Value-Based Contracts in Pharma – A buzz or a game changer?

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The healthcare industry has been talking about adopting a ‘value-based care’ for some time now.1 Overall, the healthcare systems globally are going through a ‘volume-to-value’ shift with the key aim to improve patient outcomes, cost-effectively. Value-Based Contracting (VBC) and Real-World Evidence (RWE) are the underlying tools to achieve value-based care.

Payers and providers increasingly want to understand the value of money they spend on high cost therapies. Value-based contracts link the contracted drug prices and reimbursement rates closely to the clinical outcome via the real-world data once the drug is in the market. The price of the drug is negotiated between the payer and manufacturer based on the expectation of how the drug will perform in the real world: if the drug does not perform as intended the payer will not pay the full cost of the drug. In case the drug exceeds performance expectations, payers will pay a premium over the originally negotiated price.2

The adoption of VBCs has been slow and steady over the last few years. According to a report published by PhRMA in 2018, the list of publicly announced VBCs grew from 39% to 43% during the Q3 2018. The report indicates that in reality, this is a conservative number given that not all VBCs are publicly-announced.1

In this blog, I will briefly talk about some of the most commonly emerging value-based models and examples of some early adopters of these VBCs.

Outcome-based Contracting (OBC) Model

OBCs, a type of VBC, are essentially risk-sharing agreements between the manufacturer and the payer in which the reimbursement for a drug is based on its observed outcomes in a real-world population. In case the patient outcomes are less favorable than expected, the manufacturer must issue a refund or rebate to the payer, which in turn constitutes a price adjustment. Under this type of contract, the health plan or payer is responsible for collecting and analyzing data and determining if the conditions for price renegotiation have been triggered.12

One key benefit of OBC is the potential for payers to save on high cost drugs that are not effective outside of clinical trials. Further, many private payers have adopted restrictive or closed formularies in an attempt to reduce drug prices. OBCs can provide an alternative to closed formularies (one that limits drugs to specific physicians, patient care areas, or disease states via formulary restrictions), in which drugs can remain on the formulary as long as they guarantee the desired outcomes.12

Indication-based Management Model

Although outcome-based pricing has gained traction over other forms of value-based contracting models, indication-based pricing deserves more attention especially in therapeutic areas like Oncology.13

Traditionally, rebates and pricing discounts have been negotiated either for a specific drug or an entire therapy class. In an indication-specific pricing, the contract between the manufacturer and payer applies a separate price (including rebates) to a drug depending for each indication it was used for. This type of model ensures that the right patient gets the right drug for the right condition. It also lowers the drug cost by creating a competitive environment between multiple products that are safe and effective for a given indication.5

For example, in autoimmune conditions, a drug may demonstrate competitively lower efficacy for the treatment of one indication (e.g. rheumatoid arthritis) and better performance in another indication (e.g. psoriasis). In such a case, formulary placement for the drug could be determined based on its efficacy for each of its approved indications rather than the same placement for the entire spectrum of its approved autoimmune conditions .5,6

Indication-based pricing calculates a single weighted-average price based on usage estimates of different indications that a drug is approved for. The payers and manufacturers retrospectively review the actual use and then settle the difference through rebates.13

According to an article published by CVS Health in 2017, it announced indication-specific pricing agreements for Hepatitis C and Autoimmune diseases. Their indication-based formulary for psoriasis gives preferred placement to more effective treatments. For example, CVS has lowered its placement for Enbrel in Psoriasis due to its lower efficacy versus its competitors. At the same time, CVS negotiates volume-based pricing and rebates with manufacturers of these higher placed medications.14

There are other types of contracts including expenditure capitalization, regimen pricing based and so on (not explained in this blog).7

Here is an illustrative list of value-based contracts.8,9,11

CompanyYearDrugPayerTherapeutic AreaVBC Overview
Spark Therapeutic2018LuxturnaHarvard Pilgrim (US)Congenital amaurosisReduced net cost by tying level of payment to measured improvements in patients’ vision at a 30 to 90-day interval and then again at a 30-month mark; if the therapy fails to perform as agreed upon, HP receives a rebate


