Implications of Value-Based Contracting for Drug Companies

What is value-based contracting?

Overall, value-based contracts tie reimbursement to outcomes,  cost performance, or both. In the pharmaceutical space, that could mean several different things.

There are two types of value-based contracts for drug companies, Pharmaceutical Research and Manufacturers of America (PhRMA) explains. The first is performance-based contracts, which link reimbursement for a drug to outcomes or conditional treatment continuation, and the second is differential pricing contracts, such as indication- or regimen-based arrangements and expenditures caps.

Common types of pharmaceutical value-based contracts are indication-based, outcomes-based, and cost caps, according to Surya Singh, MD, chief medical officer of CVS Specialty. He explained that the industry is using indication-based contracts to determine the value of a drug by comparing the relative cost of a patient's health condition, while outcomes-based contracts use actual health outcomes to calculate payment. Meanwhile, cost-cap agreements restrict drug costs to a negotiated threshold.

Like value-based contracting in other healthcare markets, the arrangements can also include financial risk. Drug companies can assume financial responsibility if a drug does not achieve agreed-upon metrics in value-based based contracts with downside financial risk.

But again, like other healthcare markets, the pharmaceutical segment is not robustly engaging with these types of contracts. The survey of health system leaders and heads of materials management found that more than half of respondents (55 percent) do not even know how to implement a risk-based contract with a supplier or pharmaceutical company.

Do value-based contracts work?

Pharmaceutical value-based contracting has the potential to improve patient outcomes while reducing costs, PhRMA finds.

In a 2018 report, the association highlighted an analysis of a subset of plans that announced at least one outcomes-based contract. The investigation found that cost-sharing was 28 percent lower for some of these plans from 2015 to 2017 compared to the market average, which suggests the value-based contracts may have resulted in lower patient cost-sharing.

But the pharmaceutical industry can't be sure that these contracts will achieve their intended results. Few drug companies currently participate in value-based contracts.

A survey of pharmaceutical and health insurance executives conducted by PwC’s Health Research Institute (HRI) found that only about one-quarter of pharmaceutical leaders have participated in value-based contracts. However, 80 percent of those who have experience with value-based contracts described the arrangements as successful.

Yet most pharmaceutical executives surveyed by HRI were not convinced the contracts are worth the effort. Only 38 percent of the respondents believed that the potential rewards of a successful value-based contract were commensurate with the risks.

The industry still has some kinks to work out, which is preventing value-based contracting from succeeding, according to PhRMA. As for barriers to value-based contracting, the association's members and payers reported concerns about how the contract might impact price reporting metrics, issues with potentially implicating the federal anti-kickback statute, and uncertainty about Food and Drug Administration (FDA) rules regarding manufacturer communications.

“Because of these barriers, the potential impact of value-based contracts is not accurately represented by the contracts that have been publicly announced to date,” PhRMA states. “The scale of individual contracts and the number of contracts could be dramatically increased by addressing these barriers. In addition, the types of contracts in the market could evolve with greater flexibility from policymakers.”

When are value-based contracts appropriate?

Pharmaceutical value-based contracts may be part of the healthcare spending solution. But these agreements are not appropriate for all types of prescription drugs, McKinsey & Company states.

The management consulting firm's experience suggests that innovative pharmaceutical contracts are more viable with the presence of certain conditions. Therefore, drug companies should pursue value-based contracts when a product is a priority for payers, and there is considerable value at stake.

Value-based contracts are also appropriate when manufacturers differentiate their products against significant in-class competition and when manufactures are challenged to guarantee the value because their products have a longer or unpredictable medical benefit.

Additionally, McKinsey & Company advises pharmaceutical companies to consider other factors when determining if a product is suited for an alternative payment method. The factors include:

• The ability to understand risk, including knowing therapies where patient populations and clinical endpoints are well-defined
• Likelihood of near-term impact, especially in markets where consumers change health plans frequently
• Data analytics and operational capabilities of the partner
• Commitment from both sides of the contract
• Viable economics for both partners

Pharmaceutical value-based contracting may be in its infancy. But these emerging types of contracts have the potential to not only reduce costs and prices but also improve patient outcomes, according to industry experts.

These experts also believe that these contracts will hold more significance moving forward.

“Overall, we believe that a thoughtful approach to selecting or constructing the right value-based model for different drug categories will help to catalyze the movement and ensure that the right drug reaches the right patient at the right time,” CVS’ Singh.