therate of chronic conditions and acute events (eg, heartattack, stroke).

In 2000, more than 40 million Americans hadarthritis or other rheumatic conditions, and the preva-lence is expected to grow to 59.4 million by 2020.10

Meanwhile, more than 5 million people in the UnitedStates are living with Alzheimer’s disease (AD), ofwhich almost all are elderly. Medicare spends approxi-mately 3 times more on patients with AD or otherdementias than for the “average” beneficiary.11 Morethan 5.8 million Americans, again almost all elderly,have a history of stroke, with a cost-of-illness estimateof $62.7 billion in 2007.12 The prevalence of end-stagerenal disease is expected to continue to rise, reaching785,000 in 2020.13

As a result, the pharmaceutical industry will face achallenge and opportunity over the next severaldecades or longer. Meanwhile, the federal governmenthas also responded, ensuring that the elderly will, forthe most part, be able to take advantage of the newdrugs being developed for their diseases. The MedicarePrescription Drug, Improvement, and ModernizationAct of 2003 established Medicare Part D, a voluntaryMedicare outpatient prescription drug benefit. As ofJanuary 2006, the benefit became available to allMedicare beneficiaries, regardless of income, healthstatus, geographic location, or choice of health plan.The benefit offers extra assistance to many lower-income beneficiaries (dual-eligibles for Medicaid andMedicare are moved to Medicare).

As of January 2008, about 90% of Medicare benefi-ciaries had drug coverage, although not all underMedicare Part D. Approximately 10 million Medicarebeneficiaries were covered by creditable employer orunion retiree prescription drug plans, and 4 million hadcoverage from the US Department of Veterans Affairsand other public sources.14

Emerging DiseasesAlthough private companies and the federal govern-

ment respond to the aging population, a concertedapproach between public and private entities also willbe required for new diseases for which no known treat-ment exists. And with globalization, these new diseases

Figure 1 US Population Trends, 1970-2030

*Estimated.Source: Centers for Disease Control and Prevention, National Center for HealthStatistics. Health, United States, 2006. Hyattsville, MD; November 2006. DHHSPublication No. 2006-1232.

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01970 1980 1990 1993 1995 1997 1999 2000 2004 2005 2006 2030*

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PopulationElderly (≥65 y)

In m

illio

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214.8235.2

260.1 268.2 273.1 278.2 283.1 282294 297 299

~370

20.9 26.1 32 33.5 34.3 34.8 35.2 35.4 36.4 36.8 37.3~70



The Role of Epidemiology in Drug Development

could arise anywhere and spread quickly across nation-al boundaries. Recent challenges include severe acuterespiratory syndrome, monkey pox, mad cow disease,West Nile virus and bird flu infections, and severaldrug-resistant infections.

For these new diseases, the federal government maybe able to harness the innovation potential of the phar-maceutical industry with particular incentives. TheOrphan Drug Act of 1983 has gone a long way to helpthe private sector bring new drugs to market by increas-ing the profit potential of drugs whose use is limited torelatively few patients. A successful interaction of thepublic and private sectors is their response toHIV/AIDS. It is estimated that 38.6 million peopleworldwide are currently living with HIV/AIDS.15

Innovative antiretroviral agents have made a dra-matic improvement on the quality of life of people liv-ing with HIV/AIDS.6,16,17 Antiretroviral therapy firstbecame available in 1987, with the approval of thenucleoside reverse transcriptase inhibitor (NRTI)zidovudine. It remained the mainstay of therapy untilthe introduction of several other NRTIs in the early1990s.18,19 Major advances began in 1996 with theemergence of 2 new antiretroviral classes—proteaseinhibitors (PIs) and nonnucleoside reverse transcrip-tase inhibitors (NNRTIs).

The introduction of combinations of drugs from dif-ferent drug classes, referred to as highly active anti-retroviral therapy (HAART), has had a dramaticimpact on markers of disease progression (viral loadand CD4 T-cell counts)20,21 and on HIV-associated mor-tality and morbidity.6,16,17 National guidelines for thetreatment of HIV infection recommend HAART (2NRTIs along with either 1 PI or 1 NNRTI) as first-choice therapy.17

The FDA was quick to approve these medications,with an average approval time of just 5.2 months forthe 25+ antiretroviral drugs introduced between 1987and 2003.22 Innovation continues unabated in thedevelopment of new anti-HIV/AIDS medicines. Forexample, there are several integrase inhibitors current-ly being evaluated in clinical trials, and raltegravirbecame the first to receive FDA approval in October2007. The first fusion inhibitor was enfuvirtide,approved in March 2003; it was followed by maravirocin August 2007. Finally, although not ready for market,2 maturation inhibitors are currently being investigat-ed.19 Figure 2 details this timeline.

Growing Prevalence of Chronic DiseasesRapidly rising numbers of people are being diag-

nosed with chronic diseases. Although a nature versusnurture controversy surrounds such diseases (eg, therole of genes vs environment in causing obesity), againthe pharmaceutical companies as well as the public sec-tor are responding to this epidemiologic trend. In manydifferent therapeutic classes of drugs, pharmaceuticalcompanies have been quite innovative, creating sever-al generations of drugs over time, each generation moreeffective (and more expensive) than the previous gen-eration. Meanwhile, the public sector, largely throughits Medicaid programs, has ensured that payment haskept up with innovation. And although individualstates are not required to provide a prescription drugbenefit to low-income households, they all do. In cer-tain cases, such as antipsychotics, Medicaid is the pri-mary payer, because patients with schizophrenia andother psychoses are most often too ill to work.

Antipsychotics, AntidepressantsRising antipsychotic use has been phenomenal in

the United States. In the Medicaid program, the num-ber of antipsychotic prescriptions increased from 7.2million (representing $166 million in Medicaid reim-bursements) in 1991 to 24.1 million ($5.25 billion inpayments) in 2004. More than 96% of the prescriptionsin 2004 were for atypical (or second-generation)antipsychotics such as olanzapine and risperidone, ver-sus first-generation drugs like haloperidol.23 The FDAhas approved the atypical antipsychotics for additionalindications, such as acute mania and maintenance for

Figure 2 Timeline for Innovative Antiretroviral Medications

Post-HAART era

Videx, ddI10/1991

Invirase,SQV12/1995

Norvir3/1996

Retrovir,AZT, ZDV3/1998

Hivid6/1992 Viramune

6/1996

Fuzeon3/2003

Raltegravir10/2007

1987 1st NRTI

1995 1st PI

1996 1st NNRTI

1996-1997HAARTguideline

2003 1st fusion

2007 1st integrase

Red solid arrows indicate new therapeutic classes introduced to the US market.Black solid arrows indicate specific drugs introduced to the US market. Dottedarrows indicate other new antiretroviral agents introduced to the US market.

AZT/ZDV indicates zidovudine; ddI, didanosine; HAART, highly active antiretroviral therapy; NNRTI, nonnucleoside reverse transcriptase inhibitor;NRTI, nucleoside reverse transcriptase inhibitor; PI, protease inhibitor; SQV,saquinavir.



bipolar disorder. Even before approval, the atypicalantipsychotics were being used off-label for these sameindications, and they are currently being prescribed off-label for agitation associated with dementia and pedi-atric psychiatric problems.24-26 The rate of treatment ofmental disorders with psychotropic drugs rose from3.3% to 5.9%, from 1977 to 1996.27,28

Depression is the most prevalent major mentalhealth disorder in the United States. According to theUS National Comorbidity Surveys, the lifetime preva-lence rate of major depressive disorder increased from3% in 1991 to 15% in 2003.29,30 Antidepressants arewidely used, and off-label use is quite common. Thenumber of antidepressant prescriptions for the Medicaidpopulation increased from 6.8 million in 1991 to 35.0million in 2004, a more than 400% increase.31

StatinsUtilization across Medicaid beneficiaries of choles-

terol-lowering drugs (statins) increased from 687,842in 1991 to 16.6 million in 2004.32 More generally, thenumber of US adults who took a statin increased from3% in 1994 to 10% in 2002.33 There are several expla-nations for this. Because high blood cholesterol, heartdisease, and diabetes have been diagnosed more fre-quently in the past decade, the number of patients tak-ing statins also has increased dramatically.32 And notonly are more individuals taking statins, but they aretaking them for longer duration. Physicians havebecome more comfortable prescribing statins over theyears, and more evidence has accumulated for theireffectiveness and safety.33 Moreover, the indications forstatins have expanded due to changing clinical prac -tice guidelines influenced by clinical studies. TheAmerican Heart Association/American College ofCardiology guidelines have been updated to emphasizelower goals for low-density lipoprotein cholesterol inspecific patient populations, leading to more individu-als who qualify for cholesterol reduction in the primaryand secondary prevention of coronary disease.34

Advances in Epidemiologic ResearchWhile the pharmaceutical firms and the govern-

ment work to keep up with the epidemiology of disease,the methods for doing so are being constantly refined.Many large observational data sets are now available,often collected for claims purposes, which can be usedfor pharmacoepidemiologic research as well. And theFDA’s Adverse Event Reporting System keeps track ofadverse clinical outcomes associated with drugs. Itmakes sense to analyze data quickly and efficiently aftera new drug is marketed. It also makes sense to try toforesee any potential premarketing adverse outcomes.In response to recent withdrawals of high-profile drugs(eg, Vioxx, Seldane, Rezulin, Propulsid, Baycol,Bextra), regulatory authorities have moved theiremphasis from the reactive collection of data to moreof a risk-management approach to pre- and postmar-keting surveillance.

