Innovative pharma contracts: When do
value-based arrangements work?
Many are exploring
alternatives to traditional ‘per pill’ arrangements underlying reimbursement.
This holds implications for pharma manufacturers.
Pharmaceutical markets face significant uncertainty as public and legislative debates on
healthcare topics continue to rage around the world. A theme common to many of
these debates is a drive to manage costs through better alignment with
the value of care, whether it is expressed through the reform of health policy
in the United States, the implementation of health-technology assessments in
Europe and Japan, or improved utilization management in many markets. Cost pressures
have sparked a surge in experimentation and collaborations between
manufacturers and payors or providers. As a result, innovative contracts are
moving up the strategy agenda for both market-access and business leaders.
Innovative arrangements take many
forms, but all represent a departure from the “per pill” arrangements that
traditionally underpin pharma reimbursement. Such a departure poses questions
about reimbursement, regulation, and patient management that are only now
beginning to be answered. How much contracting will be done through innovative
approaches remains to be seen, but this is a growing trend and looks to be here
to stay. In this article, we explore the trend in innovative contracting and
consider possible implications for pharma manufacturers.
What are innovative contracts?
For the purposes of this article,
we define innovative contracts as any arrangement outside traditional
fixed-cost-per-unit and rebating practices (meaning flat-rate discounts and
variable discounts based on total volume or share). We exclude other prominent
trends, such as self-imposed increase limits and transparency efforts, since
they can be implemented within current structures.
Under this broad umbrella, we can
distinguish three distinct categories:
·
Segmentation. This heading covers
indication- or population-specific arrangements that can be made unilaterally
by manufacturers or in collaboration with contracting partners. Such an
approach can be used where varying dose requirements make traditional per-pill
or per-milliliter arrangements untenable (as with Kisqali for HR+/HER2− breast
cancer).
·
Contracts
based on financial risk. These
arrangements are intended to improve cost predictability for contracting
partners—whether payors, pharmacy benefit managers, or providers—but are not
linked to health outcomes. Examples include patient spending caps, case-rate
arrangements, population- or volume-based spending caps, and subscription “per
member, per month” arrangements. An example is Novartis’s agreement with the National
Health Service (NHS) in the United Kingdom to place patient spending caps on
Lucentis for wet age-related macular degeneration. Although the manufacturer’s
recommended dose is 14 to 24 injections per patient, the National Institute for
Health and Care Excellence (NICE) specified 14 doses as its cost-effective
recommendation. To maintain reimbursement, Novartis agreed to cover the cost of
any injections beyond the 14th dose.
·
Contracts
based on outcomes, risk, or both. These arrangements link the cost of a drug to a
measure of clinical efficacy or the total cost of care of the drug in practice.
They can take the form of discounts tied to clinical end points or the number
of medical interventions, efficacy guarantees for nonresponders, or discounts
for operational outcomes such as
adherence. In recent years,
these arrangements have found success in specific therapeutic areas such as
cardiology. In France, GlaxoSmithKline (GSK) was required to provide evidence
that its Trobalt epilepsy drug (which is no longer marketed) improved outcomes
for patients not well controlled with other medication. The contract stipulated
that GSK was not paid the headline cost until patients had been treated for at
least 12 months, that the cost was fully reimbursed for health-insurance
patients who stopped treatment within the first four months, and that for
patients who stopped treatment between the fifth and 12th months, the drug was
reimbursed in line with the cost of alternative treatments.
The early days
Innovative contracts are not always
disclosed, but a number of these arrangements have been announced by payors and
manufacturers. We conducted an analysis of more than 200 publicly disclosed
innovative arrangements throughout the world since 1994, of which roughly 50
were implemented in the United States.1Nearly half of the contracts we
looked at were in oncology and hematology, and another quarter stem from
rheumatology and arthritis, cardiovascular, and endocrinology and metabolics
Much of this concentration is
driven by national regulation. For example, Italy, which represents about 35
percent of all publicly disclosed innovative contracts, requires outcomes-based
or pay-for-performance agreements for drugs in oncology, immunology, and some
rare diseases.
In fact, European markets largely
led the development of innovative arrangements in the 1990s, a time when the
United States had no more than one innovative contract. However, US contracts
began to increase in the 2000s and especially in 2014, with at least four
contracts subsequently and as many as eight in 2017 to date.2
While innovative arrangements might
be expected to offer benefits for all concerned, there is insufficient
empirical evidence to prove that this is the case. With each party seeking to
maximize its return, value may not accrue to all sides. Moreover, the
complexity of some of these arrangements makes it difficult to predict the
likely outcome at the time of contracting.
When are innovative contracts appropriate?
Our experience suggests that the
presence of certain conditions may make innovative arrangements more appealing:
·
The
product is a priority for payors, with considerable value at stake.For instance, in the highly
genericized osteoporosis market, the US payor Harvard Pilgrim Health Care
entered into an innovative contract with the pharma manufacturer Eli Lilly to
add the injectable therapy Forteo, which lists for approximately $36,000, to
its formulary. Similarly, to help manage the rapid increase in hepatitis C
virus treatment costs, the health insurer Cigna signed a value-based contract
for Harvoni, which lists for approximately $90,000 per treatment (before
discounts and rebates).
