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Outcomes-based contracts seem to have the potential to make drugs more affordable, but not without mutually-beneficial, data-driven arrangements.
These days, the phrase “affordable drug prices” seem more like a laughable contradiction of terms than a reality for American patients. Drug spending in the U.S. is out of control, with prices that tower over those quoted in other developed nations. To put this into perspective-in 2013, one study estimated per capita spending on prescription drugs in the U.S. to be $858,1 a number that seems sky-high when compared to the average $400 spent in 19 similarly developed nations. If these elevated prices were due to costly innovations entering the market, perhaps the problem wouldn’t be quite so pointed. However, another report published in Health Affairs suggests that year-over-year price hikes on existing drugs, not newly-developed ones, are to blame for high overall costs; between 2008 and 2016, researchers for the above report found that the cost of brand-name oral prescriptions drugs climbed more than nine percent a year,2 while the annual price for injectable medicines soared over 15%. Incomes and insurance packages can’t keep pace with the hikes-patients need a solution that can alleviate their cost burden.
Relief may come from an unexpected source: the drug companies themselves. Over the past decade, pharmaceutical manufacturers have held up outcomes-based deals-private agreements between drug suppliers and purchasers-as the healthcare sector’s golden ticket to affordable prescription spending. The idea has picked up considerable interest, too; a recent Avalere Health Survey reported that 25% of participating health plans and pharmacy benefit managers expressed “a great deal of interest” in outcomes-based contracts,3 while 49% has “some” interest in the solution.
Proponents tout outcomes-based contracts as the remedy to painfully high drug prices-but will it be a long-term solution or only a short-term fix?
Let’s consider the issue.
As the name suggests, outcomes-based contracts are private deals between pharmaceutical companies and health plans,4 wherein the latter pays more or less for a drug depending on how effective it is at treating plan members. When pharma companies and purchasers decide to enter into one of these deals, they establish an initial price for a given drug and link rebates to real patient health outcomes. That first quote remains in place if a certain percentage of patients achieve an agreed-upon outcome-however, if that “outcome threshold” isn’t met, the drug manufacturer would need to refund a portion of the initial price to the buyer. This solution shifts more financial risk onto the pharmaceutical company, but the purchaser is wholly responsible for tracking their patients’ outcomes, noting if performance metrics are sub-par, and taking steps to lower the price.
Outcomes-based contracts are meant to shift pharmaceutical spending towards effective drugs and create partnerships that prioritize clinical effectiveness. In doing so, proponents hope to defray rising drug prices and make treatment more affordable and effective for payers and consumers alike.
There is some promising research in favor of outcome-based contracts. A recent brief from Aetna and Harvard Pilgrim reported that enrollees with conditions such as diabetes, cholesterol, and HIV who participated in value-based drug contracts enjoyed 28% lower copays on their medications from 2015 to 2017 than enrollees in conventional plans.5 These findings drew enthusiastic support from the Pharmaceutical Research and Manufacturers of America (PHRMA),6 who noted in a press release that “if new value-based contracts can improve use of medicines and reduce the burden of diabetes in the United States by as little as five percent, these contracts could save over $12 billion annually.”
Part of an outcomes-based contract’s effectiveness lies in its ability to save purchasers from paying top dollar for drugs that may not be effective outside of limited clinical trials.7 This could be helpful, given that the FDA sometimes approves costly new drugs based on results that pull from highly selected participant populations, rather than those analogous to real-world patient bases. Once approved, these drugs can gain a popular appeal that is backed more by manufacturer promotion rather than any real evidence of effectiveness. An outcomes-based approach could use real data to weed out overhyped drugs while increasing coverage for effective medications and ensuring that purchasers and manufacturers share the risk posed by low-value spending.
Outcomes-based contracts have their appeals, but they have drawbacks. Because the rebates, refunds, and discounts that pharmaceutical companies offer hinge on how drugs work in the real world, purchasers need to dedicate considerable time and resources towards delving into patient data. This, in turn, leads to a high administrative cost burden-one that could potentially offset any cost-saving benefits that rebates, and refunds might have provided.8
Even with the necessary human resources, many purchasers lack access to the claims data they would need to assess drug efficacy and negotiate price points. Part of the issue is a technology shortfall;9 despite widespread adoption and utilization, most electronic health records are difficult to access and even harder to convert into an easily-analyzed format. Moreover, a lot of useful information simply isn’t recorded in claims data. Take details about drug changes made for symptom control as an example-as valuable as the information might be to a purchaser who wants to make a savvy outcomes-based deal, details like those are rarely disclosed in claims data, and thus might as well not exist.
Lastly, manufacturers and payers who come to the negotiating table often struggle against a value gap caused by mistrust and misaligned expectations. As Dr. Michael Sherman, chief medical officer for Harvard Pilgrim Health Care, comments in an article for Modern Healthcare, “[Purchasers are] negotiating off starting prices set by pharma companies. A value-based agreement doesn’t mean getting to fair value.”10 If the initial price of a drug is sky-high and off-base, even the partial refund given after an outcomes data assessment isn’t going to pull that cost down into a fair-value range-for patients or purchasers.
Outcomes-based contracts have the potential to make drugs more affordable for payers and consumers. However, the degree of that potential is unclear and the path to widespread implementation is too full of technological and logistical barriers for purchasers to embrace outcomes-based deals en masse. Unless measures are taken to ensure mutually-beneficial, data-driven arrangements, outcomes-based contracts won’t have the widespread impact that some proponents claim. As matters stand, relying on an outcomes-based deal to solve high drug prices is like putting a Band-Aid on a wound-useful enough in the short term, but not nearly enough to heal the underlying problem.
Mary Tolan is a co-founder and managing partner at Chicago Pacific Founders.