According to National Health Expenditure Data (published by CMS), prescription drug spending reached $333.4 billion in the year 2017 and by year 2027, is projected to reach $576.7 billion. Furthermore, the industry is witnessing unprecedented prices for new drugs and sharp hikes in prices for medicines that are currently in the market. This astronomical rise in drug prices and the overall expenditure on prescription drugs has pushed the total cost of Healthcare up, resulting an increase in participant’s contribution in the form of premiums / copays / deductibles, making innovation in the drug industry virtually impossible for few unfortunate ones. Other factors that challenge the current PBM business model are – stricter government regulation, the push towards outcome-based payment model, rise in demand and cost of specialty drugs, and a much-needed focus on consumerization.
With a collective push from government bodies and healthcare industry towards value-based pricing and outcome-based payment, the industry is adopting new age business / payment models like Accountable Care Organization, Bundled Payment, Provider Payment tied to performance / patient outcome and Evidence Based Medicine. PBMs are also changing – some of them have already set value-based prices / outcome-based payment for certain categories of medicine by getting into contracts with drug manufacturers. Under outcome-based models, volume-based contracts may become less popular and get replaced by contracts, where the reimbursements are based on the value being generated by the medicine.
Identification and measurement of the value generated by a medicine is critical. Few options are -
- Associated clinical benefits
- Convenience of taking medications
- Cost benefits
- Complete medication compliance
- Patient satisfaction
- Lack of adverse effects
Impact of Value-based Contracts
With value-based contracts placed in the Pharmaceutical category, the world will move towards a better and more efficient health care system. Here are few pointers on how major stakeholders may get impacted under a value-based contract -
Payers / PBM -
- Better aligned with the government / policy makers / industry push towards rewarding value
- Investment in resources and technology to design and implement better, effective and efficient value based contractual models
- Pay Pharma companies based on the performance or value generated by the medicine and not based on volume driven contracts
- Bring the total cost of healthcare down in long term, while improving the efficacy and efficiency of care
Drug manufacturers -
- More business from PBMs / Payers / Government
- Find a preference in formulary
- Access to more patient data
- More transparency in cost, treatment and benefits
- Better targeted attention from Payer / PBM / Provider in follow up care
Challenges with Value-based Contracts
Moving away from traditional volume-based contracts with drug manufacturers is easier said than done for PBMs and payers. Before getting into any value-based contract, there are few fundamental questions that PBMs / Payers and drug manufacturers must answer -
- Will an investment in a new contractual model reap benefits in future?
- How to cope with additional administrative cost?
- How to design an effective, efficient and acceptable value metric?
- How to measure and reward value?
- How and when to collect longitudinal data seamlessly from disparate sources?\
- How to cross regulatory and legal barriers such as Medicaid’s best price rule?
- What should be the ideal time period to collect all the data points and then make a final decision on reimbursement between PBMs / Payers and pharmaceutical companies?
Even though not many PBMs / Payers and drug manufacturers have engaged in outcome-based contract models, it might soon change. Since June 2016, Harvard Pilgrim Healthcare has signed numerous value-based contracts with pharmaceutical companies – namely AstraZeneca, Spark Therapeutics, Amgen, Eli Lilly & Company, Novartis for drugs that treat conditions such as asthma, chronic obstructive pulmonary disease (COPD), retinal dystrophy, LDL cholesterol, acute coronary disease, type II diabetes, rheumatoid arthritis, osteoporosis and heart failure.
Moreover, the Center for Medicare and Medicaid Services (CMS) and large players in the Health Plan industry such as Cigna, Aetna and United Health Group have announced outcome-based contracts with pharmaceutical companies in recent times.
To ensure such models deliver -
- Government, pharma companies and payers / PBMs should work together to set clear objectives that are acceptable to every stakeholder involved, expedite associated complexities and agree on an easy-to-measure payment structure
- Data is going to be key, and all stakeholders need to work around options to gather data from multiple sources (and different formats), store and process it to generate meaningful insights
- Technologies such as Big Data, Cloud Storage, AI and other data analysis capabilities will soon see more use cases
- Technology solutions and services companies will have to work as an enabler to solve technical, functional and data-related challenges, and provide robust resolutions by integrating newly required data points from EHRs, claims adjudication systems, patient portals / tools / mHealth apps, pharma companies etc. and employ effective and efficient data processing and analytic tools while protecting patient information