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Value-based drug contracting shifts risk to manufacturers


Value-based drug contracting between manufacturers and payers is picking up steam-appropriate timing as the healthcare industry moves toward value-based payment and purchasing and away from fee-for-service.

Value-based drug contracting between manufacturers and payers is picking up steam-appropriate timing as the healthcare industry moves toward value-based payment and purchasing and away from fee-for-service.

“Manufacturers are assuming risk based on value, while advanced insurers are interested in targeting conditions with high-cost drugs,” says Sarah Donovan, vice president of Avalere, a Washington, D.C.-based healthcare consulting firm. “Unfortunately, most of these arrangements are proprietary so that information on savings and quality improvement is unknown.”

The whole idea of value-based contracting is to pay for value-something basic in any other industry, says Michael Sherman, MD, chief medical officer, Harvard Pilgrim Health Care. “We are getting closer, however, with pay-for-performance programs for providers.”

While these contracts do not yet dominate the kinds of agreements between manufacturers and payers, they have been existence since 2009, when Cigna and Merck penned a deal for Januvia (sitagliptin) and Janumet (sitagliptin and metformin HCl) for type 2 diabetes.

Merck provided a discount on the two drugs if plan members on any oral anti-diabetic drug lowered their blood sugar levels after a year and additional rebates if members on the two drugs took their medications according to physicians’ instructions. In return, Cigna put the drugs on a low copayment tier to induce adherence.

What they look like

Since that 2009 agreement, value-based contracts have adopted a variety of features. Typically, these contracts are built around guaranteed performance by a drug based on specific outcomes from clinical trials and if a drug fails to meet benchmarks, a manufacturer offers a lower price and/or rebates, Donovan says. 

She says it’s only in the past three years that these contracts have taken off.

While it might seem that manufacturers would hesitate to take on one-sided risk, Donovan says it indicates that they stand behind their products-a powerful thing. These contracts also are a vehicle for expanding patient access to a drug in a competitive class and enable manufacturers to get their drugs on formulary as a preferred product, she says.

For insurers, value-based contracts could help reduce the cost of drugs for members and improve their ratings for various metrics under HEDIS or the Medicare Shared Savings Program.

And for both manufacturers and insurers, these kinds of contracts make it possible to predict costs.

Donovan also is seeing two-sided risk agreements. For example, a manufacturer and health plan might establish a contract based on several behavioral indications, including drug adherence, specific dose regimens, or other pharmaceutical, claims-based metrics.

At the end of an agreed measurement period (typically 12 months), if members on average in a health plan exceed contract parameters, this would be deemed a success. In this case, the health plan would transfer funds to a manufacturer as a result of meeting the performance guarantee.

On the other hand, if members on average fail to meet contract parameters, the situation would be reversed with funds going from a manufacturer to an insurer.

The transfer of funds, Donovan says, could take on many forms, such as an additional rebate or funds set aside at the beginning of a measurement period to cover payments in either direction.

Donovan predicts that follow-on phases of value-based-contracting could include more creative contracting parameters, such as the introduction of overall healthcare (medical and pharmaceutical) costs, performance measured against peer benchmarks, or performance targets adjusted on an annual basis.

Next: When it makes the most sense



When it makes sense

Value-Based Pricing in Pharmaceuticals,” an October 2016 KPMG report, says that value-based contracting is not suitable for every type of treatment: There must be measurable outcomes for the population being treated and no generic treatments available. If generics are on the market, a drug would be competing on cost, not outcomes, and reduce the relevance of value.

The report outlines three other criteria that could make a value-based contract appropriate:

  • When the effectiveness and appropriateness of a drug is questioned by payers/clinicians.

  • If a drug is highly competitive.

  • When the potential for actual sales volume is significant.

Real-world example

In 2015, Harvard Pilgrim contracted with Amgen for the drug Repatha (evolocumab), a PCSK9 inhibitor drug for lowering LDL cholesterol. The insurer receives a lower price for the drug by making it a preferred agent on its formulary, while also earning rebates if Repatha doesn’t lower LDL to the levels observed during clinical trials. Harvard Pilgrim’s contract is for two years, based on 12-month results.

“The contract is not a warranty, but is designed with value in mind,” Sherman says.  

“… Value contracts can limit member liability and ensure affordability because we are paying for what works. We are spending our dollars wisely.”

Bill Woodward, senior director, contract services pharmacy for Vizient, a nationwide network of community-owned healthcare systems and their physicians, agrees with Sherman.

“Value-based drug contracting is still in the early stages and while it is complicated, it’s where we have to go,” he says “We shouldn’t pay for products that don’t work, and this is another avenue to explore as we strive to find the best way to treat patients and deliver the best outcomes at the lowest cost.”

Harvard Pilgrim also has signed contracts with Amgen for its rheumatoid arthritis drug, Enbrel (etanercept), an expensive blockbuster, and with Eli Lilly for Forteo [teriparatide (rDNA origin) injection], an osteoporosis drug, and for Trulicity (dulaglutide), a treatment for type 2 diabetes.

Enbrel is tied to six criteria including patient compliance, dose escalation and switching or adding drugs. The Eli Lilly contract will measure patient adherence to Forteo and reduce costs if there are meaningful improvements, while Harvard Pilgrim has made Trulicity a preferred drug in exchange for a discount if the drug indicates better performance than competing medications.

“Traditional agreements simply trade off price against volume and formulary placement, but adding outcomes offers an additional dimension on which the two sides can negotiate,” Sherman says.

Harvard Pilgrim is certainly not the only insurer that has bought into value-based contracts. Both Aetna and Cigna have developed ones with Novartis for its heart failure therapy, Entresto (sacubitril/valsartan).

Aetna's agreement is based on results that replicate those found in clinical trials, while Cigna’s rests on relative improvements in patient health, including decreasing heart failure–related hospitalizations and improvements in patients’ relative health.

In return, Novartis provides both payers competitive unit pricing and an outcomes incentive in which rebates increase or decrease depending on whether Entresto lives up to its potential.


Mari Edlin, a frequent contributor to Managed Healthcare Executive, is based in Sonoma, California.

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