The Naked Truth About Outcomes-Based Pricing
Hype around outcomes-based contracts has been doing the rounds for some time now, but is pharma delivering the goods?
There is nothing new under the sun, to coin a phrase – and that includes value-based drug pricing models.
Outcomes-based contracts – in which prices are set according to a product’s perceived value, as opposed to its cost – have been hyped up for a while now, particularly in Europe where single-payer systems are commonly utilised.
Yet, hype has not necessarily translated into practice. In the US, value-based pricing deals are still few and far between, barring a couple of recent examples (on more of which shortly).
According to a recent paper by KPMG, there are currently around 25 branded drugs thought to be under value-based contracts in the country, but the majority of these are pilot programmes, or “limited in applicability to disease states”.
But with existing price schemes as exorbitant as they are, is it now time pharma companies and payers looked at truly embracing value-based pricing? It’s still early days, explains Kenneth Beers, managing director at Huron Consulting.
“We’re seeing a very uneven application of these deals,” he says. “While some companies are taking a more forward-looking role, others are still just hanging back, asking whether the hype can really be justified. What’s partly contributing to this is that not all payers are doing it.”
Harvard Pilgrim Healthcare is perhaps the most notable example of a payer willing to make the leap into the waters of outcomes-based contracts. Having already signed two such deals last year with AstraZeneca for therapies to treat acute coronary diseases and Type II diabetes, the group recently entered into an agreement with Spark Therapeutics for a new genetic treatment for inherited blindness.
Announced in January, the deal marks the first health plan to include a value-based contract for Luxturna, a new, one-time gene therapy to treat retinal dystrophy – notably, the first ever gene therapy to be approved by the FDA – which carries a price tag of $850,000, or $425,000 per eye.
While providing a reduced net-cost for Harvard Pilgrim, payment will be ultimately determined by Lexturna’s performance – through the measurement of sight improvements across 30-to-90-day intervals.
“As a payer, Harvard Pilgrim has made these agreements a part of its strategy and value mission,” says Ed Schoonveld, managing Principal at ZS Associates. “And maybe because they have done a few of them now, they have grown in confidence in closing these agreements.”
Both Beers and Schoonveld also cite last year’s deal between Novartis and the Center for Medicare and Medicaid Services (CMS), after the former won FDA approval for Kymriah, a ground-breaking new gene therapy to treat cancer.
Under the pricing model agreed between the two parties, Novartis will only receive reimbursements for the drug if patients respond positively to it within the first month of treatment.
But, such deals remain the exception rather than the rule, says Schoonveld.
“We are hearing a lot of talk about these contracts, but there’s not actually a lot happening,” he explains. “We aren’t seeing many fundamental good agreements out there.”
According to Beers, while pharma companies are generally appreciative of payers’ main goals - reducing costs and the provision of decent coverage for patients - they are still struggling to understand the complexities and motivations on the payer side, “which can derail things”.
“Some manufacturers are saying, ‘Look, we’re launching a drug, it’s late to market, it’s undifferentiated, and we’re having a difficult time communicating our value proposition’ and asking whether they can do an outcomes-based contract”, he says.
“But that’s not really going to resonate, because payers see them as warranties that the outcomes in trials translate to the real world and to do a contract they need a really big reason to believe it is going to make a material impact because of the associated complexities, especially the need to calculate and pass through rebates that are no longer simply tied to volumes.”
“The deals pharma companies are offering are also often way too complicated,” adds Schoonveld. “They require a lot of data gathering and a lot of data analysis, which can stand in the way of meaningful agreements.”
Given that value-based pricing contracts are based on risk being shared between pharma and payers, it is also important that the former makes more of an effort to appreciate the specific needs of the latter – as well as providers – says Schoonveld. This doesn’t always happen, which can create an asymmetry due to subjective definitions of value.
“For payers and providers, the problem is that pharma companies are coming to them with own data and offering self-serving deals,” he says. “Providers, in particular, want pharma to better understand their business before they offer deals, because how they define value might not ring true for the other party.
“Right now, I’d say there is a value gap between pharma on the one hand, and payers and providers on the other.”
This has resulted in what Schoonveld describes as “trust issues”. Providers, he says, tend to set little store by the data presented to them by pharma, making it harder for value-based contracts to get off the ground.
What needs to be done to improve these relationships?
“I think pharma needs to work harder to better collaborate and partner with providers,” he says.
“Yes, in some cases, you might be negotiating against each other, but it doesn’t mean that you can’t try to find joint goals, because you need that confidence in one another. If the other party doesn’t understand why you want to achieve this, they are always going to be suspicious.”
Looking ahead to the short term, there’s not much to suggest value-based contracts will become truly universal, believes Beers. But with drug funding under unprecedented pressure – and no pricing ceiling in sight – we might see “more of a need for these types of deals”.
“It’s also important to remember that value-based contracting for pharma doesn’t exist in a vacuum — it’s tied to the all the risk-sharing agreements on the medical side, that from the payer perspective offers more leverage on major drivers of cost and are higher priority,” he says.
“These are uncertain times, especially with the huge regulatory legal changes that are coming out of the government. These contracts are not going to spring up everywhere, but I think pressures on [payer] pricing and pharma pricing, as it exists today, won’t be easy to sustain unless we tie them into specific outcomes.”
The advent of new gene therapies hitting the market could also play an important role in the creation of value-based contracts. These treatments aren’t likely to be cheap – as highlighted by Luxturna’s price tag – which should surely create an even greater appetite for pharma to share the risks with payers and providers.
“Gene therapies almost beg for an outcomes-based contract because of durability of response and front-loaded costs,” says Beers. “It will be interesting to see if that drives wider-scale adoption of these contracts.”
Find out about the key issues driving the agenda at our Data, Evidence and Access Summit 2018 in November.
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