Economics - General

How to pay for cures

Do you want to cure cancer?   Diabetes?  HIV?  Imagine if there was a single pill for each of these diseases that one could take to cure the diseases.  That would be a clear clinical advance, it would save lives, and also save money form reducing the cost of treating these disease.

Can we expect to see these cures?  This is partly a question of science and partly a question of finance.  On the science side, curing complex diseases is difficult and this fact should not be underestimated.  On the finance side, however, innovators have less an incentive to invent cures than to invent treatments.  For instance, let us say that someone had a drug that would treat diabetes, but patients had to pay $1000 per month over 50 years (60 months) in order to keep the disease in reemission.  This means that patients and health plans will spend $600,000 ($1000 x 50 years x 12 months) over this time period.  If someone could invent a drug that had the same efficacy in terms of long-term, 50-year disease remission, the treatment would be worth at least $600,000.  However, health plans may not be able to afford spending $600,000 per patient in the short-run.  Even if they could afford this price, many health plan enrollees leave the system after only a few years and thus health plans that pay for the $600,000 will not accrue the full benefit.

One clear solution to the first issue is to just finance the purchase of the cure with debt.  Many individuals want to own a house, but most people cannot afford to make a lump sum payment for the house.  The solution is that people take out a mortgage and spread the payments over time.  Tomas Philipson and Andrew von Eschenbach have proposed debt financings of high-value cures.  This approach, however, does not solve the free rider problem that occurs if there is frequent health plan turnover.

Another innovation is the concept of a HealthCoin developed by Basu (2015).  In this approach, the health advantages of a cure turn into an asset.  For instance, by giving someone Sovaldi to cure Hepatitis C, a health plan could earn a “HealthCoin.”  If a person who received Sovaldi later leaves the plan, he new plan where the person was enrolled would need to pay the original plan the value of the HealthCoin. A more general description is below from Yeung et al. (2017).

HealthCoin is a potential tradable currency that would be backed by Medicare, wherein Medicare guarantees payment to the private payer for each treated person entering the Medicare program.20 This option incentivizes private payers to invest in upfront coverage for cures, since cured individuals would likely have lower morbidity, and the private payer can sell the remaining value of the HealthCoins when the member switches plans

Although the concept of a HealthCoin may seem esoteric, managed care pharmacists seem to appreciate the value of this idea, once it is clearly explained to them.

Regardless if you think HealthCoins are the right answer, we need to have the right incentives in place to make sure innovators have the incentive to develop cures for highly prevalent, high-burden diseases.


1 Comment

  1. I agree that corporations and innovators need financial incentives to invent new cures rather than treatments. If I am understanding the first solution correctly, financing the purchase of a cure with debt also places a significant financial burden on patients (if they stay with the plan) in the form of recurring payments. Additionally, these monthly payments might appear to shame or reprimand these patients for having a curable condition. Each monthly payment would be a reminder of the disease that they once had and are now still paying for. I am not sure how feasible this approach would be, as patients would likely protest paying these recurring fees for a disease they no longer have, as it has since been cured. I also agree that financing these cures might exacerbate the “free rider” problem if patients switch health plans before the plan can reap the full benefit.

    The concept of a HealthCoin is an interesting solution that would help solve the free rider problem. Since HealthCoins would be paid to the old plan by the new plan if a patient transfers insurance, would this keep new plans from insuring people who are using pricey cures? Would this make the old insurance plan apprehensive to cover the cure in the first place?

    I am curious what your thoughts are on another solution–using a “prize” approach. Earlier this year, a bill was proposed (H.R. 1776) to provide large market entry rewards (“prizes”) to companies that develop new and necessary antibiotics. Antibiotic resistance is on the rise, but companies are less incentivized to develop new antibiotics because they a) would not be used as a first line of treatment so they cannot rely on exclusivity rights to generate revenue and b) they have a lower return on investment than more lucrative fields such as oncology drugs. Traditional incentives for new medications typically exist in the form of high market prices that companies can charge while their product is still under patent, but this approach is not feasible for antibiotics. In its place, the proposed bill (H.R. 1776) suggests that the government appropriate a fund with 2 billion USD to support up to three market entry prizes. I believe this “prize” approach could successfully be applied to prioritize the research and development of new cures over long-term management medications. Offering a market entry reward when a new cure has been successfully produced could provide enough financial enticement, as this is another area that does not benefit from traditional market incentives.

    In the antibiotic scenario proposed by H.R. 1776, there are two key points: first, corporations would remain in control of their product, and second, the government would only award prizes to successful treatments. H.R. 1776 proposes that after companies receive a prize, they would be required to commit to the future development and responsible sale of their new treatment, but unlike a buy-out option, developers would remain in control of their product. The bill also states that these “prizes” would be awarded to companies after they have successfully produced a new product, thereby incentivizing development to offset the lower return on investment. By distributing these large rewards after the successful development of the drug, the greatest risk would be placed on pharmaceutical companies rather than on the government. This reward approach is superior to direct subsidization because the government would only award a prize if the treatment is deemed worthy and successful, thereby allocating funds responsibly. Ideally, these market entry rewards would encourage development while also responsibly addressing public health needs.

    This “prize” approach could also be applied to the research and development of new cures, as there are several similarities to the development of new antibiotics. Both fields require financial incentives to spark their development, as the current system is not sufficient to encourage innovation. Currently, cures and antibiotics have a lower return on investment than their competitive counterparts (long-term management medications and more costly proprietary drugs, respectively). Offering large market rewards gets around the traditional market incentives. It would somewhat offset the lower return on investment and encourage more corporations to pursue the research and development of cures. Further, both antibiotics and cures are necessary for the population’s health and will have devastating consequences if they are not pursued. Although we cannot exclusively rely on the altruism of pharmaceutical corporations to address this public health challenge, this in combination with market entry rewards could lower the threshold needed to encourage research and development. What we know right now is that both antibiotics and cures will not be developed at the rate necessary if current standards remain in place.

    However, there is still the substantial issue of cost. How will the government pay for such prizes? Currently, H.R. 1776 calls for 2 billion USD to fund up to three market entry prizes. To date, there have been suggestions that the H.R. 1776 prizes could be paid for using: (1) A tax imposed on antibiotics used on animals on a country level. (2) A “pay or play” approach would charge companies that decide not to pursue antibiotic research and development. (3) By creating a tax on public and private insurers that is linked to the number of enrollees and not the volume of antibiotics purchased. Clearly, not all of these proposals are feasible or relevant to developing new cures. However, they could be used to generate other ideas to fund market entry prizes for cures. For example, a “pay or play” approach could be modified and adopted to further encourage companies to invest in the research and development of cures. Large corporations have enough financial power that they may just pay the fee. Yet, if all their counterparts sign on, remaining corporations could be motivated to participate so that they too are ”racing towards a cure.”

    Returning back to your original suggestion, I believe that market entry rewards would be more effective than financing the purchase of a cure with debt. However, I am still intrigued by the HealthCoin option and would like to see whether or not it is feasible. I am also curious to hear your take on the concept of a prize approach to incentivize new cures.

    Sources for H.R. 1776:
    Forbes 2017:

    O’Neill 2016:

    Duke Margolis Center 2017:

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