Healthcare reimbursement in the U.S. is undergoing a fundamental transformation. The Center for Medicare & Medicaid Services has led this transformation, announcing that 50% of all Medicare payments will shift from fee-for-service to alternative payment models by 2018. Pharmaceuticals have been entirely omitted from these plans, as Medicare is legislatively prevented from negotiating drug prices. Hence, manufacturers and private payers are expected to play a dominant role in determining payment models that reimburse pharmaceutical manufactures for value in the form of patient outcomes, rather than the pills, themselves.
In previous interviews conducted by ZS for the National Dialogue for Healthcare Innovation, a summit held by the Healthcare Leadership Council to address healthcare innovation, cost stability and system sustainability, executives from a diverse array of healthcare companies identified a number of barriers to improving value, including regulatory and policy changes. Executives indicated that Medicaid “best price” regulations severely limit the ability for manufacturers to develop innovative, alternative payment methods with payers. For example, a payment system that reimbursed treatment for patients with a positive response to a drug would risk triggering a $0 price for Medicaid if some patients don’t respond.
Current anti-kickback statutes also create regulatory uncertainty regarding the formation of these payment systems. The lack of a safe harbor for these structures limits the ability of manufacturers to collaborate with payers to deliver value to the health system, such as incentives to encourage patient adherence.
Two companies that participated in our interviews recently have taken a more public stance on these regulations. Anthem and Lilly publicly detailed their proposed changes to federal anti-kickback and “best price” regulations in Health Affairs in late January, reflecting a shared interest in payment methods that deliver better value to patients. They wrote, in part: “We’ve identified two areas that we believe must be addressed in order to unleash a new wave of innovative approaches to pharmaceutical pricing: 1) facilitating more robust communication between health plans and drug developers prior to drug approval, and, 2) addressing legal and regulatory barriers to value-based payment arrangements.”
The collaboration of these two organizations lends a powerful voice to the recommended regulatory change, yet we anticipate that the ultimate inclusion of pharmaceuticals in value-based payments systems will result from a cautious market evolution. The success of legislative and regulatory changes that are required is uncertain, especially given the contentious political environment in the U.S. Similarly, we anticipate that both payers and manufacturers will cautiously adopt these new payment models, especially given the logistical barriers of measuring the health outcomes that these contracts require.
In this ongoing transition, pharmaceutical companies should proactively prepare their organizations for a value-based payment system. Stakeholders from individual physicians to large organized customers are increasingly valuing the health outcomes associated with a particular product. Some manufacturers have been very successful in distinguishing their products from the competition by determining health outcomes, such as reduced mortality rates.
The ability of an organization to collect this data in the form of clinical trials and health economics and outcomes research (HEOR) will become increasingly important. These studies will provide the important evidence of a product’s economic value as payers and providers are increasingly managing treatment options. To best communicate the results of these studies, organizations should tailor a product’s value story to particular customer segments, including the development of segment-specific marketing materials that reflect unique decision processes within payers and organized provider systems. One important aspect of this tailoring will involve engaging payers and providers by collaboratively conducting HEOR studies with these customers’ in-house data.
As more payers and providers begin to embrace value-based contracts, real-world outcomes will determine both contracting terms and product reimbursement for pharmaceutical manufacturers. For example, Novartis recently has agreed to value-based contracts with Cigna and Aetna for its cardiac medicine, Entresto. In this case, the rebate that each payer receives can increase or decrease depending upon health outcomes around reduced hospitalizations rates. Similarly, Amgen and Harvard Pilgrim agreed to a value-based payment system for the cardiac drug, Repatha, while Express Scripts has launched an oncology-specific value-based program for 2016.
These types of contracts can be a win-win for the healthcare system as a whole. They provide payers an opportunity to reduce their short-term risk and maximize the long-term value that a drug may provide by improving a patient’s health. Manufacturers can share some of payers’ short-term risk, facing financial implications if the drug isn’t as effective, in exchange for decreased market access restrictions, allowing the pharmaceutical to get into more patients’ hands.
To help increase patient access, market access and pricing teams should consider the strategic value of risk-sharing agreements, especially when launching a new product. These contracts will be most effective for products whose value is associated with long-term health outcomes, especially if the clinical evidence for these outcomes isn’t known at launch.
In the near future, there are still a number of barriers to a more widespread adoption of value-based contracts. Some companies are concerned that current pricing practices aren’t reflective of the value of a pharmaceutical. Manufactures are reluctant to initiate contracts that risk demonstrating that a product, on its own, doesn’t convey more value than the alternatives. Similarly, payers and providers are concerned that drugs, especially for chronic conditions, are adding more long-term value than their current price. Logistically, many payers and providers also lack the infrastructure to measure the health outcomes that these contracts require.
Ultimately, we believe that Medicaid’s “best price” and anti-kickback regulations will be changed as a system-wide transition to value-based payments, and this also will include pharmaceuticals. In the short term, pharmaceutical companies should evaluate their commercial strategies in marketing and market access and pricing to prepare for this future. In the longer term, they’ll have to re-evaluate their portfolios with a focus on improving patient behaviors and outcomes. The ability to more freely partner with payers and providers will require manufactures to begin considering the additional support services, technologies and applications that these partnerships require.
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