Aligning Incentives: Financing the Promise of Cell and Gene Therapies
By Sidra Ahmed and Jimmy Teng
At Munich Re Ventures, we are at the forefront of investing in new pools of risk and innovative risk transfer mechanisms across a number of industries. In the context of digital health, we’ve supported companies with ambitious visions around improving healthcare outcomes and managing healthcare risks — reducing friction in care delivery (Air Doctor), value-based care (TBA), and managing out-of-pocket expenses (Future Family).
Exploring healthcare themes through this risk transfer lens, we are drawn towards companies creating experiences and products so compelling that they become forcing functions to better align incentives in healthcare — a key challenge for the industry. In the coming months, we will publish a series of blogs on this topic. Today we’re starting with our first:
Aligning Incentives: Financing the Promise of Cell and Gene Therapies
Most people are aware of the transformative nature of modern medicine and yet, even still, the impact of new treatments such as Cell and Gene Therapies (CGTs) can surprise. Take the case of Spinal Muscular Atrophy (SMA), a hereditary disease occurring in one in every 10,000 newborns. It damages neurons and nerve cells in the brain and spinal cord, leading to 60% of infants with SMA dying before the age of two. Even for those who survive it is a horrifically debilitating disease, with some losing the ability to eat and others the ability to walk.
Prior to the 2019 release of Zolgensma (a gene therapy from Novartis), treatment relied upon managing the condition chronically. But Zolgensma has now upended the reality of those that receive an SMA diagnosis. To date, more than 3000 children have received the treatment, and of those tracked through the long-term study (LT-002), 100% of the presymptomatic cohort preserved all motor milestones (including independent walking). For SMA patients, this therapy is nothing short of a miracle. Yet along with the incredible promise of these new therapies come equally great challenges to our healthcare system.
When Growing Frequency Intersects with High Severity
Cell therapies focus on replacing damaged or diseased cells with healthy ones and are used to target certain cancers such as leukemia, lymphoma, and melanoma. Gene therapies, alternatively, modify genetic material (DNA or RNA) and treat genetic diseases such as cystic fibrosis, hemophilia, and sickle cell disease.
While the two are very different in their mechanisms of action, payers (healthcare insurers), and pharmacoeconomists often group them together due to a shared trait — their jaw-droppingly high costs. Zolgensma, for example, has a list price of $2.1M per treatment. Many other CGTs have similarly prohibitive price points, largely a result of treating conditions with small prevalent populations.
For a period of time, Zolgensma was one of the few CGTs in the market, but today there are 3000 therapies in the pipeline (over 30 already commercially available), with the FDA expecting 10–20 additional approvals each year. In April of 2023, Peter Marks (Head of FDA’s Center for Biologics Evaluations and Research) said the following regarding CGTs: “Success would be … if not exponential, at least some logarithmic progression towards more and more gene therapies being approved.” Consequently, the combined financial impact of these therapies, many in the billion-dollar range, will be immense on our healthcare system.
While CGTs have long been thought of as highly impactful therapies for small segments of the patient population, an increase in invested capital, proven commercialization pathways, and the life-saving nature of the therapies have collectively now brought us to the crest of a wave of approvals. With this, we saw a potential forcing function that could align incentives across disparate stakeholders in the healthcare system, but also would bring considerable challenges:
- For payers, these therapies will no longer be low probability events — We are entering a new reality where high severity (in terms of costs related to treatment) intersects with growing prevalence (the total number of cases addressable by CGTs), challenging the insurability of these therapies. With the expanding number of FDA approvals on the horizon covering more prevalent diseases such as diabetes and Sickle Cell Disease, some payers have already considered lasering out coverage for CGTs (ie. removing coverage from a reinsurance policy to be covered under a higher specific deductible).
- For pharma, selective coverage of expensive CGTs by payers will challenge the very principles of biomedical innovation in the US — Conventionally, pharma bears the burden of clinical research, leaving payers to finance and subsidize the costs. If budgetary pressure becomes immense and lasering out therapies become the norm, there will be significant challenges to the launch of new CGTs. Our conversations with biotech companies have made clear that the commercialization process for CGTs could have an even larger impact on a successful launch than would be the case for conventional drugs. Increasingly, many biotech companies have expressed willingness to have “skin in the game” in order to expand market access.
- For policymakers, the strong overlap between many CGTs’ target populations and the Medicaid population poses coverage challenges — The federal Medicaid Drug Rebate agreement requires Medicaid state programs to cover all FDA-approved drugs when used for a “medically accepted indication”. The budgetary implication for CGTs could be devastating if effective risk transfer mechanisms are not in place by the time the wave of approvals hits. The Centers for Medicare and Medicaid Services (CMS) has already launched new initiatives to kickstart financing innovation, serving as a good indicator of the change yet to come.
