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Will outcomes-based pricing arrangements between purchasers and pharmaceutical organizations become widespread, and will they have a material impact on prescription drug costs?”

William Demarco
 William Demarco
William J. DeMarco
Pendulum Health Care Development Corp
  This area of outcomes measurement in pharmacy is in its infancy but shows promise especially to the chronically ill population. While cost per unit is still guesswork since there is a floor and ceiling to these costs set by the pharmaceutical companies, the actual utilization of the drugs and finding alternative substitutes is a management opportunity for purchasers. We are seeing more use of Doctors of Pharmacy in the clinical management area because they can identify adverse effects from drugs quite quickly and save a lot of testing and even surgery by simply changing or discontinuing the medication that could be attached to the wrong diagnosis.

The pharmaceutical industry has been slow to grasp the concept that Prescription Benefit Management (PBM) can move millions of dollars of drugs towards or away from a vendor based on the employer’s and/or PBM’s recommendation usually through formulary design and copayment tiering. This reality is just sinking in to some of the large manufacturer’s planning processes as they begin to ask their wholesale redistribution points why orders are down.

We believe that Pharmaceutical companies should be working more closely with employers and employer coalitions to offer their experience as to what kinds of formularies are beneficial. Employers could then ask the managed care companies to tell their doctors which drugs are best applied to which diagnosis. Physicians in many states began this process but ran into a road block when managed care companies decided to control the drugs with a contracted PBM. In some cases, the PBM was owned by the managed care company so prices and utilization were unpredictable.

Once outcomes based pricing becomes the norm, a next logical step (which we are already seeing) is genetic testing of employer groups to identify unique aspects to their population. This, however, represents a whole new area of employment law and drug testing. Genetic profiling could produce a damping effect on the pharmaceutical input in certain markets especially when firings and layoffs are stratified against long term pharmaceutical use for chronic conditions.

Outcomes based pricing can be a way to hold pharmacy more accountable but may lead to something more complex in the near future.
Dudley Morris
 Dudley Morris

Dudley E. Morris
Senior Advisor, BDC Advisors
  Outcomes-based contracting(OBC) is designed to bend the cost curve by putting the onus on drug manufacturers to provide rebates to payers and providers when outcomes from new medicines don’t match up with the results from clinical trials, or demonstrably improve patient outcomes. Despite the buzz, these new contracting models are complicated, making successful contracts difficult to achieve. The contracts require hard to collect patient-level outcomes data as opposed to sales or utilization data, and require collaboration/discussion between providers, payers, and manufacturers to determine whether the new medicine actually improves patient outcomes.
While outcomes-based contracting sounds enticing, their impact on prescriptions prices may be limited since only medicines with clearly defined outcomes that can be evaluated in a relatively short time frame(a year or less) are thought to be appropriate for contracting. This would rule out medicines used to treat chronic conditions such as MS or even some cancer treatments.
Finally, the degree that drug manufacturers can reduce drug prices below Medicaid’s “best price rule” or the average sales price reimbursement under Medicare Part B is questionable, making it unlikely these contracts will have broad impact on overall healthcare inflation, or what consumers pay for their medicines. Nevertheless, payers and providers may want to pursue these agreements where possible on a one off basis since they puts the onus on the manufacturers for drug performance, rather than having payers or providers bear all of the risks.
Sonal Shah
 Sonal Shah

Sonal Shah, PharmD
Senior Manager
Deloitte Center for Health Solutions

Despite increased scrutiny over drug pricing the past several years and the desire for value-based pricing models, such arrangements between health plans and life sciences companies currently remain rare. Those who have experimented with value-based contracting cite several current challenges. However, as noted in our recent policy brief, the 21st Century Cures Act (Cures) clarifies the communication of economic evidence between health plans and biopharma companies and advances the application of real-world evidence (RWE). As a result, value-based contracts for drug pricing will likely become more common.

