Value-Based Care News

3 Value-Based Pharmaceutical Contracting Options for Payers

Payers looking to enter into value-based pharmaceutical contracting have three main options for designing profitable arrangements.

Three value-based contract options for payers

Source: Thinkstock

By Thomas Beaton

- Value-based pharmaceutical contracting offers health payers the option to lower drug prices while improving patient outcomes.

These contracts come in several different forms, according to Dr. Surya Singh, Chief Medical Officer of CVS Specialty, each with its own benefits and advantages.

Value-based contracts are important in the prescription drug environment because they can help ensure that consumers are receiving the maximum benefit from the products they are purchasing, said Singh.

“Across most consumer goods industries, the price of a product or service is determined by the value it creates,” he said. “Plainly stated, you would not pay for something that does not work or is only partially effective. In health care, however, this is not always the norm.”

Three types of value-based pharmaceutical contracts, including indication-based management, outcomes-based contracting, and cost-cap based contracting, can help payers effectively manage prescription drug value that suit their business needs.

Indication-based management

Indication-based management contracts determine the value of the drug by the relative cost of a patient’s health condition, such as associated costs of a chronic disease.

Indication-based management helps ensure that the right patient gets the right drug for the right condition. These contract models can also increase competition among the various products that are safe and effective for patients with a common condition, helping to lower costs.

“Indication-based management strategies in autoimmune categories provide preferential formulary placement for the most cost-effective, clinically appropriate drug therapies in these classes at the indication (instead of drug) level,” Singh explained.

“This helps maximize health outcomes for patients and minimize costs for payers by preferring the highest value drug option for that specific condition.”

Outcomes-based contracting

Outcomes-based contracting is a value-based contract design that ties drug reimbursement rates to actual health outcomes. These contracts provide payers with a blueprint for how to cut prescription drug costs through proactive management of patients with chronic diseases.

In an outcomes-based contract, a manufacturer may be required to show, for example, that A1C levels for diabetics would be lowered by a certain percentage in line with the evidence used to support FDA approvals. If similar goals are not reached in an outcomes-based contract, a manufacturer could pay incremental rebates to meet outcome-based value.

“Diabetes is a top drug trend driver for payers each year with double-digit, year-over-year price inflation,” Singh said, which makes it a prime use case for outcomes-based contracting.

Cost-cap contracts

Payers may also find that cost-cap based contracts best fit their value-based care goals if they are looking to treat a large beneficiary population through novel therapy-class medications.  

This arrangement is likely to be useful when a new drug comes to market at a much higher price than other drugs in the class. A pharmacy benefit manager (PBM) would negotiate formulary placement and a maximum per-member-per-month cost of the drug.

“In addition to a favorable price and/or rebate, the manufacturer may also provide additional value if the PMPM cost exceeded the threshold,” Singh said.

The results of carefully selecting an optimal value-based contract can promote market competition that makes it easier for payers to lower prescription drug costs, and help improve patient outcomes without needed overspending.

Experts believe that these contracts will hold more significance in the healthcare industry moving forward.

“Overall, we believe that a thoughtful approach to selecting or constructing the right value-based model for different drug categories will help to catalyze the movement and ensure that the right drug reaches the right patient at the right time,” concluded Singh.