·
Manufacturers
need to differentiate their offerings against significant in-class competition. Repatha and Praluent were
launched (by Amgen and Sanofi, respectively) within a few months of each other
and compete against a host of established cholesterol-reducing therapies; both
are the subject of one or more value-based agreements. Merck entered a
value-based contract for its drug Januvia with the US payor Aetna in the highly
competitive DPP-4 class of diabetes therapies. For Enbrel, an anti-inflammatory
medicine that faces upcoming competition from biosimilars, Amgen has put in
place outcomes-based contracts with the payors Medicare Australia, Ontario
Ministry of Health and Long-Term Care, and Harvard Pilgrim.
·
Manufacturers
are challenged to guarantee value because the medical benefit is longer term
and unpredictable. AstraZeneca
entered an outcomes-based agreement with regional player Harvard Pilgrim for
Brilinta, a branded antiplatelet medicine, to measure hospital readmission
rates. The product may lower costs in the long term by reducing hospital
readmissions for acute coronary disease but potentially increase near-term drug
costs, creating a trade-off for payors to evaluate.
As well as considering the factors
that determine whether a product is suited to an innovative arrangement, pharma
companies also need to consider the conditions required to execute such a
contract. These include the following:
·
The
ability to understand and model risk. Innovative arrangements are best suited to
therapies where patient populations and clinical end points are well defined. A
good example is hepatitis C therapies, which have a precisely quantified
patient population (people with hepatitis C) and unambiguous clinical end
points (an undetectable viral load). Similarly, oncology therapies have clear
and measurable near-term outcomes. However, innovative arrangements have yet to
be adopted for pain therapies, where it is difficult to measure outcomes objectively.
The same is true of antidepressants and migraine therapies, which have neither
a well-quantified patient population nor unambiguous clinical end points.
·
The
likelihood of near-term impact. Particularly in markets where consumers change
health insurers every few years, a drug that can demonstrate impact within a
few months will be a better candidate for an innovative arrangement than one
taking many years.
·
Appropriate
data-gathering, analytical, and operational capabilities.The importance of partners’
capabilities is perhaps best exemplified in Spain, where care is coordinated by
regional governments and risk-sharing agreements are rare. Catalonia’s health
ministry, CatSalut, has implemented at least seven outcomes-based contracts,
each with a different manufacturer, while the other 16 regions, with some six
times the patient population and five times the GDP among them, have executed
only two. To implement these contracts, Catalonia developed health IT tools to
monitor them and a unique personal health identifier to link data sets. In
addition, its robust medical-record infrastructure allows monitoring at the
population level and enables interoperability with providers.
·
Commitment
by both partners. Innovative
contracts are more complex than traditional arrangements and require more time,
resources, and patience. They are hard to execute unless both partners invest
in the necessary capabilities and gain senior management buy-in.
·
Viable
economics for both partners. For the payor or provider, the contract could
offer predictability, with or without a reduction in the total cost. For the
manufacturer, the value often comes from improved access and the greater share
of formulary that results from it.
Here to stay
In a rapidly changing healthcare
environment where risk-based arrangements are becoming increasingly common,
manufacturers should be aware of several important messages:
·
Innovative
contracts are here to stay. Therapeutic
areas such as oncology, cardiology, rheumatology, and endocrinology and metabolics
are seeing significant use of innovative contracts, and others will follow. As
pharma companies gain experience tracking value in such areas, those that do
not offer nontraditional arrangements will have difficulty remaining
competitive.
·
It’s
a top-management issue. Given
today’s uncertainties over policy and reimbursement, participation in even a
few innovative arrangements can act as a strategic hedge. The question is which
products, and which partners? As the industry shifts, developing a perspective
on an innovative contracting strategy will be increasingly important not just
for market access and global health and value executives but also for
therapeutic-area leaders, heads of strategy, and C-suite executives.
·
Capabilities
will take longer to build. Broader
engagement in innovative arrangements will require the ability to identify the
most appropriate contracting opportunities, build deeper relationships with
partners, execute strong contracts, and manage ongoing risk. Payors and
providers have blazed the trail to some extent through experiments with
accountable care organizations,3“episodes of care” payments,4healthcare exchanges,5and other innovations that have
exposed long-term capability needs. Building and implementing capabilities for
risk- and value-based contracts, even on a small scale, may create significant
long-term value.
·
Traditional
approaches will need to continue to be sharpened in parallel. Traditional arrangements are
expected to continue to dominate contracting for the foreseeable future. As the
frequency of negotiations and the value at stake increase, building the next generation of
analytical capabilities,
processes, and governance will be essential in positioning a brand for success.
Innovative arrangements are
unlikely to replace traditional contracts in the foreseeable future, but we
believe they are complementary and will become increasingly important. Pharma
manufacturers should be aware of the possibilities and ready to adopt such
arrangements if the conditions are right.
By Arnaub Chatterjee,
Casey Dougan, BJ Tevelow, and Amir Zamani
OCTOBER2017
https://www.mckinsey.com/industries/pharmaceuticals-and-medical-products/our-insights/innovative-pharma-contracts-when-do-value-based-arrangements-work?cid=other-eml-alt-mip-mck-oth-1710
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