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Stars Aligned for Pricing Model? Value-Based Contracts May be Poised for Takeoff

Pharmaceutical ExecutivePharmaceutical Executive: January 2023
Volume 43
Issue 01

As new forms of cell and gene therapies continue to be developed, life sciences companies and payers need to find alternative ways to pay for these expensive treatments. Value-based contracts, though slow to gain traction so far, may provide the solution these groups are looking for.

The pharmaceutical industry is changing the way that it looks at payment structures due to the continued advancements in precision medicine and cell and gene therapies (CGTs). These new treatments and therapies not only cost significantly more than traditional treatments, but each therapy also has a much smaller pool of patients who benefit from it. This is causing problems between the life sciences companies, healthcare professionals (HCPs), and payers—who all need to figure out how to get these lifesaving (but expensive) treatments to the patients who need them.

One solution to this problem is value-based contracts (VBC), and the industry is taking notice.

Unlike the current pricing models, VBCs don’t rely on pharmacy benefit managers (PBMs) and rebate programs to determine cost. Instead, the pharma companies negotiate with payers to determine a set of measurable outcomes for the patient. Payment for the treatment is then tied to whether or not those outcomes are met.

Jim Lang

In a conversation with Pharmaceutical Executive, Jim Lang, Eversana’s CEO, explains: “I think the best place to use VBCs, and where you see them being used the most, are really for the very expensive kinds of cell and gene therapy where you can directly measure if it worked or not. Did it cure the patient’s condition or not? For example, there was recently the new hemophilia drug that’s priced at $3 million and is for a rare [type of] hemophilia, type B. That seems ridiculously high priced, but those people could consume $10-20 million in healthcare cost[s] over their lifetimes without this treatment. It’s easy in those environments to see if the therapy takes and payment should happen or not. I see people experimenting a lot with that.”

Lang is part of a growing number of people in the life sciences industry who believe that VBCs will become much more prominent in the coming years. He says that while he expects VBCs will grow in prominence, they are being embraced at a slower pace than he and other industry professionals expected.

To understand why this is happening, it’s important to understand the recent surge in precision medicine and CGTs.

Cell and gene therapies

As the name suggests, precision medicine is based on providing treatment to patients based on their specific genetic conditions. Researchers look for specific biomarkers in patients, which are then used to provide targeted treatment. For example, doctors may be able to target specific genetic drivers causing tumors to grow in a patient and treat them, as opposed to using traditional treatments like chemotherapy that take a widespread approach and target all cancer cells, regardless of the patient’s specific genetics.

In August, Pharmaceutical Executive reported that new US drug approvals with pharmacogenomic labeling increased from 10.3% in 2000 to 28.2% in 2020,1 showing an increase in the industry’s interest. Due to the complex nature of these therapies, which often require expensive testing and treatment processes, payers are struggling to find ways to make them cost-effective under the current pricing models.

Girisha Fernando

In a conversation with Pharmaceutical Executive, Girisha Fernando, founder and CEO of Lyfegen, explains that CGTs provide a “radical change” to the pharma industry. Instead of treating a patient for 10-15 years and spreading the cost of coverage over that time period, these new therapies have the potential to cure serious diseases. Of course, these therapies can cost the healthcare system up to millions of dollars over a very short period of time (sometimes even for just a one-time treatment administration).

This provides significant benefits not just to patients, but also to stakeholders in pharma a biotech organizations.

“It’s not just if the industry wants to embrace VBCs in the coming years, it has to,” says Fernando. “If pharma companies have to, then payers and healthcare systems have to as well. We’re seeing this shift accelerated because of the introduction of an increasing amount of cell and gene therapies. It’s just that $2-4 million drugs do not fit in the reimbursement system that we currently have. We’re seeing more and more that drugs and therapies are being carved out from health insurance and coverages, and that is not a sustainable solution moving forward.”

