close up of businessman hands signing contractWhen it comes to groundbreaking innovations within the healthcare industry, one may not initially think of pharma companies’ contracting and pricing strategies. After all, there are new life-changing drug therapies, orphan drug therapies, and preemptive diagnostic capabilities developed more and more. But are contracting and pricing strategies tied to patient outcomes quickly becoming the new-age innovation to transform healthcare?

You may have heard Risk-Share, Outcomes-Based or Value-Based; various concepts tossed around for years that represent the same thing: financial agreements made between pharma companies and payers tied to real-world evidence of patient outcomes on a particular drug. More simply stated, the value the patient received from the drug, defined as Value = (Quality + Outcomes)/Cost.1, 2

There are three common types of rebate/pricing terms for Value-Based contracts:

    # Type* Example
  1 Rebates based on desired outcome with larger rebates in absence of desired outcome

Improved patient adherence on specific  chronic disease (e.g. diabetes) drug therapy with evidence of improved patient baseline blood levels (i.e. glucose) overtime

  2 Rebates based on comparison of drug performance against competitor

Less recurrence of acute coronary hospitalization events after use of oral antiplatelet therapy Drug A vs. Drug B

  3 Indication-based pricing

One drug therapy that has multiple approved indications (e.g. an autoimmune drug that is indicated to treat both rheumatoid arthritis and psoriatic arthritis): indications with higher clinical benefit = higher price paid for the drug, indications with lower clinical benefit = lower price paid for the drug.3

* Contracts may require a combination of these be met collectively

The innovative Value-Based Contract Model is certainly not new; it also isn’t the norm “yet” either. While many pharma companies are still leery of moving to Value-Based Contracting, others have established milestone partnerships with national payers over recent years. These partnerships are influencing the path forward in the industry and defining the new standard to manage patient outcomes and align price to value.

A survey of PhRMA members in 2017 found 16 agreements with Value-Based terms were publically announced between 2015 and 2017.4 This recent number more than doubles those disclosed in the two decades prior. Some of the more notable, recent agreements resulting from these partnerships are:

  • December 2017 - Biogen inked an agreement with Prime Therapeutics for its various unspecified multiple sclerosis drugs linking pricing to adherence-based patient outcomes
  • May 2017 – AstraZeneca inked an agreement with Harvard Pilgrim for its Diabetes drug Bydureon and its heart failure drug Brilinta linking pricing to reduce hospitalizations for repeat acute coronary events for patients on Brilinta as compared to patients on another oral antiplatelet therapy
  • May/June 2016 – Novartis inked agreements with Cigna, Aetna and Harvard Pilgrim for its heart failure drug Entresto linking pricing to reduced hospitalizations for commercially insured patients with congestive heart failure
  • October 2016 – Merck inked an agreement with Aetna for its Diabetes drug Januvia and Janumet linking pricing to improved treatment adherence and care coordination

Value-Based Contracts do pose significant administrative challenges. Systems to collectively capture and bridge the various disparate data sets together to adjudicate these types of agreements are non-existent. As a result, extensive time, effort, and resources are required to capture and analyze a vast amount of disparate data, which Payers need evaluate to determine if the drug produced the expected patient outcomes. Due to HIPAA regulations and compliance concerns, pharma companies have limited access to the patient level data. Currently, many manufacturers end up reimbursing on good faith. The minute the Payer determines the drug did not meet the expected patient outcome and the manufacturer is required to pay a higher rebate, there will be much debate.

Despite all of the potential obstacles, it is evident by the collaboration launched in May 2017 between Merck and Optum, Value-Based Contracting will only evolve and expand from here. The goal of this multi-year collaboration is to leverage a shared “Learning Laboratory” of real world data to co-develop and test advanced predictive models and co-design value-based agreements to reduce clinical and financial uncertainty with respect to payment for prescription drugs. The plan is to publicly share the analytical insights, findings and recommendations derived from this collaboration to help inform, facilitate understanding and use of value-based agreements across the industry.5

Pharma companies on the verge of contract strategy innovation through Value-Based Contracting must consider these top three guiding principles and related best practices to ensure success:  

  1. Partnership
    • Adopt a new mindset: think partnership, not negotiation!
    • Establish payer partnerships with a core focus on improved patient outcomes
    • Establish guiding principles and shared goals that ensure engagement and trust
  2. Governance
    • Establish an internal, cross-functional team that represents both economic and clinical value for defining innovative contract strategies
    • Implement contracting modeling capabilities that provide a point-of-view of the payer, the patient, and the provider
  3. Transparency
    • Develop contract terms that allow for quantifiable evaluation of patient outcomes
    • Agree on terms for data collaboration and sharing to ensure data can be used to initiate payment and derive insights; consider third-party options

As this innovative Value-Based Contracting Model becomes the new norm, real learnings will need to be shared and best practices will need to be implemented across the industry to ensure realization. By implementing successful value-based contracts centered on the patient, pharma companies and payers together can positively impact patient outcomes and improve the quality of life.