Current challenges with value-based contracting for life sciences companies include:

• Determining the appropriate measures of value to link payment;
• Controlling for non-treatment factors that can influence outcomes;
• Developing administrative capabilities to operationalize value-based care; and,
• Capturing, integrating, and analyzing real-world data to analyze outcomes.

Performance monitoring for such contracts requires new tools and technology as well as infrastructure that some biopharma companies really have not invested in over the past few years. The Cures Act clarifies the nature of economic evidence that can be shared with stakeholders including formulary committees, payers, PBMs, and others responsible for reimbursement. This change can help overcome the first challenge around determining the measures of value to link payment.

The Cures Act also allows the FDA to accept new sources of evidence, including data that is collected in the real-world, outside of randomized clinical trials (RCTs). This RWE also can be used to track outcomes tied to payments as part of value-based contracts, helping to address another key challenge. According to our recent benchmarking study, 54 percent of biopharma companies are investing in building up their capabilities around RWE. As companies build capabilities to capture, integrate, and analyze RWE, we may see the adoption of value-based contracts increase.

Moving forward, value-based contracts are more likely to be implemented for products that have measurable outcomes in specialty disease areas, where products are relatively new and the value has yet to be proven in the real world.

Mark Lutes
 Mark E. Lutes

Mark E. Lutes
Chair, Board of Directors / Member of the Firm
Ebstein Becker Green
  Adoption of value based arrangements for pharmaceuticals will continue in special cases but their widespread adoption faces several practical hurdles. Given space constraints, here we identify two of the factors worth considering in selecting optimal cases where “the juice will be worth the squeeze” involved in conceptualizing, modeling and negotiating the arrangement.
First, the pharmaceutical can facilitate a care management plan but, in many instances, its presence or absence will not be the only or even primary variable in cost control and outcomes. The ability to attain quality and cost goals for the target population will commonly also depend on a range of care plan factors governing readmissions, recurrence, or relapse. Those factors will include the followup care, adherence protocols, and control of co-morbid conditions. Success in those realms will not be under the control of the manufacturer and that will temper the manufacturer’s ability to provide cost guarantees. Those complexities also suggest that the some manufacturers will consider developing full care management organizations around the condition being treated so that the promise of the pharmaceutical can be realized and the cost/quality metrics promised can be met.
Second, the “bargain” being negotiated will be dependent on the complexity of the patients being measured. There is much work to be done in defining the subject population and controlling for intervening variables. In some cases, sufficient data or experience will be lacking. For many other potential purchasers, the remaining “N” (subject patient cohort) may be too small to make it cost effective to continue the negotiation of the arrangement including such features as the, mode for risk assessment and adjustment, the trigger for the case rate or other guarantee, and the duration of the episode.
The manufacturer will often have the “will” to find the “way”. However, many purchasers, beset by a thousand operational and strategic challenges as well as splintered ordering patterns among network participants, will lack the incentive to devote the time and resources to the effort. Manufacturers may find that their proposals in this regard are best received by integrated delivery systems that have already picked the low hanging fruit for the applicable condition’s care path and have the care management structure in place to reasonably control the other variables impacting the outcomes and total cost of care for the condition at issue.
Jeffrey Hall
 Jeffrey Hall

Jeffrey Hall
Sr. Vice President -
Pharmacy Services, Keenan
  Outcomes-based pricing arrangements have become a popular topic of conversation with the increasing pressure to shift the focus of improving health care through performance-based models. Performance models are expected to create quality and cost improvements, align incentives and take advantage of technology and medical innovations. With outcomes-based pricing, the manufacturers and insurers share in the accountability for clinical outcomes associated with the drug therapy.

To date, the implementation of these arrangements has been slow in the United States, in part due to challenges in identifying, measuring and monitoring meaningful outcomes. Many payers and manufacturers agree access to the clinical data as a barrier. As the data infrastructure and access to clinical data improves, we would expect to see more of these arrangements, and specifically in specialty drug category.