These potential modes of failure for CGTs make the financing dilemma all the more pressing. It would be a shame to let prohibitive costs threaten the accessibility of life-saving therapies. While other bottlenecks exist for CGTs (largely related to manufacturing and supply chain), we believe that the financing piece of the puzzle must be the first domino to fall in order for CGTs to not only be successful, but also sustainable.
A Looming Threat for Healthcare’s Payments Landscape
Fundamentally, the healthcare system in the US, and in most countries around the world, is built around treating and paying for chronic illnesses. Risks are typically absorbed by pooling a large population together such that claims for chronic illnesses can be distributed longitudinally through time. Using SMA as an example, previously payers could handle the treatments even if costs were high because they were predictable — administering yearly doses of SPINRAZA (a treatment for SMA prior to Zolgensma) would be $375,000 a year, but payers would have visibility into its associated costs and outcomes.
CGTs are bringing about a paradigm shift in how healthcare systems consider payments. These are often high cost, single dose, and curative therapies that accrue so much value up front that they break the healthcare system’s ability to finance these treatments. In fact, payers have struggled to use stop loss carriers and reinsurance to insure against these “unknown” risks.
For now, larger commercial insurers have the economics to weather the storm — they have a higher tolerance for CGTs because their risk pools are larger. Those who primarily bear the brunt of this cost (aside from patients, of course) are self-insured employers who cover an increasingly larger percentage of the population (65% of all employed). With smaller risk pools to absorb CGT claims, these self-insured employers are more vulnerable and need alternatives to reinsurance and stop loss as the primary risk transfer mechanism.
Oftentimes, when we look at CGT-specific stop loss coverage like Cigna’s EMBARC, loss ratios are unregulated and can be much lower than the typical Medical Loss Ratio with its regulatory 85% requirement. This translates to an added layer of complexity and costs in CGT payments, making an already expensive therapy even more challenging to cover.
As we talked to our network, we heard that CGT financing has quickly become top of mind for employee benefits consultants and financial actuaries alike. Jessica Naber, a principal actuary at Milliman and one of the co-creators of Milliman’s DNA Gene and Cell Therapy Forecasting tool, told us:
A Concerted Effort from Policymakers, Pharma, and Payers
Globally, the U.S. has the highest healthcare costs per capita, administrative costs eclipsing that of long-term care, and some of the worst outcomes — a set of circumstances that are often attributed to misaligned incentives rooted in an ineffective fee-for-service model. Value-based healthcare (VBC), where health outcomes that matter to patients are the systemic measurement for quality, has become the rubric for innovation.
While there has been progress towards VBC, infrastructural challenges, differing measures of “value,” and the inertia of existing processes have been barriers to faster adoption. In the case of CGT, however, we see early signs of a forcing function that could bring policymakers, pharma, and payers to the table.
In February 2023, CMS approved the CGT Access Model, a transformative initiative allowing state Medicaid agencies to assign CMS to coordinate and administer multistate, outcomes-based agreements with manufacturers. Medicaid state agencies have struggled with the burden of CGTs to the extent that discrepancies exist between state coverage policies and product indications. Through such initiatives, policymakers are setting the stage and building the necessary infrastructure for payments innovation in CGTs: alternative multi-pricing, reimbursements, and new access models.
Manufacturers and payers are also taking steps in the direction of VBC. Bluebird Bio offers an outcome-based contracting option for Zynteglo, whereby payers pay upfront for treatment, but are refunded 80 percent of the total cost for patients who fail to reach transfusion independence within two years. Embarc provides employer sponsored plans with a gene therapy program at $1 per member per month (PMPM), covering all members of the plan for certain CGTs.
Whether it be pharma, payers, or policymakers, each group is beginning to recognize they hold important pieces to a puzzle that can only be assembled through collaboration. Over the last year, we have heard and seen an unprecedented amount of conviction from all parties to work together in addressing CGT financing. One Director of Market Access at a CGT biotech told us:
“[We] would absolutely work with a third-party to share risk with payers if it could help reduce the internal operational burden of contracting with multiple payers and expand market access.”
These sentiments shaped our perspective and strengthened our conviction that a solution to the problem does exist, and indeed, can succeed. We believe that if there is a time and place for VBC adoption to accelerate, it is now and it is in CGT financing, where one of the largest and most important pools of risks in healthcare will reside.
Challenges To Be Addressed
While it is heartening to see these efforts take root, barriers to adequate CGT financing and widespread access remain. These sit across several buckets:
- Actuarial Management: There are many actuarial uncertainties around paying for CGTs, and building the proper risk management infrastructure to absorb its financial impacts has been challenging. Particularly for self-insured employers in the US, this issue is compounded by the portability of members, with many employees switching jobs (and health plans) every 3–4 years. For payers, this means they wouldn’t be able to actualize the lifetime healthcare savings from a CGT they’ve paid for.
- Therapeutic Performance: As CGTs are still a relatively recent biomedical innovation, there is less data around their long-term durability. Even the FDA itself has been internally conflicted about long term efficacy of certain CGTs. This makes coverage decisions difficult for payers and managing budgetary uncertainty even harder.
