Creative Financing Might Help Pay for Blockbuster Drugs

Innovation in how providers are being paid to provide health care is fairly widespread.

Just yesterday, the Centers for Medicare & Medicaid Services' Innovation Center announced it was introducing its third form of an ACO, called the Next Generation Accountable Care Organization.

But there hasn’t been a lot of talk about innovation in how pharmaceuticals are paid for. That's why a proposal from two Rand Corp. researchers to use bonds to pay for drugs with high upfront costs and expected higher long-term savings stands out amid the reform noise. The idea was floated in a perspective piece issued today called "Borrowing for the Cure, Debt Financing of Breakthrough Treatments."

Gilead Scientific's hepatitis C drug Sovaldi is identified as a prime example of a pharmaceutical that could work in this model. Its U.S. full treatment cost of $80,000 seems outrageously high, even though over the life of a patient, curing the disease would save far more than that in most cases.

The drugs are priced so high because they are effective. If they were treating the symptoms alone and expected to be needed for years, the price would be lower, according to the authors.

How it would work is that a payer of some sort would issue the bonds to the drug company under terms that would be negotiable between the two, like a typical debt offering. And likely included in the terms would be some sort of efficacy standards that if unmet by the population would reduce the obligation to pay back all or any of the borrowed funds.

The paper cites non-U.S. single payer examples, the U.K.'s National Health Service or Germany's Krankenkasse , as examples of payers that might want to take this approach. Soeren Mattke, a senior scientist for Rand, said the model is not a natural fit for the U.S. with its multiple payers, although there are some theoretical ways it could be managed. He's working on research with that in mind, he said.

Mattke also said state Medicaid programs, which have shown an inclination for innovation, could be fertile grounds for this approach, given their structure and cash-strapped nature.

The idea is not that far-fetched. Hospitals borrow from vendors to finance big ticket medical machinery such as MRIs, and the bond market was able to issue bonds based on the record sales of David Bowie.