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Forecasting the Financial Impact of Emerging Medical Technologies

Forecasting the Financial Impact of Emerging Medical Technologies

by Lisa F. Tourville and Paul E. Stordahl

As a health care actuary, do you have the skills necessary to forecast the future cost impact of new technologies?

The financial impact of emerging medical technologies has been dampened in recent years by pharmaceuticals losing their exclusivity or going over-the-counter. While there are many drugs expected to lose brand-name exclusivity over the next several years–similar to what was experienced throughout the 1990s–the financial impact of new medical technologies and biologics are expected to outpace savings generated by generics hitting the market at an increasing rate.

With the release of new medical and pharmaceutical developments year after year, the component of trend attributable to emerging technologies proves to be a continuing, yet highly variable, driver of medical expense trend. From new treatments for age-related wet macular degeneration to new first-line therapies for treatment of colorectal cancer to ovarian cancer screenings, proactively managing emerging technologies is among the most critical challenges facing health care organizations today.

For the health care actuary, forecasting aggregate health care cost trends is one of the most critical challenges. This task is virtually impossible without detailed development of the expected values of emerging health technologies.

From the health plan's perspective (or in some cases, the employer group), a detailed and structured process should be followed to effectively manage the impact of emerging technologies.

  • The process can be generalized into four steps:
    Identification of new technologies–obtained through clinical research of sufficient content to support the development of actuarial pricing assumptions.
  • Preliminary actuarial projections of the financial impact–supported by clinical research, but ignoring the potential impacts of plan-specific clinical policy decisions.
  • Clinical and benefit policy decisions–(e.g., determine whether a new technology will be covered, and if so, will its use be regulated by requirements such as pre-authorization or participation in a disease management program)
  • Final (customized) actuarial projections–reflecting the impact of plan-specific clinical and benefit policy decisions.

The order of these activities is crucial. The actuary cannot assess the ultimate financial impact of a particular technology without understanding the mitigating effect of the plan-specific clinical policy decisions. Similarly, detailed clinical research and reasoned estimates of the potential costs of new tech- nologies are essential to the development of informed clinical policy decisions.

Forecasting the Financial Impact of Emerging Technologies

The role of the health care actuary is central to the process of forecasting the future cost impact of new technologies, yet doing so stretches the skills of many health care actuaries. Many new technologies are associated with contingent outcomes and cannot be adequately evaluated using conventional health care cost analysis. Instead, these technologies require the health actuary to apply standard actuarial techniques such as survival modeling and the calculation of actuarial expected values–techniques that are more commonly associated with actuaries practicing in life insurance, annuities or pension fields of actuarial science.

Reasoned estimates of the costs of new medical technologies require careful evaluation of many factors. These include:

  • Timeframe for FDA approval and market launch
  • Patient population
  • Adoption rates among physicians and providers
  • Potential for off-label use
  • Barriers to patient access
  • Relative effectiveness of alternative therapies
  • Technology costs
  • Costs to administer: professional and facility fees
  • Offsetting costs from forgone treatments
  • Emerging competing technologies
  • Certificate of coverage
  • Benefit plan design
  • Formulary
  • Contract negotiations (discount rates and carve-outs)
  • Administrative controls
  • Public-to-private cost shifting

In addition to clinically and actuarially tested assumptions for each variable, it is often also necessary to utilize the actuarial techniques mentioned above. Actuarial expertise is particularly relevant in the analysis of therapies with contingent outcomes.

See an example of the development of the actuarial expected cost per treatment for a new technology dependent on contingent outcomes.

Creation of sophisticated models for therapies with contingent outcomes is a team effort that requires the insights of physicians, clinical research and other experts in health care utilization patterns. However, the specific contribution of the actuary is central to this process. Clearly, our unique skills can provide much-needed information that will allow health plans to make more informed policy decisions and increase the accuracy of medical expense trend forecasts.

Lisa F. Tourville, ASA, MAAA, is vice president, Reden & Anders Ltd. and Paul E. Stordahl, FSA, MAAA, is principal, Reden & Anders Ltd.