Value-Based Pricing Interest Stays High, But Headwinds Could Hamper Uptake

Payers and manufacturers continue to exhibit broad interest in executing value-based pharmaceutical pricing agreements. But multiple factors — some of them amplified by the coronavirus pandemic — could pose challenges for those agreements as the health care industry tries to shake off effects of the pandemic and get back to more normal business, industry stakeholders say.

There’s likely to be a growing role for value-based pacts for very complex products, particularly in oncology, even as increased transparency on consumer pharmaceutical prices hampers prospects for value-based agreements for more straightforward drugs and other products, says Ashraf Shehata, partner and advisory industry leader for health plans at consulting firm KPMG.

“The overall model of value-based pricing is still very promising and certainly the right thing,” Shehata says. “But I do think this is a year where we are probably going to be facing more headwinds than tailwinds.” For example, he says, the health insurance trade group America’s Health Insurance Plans (AHIP) reported in January that “Big Pharma” has increased prices for at least 582 brand-name drugs. “The price hikes continue a long-standing pattern for Big Pharma,” AHIP said in a press release. “Pharmaceutical companies raised prices for 639 drugs in January 2020, and for 486 in January 2019, according to [data from] GoodRx.”

AHIP “is basically excoriating the pharmaceutical industry,” asserts Shehata. “This is the trade organization taking a position on pricing. And it’s setting a different tone for the year. I think we’re going to see this as a year for what I call post-pandemic settling and obviously post-election-year settling.” That could mean fewer value-based contracts are negotiated, he says, even if there’s a significant amount of public discussion surrounding unit costs for drug pricing.

Much of this dynamic is being driven by the volume of COVID-19 vaccine pricing and distribution, he says, adding, “I think it’s going to probably be more of a year focused on pricing rather than value-based discussions,” particularly since organizations may not want to get out beyond their comfort zones while they’re still coping with the aftereffects of the pandemic.

However, research from consulting firm Avalere Health shows there’s still broad-based interest in value-based pharmaceutical agreements, with little effect — at least through mid-2020 — from the pandemic, says John Linnehan, practice director at Avalere.

“We did ask payers in 2020 whether the COVID-19 pandemic has had an impact on how they are approaching outcomes-based contracts, and, interestingly enough, almost 70% said no,” Linnehan tells AIS Health. “This makes sense because health plans are being stretched in other ways as a result of the pandemic. The promise of value-based contracts is to guarantee paying for value, and that can only help when focus needs to be in other places as a result of the pandemic.”

Majority of Payers Have Contracts

The survey, conducted in August with 50 health plans and PBMs representing roughly 57 million covered lives, found that among U.S. commercial payers, familiarity with and uptake of outcomes-based contracts increased between 2017 and 2020, and the number of payers with an outcomes-based contract in place has increased substantially since 2017.

Some 61% of payers said they have executed outcomes-based contracts, an increase from prior years, and 75% of payers with such contracts in place also are considering additional ones. Existing contracts continue to focus on a broad range of therapeutic areas related to primary and chronic care — for example, cardiovascular disease and endocrinology — with a renewed 2020 focus on infectious diseases, Avalere found.

Value-based agreements are in force for both specialty drugs and primary care drugs, says Linnehan. “Historically, we saw more outcomes-based contracts in primary care conditions, where maybe the drug prices weren’t quite as high, but the volume was considerable, and therefore the exposure to health plans was significant,” he says. “That’s where we saw early growth in outcomes-based contracts over the past eight to 10 years. But more recently, we have seen more nuance and more innovation in the specialty area and a broader focus on drug pricing, and we’ve seen growth of outcomes-based contracts in specialty areas where the volume of patients may not be as high, but the cost of the drugs is significant.”

Oncology Is Seeing Increase in Interest

In Avalere’s 2020 payer survey, the top two therapeutic areas of interest to payers for value-based pricing were cardiovascular disease and oncology, Linnehan states. “So there’s consistent interest in primary care, which is where I put cardiovascular disease, but also significant growth and interest in oncology. I don’t think that’s a surprise when you consider the growth of innovative products that are on the market in the oncology space.”

There’s even some interest in value-based pricing for COVID-19 vaccines and therapeutics although it’s unclear how well such pricing models could work in practice. Four Tufts Medical Center researchers, writing in the January edition of Health Affairs, argued that payers shouldn’t write off the idea of value-based pricing just because it would be challenging to do in the midst of a pandemic.

“No. 1, pricing therapeutics and vaccines in a pandemic is complicated and fraught. No. 2, a mix of public and private approaches are needed. No. 3, that should all be informed by formal cost-effectiveness analysis,” says lead author Peter Neumann, director of the Center for the Evaluation of Value and Risk in Health at the Institute for Clinical Research and Health Policy Studies, Tufts Medical Center.

“We still have to put a limit on the price — we can’t pay limitless price. So we need to think about what the price should be. And that’s where we talk about the idea of using cost-effectiveness data,” Neumann tells AIS Health.