Under the Prescription Drug User Fee Act, firstenacted by the Congress in 1992 and revised in 1997and 2002, the FDA has been charged with developingrisk management guidance for the pharmaceuticalindustry. In March 2005, 3 separate guidelines wereissued by the FDA:1. Premarketing Risk Assessment2. Development and Use of Risk Minimization Action

Plans (RiskMAP)3. Good Pharmacovigilance Practices and Pharmaco -

epidemiologic Assessment. Drug safety risk management is defined as “an itera-

tive process designed to optimize the benefit-risk bal-ance for regulated products.”35

The Premarketing Risk Assessment guidance focus-es on the generation, acquisition, analysis, and presen-tation of premarketing safety data with the goal ofimproving the adequacy of the clinical trials used tocharacterize a product’s safety profile.36 The guidanceprovides an array of recommendations for conductingclinical studies, including when to increase the size of adatabase, use of long-term control-group studies, diver-sity of the study population, exploring dose effectsthroughout the clinical program, detecting unantici-pated interactions, and developing comparative data.

The RiskMAP guidance describes how industry canaddress specific risk-related goals and objectives.37 Theguidance defines RiskMAP as “a strategic safety pro-gram designed to meet specific goals and objectives inminimizing known risks of a product while preservingits benefits.”36 RiskMAP targets 1 or more safety-relat-ed health outcomes or goals and uses 1 or more tools toachieve those goals. A variety of RiskMAP tools arecurrently used in risk minimization plans, such as tar-geted education and outreach; reminder systems that

Under the Prescription Drug User Fee Act, the FDA has been charged with developing risk management guidance for the pharmaceutical industry.



The Role of Epidemiology in Drug Development

prompt, remind, double-check, or otherwise guidehealthcare practitioners and/or patients in prescribing,dispensing, receiving, or using a product in ways thatminimize risk; and performance-linked access systemsthat link product access to laboratory testing results orother documentation.36

The Good Pharmacovigilance Practices and Phar -macoepidemiologic Assessment guidance identifiesrecommended reporting and analytical practices tomonitor the safety concerns and risk of medical prod-ucts in general use. According to the FDA, “Phar -macovigilance refers to all observational postapprovalscientific and data-gathering activities related to thedetection, assessment, and understanding of adverseevents with the goals of identifying and preventingthese events to the extent possible.”37

The guidance requires companies to identify anddescribe drug safety signals, to investigate signalsbeyond case review, and to interpret signals in terms ofrisk. The guidance also specifies the pharmacoepidemi-ologic research methods that are commonly used for riskassessment. They are nonrandomized research methodssuch as cohort (prospective or retrospective), case-con-trol, nested case-control, case-crossover, or other mod-els that could be used to assess drug safety risk.

The results of pharmacoepidemiologic studies maybe used to characterize 1 or more safety signals associ-ated with a product, or may examine the natural histo-ry of a disease or drug utilization patterns. In addition,the guidance discusses how important it is to developdisease and drug registries as well as conduct patient orhealth provider surveys for drug safety surveillance.35

With the FDA guidance for postmarketing drug sur-veillance, many pharmacoepidemiologic research pro j -ects have been undertaken in different therapeuticareas. For example, the risk of diabetes mellitus onsetassociated with antipsychotics,38 the risk of cardiovas-cular disease associated with antidepressants,39 andhepatotoxicity associated with the antibiotic telith-romycin40 were studied in the postmarketing phase.Those evaluations should provide valuable clinical infor-mation for practitioners when prescribing medication,and ultimately enhance patient safety and healthcare.

Cost Drivers In 2006, spending on prescription pharmaceuticals

totaled $275 billion, or 2.1% of the gross domesticproduct in the United States.41 The pharmaceuticalsector’s current large size results from double-digitannual increases in drug spending over the past 2decades. Although drug price increases account for

some of the growth, rising utilization has been the driv-ing force.42 Drug companies have capitalized on epi-demiologic trends, including the aging of the popula-tion, emerging diseases, and increased prevalence anddiagnosis of chronic diseases, following their goal of

profit maximization. Meanwhile, the public sector,while hoping to ensure fair access to these innovationsespecially through its Medicare and Medicaid pro-grams, has provided the necessary regulatory frameworkand financial support to keep these engines of innova-tion running with consideration for the public good. ■

KEY POINTS▲ Despite the high failure rate at each stage of drug

development, many pharmaceutical and biotech-nology companies participate in that process.

▲ Drug innovations have improved longevity andquality of life. Between 1993 and 2003, the FDAapproved more than 300 new drugs, biologics, andvaccines for more than 150 conditions.

▲ The US elderly account for a large share of pre-scription drug use. For example, in 2000 more than40 million Americans had arthritis/rheumatic con-ditions; this number is expected to grow to 59.4million by 2020. And more than 5 million haveAlzheimer’s disease, which costs Medicare 3 timesmore than the “average” beneficiary.

▲ This presents a challenge and an opportunity tothe pharmaceutical industry. The pharmaceuticalcompanies and the government work to keep upwith the epidemiology of disease, and the methodsfor doing so are constantly being refined.

▲ The FDA has been charged with developing riskmanagement guidance for the pharmaceuticalindustry.

▲ In 2006, spending on prescription pharmaceuticalstotaled $275 billion, or 2.1% of the gross domesticproduct in the United States. Although rising drugprices account for some of the increase, growingutilization has been the main cost driver.

In 2006, spending on prescriptionpharmaceuticals totaled $275 billion, or 2.1% of the gross domestic product in theUnited States.

References on page S54


References1. Personal communication with Ruben Papoian, PhD, Director of DrugDiscovery and Professor, Department of Genome Science, University ofCincinnati. April 19, 2006.2. Anand G. Lucrative niches: how drugs for rare diseases became life-line for companies. Wall Street J. November 15, 2005:A1.3. Guo JJ, Kelton CML. Competition between brand-name and genericdrugs. In: Fulda TR, Wertheimer AI, eds. Handbook of PharmaceuticalPublic Policy. New York, NY: Haworth Press; 2007:395-416.4. Pharmaceutical Research and Manufacturers of America. A decade ofinnovation. 2007. www.phrma.org/files/Decade_of_Innovation.pdf.Accessed October 18, 2008.5. Lichtenberg FR. The impact of new drug launches on longevity: evi-dence from longitudinal, disease-level data from 52 countries, 1982-2001. Int J Health Care Finance Econ. 2005;5:47-73.6. Porter K, Babkier A, Bhaskaran K, et al. Determinants of survival fol-lowing HIV-1 seroconversion after introduction of HAART. Lancet.2003;362:1267-1274.7. Lichtenberg FR. The expanding pharmaceutical arsenal in the war oncancer. February 2004. National Bureau of Economic Research. WorkingPaper No. 10328.8. IMS Health Inc. National Prescription Audit Plus. 1996-2000.Plymouth Meeting, PA. April 2001. 9. US Census Bureau. Age and sex distribution in 2005. December 2005.www.census.gov/population/www/pop-profile/files/dynamic/AgeSex.pdf.Accessed December 2, 2008.10. Helmick CG, Felson DT, Lawrence RC, et al. Estimates of the preva-lence of arthritis and other rheumatic conditions in the United States.Part I. Arthritis Rheum. 2008;58:15-25.11. Alzheimer’s Association. Alzheimer’s Disease Facts and Figures, 2008.www.alz.org/national/documents/report_alzfactsfigures2008.pdf.Accessed December 2, 2008.12. Centers for Disease Control and Prevention. Prevalence of stroke—United States, 2005. MMWR Morb Mortal Wkly Rep. 2007;56:469-474.13. Gilbertson DT, Collins AJ. Projecting the ESRD population to2020. Abstract presented at the American Society of NephrologyAnnual Meeting, November 2007. Abstract FC046.14. Kaiser Family Foundation. 2008. Prescription Drug Trends.www.kff.org/rxdrugs/upload/3057_07.pdf. Accessed October 18, 2008.15. United Nations AIDS/World Health Organization. AIDS epidemicupdate 2006. December 2006. http://data.unaids.org/pub/EpiReport/2006/2006_EpiUpdate_en.pdf. Accessed November 10, 2008.16. Katzenstein DA, Hammer SM, Hughes MD, et al. The relation ofvirologic and immunologic markers to clinical outcomes after nucleosidetherapy in HIV-infected adults with 200 to 500 CD4 cells per cubic mil-limeter. AIDS Clinical Trials Group Study 175 Virology Study Team. NEngl J Med. 1996;335:1091-1098.17. NIH Guidelines for the Use of Antiretroviral Agents in HIV-1-Infected Adults and Adolescents. October 10, 2006. http://www.aidsinfo.nih.gov/Guidelines/GuidelineDetail.aspx?MenuItem=Guidelines&Search=Off&GuidelineID=7&ClassID=1. Accessed October 18, 2008.18. Fischl MA, Richman DD, Grieco MH, et al. The efficacy of azi-dothymidine (AZT) in the treatment of patients with AIDS and AIDS-related complex. A double-blind, placebo-controlled trial. N Engl J Med.1987;317:185-191.19. FDA. Drugs Used in the Treatment of HIV Infection.http://www.fda.gov/oashi/aids/virals.html. Accessed November 5, 2008.20. Collier AC, Coombs RW, Schoenfeld DA, et al. Treatment ofhuman immunodeficiency virus infection with saquinavir, zidovudine,and zalcitabine. AIDS Clinical Trials Group. N Engl J Med. 1996;334:1011-1017.21. Cameron DW, Heath-Chiozzi M, Danner S, et al. Randomised place-bo-controlled trial of ritonavir in advanced HIV-1 disease. The AdvancedHIV Disease Ritonavir Study Group. Lancet. 1998;351:543-549.22. Jing Y, Klein P, Kelton CML, et al. Utilization and spending trends

