Engaging in Risk-Sharing Agreements with Providers

Nov 10, 2017

With spiraling healthcare cost inflation and outcomes that lag many other developed economies, CMS is driving reform aimed at better quality and lower cost, and private payers are following suit.

Both state and private payers are moving toward alternative payment models like episodic payment or capitation that make providers accountable for cost and quality. Such arrangements obligate providers to manage against agreed-upon quality criteria and pre-set cost targets in return for a share of potential savings and increasingly, financial risk for missing them. Consequently, providers are beginning to look for ways to spread their risk by adopting risk-sharing agreements (RSAs) with manufacturers.

Providers are interested in RSAs with manufacturers for various reasons:

• avoid the cost of product use in non-responders,

• require manufacturers to demonstrate confidence in their product,

• gain insight into how well a product works with a specific sub-population, and

• demonstrate a focus on clinical quality rather than cost.

As pressure for “better outcomes at lower cost” continues to mount, manufacturers must understand that they too must be accountable for the performance of their products. However, before entering into risk sharing agreements, manufacturers must understand the challenges and implications of these agreements, including considerations for the collection of outcomes data. In addition, manufacturers must be able to accurately assess when these arrangements make sense, and when they don’t.

The rationale for engaging in risk-sharing agreements

Entering into RSAs requires manufacturers to carefully consider their ultimate goals for participation. These can include:

• accelerating market access and premium pricing against entrenched competition;

• achieving competitive differentiation and making a statement about the brand;

• developing additional insights into particular patient populations; and

• building deeper relationships with key payers and providers.

RSAs are complex agreements that take considerable time to develop. A key first step is to gain internal alignment on the goals for the initiative, who will be involved in the approval process, and when go/no-go decisions will be made. Sometimes manufacturers are approached with an opportunity and start working on bringing it to fruition without first gaining internal agreement that the effort is justifiable.  This results in unnecessary expenditure of time and resources. It can also damage the customer relationship.

Another consideration for manufacturers is the type and level of risk they are willing to assume. Internal discussions should focus on defining the specific therapeutic areas and products where a RSA might be advantageous, how much risk is acceptable, how success will be measured, and criteria for identifying a good partner. Exploring these topics in advance of customer conversations will help manufacturers to ensure that potential benefits of an RSA are significant enough to justify the effort and risk.

Risk-sharing agreements can take many forms

Once the goals of the RSA are clear, manufacturers need to determine the best agreement structure. Ways to structure RSAs vary based upon the amount of risk assumed by each party. The risk proposed in the agreement can be upside, downside or a combination. The most common of these arrangements are finance-based and outcomes-based agreements.

Historically, finance-based risk arrangements have been more common than outcomes-based approaches.  Finance-based risk arrangements involve setting caps or limits on the amount of spend per product or patient.  For example, Italy will pay a set price per patient for Avastin® when it is used for the treatment of approved cancers.  In addition, the UK agreed to pay for up to 14 injections of Lucentis® for treatment of wet AMD; if subsequent doses are required, Novartis has agreed to reimburse for them. 

Outcomes-based risk arrangements involve establishing an outcome metric target that must be achieved before additional payment is made or a rebate is offered. As an example, Merck and CIGNA agreed to link the price of Merck’s Januvia and Janumet (two of the company’s leading diabetes drugs) to how well the products lowered blood sugar levels in patients with Type 2 diabetes. 

Determining what to measure and how has been an ongoing challenge in creating these types of agreements, however, they are not uncommon. Outcome-based agreements present an opportunity to engage in good faith collaborative efforts with provider stakeholders to facilitate improvement in the standard of care in the therapeutic areas where manufacturers have products to bring to the table.

Challenges of risk-sharing agreements

One of the biggest challenges of RSAs is determining how to structure these types of arrangements. Providers and manufacturers must be clear about the mutual goals they are trying to achieve – and if a finance-based or outcomes-based model is better. For outcomes-based agreements, it is critical to ensure that the measures tracked are objective, clearly defined, reproducible and difficult to manipulate. In addition, consideration must be given to how the outcomes will be captured. The extent to which current tracking mechanisms can be used will help minimize objections for moving forward.

Opportunities in risk-sharing agreements

Although RSAs carry risk, they also create opportunities for manufacturers. One of the greatest opportunities is the ability to develop a deeper relationship with a provider. Through discussions, manufacturers have the opportunity to gain insight into the provider’s operations and goals, and to create greater alignment. These insights can enable a stronger working relationship that will be helpful in the future.

Outcomes-based agreements also provide the opportunity to develop data about a particular population. This data might provide both the manufacturer and provider with insight on how they can create further differentiation from their respective competitors. To the extent a manufacturer can learn about how well its product works with a particular subpopulation, it can leverage that information in future negotiations with other providers as well as with payers. Similarly, providers can use their insights to demonstrate better quality care for their specific population – something that is becoming more critical in the rapidly consolidating marketplace.

Preparing for opportunities with provider organizations

To date, the majority of manufacturer-provider agreements are with medical device manufacturers. One of the most recent was put in place between Medtronic and over 100 health systems. Reflecting confidence in the performance of its heart devices, it has agreed to pay a ‘substantial rebate’ toward costs of removal and replacement of an infected device.

Increasingly, many pharmaceutical companies are starting to explore which of their products may be well positioned for RSAs with providers. Throughout this process, it’s imperative to consider:

• Where and how is your drug reimbursed in the hospital system? Is it part of a bundled procedure, or billable as an additional service?

• What’s the economic and clinical value of your drug compared to its competitors?

• Does your drug improve hospital outcome measures and/or reduce risk of penalties? If so, how do you quantify that result?

• Is your drug better suited for a financial- or outcomes-based risk agreement?

• Is the hospital able to track the outcome measure that suits your drug? If not, how difficult would it be to track it? How objective is the measurement?

• Is the agreement a win-win-win for the hospital, your company, and the patient?

A promising future

Risk-sharing is an old concept that is gaining renewed attention as providers struggle to meet growing demands for better outcomes at lower costs. Payers have made clear their intention to share risk with providers, and providers will increasingly look to manufacturers to do the same with them. Those organizations that spend time determining how and when these arrangements might be beneficial will be best positioned to respond to providers. Many manufacturers are taking the time to evaluate the pros and cons; are you?

Kimberly E. White, MBA is a Vice President at Numerof & Associates, Inc. (Numerof), a strategic management consulting firm focused on organizations in dynamic, rapidly changing industries. www.nai-consulting.com.

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