The current reimbursement system in the United States discourages some forms of innovations in health care. The development of new antibiotics that aren’t needed now but could be down the road are a case in point. A subscription-based pricing model could address this problem.
Standard ways of reimbursing for innovations can create disincentives for the development of high-value innovations in health care. One remedy is the development of “Netflix-like” subscription models that entail paying a subscription fee for access to drugs and treatments. Such models are already in use in the United Kingdom, Australia, and Sweden.
Consider antibiotics. Saving lives by developing new antibiotics ought to be a good business, particularly because the threat of drug-resistant microbes creates a constant demand for new drugs. But it’s not. New antibiotics must compete against low-cost generics that keep prices low for most clinical applications. In addition, without demonstrable superiority to existing drugs in the here and now, new antibiotics cannot command a higher price even though they might be highly valuable in the future when they are needed to treat pathogens that are resistant to prevailing therapies.
Individual patients and health plans also undervalue new antibiotics. This is because they do not consider the public health effects of protecting the general population from drug-resistant microbes when deciding the price they are willing to pay.
Low prices make antibiotics looks like a bad bet, so many pharmaceutical companies decline to develop them, despite their obvious long-term value to patients and society. The consequence is a very thin pipeline of potential new antibiotics.
The Pasteur Act, now under consideration in the U.S. Congress, proposes to stimulate the development of new antibiotics through a subscription model. Such pricing models are likely to become an increasingly important feature in the health sector to stimulate valuable innovation and to improve access to new treatments, particularly those — like gene therapies — that come with very high price tags.
To make subscription models work better in health care, innovators, and leaders can do at least three things:
1. Be clear on the purpose.
Subscription models come in two flavors. The first supports the creation of a valuable option, like antibiotics held in reserve against the rise of drug-resistant pathogens. The second expands access to a high-priced treatment to populations who may otherwise be priced out of the market. The State of Louisiana has used this second type of subscription model to create access to antiviral drugs for Hepatitis C for its Medicaid and incarcerated populations.
Each model depends on a distinct type of trust. The option model works only if the subscribers — public and private payers — believe that the new treatments, for which they are paying in advance, will work as advertised. Some of the opposition to the Pasteur Act arises from the fear that the subscription payments may be spent on inferior drugs. Increasing trust in the value of the option is key to making this subscription model acceptable to governments, payers, and providers.
Access models begin with a treatment that everyone already agrees is valuable to patients and seeks to make available to as wide a population of patients as possible. Essentially, in exchange for a subscription fee, the drug company agrees to make the drug available at a low unit price. The trust problem here is different. The drug company must believe that the subscriber can deliver a population of patients that would otherwise be unreachable with conventional pricing.
2. Exercise forbearance in negotiations.
Both types of subscription models are an application of a common pricing strategy that economists call a two-part tariff, in which a price is composed of two parts: a subscription fee and a per-unit charge. This strategy is familiar to anyone who has gone to a bar with a high cover charge but relatively low prices for drinks or to a health club with a membership fee and a small additional charge per workout. The high cover charge or membership fee assures the firm of revenue regardless of the volume of drinks consumed or exercise classes attended. The low-per unit charge encourages people to drink or workout more.
Two-part tariffs offer several advantages. In the case of new antibiotics, they allow drugmakers to profit even though payers and providers are holding the drug in reserve. A two-part pricing strategy can also increase the size of the market relative to traditional per-dose volume-based pricing.
However, negotiating subscription fees is hard because the fees determine how value is divided between innovators and consumers. Too high a subscription fee enables drugmakers to capture even higher profits than they could with conventional pricing. An overly aggressive “take it or leave it” offer by a big purchaser, in contrast, may leave drugmakers with lower profits than under conventional pricing.
Agreeing on some principles in advance can facilitate successful negotiations over subscription fees. For instance, parties could establish limits to exploiting bargaining advantages. Such forbearance could take the form of rules or understandings that link revenues under the subscription model to some percentage of what they might be under traditional pricing. Alternatively, parties could agree to share in equal portions the additional value created by the subscription model.
3. Align with professional and social norms.
Our research on innovation has found that providers and society at large may greet potentially valuable innovations in the health sector with indifference or even contempt if they do not comport with professional and social norms. Particularly provocative are new clinical or business practices perceived as furthering a financial interest at the expense of ethical duties and obligations. A case in point is the national negative reaction against health maintenance organizations (HMOs) in the United States in the 1990s, when HMOs were so unpopular that they were routinely cast as villains in popular entertainment.
There have been similar reactions to subscription models. Some of the most effective opposition to the Pasteur Act has come from physicians who perceive the plan as ethically dubious because, in their telling, it furthers the financial interests of pharmaceutical companies at the expense of patients.
In contrast, Louisiana’s access model is widely seen as making life-saving medications available for people who would otherwise be unable to afford them. As such it has been praised by Scott Gottlieb, the former commissioner of the Food and Drug Administration, and many others as a way to reduce health inequality.
Subscription models will be accepted to the extent they are seen by providers and the public as furthering the goals of healing and health. Payers and innovators will do well to keep this lesson in mind when designing their models.
The United States is a country with extraordinary innovative capacity. The challenge for the health sector is to harness that capacity to make health care both better and cheaper. New ways of reimbursing for innovation, like subscription models, have an important role to play in meeting this challenge.
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