for antiretroviral medication in the US Medicaid programs from 1991 to2005. AIDS Res Ther. 2007;4:22. www.aidsrestherapy.com/content/4/1/22.Accessed October 18, 2008.23. Jing YH, Kelton CML, Guo JJ, et al. Drug utilization, price, and mar-ket-share competition among antipsychotics in US Medicaid programs.Drug Benefit Trends. 2007;19:27-41.24. Keck PE Jr, Marcus R, Tourkodimitris S, et al. A placebo-controlled,double-blind study of the efficacy and safety of aripiprazole in patientswith acute bipolar mania. Am J Psychiatry. 2003;160:1651-1658.25. Lyseng-Williamson KA, Perry CM. Aripiprazole: in acute maniaassociated with bipolar I disorder. CNS Drugs. 2004;18:367-376.26. Demland J, Jing Y, Kelton CML, et al. Drug utilization pattern andoff-label use of atypical antipsychotics in patients with bipolar disorder:1998-2002. Am Health Drug Benefit. In press.27. Frank RG, Conti RM, Goldman HH. Mental health policy and psy-chotropic drugs. Milbank Q. 2005;83:271-298.28. Duggan M. Do new prescription drugs pay for themselves? The caseof second-generation antipsychotics. J Health Econ. 2004;24:1-31.29. Kessler RC, Nelson CB, McGonagle KA, et al. Comorbidity of DSM-III-R major depressive disorder in the general population: results from theUS National Comorbidity Survey. Br J Psychiatry. 1996;168:17-30.30. Kessler RC, Berglund P, Demler O, et al. The epidemiology of majordepressive disorder: results from the National Comorbidity SurveyReplication (NCS-R). JAMA. 2003;289:3095-3105.31. Chen Y, Kelton CML, Jing YH, et al. Trend analyses of utilization,price, and spending for antidepressant drugs in the US Medicaid pro-gram. J Res Social Admin Pharm. 2008;4:244-257.32. Jing YH, Kelton CML, Guo JJ, et al. Price and utilization of HMGCo-A reductase inhibitors (statins) in the US Medicaid program. DrugBenefit Trends. 2006;18:580-592.33. Carroll MD, Lacher DA, Sorlie PD, et al. Trends in serum lipids andlipoproteins of adults, 1960-2002. JAMA. 2005;294:1773-1781.34. Ridker PM, Morrow DA, Rose LM, et al. Relative efficacy of ator-vastatin 80 mg and pravastatin 40 mg in achieving the dual goals of low-density lipoprotein cholesterol <70 mg/dL and C-reactive protein <2mg/L: an analysis of the PROVE-IT TIMI-22 trial. J Am Coll Cardiol.2005;45:1644-1648.35. US Food and Drug Administration Center for Drug Evaluation andResearch. Guidance for industry: premarketing risk assessment. March2005. www.fda.gov/cder/guidance/6357fnl.htm. Accessed October 31,2006.36. US Food and Drug Administration Center for Drug Evaluation andResearch. Guidance for industry: development and use of risk minimiza-tion action plans. March 2005. www.fda.gov/cder/guidance/6358fnl.htm.Accessed October 31, 2008.37. US Food and Drug Administration Center for Drug Evaluation andResearch. Guidance for industry: good pharmacovigilance practices andpharmacoepidemiologic assessment. March 2005. www.fda.gov/cder/guidance/6359OCC.htm. Accessed October 31, 2008.38. Guo JJ, Keck PE Jr, Corey-Lisle PK, et al. Risk of diabetes mellitusassociated with atypical antipsychotic use among patients with bipolardisorder: a retrospective, population-based, case-control study. J ClinPsych. 2006;67:1055-1061.39. Chen Y, Guo JJ, Li H, et al. Risk of cerebrovascular events associat-ed with antidepressant use in patients with depression: a population-based, nested case-control study. Ann Pharmacother. 2008;42:177-184.40. Chen Y, Guo JJ, Healy DP, et al. Risk of hepatotoxicity associated withthe use of telithromycin: a signal detection using data mining algorithms(December). Ann Pharmacother. 2008 Nov 25. [Epub ahead of print.]41. Hoffman JM, Shah ND, Vermeulen LC, et al. Projecting future drugexpenditures—2008. Am J Health Syst Pharm. 2008;65:234-253.42. National Institute for Health Care Management Foundation.Prescription drug expenditures in 2001: another year of escalating costs.May 2002. www.nihcm.org/~nihcmor/pdf/spending2001.pdf. Ac cessedDecember 2, 2008.




The pharmaceutical research and devel-opment (R&D) pipeline is a corner-stone of innovation and a reflection of

what the future holds in terms of advances inhealthcare. Pharmaceutical and biotechnolo-gy research companies in the United Statesplay a leading role in the worldwide discov-ery and development of future treatmentsand potential cures for a wide range of dis-eases, including cancer, heart disease, andinfectious diseases. Because a number of industrytrends, economic factors, and regulatory issues shapethe landscape of innovation in today’s pharmaceuticalmarket, it is essential for key stakeholders to under-stand the impact these factors have on current andfuture market trends.

There are currently more than 2700 drugs in devel-opment in the United States, for nearly 4600 differentindications. The industry’s commitment to R&D hascontinually increased over the past few decades. R&Dspending for pharmaceutical companies (members ofthe Pharmaceutical Research and Manufacturers ofAmerica [PhRMA] only) grew from $2 billion in 1980to $8.4 billion in 1990, to $26 billion in 2000, to anestimated $44.5 billion in 2007.1 In 2007, US pharma-ceutical and biotechnology companies combinedinvested $58.8 billion in R&D for new medicines andvaccines, representing a $3-billion increase from thetotal R&D dollars invested in 2006 (analyses byPhRMA and Burrill & Company).1 These figures rep-resent a routine reinvestment of approximately 20% ofthese companies’ annual domestic sales dollars intoR&D activities. Despite the growth in R&D invest-ment in recent years, the US Food & DrugAdministration (FDA) approvals of new molecularentities and biologics have actually decreased. In 2007,the FDA approved only 18 new molecular entities andbiologics compared with 22 in 2006.2

Several factors—including increased entry of gener-ic products, regulatory pressures, tighter formulary con-

trols, rising costs of product development,and focus on comparative effectiveness/outcomes—are dramatically changing thepharmaceutical pipeline and developmentprocess. This article describes several ofthese factors and their impact on the futureof pharmaceutical development.

