Are digital therapeutics the new specialty pharma?

Specialty pharma is a multi-billion dollar industry based on making existing drugs more convenient. The industry exploded in the 1990s, offering new formulations and more convenient dosing, while not changing the underlying active ingredient. These new specialty drugs created significant value for the pharmaceutical industry as they could be patented and made great marketing stories. I wonder if digital therapeutics will turn out similarly? More specifically, I wonder how digital therapeutics will be paid? Will the ROI created by digital therapeutics accrue not to the physician or the payer, but rather to the existing therapies with which they’re administered?

As more of our healthcare interventions are focused on chronic rather than acute diseases, behavioral therapy is surpassing pharmaceutical intervention as first line therapy. Smoking cessation, exercise, weight loss, and cognitive behavior therapy are all behavioral interventions, targeting the major chronic diseases — diabetes, heart disease, arthritis, mental illness. Each of these treatment paradigms can be standardized, personalized, and scaled with software.

A previous post provided an overview of digital therapeutics — why this new class of therapeutics will be a mainstay in chronic disease treatment paradigms, the difference between a rigorous clinical trial supported digital therapeutic and a consumer-focused digiceutical, and some of the business model challenges in getting paid for a software-mediated treatment. This post will focus on how our system is paying for digital therapeutics.

Who Currently Pays?

Our healthcare system is based on a fee-for-service structure, essentially a cost-plus model. Unfortunately, this methodology does not reward leverage. Providing healthcare more efficiently and scalably will result in less revenue for healthcare providers, providing a disincentive to adoption.

In contrast, the software value proposition is based on leverage. Finding a software package that allows you to do more with less, thus reducing your cost and/or increasing your efficiency, is the goal — you pocket the productivity gains. Under the fee-for-service model in healthcare, the provider (doctor) is paid less and the payer (insurance company) pockets the gains. While value-based payments are increasing in the US, the majority of the healthcare payment is still fee-for-service (Across the health system, only 30% of total hospital and physician revenue is tied to value-based payments. Medicare FFS is still 65% of Medicare spend, Medicaid FFS is still 60% of total Medicaid spend). Thus, for digital therapeutics to take off, insurance companies must implement coverage decisions paying for them. Convincing the doctor or hospital of the ROI isn’t enough. Going directly to self-ensured employers and convincing them to add the benefit is a very difficult business model.

Should insurance companies pay directly for software-mediated digital therapeutics? There is precedent for this — medical devices (including durable medical equipment) and pharmaceuticals. Your insurer has a pharmaceutical formulary (a tiered list of medications that it pays for along with co-payment amounts, etc) and a list of medical products it will cover if a patient has certain conditions (e.g., a diabetic insulin pump, a wheelchair, etc).

Getting ‘On Formulary’

How can digital therapeutics get ‘on formulary?’ There is no shortcut here. Like drugs and devices, digital interventions must prove their value to insurers. This means rigorous, double-blind, controlled clinical trials. The details are more complicated. How can you conclusively prove the value to insurers? What is the ‘placebo’ equivalent for a digital therapeutic? The control group will need to get a digital intervention — just with different content and/or a different design, so the placebo effect might be huge. Depending on the effect of your treatment, the study size necessary might be very large. A rule of thumb for the cost of digital therapeutic trials is $5,000/enrolled patient. If you need 2,000 patients to show a statistically significant treatment effect, that’s a $10 million trial. (If the digital therapeutic is paired with a pharmaceutical, the cost is much higher.) Companies like Neurotrack and Halo Neuroscience (their cognitive treatment program not their current consumer-focused sports application) are pursuing this path. Without the patent protection typical in pharmaceuticals or medical devices, or the regulatory necessity of the FDA, it’s hard to justify the large development costs.

Thus, most companies compare their treatment costs and efficacy against published historical control groups. This is not likely to convince insurers to put the digital therapeutic on formulary for all patients. Thus, companies will need to go insurer-by-insurer to lobby for coverage decisions. Companies like Propeller Health, Click Therapeutics, Constant Therapy, BrainAid are pursuing this path exclusively or in addition to patient direct-pay.

Even then, without rigorous trials proving value, most companies will be stuck with pricing within the current industry norm of $10–50 per patient per month (PMPM), significantly lower than the average chronic drug cost of $200/month. Since physicians still need to be detailed (sales calls) to prescribe these digital therapeutics and insurance companies must be persuaded to pay, the resulting CAC (per patient) is likely to be thousands. (The fully loaded cost of a sales rep detailing physicians is $300,000/yr, including their marketing, travel, & expense budget.) It is imperative, therefore, that digital therapeutic companies identify a way to support higher PMPMs.

Source: Michigan Center for Value-Based Insurance Design (

Maximizing Payment

One way to increase PMPM is to rebate for non-performance. Novartis recently made headlines when they launched a new heart failure drug, Entresto, and linked rebates to the drugs performance. If the drug doesn’t help the patient enough, it will cost less. Thus, while the price-tag is high for a chronic medication ($380/mo), only those that benefit will pay. Digital therapeutics are well positioned for this approach. Not only is patient compliance automatically tracked, good digital therapeutic companies also assess a patient’s motivation and can screen out patients not likely to benefit, increasing ROI.

An interesting alternative to rebating for non-compliance is directly incentivizing the patient. Instead of the insurance company or physician receiving all of the benefits of patient compliance (in the form of lower medical expenses), why shouldn’t the patient share in the savings? Mark Fendrick, the director of the Center for Value-Based Insurance Design at the University of Michigan has studied this extensively. Traditional couponing is very inefficient. A couple of companies, including Sempre Health, are bringing behavior-based dynamic pricing to pharmaceuticals. They are able to incentivize patients, for example by dynamically decreasing co-payments. “Fill your prescription today, it’ll cost you $5, wait until next week, it’ll go back to your regular co-payment of $25.”

Entrenching your product in existing payment streams is always a good idea. Then it won’t require any workflow or process changes. Proteus, a digital sensor that can be delivered with pharmaceuticals or medical devices achieves this. Thus, Proteus becomes a component of the cost-of-goods of the existing therapy and is incorporated into the price and paid routinely, via our current systems and workflow. If the addition of a sensor creates meaningful value, Proteus should be able to extract it. The issue is using the data — why pay if it isn’t being used? In January, Proteus announced a partnership with Barton Health, whereby certain Barton chronic disease patients would receive their medication compounded with the Proteus sensors and the system would be prepared to act on the data. Whether the market (payers) will tolerate the increased pharma/device prices to pay for this data is unclear. But if the ROI is strong, we could see Proteus spread quickly. After all, everything is passive, no new workflows are necessary.

Finally, as discussed in a previous post, some companies are exploring the opportunity to patent their digital therapeutic in conjunction with specific existing pharmaceuticals and then get listed in the orange book — potentially allowing for patent extension, which could be worth hundreds of millions to the pharmaceutical patent owner. I don’t know of anyone who has successfully done this yet, but I’ll be watching to see if anyone can pull it off!

Digital therapeutics will be first-line treatment for chronic disease. In a decade, digital therapeutics will be a multi-billion market founded on making existing therapies (whether solely behavioral or behavior + pharma/device) more effective. The shift to value-based payments is helping to catalyze this. Rigorous studies that prove ROI will convince payers (or risk-holders) that it is worth it. Companies that figure out how to incorporate their pricing into existing pharmaceutical workflows will be able to scale quickly. Those that are creating a new path will face significant delays while they establish the payment/reimbursement mechanisms, typically on a payer-by-payer basis, but once in place will benefit from a pathway tailored to their intervention.

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