CompanyYearDrugPayerTherapeutic AreaVBC Overview
Amgen2017RepathaHarvard Pilgrim (US)CholesterolHarvard Pilgrim can receive a full rebate for the cost of Repatha if an eligible patient experiences a myocardial infarction or stroke while on the drug—essentially a money-back guarantee
2015RepathaHarvard Pilgrim (US)CholesterolHarvard Pilgrim gets additional discounts if the reduction in LDLs is less than how it performed in clinical trials or if utilization of the drug exceeds certain predetermined levels


CompanyYearDrugPayerTherapeutic AreaVBC Overview
AZ2017Brilinta, BydureonHarvard Pilgrim (US)CVD, DiabetesOutcome-based contracts for both

Brilinta: measuring the reduction in hospitalizations against competitors

Bydureon: adherence to HbA1c levels

2014CrestorCigna (US)CholesterolUse of predictive risk modeling to assess a patient’s overall health condition to administer the appropriate cholesterol-lowering medication


CompanyYearDrugPayerTherapeutic AreaVBC Overview
Eli Lilly2017ForteoHarvard Pilgrim (US)OsteoporosisRewards improvement in adherence compared to baseline; if meaningful improvements are found, Lilly reduces the cost of the drug for Harvard Pilgrim
2016TrulicityHarvard Pilgrim (US)DiabetesIf fewer Trulicity patients reach their A1C target (>8%) vs. those using other GLP-1 drugs, the payer will collect bigger rebates from Lilly. If more Trulicity patients hit their goals, then Lilly scores a higher net price for the medicine


CompanyYearDrugPayerTherapeutic AreaVBC Overview
Novartis2016EntrestoCigna, Aetna, Harvard Pilgrim (US)Heart FailurePay-for-performance tied to hospitalizations and re-hospitalizations for their heart failure population


CompanyYearDrugPayerTherapeutic AreaVBC Overview
GSK2016StrimvelisAIFA (Italy)Genetic DisorderAIFA pay for the Strimvelis gene therapy, indicated for paediatric ADA-SCID only if it successfully demonstrates cure


CompanyYearDrugPayerTherapeutic AreaVBC Overview
Celgene2015ImnovidCEPS (France)OncologyCelgene agreed to one of the first outcome-based pricing agreements in France, undertaking to repay the cost of the initial 21–day treatment period if ineffective


CompanyYearDrugPayerTherapeutic AreaVBC Overview
EMD Serono2011RebifCigna, Prime Therapeutics (US)Multiple SclerosisRebate amount linked to the percentage of hospitalization ER visits avoided by use of Rebif. The deal also stipulates minimum levels of adherence — Serono pays higher rebates for better adherence


CompanyYearDrugPayerTherapeutic AreaVBC Overview
Merck2009Januvia, JanumetCigna, Aetna (US)DiabetesBetter formulary placement and lower consumer out-of-pocket expenses for Januvia and Janumet tied to how well individuals with Type 2 diabetes are able to control blood sugar

Note: The VBC examples are not exhaustive and have been sourced as-is from a report published by Darwin Research Group (2019) and EY (2018)

 With the growing public scrutiny over high cost therapies, pharmaceutical companies are under pressure to justify the cost of their drugs. Value-based pricing and reimbursement models have emerged as a potential solution of controlling the cost burden of pharmacological agents. VBCs have emerged as a potential platform for Pharma companies to demonstrate the “value” of their products. These contracts pave the way for patients’ access to those drugs with the best benefit-risk profile, thereby reducing the cost of primary/secondary/tertiary care. And with the pay for performance driving the payer-pharma relationship, VBCs also set the foundation for generating real-world data as a robust feedback mechanism to pharmaceutical companies.10

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Preeti Parikh
Preeti Parikh
Preeti has been with RAS since its inception in 2014. She has worked on several projects involving strategy development, competitive intelligence and market analysis. She is passionate about data which she combines with her natural knack for visualisation and creating engaging content. Preeti began her career with a Masters Degree in Biotechnology from University of Abertay

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