Challenges Facing New ProductDevelopment

One of the greatest hurdles to drug innovation todayis the cost and time to bring a product to market: it takesan estimated $1.3 billion and 10 to 15 years to bring anew drug from the laboratory to the pharmacy.1 Theindustry’s continued commitment to invest in R&D inrecent years is commendable, in light of the growingcosts and resources required to navigate through thecomplexities of the current risk-averse healthcare envi-ronment. The high cost of product development is theresult of several factors, including, but not limited to: • Increased scrutiny over the safety of new agents • Push toward measuring outcomes and events in clin-

ical trials, along with comparative effectiveness• Shift to the development of biologics.

The requirement for stronger safety data and prefer-ence for measurement of “hard” clinical outcomes over“intermediate” or “surrogate” end points (eg, reductionin heart attacks rather than decrease in systolic bloodpressure) has dramatically increased the length of fol-low-up time and the average sample size of clinical tri-als. Both of these factors contribute significantly todevelopment costs and time. In addition, manufactur-ers are required to invest in postmarketing surveillancefor many of their products to ensure their safety oncethey are on the market. Finally, in an effort to contin-ue to bring innovative products to market, much of theindustry has shifted its focus from traditional, small-molecule products to biologics. Because the latter prod-ucts are typically derived from human-based antibod-ies, enzymes, or hormones,3 their production isgenerally more complex and costly.

To survive in this changing R&D environment,many pharmaceutical and biotech companies are

Impact of Market Trends on DrugPipelines: The Need for Value-Based R&D Matthew Sarnes, PharmD

Dr Sarnes is Vice President, Managed Markets Division,Xcenda, Collegeville, PA.

Sarnes.qxp:Cover 1/12/09 4:55 PM Page S55


breaking away from traditional development businessmodels and practices. For example, GlaxoSmithKlineis setting up small research teams or drug performanceunits (DPUs) that will compete for funding from aglobal resource.4 The allocation of funding to eachDPU will be based on that research team’s ability todocument the potential value of the product line andits future value proposition to the marketplace. Thesesmall research pods foster an entrepreneurial spirit andhelp the company become more flexible and nimble.

In addition to this type of internal developmentshift, many larger pharmaceutical companies are alsomoving more resources to evaluate licensing and acqui-sition opportunities. Given the high attrition rates seenin phase 3 drug development during the past few years,larger companies are more willing to enter into risk-sharing agreements with smaller development compa-nies. These types of arrangements may allow the largerpharmaceutical company to have a stake in more com-pounds with less investment up-front, in exchange forfuture royalties once a product enters the market.

Factors Influencing R&DGenerics and Patent Expirations

Continued pressure from generic drugs is anotherfactor influencing the industry’s ability to investresources in innovation. Since 2003 there has been amarked increase in the number of generics entering themarket. Generics represented 51% of total prescrip-tions dispensed in 2003; by 2008 generics grew to 64%of total prescriptions dispensed in the United States.5

Factors driving the growth of generic prescriptionsinclude the increased availability of generics in themarketplace, as well as “generics first” and pay-for-per-formance (P4P) policies adopted by managed careorganizations (MCOs). Patent challenges and expira-tions to “blockbuster” medications have also increasedthe rate of generic entry, and this trend is expected tocontinue: between 2007 and 2011, patents for productsworth $64 billion in branded US drug sales are due toexpire.6 The increased availability of generics is cer-

tainly a positive development for the healthcare systemas a whole, because it may help to lower the prescrip-tion costs of managing diseases. But there are also moresubtle implications to these patent challenges andexpirations that drive the generic market growth. Themost apparent is that once a branded drug goes offpatent, the revenue for that branded drug can declinesharply—meaning fewer dollars to reinvest in R&D. Inaddition, manufacturers have had to steer additionalresources to legal departments to protect existingbranded products from premature patent challenges,thereby decreasing potential R&D investment. Finally,the shift to the development of more expensive biolog-ics has partially been driven by the difficulty for gener-ic manufacturers to challenge patents for these prod-ucts or to reproduce them. This protection, however,will likely be short-lived, given the focus on genericbiologics or biosimilar legislation.

Regulatory Pressure on the Branded DrugMarketplace

As was briefly mentioned, the regulatory processadds another layer to the pressures facing innovation inthe pharmaceutical industry. The FDA began regulat-ing traditional pharmaceuticals in 1938 with the Food,Drug & Cosmetic Act. Six decades later, in 1984, theDrug Price Competition and Patent Term RestorationAct (or Hatch-Waxman Act) expedited the availabili-ty of less costly generic drugs by permitting the FDA toapprove applications to market generic versions ofbrand-name drugs without repeating the research con-ducted to prove them safe and effective.7 It provided anincentive for generic manufacturers to challenge theoriginator’s patent and lowered the bar for datarequired to bring generic products to market. After the1984 legislation, more generic drugs began to enter themarketplace, resulting in lower drug-acquisition costs.

Although this incentive is in place for traditional,small-molecule products, different legislation governsthe production of large-molecule or biologic products.More specifically, in 1997 the Public Health ServicesAct was enacted to emphasize the importance of strictmanufacturing controls required to produce biologics,because of their complexity. This regulatory actiondoes not contain a process for the development ofbiosimilars. It will be important to follow whetherbiosimilar legislation will be enacted under PresidentObama’s administration. Given the growing emphasison biologics and specialty pharmaceuticals, and the ris-ing costs of these agents, the regulatory process maychange in the coming months or years.

These types of arrangements may allow thelarger pharmaceutical company to have a stakein more compounds with less investment up-front, in exchange for future royalties once aproduct enters the market.



Impact of Market Trends on R&D

Specialty Pharmaceuticals and Biologics GrowthGiven the more protected status of biologic prod-

ucts, the business side of pharmaceutical developmentis also moving toward specialty products. In 2005, therewere more than 600 biologic products in the USpipeline (Figure 1), and the number is expected tocontinue to rise. The top 3 therapeutic areas forpipeline products are8,9: • Oncology—210 agents• Infectious diseases—50 agents• Autoimmune diseases—44 agents.

Biologic product sales are expected to exceed $60billion by 2010 and will likely account for 25% of alldrug sales and 50% of new drug approvals.10 While thegrowth in biologics represents innovation, there will bea substantial financial impact to the healthcare system.For example, the average cost of a biologic agent is$55/day compared with $2/day for a traditional small-molecule drug.8,9

Cost-Management TrendsAn important factor in the current healthcare sys-

tem is the interaction between pharmaceutical devel-opment and managed care: pharmaceutical innovationcannot be sustained without the sanction of the payer,and the objective of managed care is to provide thehighest quality and most cost-effective care to theirmembers. Thus, changes by manufacturers influenceMCOs and, in turn, shifts in policies by MCOs affectmanufacturers. For example, in light of the anticipatedcost pressures from a rise in specialty products, MCOsare evolving the way in which they manage utilization.In a recent survey of 50 medical and pharmacy direc-tors from commercial managed care plans in theUnited States,11 participants were asked about currentand future pharmaceutical management trends inoncology, a historically open or lightly controlled ther-apeutic area. Results from the survey indicate that uti-lization management controls for oncology productswere used more aggressively in 2008 and are anticipat-ed to increase further in the coming years. More specif-ically, prior authorizations, adherence to clinical guide-lines, variable reimbursements, and step therapy are allstrategies that were used to help manage costs in 2008.The percentage of participants who will use at least oneof the latter management strategies is expected to jump20% from 2008 to 2009 for each method.11

The oncology market exemplifies the trends inR&D and the need to shift to a value-based strategy.MCOs are increasingly focused on managing costs inthis therapeutic area as a result of several factors. First,

a substantial cost is associated with existing and emerg-ing oncology biologic therapies. Second, in contrast toprevious years, in which 1 or 2 agents were available tomanage a specific cancer, now 3 or 4 treatment optionsfor patients with various cancer types are available.Third, the availability of specific clinical guidelines inoncology is becoming more common. Finally, the abil-ity of MCOs to track and manage utilization and out-comes associated with the individual therapies is pro-gressing. For example, when asked how injectable drugsare currently (in 2008) covered in managed care plans,95% of respondents (n = 47) indicated that these prod-ucts were mostly covered under the medical benefit,and 4% of the respondents said these products werecovered under both the medical and the pharmacy ben-efit. However, when asked the same question aboutcoverage of injectable drugs for the next 2 years, theparticipants responded that 69% of these productswould be covered under the medical benefit, 20%would be covered under the medical and the pharmacybenefit, and 11% would be covered under the pharma-cy benefit. These data indicate that there is a definedshift to managing injectable products under the phar-macy benefit as quickly as possible. This shift to cover-age under the pharmacy provides access to richer data,better utilization monitoring, and prior authorizationsto help control costs.11

Shift to Value-Based Healthcare Management In addition to the more common management

strategies mentioned earlier, there are global trends

Sources: Grabowski H, Cockburn I, Long G. The market for follow-on biologics:how will it evolve? Health Aff (Millwood). 2006;25:1291-1301; Miller S, Houts J.Potential savings of biogenerics in the United States. Express Scripts. February2007:1-8.