Pharmacy benefit managers (PBMs) play a critical role in outcomes-based pricing with their purchasing power and ability to control formulary tier placement. As payers continue to ask their PBM to provide affordable and sustainable coverage, PBMs recognize the importance of aligning their manufacturer contracts around clinical and financial outcomes, and not just volume. By sharing the risk and paying for value as defined in the agreement, payers should be able to lower overall costs and preserve the clinical value of these drugs.

Payers typically manage their prescription drug costs through formulary management, benefit design, and network coverage. PBMs can also create savings through clinical and utilization management programs and negotiating rebates with the manufacturers. But as specialty drugs continue to drive pharmacy costs with traditional inpatient costs such as chemotherapies shifting to the pharmacy benefit, payers need to consider other alternatives. The number of specialty medications has grown substantially over the years, and specialty drugs are expected to account for fifty percent of total drug spend within three to five years. Specialty medications can cost thousands to hundreds of thousands of dollars per treatment with some of the newest drugs lacking long-term benefits data.

A wider acceptance of outcomes-based pricing requires further collaboration between the manufacturers and payers to agree on evaluation metrics, develop the infrastructure needed to collect, share, and report on data, and a willingness to adopt new pricing models.
Peter Kongstvedt
 Peter Kongstvedt

Peter R. Kongstvedt
  Short answer first. It will spread, but not become wide-spread; but it will have little material impact on prescription drug costs. And now the too-long answer, ending with something positive.
“Outcomes-based pricing arrangements,” a minor variant of “value-based pricing arrangements,” have been growing since 2009 when CIGNA and Merck & Co. agreed to rebate levels being tied to certain diabetes metrics. But growing is not the same as becoming widespread. Like many other payment methodologies, this will expand up to a point and then slow down, occupying a definite space in our legion of payment methodologies, but not as the dominant form.
There are several reasons why this is so, including the following.
• There are sooooooo many drugs out there that it’s just not practical to try and handle them all this way. Of course, you don’t need a lot of these agreements to affect a lot of the total drug spend, so this isn’t a primary reason.
• Being outside of the automated (and inexpensive) payment processes of most PBMs, they can be costly to administer because of the need to run special reports, perform manual calculations, and then deal with the inevitable disagreements that then arise.
• Most “outcomes”* metrics are clinical, though some agreements include utilization as well. The primary focus on clinical metrics is fine (and it would be sad indeed if a drug could not produce similar results to its clinical trials in the first place), but are not automatically linked to reducing or even managing costs; not that there’s anything wrong with that, just sayin…
• Metrics around utilization are mostly, but not always, avoidance of costs in the future, which requires an act of faith, unless a payer is willing to swallow the old “regression to the mean” idea that still bedevils the disease management industry.
• The admixture of rebates, discounts and tier-level placement is not so easy to explain to, and achieve buy-in from, self-funded employer groups. It also gets tossed in the existing murk of rebates, discounts, and side-deals that have come to dominate payment for the drug benefit (assuming any one party even knows what they all are)
• State and federal governmental agencies with “most favored nation” requirements may make it difficult to apply any agreement that can potentially reduce a drug’s cost to less than what the agency is paying, even if they do not participate.
But the Number One Reason with a Bullet, or more accurately without a bullet [point] is this: Even good rebates or an outcomes-based payment agreement cannot seriously blunt the impact of the regular and significant price increases that have been boosting overall spending for prescription drugs by both payers and consumers. To be sure, any rebate program is better than paying full price, but at best it’s a modest slowing of the rate of rise that does not materially have an impact of the total cost of drugs.
Having thrown so much shade on this, I’ll end by saying that in my opinion, outcomes-based payment arrangements are not a bad thing. They do no harm, and they do align clinical, if not financial, goals of all the involved parties: payers, providers, patients, and manufacturers.
* I put “outcomes” in quotation marks because so many are actually intermediate metrics that we all hope will improve outcomes, if we can even agree on what an outcome is for a particular condition. This isn’t a bad thing, just reality.

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