Are we at the dawn of a new era for value-based contracts?

Today, there’s bipartisan support to address the ballooning impact of pharmaceutical drug spend on healthcare cost and affordability. Value-based contracts (VBCs) have garnered interest in recent times, as they carry the promise of tying drug price to the value delivered. There have been a few challenges to more widespread adoption of these contracts in the U.S., such as their implication on Medicaid best price and other rules like anti-kickback statutes. Legislation proposed by CMS on June 17, 2020 and the final ruling on Dec. 21, 2020 promises to remove the Medicaid best price barrier.

In addition, digitization of electronic health records and legislations that promote data exchange, such as HITECH, provide better access to health data. Today’s technology standards allow easier interoperability of data from various technology systems, alleviating another significant barrier around access to real world outcomes data. There are still other challenges that organizations need to address, but the promise to unlock access through the novel agreements that have been discussed for decades is getting closer to becoming a mainstream reality.

VBCs allow organizations to unlock win-win partnership opportunities. However, for them to be successful, they need to address a true unmet need in the market. Here’s a four-step framework to validate where VBCs can create incremental value to both payers and manufacturers, which would be otherwise left on the table with traditional contracting approaches.

1. Do payers have a valid concern?
   It’s important to identify if there are valid concerns that can’t be addressed through a traditional contract. If there aren’t, VBCs may not add enough incremental value to rationalize the effort needed to design and operate them. In some situations, VBCs may even trigger unintended consequences. For example, it might sound innovative to enter into a winner-takes-all subscription model, but if there isn’t a genuine unmet need in the market to treat unlimited patients at a flat fee, such exclusive models can lead to price wars in competitive markets.
2. What’s the type of concern?
   Understanding the type of concern will help identify the right contract archetype to address it. Typically, we look at whether the concern is purely financial (cost or budget) or if there are additional concerns around the drug performance and outcomes. In many cases, there are concerns regarding both.
3.  What’s the main cause of concern?
   Delving into the cause of concern will further help in designing the contract structure; specifically, whether the concern is driven by budget impact or by mechanism to fund payments (typically in high one-time, high-cost durable therapies). This will help bring the right elements into the contract, such as budget caps or mortgage payments. Similarly, if there are concerns around outcome uncertainty, such as real-world performance or long-term outcomes, then a pay-for response or risk-sharing structure could be used to address them.
4. What are the most important measures to track success?
   Measures to track contract performance should be identified so the right parameters can be embedded into the terms of the contract upfront. Payers and drug manufacturers will need to mutually agree on the definition of the measures, and how they’ll be collected and tracked for both outcomes and financial parameters.
   
   It’s also important to approach these initiatives with a partnership mindset, where the payer and manufacturer are co-creating value. Often, when approached as a contract first, they end in a transactional setup which lacks the level of pricing innovation that today’s health system aspires to achieve. We will look at two real world agreements in detail to apply our framework and test their success.

In 2019, Louisiana entered into a five-year subscription contract with Asegua Therapeutics (an affiliate of Gilead) to treat hepatitis C (HCV) patients covered under the Louisiana Medicaid and Department of Corrections (DoC). The contract aims to treat at least 31,000 of the state’s 39,000 HCV-positive residents by 2024, 10 times as many as current treatment levels. As part of the deal, the state is paying a guaranteed annual fee of $58 million (equal to its current spending on direct-acting antiviral prescriptions) or up to $290 million over five years, for unlimited access to the generic form of the antiviral medication Epclusa.

This situation could be a clear win-win for both parties. For the state, this can help with eradication of the disease and reduction in long-term healthcare costs associated with liver damage such as cirrhosis and cancer. For Asegua, this winner-takes-all model would give them exclusive access to the state’s Medicaid and DoC patient population. The success of this model depends on the treatment rate of the total HCV-diagnosed population achieved under the new model. ZS built a financial risk simulation based on publicly available information and third-party data sources to assess this contract. Our results suggest that at a treatment rate below about 19%, the state is better off with the fee-for-service model. Our base case scenario indicates that a treatment rate of about 24% over five years would yield a total savings of about $46 million between 2019 and 2024. Over a 10-year period, this model will have a long-term savings of about $300 million, driven by savings in medical costs. However, achieving this treatment rate, which is eight times higher than the current treatment rate of about 3%, is a tall ask. This would require an active push to drive increased diagnosis and treatment across the state health systems.

Beyond Louisiana, our simulator suggests that states such as Ohio, Arizona, Pennsylvania and Minnesota could benefit from a subscription model. This is based on high HCV prevalence among Medicaid patients, low treatment rate and a differential in market share across competitors that creates larger benefits and costs to the player. Beyond HCV, we believe the subscription model could be applicable in therapeutic areas where there are clear treatment options available, large defined and untreated populations, payer budget concerns, and clear immediate health and budget benefits to treating patients right now (frontloading). Some examples where this model could make sense are in diabetes, opioid addiction and even COVID-19. This would not make sense for novel or innovative treatments where the market is too immature to gauge.

In January 2018, Harvard Pilgrim entered into an outcomes-based contract with Spark Therapeutics for their drug, LUXTURNA, a one-time gene therapy that treats patients with a form of retinal dystrophy for a staggering one-time cost of $850,000. With a large upfront spend, one area of concern to payers is the real-world outcomes of this treatment. In order to address this uncertainty, Spark agreed to an innovative contract, tying a portion of the payments to both short-term efficacy (30-60-90 days) and long-term durability (over a 30-month period) of treatment. The short- and long-term measures are based on full-field light sensitivity threshold testing scores, with a baseline to be established for each eligible patient before administration of the drug. For Spark, this provides access with a large payer network and for Harvard Pilgrim, it provides them an option to stratify their risks.