Therapeutic AreasCancer 210Infectious disease 50Autoimmune 44AIDS/HIV 22Cardiovascular 22Neurologic 17Diabetes 15Other 85

369

197

600

92

240

29100

10

600500

400

300

200

100

01990 1995 2000 2005

Biotech drugs in development

Biotech drugs on the market

Figure 1 Focus on Specialty Product Development

• Expected sales of biopharmaceuticals will exceed $60 billion by 2010• Should account for 25% of all drug sales and 50% of new drug approvals*

• Average cost of a biopharmaceutical ($55/day) vs traditional ($2/day)

Biopharmaceutical Pipeline Continues to Grow

*Schofield I. Getting biosimilars to market. RAJ Pharma. 2007;6:369-371.



toward true value-based benefit designs. One suchexample is in the United Kingdom, where the NationalInstitute for Health and Clinical Excellence (NICE)and Janssen-Cilag had discussions about Velcade(bortezomib).11 Previously, NICE had issued a negativerecommendation for the use of bortezomib for thetreatment of patients with multiple myeloma given itsexpected cost-benefit profile. However, Janssen-Cilagcontended that there was value in their product andproposed entering into a risk-sharing agreement withNICE. As part of this agreement, patients receivingVelcade would be monitored for the initial 4 months.For patients with a partial or complete response tobortezomib within that timeframe, NICE recommendsreimbursement for the product. However, if patientshave less than a partial response to bortezomib withinthat timeframe, Janssen-Cilag would rebate the fullcost of the product.12

When surveying US-based managed care thoughtleaders regarding their thoughts on this type of risk-sharing agreement, most participants claimed theywere not ready to lead the way with this type of agree-ment.13 However, about 38% of them said they wouldconsider such an agreement if the government or pub-lic payers lead the way (potentially because of legalconcerns). Another 38% of participants responded thatthis type of agreement would not work unless it becamea nationalized, government-run health insurancemodel; an estimated 19% said they would indeed con-sider this type of agreement with private payers leadingthe way; and only 2% said they would consider thistype of agreement and are already using a similar modelfor other technologies.13 Interestingly, most partici-pants stated that there was a constant demand forvalue-based healthcare and value-based data; however,few expressed a willingness to make decisions based onthe available data at the time.13 This difference indesire for value and willingness to act may exemplify adisparity in the understanding of value and the type ofdata often used.

Comparative EffectivenessAnother factor that is significantly influencing both

product development and postlaunch surveillance activ-ities is the push for comparative effectiveness data. Somemanufacturers routinely select a current market leader asa comparator for their clinical studies, representing anew trend in randomized controlled trial design. Forexample, Amgen has set up head-to-head osteoporosisstudies with a current osteoporosis market leader. Pfizerhas also recognized that comparative effectiveness has

become an important factor in getting a product to themarket and in being successful on the market.

To assess the impact of comparative effectivenessdata on pharmacy management practices, approximate-ly 50 medical and pharmacy directors were asked whateffect a public or a private institution that was createdto support the collection and sharing of comparativeeffectiveness data and studies would have on privatepayers.13 Almost 50% of responders said that the realimpact for private payers would occur when Medicarestarted making decisions based on that data. At thattime, MCOs would follow suit. The second most fre-quent response (38% of responders) was that theimpact for private payers would happen when costs areintegrated into the comparative effectiveness data.13

Further substantiating this need for inclusion of costinto comparative effectiveness data, almost across theboard, the participants said that they neither embracednor understood the concept of quality of life as a tangi-ble expression of cost-effectiveness. Instead, partici-pants indicated that they were more interested in tan-gible cost outcomes, such as cost per year of life gainedor the cost per cure.13

Impact of Trend on R&DWhere does this all lead to? These trends telegraph

that when it comes to bringing a product to market, thebar is being raised across the spectrum. Hints of theimpact of these trends on industry are evident in thepages of The Pink Sheet, the Wall Street Journal, andother news sources. More and more, chief executiveofficers (CEOs) are recognizing the need for value-based decision-making and value-based R&D. Forexample, GlaxoSmithKline CEO Andrew Witty hasindicated that a central theme for the company wouldbe seeking feedback from payers early in the develop-ment process (ie, phase 2 clinical studies) to determinewhether a product’s potential value proposition war-rants continued product development.4

Market Value PlanningThe shift to value-based drug development requires

a paradigm shift. Although critical to the success of anew pharmaceutical product, drug developers can nolonger rely solely on traditional efficacy and safety datato feel confident that they have a “blockbuster” drug.Given the growing influence of payers and the demandfor cost-effective therapies, health outcomes scientists,reimbursement specialists, and managed marketsexperts are playing a larger role in the developmentprocess. Therefore, experts from these various disci-



Impact of Market Trends on R&D

plines must work hand in hand along with clinical andmarketing teams to develop a cohesive market strategyfor an emerging therapy. Figure 2 outlines a marketvalue planning approach to allow the various function-al experts to collaborate in an efficient manner.

The first step is to conduct market assessment usingavailable data from each of the buckets that may influ-ence future acceptance/reimbursement of the product.Activities in this step may include: • Conducting an analysis to determine which

groups/segments (eg, MCOs, Medicare, Medicaid,hospitals, employers, patients) will likely be payingfor the product

• Evaluating existing clinical and economic data forpotential competitor products. How well supported istheir value proposition? What clinical and economicend points are included in their clinical trials and/orhealth economics studies?

• Completing a quality improvement scan to identifyperformance measures such as HEDIS (HealthcareEffectiveness Data and Information Set) measures,JCAHO (Joint Commission on the Accreditation ofHealthcare Organizations) standards, or CMS(Centers for Medicare & Medicaid Services) mea -sures that may be important to payers for the product.Also, are there P4P measures that may be importantto physicians? These measures may influence clinicaltrial or health economics study end point selection

• Conducting a policy assessment may also provideinformation that may affect existing and emergingproducts. The most notable example in recent yearswas the implementation of Medicare Part D. Giventhe outcome of the recent election and the focus onhealthcare reform, routinely conducting a policyassessment in the upcoming months to years willbe crucial

• Completing a coding analysis will also help deter-mine whether the current billing system is designedto allow appropriate reimbursement for the product.Will the product be administered in the inpatient oroutpatient setting? Will submission for a J-code or aC-code be required? Will the drug be covered undera diagnosis-related grouping payment? Addressingthese coding issues prior to launch is important toensure that practical reimbursement barriers forphysicians and patients will not exist once a productis on the market.Once these assessments are completed by the vari-

ous functional groups, the collection of informationcan be evaluated to determine what gaps or unan-swered questions exist. To address these questions, pri-

Payer mixanalysis

Clinical/economicevidence

Codinganalysis

Policyresearch QI scanMarket

data

Synthesis and gap analysis

MVP Strategic and tactical plan

Commercial MedicaidMedicare

Message testing/additionalprimary research

Tools and tactics

Evidence generation

Mar

ket r

esea

rch

Primary research

Secondaryresearch

Bran

d pl

anni

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Figure 2 Planning for a Long-Term Value Platform

MVP indicates market value plan; QI, quality improvements.

Managed markets, Health economics, Outcomes research

Clinical medical affairs

Reimbursement and pricing

• What metrics/end points are most importantto those payers?

• Is there a defined clinical and economic needfor my product?

• What is the value proposition for my prod-uct (not just price)? At launch? Postlaunch?

• How can I demonstrate the value of myproduct?

• Are the end points being captured meaning-ful to payers?

• Can the end points we are capturing belinked to hard outcomes?

• Is utilization data being captured?• Are the primary or secondary end points

able to be measured in the real world?• Does the wording in the label create poten-

tial reimbursement barriers?

• Is the reimbursement landscape set up toallow for acceptable reimbursement of myproduct?

• Have the barriers been removed to allowphysicians to access my product?

• Have the barriers been removed to allowpatients access to my product?

• Do I have an effective policy strategy toallow for uptake/access?

Figure 3 Market Value Plan: Key Questions


mary market research can be conducted with the rele-vant stakeholders that were identified during the payermix analysis. This additional and more targeted infor-mation can then be factored into the overall marketvalue strategy. Some key questions for market valueplanning are listed in Figure 3.

The most important take-away message from aprocess such as this is that the success of a product isdependent upon many factors, not just clinical data.Therefore, assessing all the variables throughout thedevelopment process and sharing this informationacross functional departments (eg, medical affairs, mar-keting, health outcomes, reimbursement) is imperative,because information from each group will affect deci-sions that other groups are making for the product.Lack of communication between departments willresult in inefficiencies and additional or unwarranteddevelopment costs, which the industry can ill affordgiven today’s environment.