However, F. Randy Vogenberg, Ph.D., principal of the Institute for Integrated Healthcare, says that incorporating value-based pricing into procurement during the coronavirus pandemic may not be practical. “The market is not ready to work this fast nor change their pricing in the pandemic,” he says. “The scenarios in Health Affairs may be logical or scientifically sound from an academic perspective but not real-world.”

He says that “there has been pent-up demand for real-world information [on pricing] in real-time, something that has yet to happen.” Realistically, Vogenberg tells AIS Health, payers are unlikely to implement any truly value-based strategy during the pandemic.

Outcomes Data Is Critical

Data is key, even in a pandemic, says Linnehan. “There’s the dichotomy between, ‘we’re in the middle of a pandemic right now,’ versus being able to collect longitudinal data on outcomes to substantiate value-
based care,” he says. “I think this is where we need to rely on data analytics and predictive modeling to be able to shed some insight into what’s going to happen.”

Advanced analytics can help to “bridge the gap” between short-term results and long-term outcomes by using historical data to assess how different outcomes measures are impacted by shifts in utilization and then overlaying that historical knowledge on top of the real-time trends in use to project what’s likely to happen going forward, Linnehan says. This could aid in crafting value-based agreements, he says, but he adds that it’s difficult since “we’re still dealing with the acute phase of the pandemic.”

Beyond the disruptive force of the COVID-19 pandemic, there are real headwinds in play, Shehata points out, as payers and manufacturers consider how to implement value-based pricing agreements in 2021 and beyond. These headwinds include consumer tools that provide an ever-clearer window into drug pricing, plus the current political environment, he says.

Consumer tools such as website GoodRx make it harder for the industry to create value-based agreements, since consumer-facing retail tools — in use by a growing number of patients — focus exclusively on the lowest price, says Shehata.

There’s also some momentum in Congress for action on drug pricing, which might work against value-based agreements, he explains: “You need to have a little bit of room in the transaction to transfer them from pricing- to value-based. If the market is pushing on the price, that room basically goes away, and it will be much harder to structure those agreements.”

These headwinds Shehata sees affecting value-
based agreements going forward mean that payers and pharmaceutical companies will be more interested in negotiating such agreements for more complex products, particularly new ones. Oncology likely will be one area where value-based agreements continue to take hold, Shehata says, noting that there may be more opportunities there than there were a few years ago.

“Maybe value-based pricing continues to be a very sophisticated tool we use for complicated, highly developed, highly funded drugs around complicated therapeutic areas while we continue to go down the path of the commoditization of pricing for generics and overall pharmaceutical brands,” says Shehata.

Little Publicity Exists for Agreements

Beyond broad surveys such as the one from Avalere, it can be difficult to gain visibility into the number and type of deals being negotiated. Around five years ago, manufacturers were eager to tout their newly inked value-based contracts, and did so with announcements and press releases, Linnehan says: “In some ways, it was a means to demonstrate a commitment to value-based care — behind the scenes, we saw a lot of direct activity and implementation, as well.”

Now, however, there are fewer agreements announced publicly “although our data show that the volume of the agreements is not necessarily decreasing,” Linnehan says. “I think that this is reflecting the fact that value-based agreements are becoming a bit more commonplace, and also manufacturers and plans are getting better at actually implementing them.”

Stakeholders also are seeing more cost savings being derived from value-based contracts, and they are seeing those savings attained more quickly than they have in the past, Linnehan says. “So I think the stakeholders are finding less reason to use them as a means to get attention. They’re just becoming more ingrained in the fabric of pharmaceutical contracting.”

The predominant model for a value-based drug contract continues to be the traditional model that’s dominated for years, says Linnehan: Rebates paid from a manufacturer are “tied in some form or fashion to the attainment of outcomes” as laid out in the contract. These models are easier to implement, and both payers and manufacturers are familiar with them, he says.

Newer Models Are Gaining Interest

Still, Avalere’s research is finding payers putting more weight on other types of models, Linnehan says. For example, payers and manufacturers are reporting the use of agreements where the manufacturer, instead of just providing rebates, provides full or partial coverage of any corrective services or any type of unexpected treatment that occurs for patients taking a particular drug.

“So, for instance, if the value proposition or the outcomes built into a value-based contract are to decrease hospitalizations beyond some baseline level for patients receiving a specific drug or to eliminate the need for certain supportive therapies or other potentially high-cost drugs, then we might see models evolving whereby if that outcome or that decreased utilization is not realized, the manufacturer will effectively pay for the unanticipated care,” Linnehan says.

Avalere’s research is showing less emphasis on cost savings by payers. A vast majority of payers — some 81% — said in the 2020 survey that they expect cost savings from outcomes-based contracts within 18 months of contract initiation, up almost 20% from 2019. However, there was a decrease in the proportion of payers with outcomes-based contracts in place reporting cost savings as an advantage. Meanwhile, improvement in patient management and capture of real-world data have consistently trended upwards as perceived benefits of outcomes-based contracts between 2018 and 2020.

