Growth of Warranty-Based Contracts
As payers grapple with their ever-increasing spend on healthcare services, many are entering into various arrangements with pharma manufacturers to help mitigate their risk when paying for cell, gene and specialty therapies—which often have price tags ranging from several hundred thousand to millions of dollars. A warranty-based agreement is one approach that can benefit both stakeholders. These agreements can potentially boost the uptake of high-cost treatments by increasing the likelihood that payers will cover products, particularly those with unclear efficacy or durability.
Warranty-based agreements function similarly to any product warranty. Drugmakers agree to reimburse payers — as well as patients, in some instances — a certain amount, or all, of what they spent on a therapy if it fails to work as intended, or if a patient discontinues it for clinical reasons. These agreements are typically in effect for a specified period of time or number of treatments, and they may be administered by manufacturers themselves or a third party.
Among drugmakers who have entered into these contracts, Pfizer has offered warranties for its metastatic non-small cell lung cancer (NSCLC) drug Xalkori, as well as for Panzyga, a therapy for people with chronic inflammatory demyelinating polyneuropathy. Takeda struck a deal with Point32Health for its metastatic NSCLC treatment Alunbrig. And many of the cell and gene therapies, including all three agents approved for hemophilia, offer them.
Free From Best Price, Kickbacks
Notably, warranties are not factored into the Medicaid Best Price Policy, nor are they considered kickbacks. As part of the Medicaid Drug Rebate Program, the Medicaid Best Price policy requires manufacturers to provide drugs to state Medicaid programs at a comparable or lower net price than it offers them to commercial payers. Drugmakers have long been concerned that rebates offered via warranties would be calculated into their best price, forcing them to offer the same rebate to all states.
To allay these concerns, the Office of Inspector General and the Department of Health and Human Services published a final rule in 2020 that, among other things, modified the safe harbor for warranties to “protect low-risk, beneficial arrangements without opening the door to fraudulent or abusive conduct that increases Federal health care program costs or compromises quality of care for patients or patient choice.”
Increasing Utilization
In Q3 2024, the MMIT’s Managed Care Biologics and Injectables Index polled 35 commercial payers covering 120.8 million lives about their experiences with warranties. Those results revealed that more payers are engaging in warranty-based contracts than not.
Respondents covering 69% of lives said they currently have such a contract, while those with 30% of lives said they did not have one currently, but planned to in the future. Payers with a warranty-based agreement in place averaged eight contracts per payer, with some having only one, and one PBM reporting 50. The agreements were for rare/orphan diseases and oncology indications.
Dynamic Pricing Model
Survey respondents said that about $500,000 for a treatment is the critical point where they would consider entering into a warranty, although independent plans and PBMs seem to have a lower threshold than large national players and regional/Blues affiliates. This is not surprising, however, as independent plans are generally smaller, and PBMs are dealing with many high-cost specialty pharmacy benefit products. Perhaps manufacturers looking to engage in warranty-based products should consider a dynamic pricing model based on payer type.
All of the respondents cited the high cost of a product as the main reason for engaging in warranties. Secondary reasons included unknown product efficacy, approval via the accelerated pathway, and a lack of strong durability data.
If an agent is so expensive that payers are willing to cover it only if a warranty is available, payers should be communicating their concerns with manufacturers and advocating for a mutually beneficial warranty-based agreement. Similarly, manufacturers should be aware of instances where patients are experiencing difficulties with adherence or relapse. There are multiple ways for payers and manufacturers to come to an agreement on what success looks like for these products.
Selecting a Clinical Outcome
Respondents said that the main challenge they have encountered with warranty-based contracts is outcome selection. Manufacturers can align with payers on this subject by first defining what success looks like for a course of treatment. They should also determine and clarify common issues patients face with the treatment. Drugmakers should then communicate the criteria for the product’s clinical trials.
Warranty-based contracts are meant to ensure that therapies are working as intended. Payer and provider feedback can give manufacturers real-world insights into how patients are utilizing their products and the problems they may be facing. By considering the goals payers are trying to achieve with their members, whether it be patient adherence or lack of relapse, manufacturers and payers can come to an agreement on suitable terms for these contracts.
Member Erosion
One concern payers have with warranties is what happens if a member switches to a different payer in the middle of the agreement. Survey respondents representing 26% of covered lives said they would consider that patient lost to follow-up, and receive no reimbursement for the drug’s cost. However, payers representing 41% of covered lives said they would seek reimbursement from their former member’s new payer.
In conclusion, manufacturers should keep in mind that payers are risk-avoidant organizations. With the rise of high-cost products that may also have uncertain efficacy, many payers are open to entering into warranty-based arrangements. Ultimately, manufacturers and payers share the common goal of ensuring that a drug proves effective for patients in need. By carefully structuring such agreements to mitigate risk for both payers and manufacturers, more patients will be able to access these life-saving therapies.
For insights into payer perspectives on utilization, contracting, and management, learn more about MMIT’s Biologics & Injectables Index.