Delivering on the Promise A final important take-away message for today’s

changing healthcare environment is the need to deliv-er on the brand promise or value proposition that isbeing created during the drug development/planningprocess. Effective market value planning allows themanufacturer to not only evaluate which products topursue based on their potential value proposition whenentering the marketplace, but also to set the expecta-tion of payers and deliver or document that valueproposition once on the market. With the growingfocus on tracking outcomes and the progress in datacapture systems (ie, electronic medical records, claimsdatabases), the ability of the various stakeholders toevaluate the true value of new medical technologies willcontinue to increase. Therefore, setting a defined andrealistic value proposition for the product at launch thatcan be proved or reinforced over time will be a key char-acteristic of successful emerging therapies. ■

KEY POINTS▲ Multiple factors influence the new product pipeline,

including increased regulatory pressure, increasedgeneric availability, shift toward specialty products,greater utilization management and scrutiny, andthe need for comparative effectiveness.

▲ Patent litigation and a growing generic market-place provide both an advantage for our cost-con-scious healthcare system and a disadvantage in theresource drain away from R&D.

▲ Increasing numbers of biologics and specialty phar-maceuticals represent a new wave of innovationand potential cure for disease, yet also have sub-stantial financial implications for payers.

▲ These factors drive the need for value-basedapproach to both product development and utiliza-tion management from manufacturers and payers.

▲ Planning for a long-term value platform requirescommunication within the pharmaceutical orbiotechnology company, as well as with govern-ment and outcomes researchers.

▲ Today a company not only needs to demonstratethe value of its product before the launch, it alsohas to deliver on the promise it made to the systemand to payers, after launch.

References1. America’s Pharmaceutical Research Companies. New drug approvalsin 2007: pharmaceutical research companies receive approval for 26 newtreatments in 2007. 2008. www.phrma.org/media/NDA2007.pdf. AccessedNovember 16, 2008. 2. Hughes B. 2007 FDA drug approvals: a year of flux. Nature ReviewsDrug Discovery. 2008;7:107-109. Doi:10.1038/nrd2514.3. US National Library of Medicine and the National Institutes ofHealth. MEDLINE Plus. One-quarter of biologic drugs have had safetyissues. www.nlm.nih.gov/medlineplus/print/news/fullstory_70694.html.Accessed November 17, 2008. 4. Mauney E. Pipeline dreams: GSK’s Witty outlines plans to lowerphase II attrition. The Pink Sheet. 2008;70:10.5. IMS Health. IMS Health reports annual global generics prescriptionsales growth of 3.6 percent, to $78 billion. December 10, 2008.www.imshealth.com/portal/site/imshealth/menuitem.a46c6d4df3db4b3d88f611019418c22a/?vgnextoid=2943d52288d1e110VgnVCM100000ed152ca2RCRD&vgnextchannel=41a67900b55a5110VgnVCM10000071812ca2RCRD&vgnextfmt=default. Accessed January 1, 2009. 6. Dillon JM. Generics: coming wave is just what the fiscal doctor ordered.ING Investment Weekly. February 25, 2008. http://weekly.inginvestment.com/e_article001025206.cfm?x=b11.0.w. Accessed November 17, 2008. 7. US Food and Drug Administration. Milestone in US food and druglaw history. May 3, 1999, updated May 2005. www.fda.gov/opacom/backgrounders/miles.html. Accessed November 16, 2008. 8. Grabowski H, Cockburn I, Long G. The market for follow-on biolog-ics: how will it evolve? Health Aff (Millwood). 2006;25:1291-1301. 9. Miller S, Houts J. Potential savings of biogenerics in the US. ExpressScripts. February 2007:1-8. www.express-scripts.com/industryresearch/outcomes/onlinepublications/study/potentialSavingsBiogenericsUS.pdf.Accessed December 2, 2008.10. Schofield I. Getting biosimilars to market. RAJ Pharma. 2007;6:369-371.11. Xcenda. Trends in injectable versus oral management practices.Managed Care Network meeting. March 2008; Orlando, FL. (The sur-vey was conducted through Xcenda’s Managed Care Network, an organ-ization comprised of more than 100 medical and pharmacy directorsfrom commercial managed care plans and pharmacy benefit managersfrom across the United States.) 12. National Institutes for Health and Clinical Excellence. NICE guid-ance on bortezomib (Velcade) is a win-win solution for multiple myelo-ma patients and the NHS. October 24, 2007. www.nice.org.uk/media/EB7/14/2007056BortezomibformultiplemyelomaAPPv2.pdf.Accessed January 1, 2009.13. Xcenda. PayerPulse Check. Managed Care Network meeting;September 2008; Salt Lake City, UT.




Research and development (R&D)activities exist to provide innovativepharmaceutical products that answer

customer needs, and in healthcare thisrequires an acknowledgment of the perspec-tive of multiple stakeholders. An efficienthealthcare system must therefore facilitate anR&D process that is aware of the real “ques-tions” (customer interests and incentives) inpursuit of products relevant to those interests,and in the process generate a body of evidence to veri-fy performance and safety. At what point is the evi-dence provided too slim, at what point do these con-cepts provide the most relevance, and at what pointdoes it become cost-prohibitive? The following casescenario is intended to evoke thoughtful dialogue onthe challenge of integrating all stakeholder interests inthe discovery and development of value-based productsthat patients need and can afford.

The potential for a misalignment of stakeholderinterests at the R&D level is the theme of the follow-ing hypothetical case study presented during the sum-mit. The case involves a new (hypothetical) pharma-ceutical company and an exciting new (hypothetical)product in the earliest stages of the clinical develop-ment process. It outlines parts of a typical process ofdeveloping and getting a new pharmaceutical agent tothe market and obtaining adequate financing frominvestors for the scientific and clinical researchrequired to get the agent approved as expeditiously aspossible by regulatory authorities, such as the US Foodand Drug Administration (FDA). The initial presenta-tion is purposely slanted toward a model that has aplausible medical and commercial rationale, but iscrafted only to serve the manufacturer’s immediateinterests. Its intent is to prompt commentary by other

stakeholder sectors on how the drug dis-covery and development process wouldhave to be modified in order to addressquestions that they might regard as particu-larly relevant.

This case study represents a typical pres-entation to a group of potential investorswho might be willing to back the develop-ment process financially, if they could be“sold” on the potential viability of the

product, with crisp and predictable development time-lines and attractive commercial focus. As is the case inthe modern R&D environment, these investors areexperienced with the drug development process, busi-ness-savvy, and can develop meaningful insights onboth the product and the proposed program of clinicalresearch. It is also assumed that they appreciate themedical importance of the unique compound underconsideration with better than average awareness oftraditional risks in clinical development, but neverthe-less are attracted to both the uniqueness of the inter-vention and its potential commercial value.

After the case presentation, a group discussion ofthe summit’s participants (which was led by Dr ThomasMcCarter) ponders the strengths and weaknesses of thetherapeutic intervention, its proposed method ofdevelopment and marketing, and implications for otherstakeholders in the process.

CASE PRESENTATIONThe Company

Nexthera Pharmaceuticals, Inc, is the company cur-rently seeking investment financing for the develop-ment of its investigational drug NV 1008 (trade name,Insu-Nectin). This drug is a new and innovative small-molecule designed to be used in the treatment of type2 diabetes mellitus (DM). Nexthera is a prototypicalsmall company, with some of the best basic researchersfrom academia providing the intellectual capitalaround the drug discovery process. In addition,Nexthera’s staff includes a world-class developmentteam that has been seasoned through clinical develop-

Case Study: Insu-Nectin (NV 1008) forType 2 DiabetesMichael F. Murphy, MD, PhD

Dr Murphy is Chief Medical and Scientific Officer forWorldwide Clinical Trials, and is a faculty member, Centerfor Experimental Pharmacology and Therapeutics, Harvard-MIT Division of Health Sciences and Technology,Cambridge, MA.

Murphy_x.qxp:Cover 1/12/09 4:49 PM Page S61


ment and commercialization of many products. Thecompany has adopted the motto of “scientifically driv-en, commercially focused,” which indicates its commit-ment to high science, yet reminds all parties that prof-it “makes the world go round,” or at least fuels theengine of the drug discovery and development process.

Corporate Background, PhilosophyPrivate equity was initially obtained in 1999, indi-

cating a commitment by the investment community tothe therapeutic concept. The scientific founders areinternationally recognized individuals who have estab-lished pedigrees of discovery for innovative therapeu-tics in DM. Each member of the management team hasextensive experience in the pharmaceutical business,including major pharmaceutical companies. Paren -thetically, it should be noted that a partnership with amajor pharmaceutical company for development pur-poses also has been considered.

