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How payers are tackling value-based drug pricing

A growing number of value-based drug pricing arrangements are tying the price of treatments to outcomes. While these payment models are far from prominent now, is it likely that drug makers will have a greater share of the risks and rewards associated with value-based care moving forward?

Untapped potential in value-based drug pricing

Over the past couple of years, Dr. Bimal Shah has seen dozens of value-based drug pricing contract negotiations falter. As vice president for the research division of Premier, a provider-owned healthcare improvement company, he oversees research to identify opportunities for value-based drug pricing. Despite a focus on value-based drug pricing, Premier has yet to enter a value-based drug pricing contract. However, Dr. Shah said there is reason to believe that these payment models could be transformative.

There is a lot of talk surrounding value-based drug pricing, but there is decidedly less action. A total of 20 performance-based, risk-sharing arrangements were established between payers and drug or device makers from 1993 to 2013, according to a review published June 2014 in Applied Health Economics and Health Policy. Only four of these focused on drugs.

While value-based drug pricing contracts have been slow to gain traction, it seems like payers are more actively looking to implement these payment models. Several large payers including Aetna, Cigna, Humana and UnitedHealthcare have recently announced value-based drug pricing contracts with various drug makers. If executed correctly, these payment models could deliver benefits to providers, payers and drug makers.

Who benefits from value-based drug pricing?

The benefits for payers are somewhat obvious, according to Jason Shafrin, a senior research economist at Precision Healthcare Economics. Value-based drug pricing contracts mean they pay less for ineffective treatments. The benefit for providers becomes more obvious as they are assigned more of the financial risk associated with care. With payments increasingly tied to outcomes, providers want drug makers to share that risk.

Incentives for drug makers to enter value-based pricing contracts are also growing. These payment models have the potential to be lucrative for drug makers whose research leads to treatments. For instance, a drug maker might have a hard time convincing providers and payers that a new treatment is worth the higher cost compared with other options, Dr. Shah said. Value-based drug pricing challenges drug makers to prove the value of their products if they want to be paid full price.

If value-based drug pricing has the potential to introduce more value to healthcare, why aren’t these payment models more prominent? There are a lot of complexities to these payments, Dr. Shah said. “We’ve been in a lot of conversations, but executing it is a lot harder than talking about it.”

Finding the sweet spot in value-based drug pricing contracts

Two of the key questions that decision-makers are trying to answer are, according to Shafrin, how do you measure value and how do you tie payment to value?

“Value is not an intrinsic number as value varies depending on the stakeholder of interest,” Shafrin said. For instance, his own research on cancer care has indicated that providers value treatments that offer improvements in average or median survival. Meanwhile, patients value treatments that offer a significant chance at long-term survival even if average or median survival gains are lower. “Value should be defined as ‘value to whom.’”

Dr. Shah’s experience at Premier seems to support the claim that divergent stakeholder interests can prevent all parties from hammering out the details to a value-based drug pricing arrangement. During his time with Premier, he and his colleagues have explored various mechanisms to get all stakeholders on the same page. However, they haven’t quite figured out how to balance the scales in a way that doesn’t leave one side feeling like they’re giving up too much.  

“How do you find that happy middle ground where everyone sees it as a win – a win for the patient, a win for the provider, a win for the payer, and a win for the manufacturer?” Dr. Shah said. “That sweet spot is what we’re trying to find.”

Other barriers to value-based drug pricing

Disagreements among stakeholders isn’t the only thing holding value-based drug pricing back. Administrative and technical burdens can be costly. Additionally, there are regulatory obstacles to be considered.

Implementing a value-based drug pricing arrangement means additional patient monitoring and exchange of health information between provider, payer and drug maker. The costs associated with increased monitoring, interoperability issues, and potential for patient privacy breaches often outweigh the potential improvements to be made in a value-based drug pricing arrangement, according to Shafrin. For this reason, it often doesn’t make sense to have value-based pricing for lower cost treatments.

Many recent healthcare reforms are intended promote value-based care. However, some older rules and regulations might be hindering some of these initiatives. Shafrin pointed to the Medicaid best price requirement. This discourages drug makers from offering treatments at a lower price in value-based pricing arrangements because they would potentially have to honor that lower price with Medicaid. Dr. Shah noted that the Anti-Kickback Statute can sometimes complicate value-based drug pricing contracts.

Despite these barriers, it seems payers and providers will find a way to transfer some of the risk, as well as the potential rewards, of value-based care to drug makers. If drug makers are confident that their products can help improve outcomes, they might want to play along. “What society is saying with value-based pricing is that if you produce a drug with huge health benefits, we are willing to pay a lot to incentivize the development of these types of treatments,” Shafrin said. 

Filed Under: Payer
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