- Payment Timing: Through discussions with payers, we believe CGTs will soon become an elevated risk. As insurance premiums rise, reinsurance cost grows, and the pipeline of CGTs expands, self-insured employers are looking for a creative solution with value-based contracting that can better tie price to value and manage payment timing.
- Value Negotiation: As we continue to use VBC as the innovation rubric, finding common ground on “value” has always been challenging. One provocative analogy we’ve heard compares outcome-based agreements to a test-taker that is tasked with writing the test themselves — they simply wouldn’t write questions they couldn’t answer. Currently, the discussion of value and price is where misalignment is most pronounced around CGTs (especially external to the US). It’s a conversation the industry as a whole needs to tackle.
- Contract Negotiation: We’ve heard multiple sentiments from pharma, especially at smaller biotech companies, on the importance of reducing the operational burden of contract negotiation. It’s already difficult for pharma to commercialize therapies targeting niche areas. Layering on value-based agreements and the sheer number of payers in the US, even big pharma have struggled with both setting up, as well as managing, these contracts.
While we believe there will be multiple winners in the space, successful CGT financing solutions should adequately address a combination of these five challenges.
Fundamentally, many of these challenges reflect a deeper misalignment of incentives. Between patients, healthcare providers, payers, and pharmaceutical companies, there is room for risk transfer and payments innovation to better align incentives — driving the best patient outcomes and expanding access to these life-saving therapies. Also, despite the idiosyncrasies of the U.S. healthcare system, the costs associated with CGTs are a global problem. We shouldn’t aim to focus solely on the U.S. instance, as single-payer healthcare systems around the world grapple with many of the same issues.
Bringing CGT to Market: Creative Solutions We’ve Seen to Date
In talking to companies in the CGT financing space, we see entrepreneurs from across the healthcare landscape each tackling the problem with innovation and perspectives unique to their own experiences.
- Insurance-based Solutions: To many, it simply made sense for an actuarial problem to be addressed with an insurance solution. PayRx provides self-insured employers and payers a platform for analyzing utilization exposure and budgetary risk of CGTs, and are currently exploring insurance-linked securities as a way to transfer this risk. Octaviant (in partnership with Marsh) provides compliant warranties as a reimbursement mechanism for CGT manufacturers and payers.
- Debt-based Solutions: To others, a payment timing problem should be solved through debt. Aegle provides an alternative to reinsurance through a credit-based solution, by financially engineering predictability and smoothing cash flows.
- Value-based Contracting Solutions: Negotiating contracts has been a pain point for pharma and payers due to the fragmented and diverse payer landscape both in the US and globally. Lyfegen has built a moat around its database of pricing models, allowing pharma and payers to scale innovative design agreements and analyze or manage rebates. CCX has built a platform to negotiate, structure rebates, and manage the value based contracting process between pharma and payers.
- Alternative Solutions: There are also companies who approach the problem from entirely new angles. Quantile Health has built a risk transfer platform for pharmaceutical manufacturers to bear the utilization risks at a PMPM cost for payers. After acquiring Tokio Marine’s Lifetrac business, ETS transferred their learned expertise from organ transplants to CGTs, building a platform for patient referral management to Centers of Excellence, where most CGTs are administered today.
Andrew W. Lo, a professor at MIT whose research focuses on new funding models for biomedical innovation, shared a similar vision regarding the need for financial innovation for CGT during a recent conversation with us:
Unlocking Access to CGT Innovation
We have built deep conviction in the need for financing solutions to help payers in the US and around the world pay for CGTs. This is a rare chance for risk transfer mechanisms to align incentives across pharma, payers, and policymakers, addressing a rising healthcare cost so pressing that none can turn a blind eye. We believe that the right business would have the potential to become the payment infrastructure and building block for additional solutions, i.e. layering on important tools like patient outcome tracking to facilitate value-based payments.
The wave of CGT approvals is upon us. Now it is incumbent upon the various stakeholders of our healthcare ecosystem to better provision these therapies as widely and effectively as possible.
If you are a founder or stakeholder in the healthcare ecosystem seeking to align incentives, we would love to connect. We’re looking forward to seeing more innovation and hearing from you — do not hesitate to reach out if you are building in this space or have thoughts and questions you’d like to share.
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Thank you to Andrew Lo, Jessica Naber, and the founders and stakeholders who shared thoughts that helped inform the development of our perspective.
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Munich Re Ventures (MRV) is the venture capital arm of Munich Re Group, one of the world’s leading providers of reinsurance, primary insurance, and insurance-related risk solutions. With more than $1 billion in assets under management, Munich Re Ventures invests in the most innovative start-ups transforming the future of risk and risk transfer. MRV’s experienced investors are financially-driven while focused on the strategic interests of Munich Re and the broader insurance industry. MRV works closely with Munich Re Group businesses across the globe to fund and partner with the best emerging companies developing new technologies and business models — and risks — for tomorrow’s world.
