Outcome based Services

Servitization of drugs treatments? At least kind of

It seems that some drugs in the future will be sold under outcome based service contracts. New gene based therapies, where an intervention on genes can cure a disease, which would have otherwise required life-long treatment at huge cost, are very expensive. Not necessarily because of development costs, but because drugs manufacturers try to implement value based pricing based on the avoided cost of the alternative therapies and treatments or on avoided lost income. For example Europe approved its first gene therapy last year. Glybera treats a rare disorder that clogs the blood with fat and has been cleared for reimbursement in Germany at a price of 850,000 euros, or around $1 million per treatment. Avoided are of course not only the costs of other (less effective) medicines, but costs of surgeries, sickness and early death. Nevertheless insurers are balking at very high upfront payments, as the business model here is matching flow of payments with flow of premiums. Increases in costs over time are recouped through increases in premiums over time.
To escape these constraints a number of drugs companies are therefore looking at the possibility of charging for outcome over time, the outcome being in this case the avoidance of the specific disease as defined by some bio-chemical markers. It allows insurers to continue matching payments to premiums and provides a potential for premium reduction -if the “lifetime cost of ownership” of the drug proves less than the alternative. This enables also the spreading of risk, as nobody yet knows how long such a treatment would remain effective. The resulting annuity streams could be sold to investors who would apply a discount for perceived risk. Ingenious!

Paying for gene therapy: are annuities the next big thing?

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