Our financial simulation looked at the implications of this innovative agreement for each party using a mix of publicly available clinical study data, syndicated data and analysis. Our analysis suggest that majority of the patients are expected to witness a mean full-light sensitivity threshold (FST) score change of 2.1 at the first year after administration that is expected to sustain over period of three years.

For Spark Therapeutics, the agreement gives them treatment access and steady flow of net revenues contingent on demonstrating better patient outcomes. For Harvard Pilgrim, this arrangement will allow access to this breakthrough treatment for their enrolled patient population, while covering their financial risk if the drug doesn’t perform as expected. It also makes it possible for Harvard Pilgrim to buy LUXTURNA from Spark Therapeutics, thus avoiding mark-up of the drug by the institution.  

The success of this innovative arrangement depends on the assumptions around percentage of patients meeting defined outcomes at different time milestones. Our simulation indicates that for each percentage increase in patients not meeting the outcome on 30 to 90 days and the 30 months mark, Spark Therapeutics is expected to lose about two percent of net revenues over a period of three years. This would be direct savings to Harvard Pilgrim. In our base case, we expect Spark to make a net revenue of $86 million over three years. We expect Harvard Pilgrim to avert $16 million in spend in our base case for patients whose outcomes don’t match expectations, compared to no such savings in a scenario with upfront discount (assumed 10%). Due to current government price reporting requirements, it’s not feasible for Spark Therapeutics to offer installment payments, or to offer outcomes-based rebates above a certain threshold (assumed Medicaid mandated rebate of 23.1% for this model). With the new changes in legislation, both manufacturers and pharma can expect to structure contracts that shift more value at risk.

Such innovative financial risk-sharing arrangements should give comfort to payers providing access to expensive treatments for rare diseases such as hemophilia and spinal muscular atrophy, where the real-world outcomes are uncertain and price-value equation isn’t sufficiently demonstrated with limited clinical trials data. These arrangements also allow for a period of experimentation where manufacturers can get access while both parties partner identify the right financial payments for the long term. 

As organizations embrace value-based partnerships, they will need to build capabilities to identify opportunities, design partnership solutions and track them to measure their success. These capabilities range from developing value strategy, real-world evidence (RWE) generation and robust analytics for designing mutually-beneficial partnerships. Three capabilities stand out:

• Value strategy: Developing value-based partnerships will require organizations to systematically identify value gaps across global markets that can be addressed through value-centered partnerships. They need organizational vision and processes to ensure they are consistently identifying opportunities and executing against them. While individual markets tailor their partnerships to meet their local needs, having a central vision and standards will drive consistency and effectiveness through shared learnings.
• Organizational readiness: Developing value-based partnerships will require cross-functional collaboration from different teams such as market access, HEOR, finance and the analytics functions. These teams will also need to upskill their capabilities to better understand patient outcome measures and how they vary within a given market and to tie them financially to the value exchanged. Having a cross-functional Center of Excellence (CoE) that defines and drives best practices across the organizations will be mandatory to bring about transformation.
• RWE capabilities: Value-based partnerships are often centered around product performance that require collection and analysis of real-world outcomes data. Organizations will need to build significant skills in analyzing the uncertainty in performance and assessing their impact on financial risks of the partnership. Such agreements will also need additional effort in discussing the post-deal tracking and data exchange mechanisms that will allow both parties to agree on the financial exchange. Scaling these partnerships will also require significant investment in terms of data, analytics and technology to allow for rapid assessment of these deals and portfolio-level tracking of performance.

While these capabilities may feel daunting to develop, they don’t all need to be built right away. Most organizations will start off on the journey where they would assess the opportunities presented by such innovative partnerships for their portfolio. Over time, organizations can develop these capabilities as they realize the benefits of such partnerships and replicate their success across markets. This will require them to first experiment with various alternate models on a small scale before committing to these programs on a broader scale. Until they build the expertise of executing these agreements at scale, they can’t expect to transform and operate at the same level as best-in-class organizations. Value-based agreements are still very new and most of pharma is still in levels one or two in the maturity model. Very few organizations operate at level three, largely driven by the needs of their portfolio and their organization’s commitment to VBC as a strategic priority.

While VBCs may not be the solution for all pricing and access challenges, they have the potential to uncover new partnership opportunities between payers and manufacturers in many situations. We see three takeaways:

• Increased adoption in the future. With the appetite to disrupt the current drug pricing model, the policy landscape looks favorable for VBCs. In addition, improvements in technology and data-exchange mechanisms will alleviate the logistical barriers to adoption.
• Uneven adoption. While adoption will increase, we don’t expect it to be even across the pharmaceutical market. Novel treatment options such as cell and gene therapy common within oncology and rare diseases will see a definite increase, given their high cost and high uncertainty in outcomes. Other large budget specialty drugs with continued unmet patient needs will also see an increase, specifically in crowded markets with less-differentiated drugs. In all these cases the success of VBC adoption will depend on whether they represent a win-win partnership between payers and drug manufacturers.
• Developing new capabilities. As adoption increases, organizations will also need to develop significant capabilities to systematically identify opportunities, design contracts and measure their success. Building these capabilities will take time and require commitment from senior leadership. In the immediate future, we anticipate plenty of experimentation driven by individual brand access needs.