The most typical stumbling blocks in value-based agreements involve the administrative burden, Linnehan says. “It’s still the case that the payers are required to put a significant amount of effort into collecting the data needed to adjudicate the contract and analyze that data. I’ve heard directly from payers that they need a certain level of sophistication and understanding, and not all payers have the capacity to invest in that internally — it’s a considerable amount of work and investment to be able to do this appropriately.”

Larger payers generally have more sophisticated data management and analytics teams, giving them more capabilities surrounding data analysis, Linnehan says. Still, “there are smaller payers who, as an organizational philosophy, want to make investments into value-based care, and part of that is to hire data scientists, programmers and strategists who can support the implementation of this.”

Vertical Integration Has Helped Deals

As vertical integration has accelerated, it has enabled more players to participate in value-based agreements, maintains Linnehan. “The combination of PBMs and payers and providers allows for better interconnectivity and sharing of data, whereas at one point, PBMs really only had insight into prescription drug benefits and couldn’t really have insight into the full benefit that might be realized by a patient taking those particular drugs.”

Therefore, PBMs have more of an opportunity to participate in value-based pharmacy contracts “because they are both providing or administering the pharmacy benefit and in many cases also analyzing utilization, taking advantage of being part of health plans and seeing medical data, and oftentimes even providing wraparound interventions to support things like adherence,” says Linnehan, adding, “vertical integration is really driving that.”

The same holds true for specialty pharmacies since they “are becoming more closely aligned directly with PBMs and directly with health plans,” he says. This gives specialty pharmacies the opportunity to provide more value to their stakeholders since they engage closely with patients and are collecting increasing amounts of data as they do so, he says. “So there’s more opportunity for them to emerge as facilitators of value-based agreements.”

Still, vertical consolidation in the industry also has complicated contract negotiations for value-based pharmaceutical agreements, contends Shehata. “In a normal world, what we would do is leverage the relationships that you have with the distributors and the PBMs,” he says. “You would have a discussion with their medical review boards, and then you’d have an ability to distribute through their payer partners. Now in this new world, many of these PBMs are wholly owned by entities that include the payer. And on top of that, many of these payers are acquiring specialty and primary care practices. So pharmaceutical manufacturers are negotiating against a much larger entity than they were in the past.”

In this world, truly innovative products may draw interest in value-based agreements, Shehata says, while products with marginal benefits may have a more difficult time, he says.

Third Parties May Collect, Analyze Data

To help solve the data problem and drive growth of value-based agreements for organizations that are not vertically integrated, data aggregators and analytics organizations can collect data from the plans or providers, analyze the data according to the terms of the contract and then share the information in real time with all parties involved in the contract, explains Linnehan.

“That enables broader uptake beyond those organizations that just have the [data and analytics] staff internally, and it also gives the added benefit of having a trusted third party who also serves effectively as the auditor of the agreements,” he says. “That supports the building of trust between manufacturers and payers. I expect to see continued growth in third-party intermediaries to really minimize that administrative burden and help all of the stakeholders continue to reap the value that these types of contracts have been proven to provide.”

Over the next few years, Avalere’s data indicate value-based pharmaceutical contracts may evolve beyond traditional drugs and even beyond specialty drugs and devices, says Linnehan.

“In our research, we surveyed about 50 plans, and 56% of those plans stated that the emergence of cell and gene therapies have impacted their approach to outcomes-based contracts,” he says. “At this time, only 15% are actually implementing innovative value-based payment models in this area, but over half of them are considering it in some way.”

Cell, Gene Therapies Are Affecting Deals

Cell and gene therapies, along with other types of durable therapies, obviously are extremely expensive but “have the potential to be highly valuable,” Linnehan says. This will spur innovation in contracting, he contends: “We’re going to see more manufacturers and payers and all of those intermediaries looking for opportunities to not just finance these products but also to tie financing to the attainment and maintenance of the outcomes that one wants to see.”

Payers with a deeper understanding of and experience with outcomes-based contracts are using ancillary services to ensure the success of their contracts, Avalere’s survey found. In the consulting group’s survey, payers’ utilization of ancillary support services to supplement outcomes-based contracts increased from 33% in 2019 to 48% in 2020.

The drug is an expense to the health plan, but it might provide ancillary benefits in the form of decreasing total cost of care or offsetting other medical costs, he says. Manufacturers, meanwhile, are receiving a premium on net prices for the product and
may also experience an uptick in demand for it.

“I would argue to you that when these work, nobody loses,” Linnehan says. “When these contracts work, generally what we see is that the drugs are generating the positive patient outcomes that data suggests they would.”

Access the Health Affairs analysis at https://bit.ly/39JGP7D. Contact Linnehan via Avalere spokesperson Liz Moore at lmoore@avalere.com, Shehata via KPMG spokesperson William Borden at wborden@kpmg.com, Neumann at pneumann@tuftsmedicalcenter.org and Vogenberg at randy@iih-online.com.

by Jane Anderson

Freelance Reporter Freelance Reporter

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