All discovery is done in-house, including all process-es up to and including the filing of an investigationalnew drug application. To keep costs to a minimum,there is a virtual team for subsequent drug developmentand commercialization activities. The company’s focushas been on “transforming” small-molecular therapeu-tics for type 2 diabetes, looking not just for an incre-mental change but rather for a change in the wayhealthcare could be delivered in diabetes. The manage-ment plans to bundle innovative diagnostics with ther-apy, that is including the drug and a diagnostic testbased on genetic biomarkers that can enhance prospectsfor successful therapy, maximizing benefit and minimiz-ing potential risk. The company intends an aggressive,focused clinical development program, with the goal ofbringing the first drug of this class quickly to the marketto ensure maximum commercial impact.

Diabetes Mellitus Refresher The 2 basic types of diabetes are type 1 and type 2

DM. Diabetes affects 7% (20.8 million) of the US pop-ulation, 90% of whom have type 2 DM (previouslycalled adult-onset diabetes), which typically affects

individuals after age 40 years. However, the concept isapplicable to children and adolescents, with DM hav-ing been diagnosed in children as young as 2 years infamilies with a history of diabetes.

Type 2 DM is characterized by peripheral insulinresistance, with an insulin-secretory defect that variesin severity across patients. For type 2 DM to develop,both defects must be present. About 90% of patientswith type 2 DM are obese. Some patients on an activeweight reduction program may not require treatmentwith oral antidiabetes medication or with insulin.

Short- and long-term complications of DM are wellrecognized, and include hypoglycemia and hyper-glycemia, an increased risk of infections, microvascularcomplications (eg, retinopathy, nephropathy), neuro-pathic complications (eg, painful diabetic peripheralneuropathy), and macrovascular disease (eg, coronaryartery disease, stroke).

The many classes of drugs currently being used totreat type 2 DM include sulfonylurea, metformin,pioglitazone, sitagliptin, acarbose, and others. A vari-ety of different surveys and metrics suggest there isroom for a more effective agent, particularly one thathas a disease modification profile.

Biologic Properties of Insu-NectinThis new agent targets adiponectin and preproin-

sulin biology. This is an optimal pathway to modulatethe underlying defects associated with type 2 DM. Theoriginal molecule was optimized using gene-expressionprofiling in patients with type 2 diabetes, and thosedata have been informative regarding treatment opti-mization. The result was an agent that enhancesinsulin sensitivity and normalizes insulin secretoryresponse, and that can be targeted toward patients mostlikely responsive to the product. In other words, it hita key issue in the treatment of type 2 DM, and it did itwith a small molecule.

A genotype may be associated with favorableresponse to this drug. This would make possible a diag-nostic test as well as a therapy. Safety, pharmacology,toxicology, and the biodisposition profile across speciesprior to entry in man indicate that this drug is permis-sive, without prospects for significant drug–drug phar-macokinetic or pharmacodynamic interactions, oruntoward safety issues. It took 2 years and $2.5 millionfor the preclinical effort to file an investigational newdrug application, an amount of money that is dispro-portionately high in relation to available funds.

Phase 1 drug development activity for Insu-Nectinrecently ended. Although limited in scope, all ques-tions relevant to the next stage of development (eg,

The result was an agent that enhances insulinsensitivity and normalizes insulin secretoryresponse, and that can be targeted towardpatients most likely responsive to the product.


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phase 2) have been answered satisfactorily. Con -sidering that discovery and development efforts havebeen ongoing for approximately 6 years, Nextheramanagement has spent $36 million (of somebody’smoney, so the first part of the pitch must have beensuccessful) and has calculated that barely enoughresources remain for an efficient, highly targeted pro-gram of clinical development leading to registration.The company would need significantly more resourcesto expand the program beyond that proposed.

Proposed Development of Insu-Nectin The drug is a large, water-soluble molecule that is

easily mixed in an aqueous solution before administra-tion. However, it has limited stability at room temper-ature and requires intravenous (IV) administration atleast at this stage of its development, meaning it willhave to be administered in the physician’s office, a clin-ic, or a hospital until an oral or a transdermal applica-tion can be evaluated. Although the development pro-gram leading to an oral or a transdermal formulationhas been clearly articulated, senior management con-siders that effort relatively distracting, given theunique, transforming, biological properties of the prod-uct and the severely restricted resources available.

Review of Phase 1 Clinical Trial. Phase 1 has beensuccessfully completed, with results still very promis-ing. There is no evidence of any important systemicintolerance, except for rare hypersensitivity reactions.The estimated incidence is uncertain because of thelimited sample size and broad confidence intervals. Theseverity of the hypersensitivity reaction can be attenu-ated by pretreatment just before compound administra-tion with antihistamines and/or corticosteroids. Thedrug has not been associated with local toxicity (at thepoint of infusion), and no hemodynamic or cardiovas-cular effects have been noted in the absence of a hyper-sensitivity reaction. A total of 60 subjects wereinvolved in the phase 1 study.

Pharmacokinetic profiling, as well as pharmacoki-netic/pharmacodynamic modeling have been complet-ed and are considered informative. One of the mostimportant findings of the phase 1 study was that thepharmacodynamic effects persist for at least 1 monthafter the compound has been injected parenterally. Thepharmacodynamic effect lasted far longer than thepharmacokinetic profile of the compound would havesuggested, raising prospects for once-a-month adminis-tration. A long duration of action is assumed by seniormanagement to mitigate the encumbrance associated

with parenteral therapy, and again reinforces theirdecision to avoid the development of alternative for-mulations that might enhance convenience. Becausethe incidence and severity of hypersensitivity reactionsalso is unknown, in-clinic administration will enhancesafety monitoring. Given available preclinical data, itis anticipated that there will be no pharmacokinetic, orpharmacodynamic interaction with the coadministra-tion of other agents, thus there will be no restrictionsmandated on concomitant therapy in the proposedprogram.

Phase 2. The phase 2 study will consider adjunctivetherapy only. There will be genotypic and phenotypicstratification to confirm the predictive utility of the pro-posed diagnostic test intended to enhance patient safe-ty and efficacy. The primary end point will be glycosy-lated hemoglobin (HbA1C), a well-established surrogatein DM reflecting the adequacy of control. Proposedstudies can also include other secondary measures,although the sample size will not be dictated by thoseconsiderations. Patients will be monitored duringapproximately 3 months of therapy and common, easilydiscernible side effects will be determined through thecustomary ascertainment procedures and a collage ofcardiovascular and laboratory assessments that are con-sidered routine within this therapeutic area.

The study will include about 200 subjects, bringingthe total number of people to be tested to about 260(phases 1 + 2). Although management has acknowl-edged the appearance of a minimalist program, theyconsider phase 2 plans acceptable given the goal need-ed to move forward with this novel therapeutic agent.

Phase 3. As in phase 2, the phase 3 study will also con-sider only adjunctive therapy. No comparative agentswill be used either for assay sensitivity or to estimatepotential attributes that would differentiate Insu-Nectin from established therapy. Genotypic stratifica-tion will be used in the study to further enhanceprospects for a genetic test that could be universally

Considering that discovery and developmentefforts have been ongoing for approximately 6 years, Nexthera management has spent $36million (of somebody’s money, so the first partof the pitch must have been successful).



applied to all patients receiving treatment. More shouldbe known about the various genotypes versus responseat the conclusion of this program, and it may be possi-ble to clearly define subgroups where the overall bene-fit of product administration is optimized. The primaryend point again will be HbA1C, although other ancillaryoutcomes will clearly be included to provide a 3-dimen-sional perspective on product attributes. However, as inphase 2 studies, phase 3 will not be powered on second-ary outcomes.

These trials will be 12 months long, and the inclu-sion of an extension phase to continue safety and pos-sibly efficacy observations beyond that required forapproval is doubtful. About 1500 people will be includ-ed in this program, resulting in a total of nearly 1800 inall trials.

Final Product Target Profile The clinical development and commercialization

program for Insu-Nectin is based on a clear productprofile. Insu-Nectin provides symptomatic and poten-tially disease-modifying therapy with acceptable toler-ance/toxicity for the majority of patients. It is adminis-tered intravenously once monthly in a clinic settingbased on its duration of activity and the possibility thatidiosyncratic hypersensitivity reactions may occur in asmall number of subjects. Genetically based diagnostictesting can prospectively segment the population intorelatively good versus relatively poor responders. Thereceiver-operating characteristics of this new diagnos-tic test will be incorporated into the treatment algo-rithm. Other compounds are in development basedupon a combination of genotypic and phenotypicmarkers as well.

