What is payer contracting?

What is the Focus of Manufacturer/Payer Contracting?

Given that manufacturers are already contracting with GPOs, many actively avoid contracting with payers and PBMs for their medical benefit products. Ten years ago, payer/PBM contracting in the medical benefit space was quite rare, as payers were not practicing utilization management for these products; as a result, patient access was not an issue for manufacturers.

In the past few years, treatment options have grown significantly. In some therapeutic areas, especially oncology and rare disease, a host of pharmacy benefit drugs have been introduced to what was previously a medical benefitonly space. When treatment options include oral and self-injectable drugs on the pharmacy benefit side, the restrictions commonly used to manage formulary drugs tend to bleed over to an indication’s medical benefit counterparts.

While in-office GPO contracting is still much more prevalent than payer contracting, MMIT data reveals that payer contracting for agents under the medical benefit is already robust. In an MMIT Index survey of large national and regional MCOs and PBMs, payers representing 51% of commercial lives reported contracting is in place for at least some medical benefit products, while payers representing 28% of lives said that most of their covered medical benefit products have contracting.

In the next few years, increased payer/PBM consolidation will likely drive additional contracting, as we’ve seen with the mergers of Aetna/CVS and Cigna/Express Scripts. As PBMs’ utilization management practices have proven quite effective at reducing costs, we’re likely to see them spread into the medical benefit space.

What is the Focus of Manufacturer/Payer Contracting?

Manufacturer/payer contracts run the gamut from traditional rebate agreements, which offer rebates based on the contractual terms, to more creative value-based contracts, which may use outcomes-based metrics to assess a drug’s performance.

One of the factors that has historically driven heavy manufacturer/payer contracting for pharmacy benefit products is that it is relatively easy to track formulary placement. If a payer places the drug on tier two as their manufacturer contract requires, then the manufacturer pays them a rebate; if the payer keeps the drug on tier three, then they don’t receive a rebate.

For medical benefit products, manufacturers are more often focused on easing providers’ administrative burden, as pre-certifications for these products are both more frequent and more complex than those for pharmacy benefit drugs.

For example, when the first PCSK9 inhibitor drugs came out to reduce low-density lipoprotein cholesterol, pre-certifications required physicians to answer a list of 45 questions and include a copy of their chart notes. Manufacturers of both Repatha and Praluent offered rebates to payers who agreed to remove the requirement for extra documentation, as it places an unnecessary burden on providers.

How are Traditional Payer Contracts Structured?

In a traditional contracting scenario, a payer or PBM will pay the full WAC for the drug, and then receive a percentage of that cost back once they meet their contractual requirements.

Medical benefit rebates are typically based on the full cost of the medical procedure. Manufacturers can try to negotiate for their drug to be billed separately through a specialty pharmacy so the rebate is on the drug only, but prescribers rarely prefer being forced through pharmacy benefit for a physician-administered product.

Your team should consider the needs of all parties in the transaction and safeguard the provider’s profit margin, which will increase the likelihood that your drug is prescribed. Your team might also negotiate with the payer or PBM to grant your product preferred status within their medical policies, indicating that your drug is considered the first line of treatment, which must be tried and failed before the patient tries any other drugs.

Payers/PBMs might also signify a drug’s preferred status by reimbursing it at a higher rate over the ASP relative to its competitors, thereby nudging providers to prescribe it. Less commonly, a manufacturer might be able to negotiate for the removal of pre-certification restrictions.

Contracts can also include graduated rebate scales, which can specify a higher or lower rebate given the degree of product preference. For example, removing all step requirements for only your drug might warrant the highest rebate percentage, while removing step requirements for both your drug and a competitor’s might reduce that rebate percentage.

How are Value-Based Payer Contracts Structured?

According to the MMIT Index survey, payers representing 56% of commercial lives report occasional use of valuebased contracts for medical benefit products, a percentage which is expected to climb. The use of value-based agreements varies significantly by therapeutic area; currently, rare diseases and hematological, neurological, and respiratory disorders are the most likely to be associated with such a contract.

Typically, a value-based agreement uses measurable clinical outcomes to assess the efficacy of treatment. Payers and manufacturers must agree upon an expected outcome, as well as the reimbursement or rebate terms if the product fails to produce that outcome. For example, a patient getting an infusion to treat urothelial cancer might be assessed based on four comorbidities. If the cancer metastasizes in another part of the body, or if the patient ultimately loses a kidney, the manufacturer might be required to pay for the patient’s past infusions, because they were not beneficial.

Less common examples of value-based agreements include a differentiated rebate structure based on the patient’s indication or diagnosis, or capping the cost of a curative drug that is only used for a definitive period. In cost-cap scenarios, a payer might agree to prefer a product as long as the manufacturer agrees to reimburse them if the payer exceeds a specific per-patient total expense.

When Should You Consider Contracting with Payers?

Despite widespread reluctance, medical benefit contracts are already happening at scale, primarily in indications where there are multiple therapies available for the same patient. A good rule of thumb to frame this question is the rule of three. If your ideal patient population has three available therapeutic options, the fourth entry into this space is likely going to need to contract with payers/PBMs. When there are only one or two drugs available for a given patient, access is generally not controlled.

With the advent of three or more therapies designed for the exact same patient population, however, payers and PBMs will undoubtedly create utilization management restrictions to guide providers and reduce costs. Once the first manufacturer in an indication negotiates a payer/PBM contract for improved access to their drug, the rest of the manufacturers in that space will eventually follow suit—or lose access and market share.

How are Contracting Requirements Tracked?

Tracking whether a payer has met the requirements set forth in a manufacturer’s contract is much more difficult for medical benefit drugs than it is for pharmacy benefit drugs. If your company enters into contractual agreements, you assume the administrative burden of determining payer compliance, which typically requires hundreds of hours of manual verification.

As the rebate payment process is neither transparent nor easily monitored, most manufacturers end up losing millions of dollars every year in rebate leakage. By automating the contract validation process, your team can simplify verification and prevent leakage. Your contractual formulary and medical benefit requirements can be automatically crosschecked against payer coverage data to confirm compliance—and ensure that your company is not paying for unrealized market access.

Learn more by reading the full ebook The Essentials of Market Access: How to Build a Strong Commercialization Strategy for Your Pharmacy Benefit Therapy.