Here’s why drug reimbursement is so important for ASX healthcare stocks

Let’s take a look at the concept of drug reimbursement, something that is crucial for ASX healthcare stocks looking to sell their drugs or devices, especially in the USA. So the next time you see an announcement that an ASX-listed company has had their drug or device approved for reimbursement, you should wonder why a stock may only go up by 5%, when it should be going up by more.

What is drug reimbursement?

Drug reimbursement refers to the process through which patients, healthcare providers, or pharmacies receive financial compensation for the cost of medications. This compensation typically comes from health insurance plans, government programs, or other third-party payers. The goal of drug reimbursement is to ensure that patients can access necessary medications without bearing the full financial burden.

How does it work?

First of all, individuals will have government-funded healthcare and/or health insurance plans. In the US it is only the latter, often through private companies. These plans often include prescription drug coverage, where the insurer pays part or all of the medication cost.

Any such programs won’t necessarily cover everything. There’ll be a specific list of medications covered by a plan, often categorised into tiers based on cost and therapeutic value. Lower-tier drugs are generally less expensive for patients, while higher-tier drugs may require higher out-of-pocket costs or prior authorization. There are intermediaries called Pharmacy Benefit Managers (PBMs) which  negotiate drug prices and manage formularies on behalf of insurers. PBMs aim to control costs while ensuring access to effective medications.

There are a variety of revenue models. Some may reimburse providers for all prescriptions dispensed. Some may receive a fixed amount per patient regardless of the number of prescriptions each patient has dispensed. Others still may have reimbursement is tied to the effectiveness of the medication and patient outcomes.

Drug reimbursement systems vary widely by country and healthcare system, but the primary goal remains consistent: to ensure patients can access and afford the medications they need for their health and well-being.

What are the steps involved?

Here’s a detailed overview of how drug reimbursement typically works:

1. Prescription and Dispensation

A patient receives a prescription for medication from a healthcare provider. The patient takes the prescription to a pharmacy, where the medication is dispensed.

2. Insurance Verification and Claim Submssion

The pharmacy verifies the patient’s insurance coverage to determine if the prescribed medication is covered under their plan. The pharmacy checks if the medication is on the insurer’s formulary and if there are any restrictions (e.g., prior authorization, step therapy).

The pharmacy submits an electronic claim to the patient’s insurance company or Pharmacy Benefit Manager (PBM) for reimbursement. The claim includes details such as the patient’s insurance information, prescription details, National Drug Code (NDC), quantity dispensed, and the pharmacy’s identification.

3. Adjudication

Claim Processing: The insurer or PBM processes the claim through an adjudication system that evaluates the claim against the patient’s benefits and coverage rules. For some medications, the insurer may require prior authorization, where the healthcare provider must justify the need for the specific drug before it is approved for reimbursement. The claim is either approved or rejected based on coverage, formulary status, and other criteria. Rejections may occur due to issues like non-coverage, missing information, or the need for prior authorization.

4. Patient Payment and Pharmacy Reimbursement

If the claim is approved, the patient may be required to pay a co-payment (a fixed amount) or co-insurance (a percentage of the medication cost) at the pharmacy. The amount the patient pays out-of-pocket depends on their insurance plan, the medication tier, and any applicable deductibles. The insurer or PBM reimburses the pharmacy for the cost of the medication minus the patient’s out-of-pocket payment. This reimbursement can occur in batches, typically on a weekly or bi-weekly basis.

In some cases, reimbursement may be tied to the effectiveness of the medication, where payments are adjusted based on patient outcomes. Pharmaceutical companies and not for profits may offer assistance programs to help patients afford medications that are not fully covered by insurance.

Why drug reimbursement is a good thing

It means that drugs can be used that otherwise couldn’t be. Certain drugs, particularly cancer drugs, can cost hundreds of thousands or even million of dollars. But reimbursement keeps the market opportunity open. It is also good for patients and healthcare systems because they usually aid medical conditions.

Investors in healthcare companies should therefore consider reimbursement as a vital step towards bringing a drug to market.

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