As written, the management of Nexthera believesthat the proposed clinical development can meet regu-latory guidance with relatively minor modifications.Notable facts and future plans are: • There are no plans for a prospective trial to evaluate

longer-term outcomes or for comparative trials usingcurrent or anticipated agents for type 2 diabetes. Ifthe sample size and trial duration are considered ade-quate from a regulatory perspective, no other point of

view will carry cachet.• There is high patient and physician acceptance of

the concept of this therapy, as well as its route andfrequency of administration, based on quantitativeand qualitative market research that has been com-pleted. Those assessments, coupled to the extremelylarge unmet need mandates of family physicians, gen-eral practitioners, and internists, will be targeted dur-ing the commercialization effort.

• Aggressive pricing will be pursued, given the unique-ness of the compound’s pharmacology and the rela-tively infrequent application of treatment.

GROUP DISCUSSIONYou now know everything you are going to know

about this product. It is now time to say “go” or “no-go”to this product with the development program asdesigned. Use the information presented to make your decision.

1. What would make you say yes, go with this prod-uct? What are the positive points about it?

Responses:• Once-a-month administration would be a plus for

many patients. Patients do not like taking pills 1 ormore times every day or, more important, requiring 1to 4 finger sticks and/or needle sticks daily.

• This is a new molecular entity that promises to comeas close to a cure as we can with diabetes.

• Primary care physicians will probably love this prod-uct. They already manage most patients with dia-betes, and this would give them another proceduralcharge per visit.

2. What would make you say no to this product? Whymight it end up on the floor at a major pharmaceuti-cal company or if approved, remain underutilized?

Responses:• Too much work for primary care physicians; they may

want a new source of revenue, but would they wantto administer this in their offices? Many may not beset up to give IV drugs and might require new set-upfacilities and new staff.

• Who is going to pay for this drug? What about reim-bursement?

• What about Medicare patients—will this be a Part Dor Part B drug?

• Payers might want to get the drug through a special-ty drug plan.

As written, the management of Nextherabelieves that the proposed clinicaldevelopment can meet regulatory guidancewith relatively minor modifications.


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• What about the possibility of adverse reactions?Would you need a crash cart in the office, just in caseof a problem?

• Once-monthly administration may be perceived as anegative by some.

• If it does not achieve anticipated outcomes or thereis an adverse reaction, what then?

• The FDA may not accept surrogate markers. If not, itwill never make it to market.

• Even if it makes it through the FDA with a surrogatemarker, are health plans (eg, Independent Blue CrossBlue Shield, UnitedHealthcare) going to make theinvestment; and who would pay for it?

• If you don’t do comparative effectiveness analysis,you have to be sure that the diagnostic test can iden-tify the right population.

• Who pays for the diagnostics? Is it an additionalcharge?

• The length of time required for a patient to wait atthe doctor’s office could increase with the need forIV administration.

• What about the cost for genetic testing? Althoughgenetic testing will help with population identifica-tion, many people are against this type of testing.

• The diabetes therapy marketplace is crowded.

3. Do you want to take the risk/bet to take this drugto the market?

Responses:• With Medicare Part B, patients are going to pay 20%

for the drug, 20% for the office visit, and 20% for thediagnostic every month, whereas now there is nocharge. This may be an issue.

• Profit margins are not that good; doctors are notmaking the profit margins needed, unless their officeis a factory—the only one around for miles who han-dles this product.

• Hospitals are probably not going to be interested in thisproduct, because this is an office-based procedure.Hospitals have too much overhead to handle this prod-uct. But it could be a bridge market for when patientsare discharged from the hospital.

WRAP-UPThe tone, if not exact detail, of this case study may

be representative in many pharmaceutical companies,given the imperatives of brisk, unencumbered clinicaldevelopment and rapid commercialization. Moreover,therapeutic novelty, and not necessarily value, hasbeen the key determinant of product acceptability his-

torically. As commented on by Kip Piper (see Page S36),in the past the private sector was the driver for newproduct introductions with a supply-side business phi-losophy that incorporated opaque pricing strategies,market-driven business practices, and sales/marketingand advertising initiatives at its core. In stereotypicalsmall pharmaceutical companies, where scientificfounders provided intellectual capital, the novelty ofthe product and the supporting science drove the scopeand timing of clinical development, rather than theperspective of multiple stakeholders that seem distal tothe immediate clinical and commercialization issues.Today, however, with the public sector as a driver, witha demand-side perspective dominant for product acqui-sition, and with the need for transparent pricing andrule-driven business practices, clinical developmentprograms need to incorporate patients and outcomesthat are relevant to different stakeholders.

Future PlansSenior management of Nexthera has recognized that

the perspectives of multiple stakeholders are key ele-ments to successful product introduction. Modi -fications to the development program for Insu-Nectinhave been proposed:• In phases 2 and 3, open-label prospective cohortstudies will be included, and a protocol extension willbe added to all prospective controlled studies for thepurpose of collecting longer-term safety and efficacyinformation (piggybacking on the end of the controlledinvestigations originally proposed). Hypotheses, out-come measures, and methods of analysis will also beformulated based upon longer-term data.• Nexthera will also launch periapproval studies,which will include patients with comorbidities andconcomitant medications that may have been under-represented in registration trials. Prototypical registra-tion programs generally restrict patient participationbased on key inclusion/exclusion criteria. The smallerthe proposed study, the more influential is patient het-erogeneity on overall outcome, and the less informa-tive will be any post-hoc segmentation of the sample

Today, however, with the public sector as adriver, clinical development programs need toincorporate patients and outcomes that arerelevant to different stakeholders.


into subgroups for the purposes of hypothesis genera-tion. Assured that core elements of the program willmeet with regulatory approval, additional questionsusing more ecologically relevant study designs will helpaddress the legitimate perspectives of payers, and otherstakeholders.

• In phase 4 Nexthera will create a “special needs proj-ect,” with a Medicare HMO that will serve as a demon-stration project for Insu-Nectin utility. Also, a commu-nication strategy will be designed to help direct overallpatient care in diabetes, particularly given the innova-tive molecular mechanism and method of administra-tion presented by this novel therapeutic agent. It will

be designed and implemented with the help of advoca-cy groups and disease management organizations. • Prospective studies that evaluate methods of educa-tional intervention in diabetes will be implemented.Although education studies may use pre-/postdesigns,with no concurrent control, the management ofNexthera has elected to pursue a program incorporatingall the elements customarily reserved for randomizedcontrolled investigations. Specifically, methods ofphysician/patient education will be used as independentvariables; cluster randomization will assign “treatment”on a practice level, and modifying variables within thephysician and patient will be analytically explored inthe process of monitoring patient outcomes.• Development efforts, which had been shelved for anoral formulation and patch, have been resurrected withan estimated timeline of 2 years for their completion.Although not confirmed, it is hypothesized that alter-native routes of administration may be associated withenhanced patient safety (eg, a lower incidence ofhypersensitivity) as well as convenience. ■

▲ In today’s environment, the perceived value of aproduct in a system of healthcare trumps the noveltyof new biological properties.

▲ At the outset of clinical trials development, planahead for incorporation of the perspectives of multi-ple stakeholders into the clinical development pro-gram. This would include the enrollment of patientswith comorbidities and concomitant medicationsthat might not be originally envisioned, the evalua-tion of outcomes that might drive healthcare utiliza-tion, and the inclusion of a portfolio of services thatmaximize the contributions of complementary disci-plines (eg, outcomes research, pharmacoeconomicmodeling, issues of comparative effectiveness analysisand cost-effectiveness).

▲ More and more, decision makers are on the demandside of the equation, not the supply side. The abilityto successfully translate from animals to man must bemirrored in the capability to also transition fromdevelopment to commercialization in a fashion thatis cognizant of the application of very different met-rics for product usage.

▲ Consider the implication of health status reporting,whereby anything arising from a policy position iscoupled to performance reporting. The following ques-tion may prove very informative in the planningprocess, “Are there certain measures of performance,certain measures applied, such as pay-for-performance,pay-for-reporting, that would make the provider or thehealth plan look better by using this particular drug?”

Senior management of Nexthera hasrecognized that the perspectives of multiplestakeholders are key elements to successfulproduct introduction.


A NEW ENVIRONMENT FOR DRUG DEVELOPMENT


AHDB0508

This supplement has been supported by funding from Eli Lilly and Company. Commercial supporter did not influence the content.

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© 2009 Engage Healthcare Communications, LLCwww.AHDBonline.com

Supplement to American Health & Drug Benefits

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Pharma R&D in a Value-based Healthcare System