Annuity Payment

A reimbursement structure paying a treatment's total cost to the manufacturer in a series of instalments over time, rather than as a single upfront sum.

Source: Jørgensen & Kefalas 2015

An annuity payment spreads the total cost of a treatment across a series of instalments over time, rather than settling it in a single upfront sum. The manufacturer receives regular payments over several years, which eases the immediate strain on a payer's budget and can be linked to the treatment continuing to work. This structure was devised chiefly for one-time therapies whose huge prices would otherwise land all at once. Paying over time instead of all at once is its principle. Drummond and colleagues (2015) discuss such arrangements.

Source: Drummond et al. 2015

Annuity payments are used because some treatments, particularly one-time gene and cell therapies, carry very high upfront costs that strain budgets, and spreading the cost over instalments improves affordability and can align payment with the period over which the benefit is realised. So annuity payments are used to manage the affordability of large upfront costs and, when tied to ongoing benefit, to share the risk that a durable therapy may not last as expected, which is why they are proposed for high-cost, potentially curative treatments, converting a single large payment into a manageable stream that can be linked to continued performance.

Source: Jørgensen & Kefalas 2015

An annuity payment works by dividing a treatment's total agreed cost into periodic instalments paid over a set period, sometimes with the instalments conditional on the treatment continuing to demonstrate benefit in the patient. If the benefit ceases, payments may stop or be adjusted. So an annuity payment works by spreading reimbursement over time and potentially linking each instalment to ongoing evidence of benefit, which converts a large upfront cost into a series of payments, easing budget impact and, when performance-linked, sharing durability risk, though it requires arrangements to track outcomes and manage payments over the period.

Source: Jørgensen & Kefalas 2015

Annuity payments face challenges including tracking outcomes over time if instalments are linked to benefit; patient mobility between payers, which complicates who pays remaining instalments if a patient changes insurer; the accounting and budgeting treatment of future payment commitments; and administrative complexity. So annuity payments face practical obstacles around continuity of payment across payers, financial treatment of the obligations, and the administration of instalments, which is why, despite easing affordability, they are not straightforward to implement, requiring solutions to these issues, and their adoption depends on the health system's capacity to support such arrangements over time.

Source: Jørgensen & Kefalas 2015

Annuity payments relate to one-time treatments as a payment model designed for them: because one-time treatments deliver durable benefit from a single administration at high upfront cost, paying in instalments over time spreads that cost and can match payment to the period of benefit. So annuity payments are proposed specifically for one-time treatments, whose single high-cost, potentially long-lasting nature makes a large upfront payment difficult and a spread-out, possibly performance-linked payment attractive, which is why the two are closely linked in discussions of how to fund advanced therapies such as gene and cell treatments.

Source: Jørgensen & Kefalas 2015