Innovative Contracting: A Trickle Turning into a Constant Stream

In a conference call last month, Michel Vounatsos, the CEO of Biogen Inc., told his board that in order to succeed in multiple sclerosis, Biogen needs to move away from the current pricing landscape, towards a value-based system that relies on innovative contracting. Although US health-watchers have been distracted by many others things of late, an interesting trend has been emerging.

What used to be a small trickle of news about innovative contracts in the US – a small deal with a hospital here, an agreement for a drug there – has turned into a torrent of news about companies embracing innovative contracts and the new type of pricing they imply. In late March 2017, for instance, it was announced that Amgen signed an agreement with a U.S. consulting firm to support outcomes-based contracting (OBC) for their product portfolio. Again, not just one drug as we would have seen in the past, but for the entire Amgen product portfolio.

This idea is not exclusive to the US, however. In fact, it does not even originate there. As I explored in a recent white paper on innovative contracting based on research for DRG’s A&R and GMA product lines, this trend has firmly taken hold in many European countries and has only spread from there.

The global recession and consequent cuts in healthcare budgets have erected new hurdles for innovative drugs to achieve market access, let alone premium pricing, in the past decade. In response to this impasse, payers and pharmaceutical companies have searched for alternative funding formulas that allow them to maximize public coverage of innovative pharmaceuticals without breaking the bank for healthcare budgets.

Simple managed entry agreements (MEAs) such as rebates and discounts have existed for decades. These have allowed pharmaceutical manufacturers to provide discounts without compromising the official list price, thereby protecting themselves from the negative knock-on effect a simple price reduction would have based on international reference pricing (IRP).

However, another avenue for balancing budgets and access to innovation has emerged, providing a venue for the more innovative type of MEAs. In particular, more-innovative contracting types, such as risk-sharing agreements and performance-based schemes, have allowed payers and manufacturers to share the risks and uncertainties arising from premium-priced innovative agents and their use.

Traditionally, payers in the past have been hesitant to commit to these contracts, reflecting the costs and labor associated with collecting the data and monitoring the results. However, more and more payers are embracing these models in some countries—especially if the manufacturer is willing to do some of the heavy lifting. The success of the innovative forms of MEAs in some countries—particularly in Europe—is now serving as a model for payers in countries new to innovative MEAs.

And industry is increasingly embracing the new payment model as well. In June 2016, an internal document from the European Federation of Pharmaceutical Industries and Associations (EFPIA) was leaked to the press, and it disclosed that Europe’s main pharmaceutical industry group was considering a radical shift in the way that the drug industry prices their products, by developing a “roadmap for change towards outcomes-based reward systems.”

This leaked report can be seen as part of the overall industry move to paying for value. As mentioned, many European payers already rely on performance-based agreements to provide patient access while balancing the budget. Although payer pushes for innovative forms of MEAs is not necessarily surprising, the growing openness to these programs by industry is certainly an affirmation that these agreements are more than just a passing fad. Roche, Novartis and many more companies have explored this idea in Brazil, Italy, France, the US and beyond.

It is undeniable, of course, that there are hurdles to transitioning to such a system. A key hurdle noted by both Roche and Novartis is that electronic medical record systems are not yet capable of accurately tracking a drug’s role in reducing hospital stays or preventing further trips to the emergency room. Other commonly cited barriers include Medicaid best price guarantees, anti-kickback rules, FDA regulations limiting the information manufacturers can share with payers, and administrative difficulties of data sharing and collection. These may be stalling this type of contracting in the US, but it is temporary at best, and the dam is likely to burst eventually.

Payers have a number of concerns when it comes to drugs and the current healthcare environment, including—but by no means limited to—rising budget impact, large patient populations, difficulty in identifying responders, and uncertainty regarding duration of treatment. At the same time, manufacturers are concerned with delayed market access due to onerous pricing and reimbursement negotiations, demonstrating value in crowded therapeutic areas, and earning a premium price that is commensurate to the value their products create. As demonstrated in a number of countries globally, and now seen in the US, innovative contracts represent an appealing option for both parties, when designed appropriately and implemented in a collaborative manner.

To hear more on innovative contracting globally, attend our upcoming Webinar on May 23, entitled “Innovative Contracting: What Europe Is Teaching the World.” Registration available here.

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