A slow rise

Indranil Bagchi

While VBCs are getting a lot of attention now, they’re not a new invention. Indranil Bagchi, senior vice president and worldwide head of value and access at Novartis Oncology and a Pharmaceutical Executive Editorial Board member, explains that these types of contracts first appeared more than a decade ago. According to Bagchi, VBCs progressed much more quickly outside of the US in countries like Australia, Denmark, Italy, and Spain, to name a few.

“The reason for that,” says Bagchi, “is primarily because of market access restrictions, in terms of how products get priced, reimbursed, and what type of assessment they go through to be listed on national formularies.”

Outside the US, he notes, the focus on market access restrictions occurs significantly earlier and is much more stringent. “In the US, physician choice and ability to prescribe is still front and center; whereas, in countries like England, Germany, Sweden, etc., physicians can’t always write prescriptions at will,” Bagchi tells Pharmaceutical Executive. “[The treatments] need to be what their national agency approves. These health technology assessment agencies (HTAs) assess treatments and technologies and decide if it can be included in the national formulary, based on the value it brings to the healthcare system; if not, then the treatment would not be reimbursed within the national healthcare system. That also happens here in the US, but to a much lesser extent than in Europe.”

As a result, countries outside of the US are less able to rely on rebates when determining prices of medicines and treatments, making the need for VBCs much stronger than in the US. Due to the rise in CGTs, however, more life sciences companies are starting to see the benefits. While VBCs may make it easier to bring these treatments to patients, putting these contracts into place isn’t always necessarily easy.

Difficult negotiations

VBCs may help bring effective, yet expensive, treatments to patients, but they also require a great deal of negotiations between pharma companies, Medicaid home and community-based services (HBCs), HTAs, and payers before they are put in place. These contracts require a set of specific outcomes, in order to determine when and how payments are processed. Negotiations won’t just focus on these outcomes but also how they are specifically going to be measured. According to Bagchi, this includes what endpoints need to be assessed, in what population, what time period will the results be collected in, and how this data is adjudicated on whether the medicine is working or not.

“All of that can be in the gray zone,” he explains. “There are certain medicines where the endpoint is very clear and the time window is very finite, but that’s not how most medicines are. You have to decide: what data to collect, in what population, over what time; who pays for the data collection; how do we determine the data is reliable; and how does that [data] get adjudicated? All of these can be points of conflict between the payer provider and the pharmaceutical company.”

Lang believes that insurance reform is a “fundamental challenge” to VBCs really taking off. According to Lang, the problems don’t just stem from the difficulties in negotiating the contracts, but also from how most people get access to health insurance. Employer-based health insurance is one of the most common ways people get covered, which means that they are likely changing their healthcare coverage every time they change jobs.

“The problem is the person who pays for my things could change by the end of the year,” says Lang. “It’s very difficult, sometimes, to make the cost of treatment and the payment scheme around the cost deal with the eventually that you could change employers and be with a different commercial plan, or you could be switching to a government plan for whatever reason.”

Bagchi explains that for most companies, it’s easier to get a rebate agreement based on price and volume. Those contracts are simple and are easily concluded. For example, the payer buys a certain amount of product and then files for a predetermined rebate. With VBCs, however, the value must be determined. It isn’t until after the therapy is performed and enough time has passed that companies can then determine if payment should be issued. This causes issues on the payer’s side due to infrastructure, data requirements, and trust factors.

That’s not to say that insurance companies don’t have reasons to advocate for VBCs, Fernando notes. He says many insurance companies are worried that PBMs may end up taking control of CGTs. As he explains, PBMs first appeared approximately 15 years ago and were initially intended to help cover and negotiate drug prices. Since then, however, the system has changed in ways that the insurance companies aren’t happy with.

“Now, [PBMs] have become non-transparent and are driving prices up because they’re incentivized on the rebates,” contends Fernando. “It’s 10-15 years later, you have 2% of the population that’s incurring 51% of the overall drug cost. That’s ridiculous. Payers are skeptical that this could [be] a repeat of that if PBMs take control of cell and gene therapies or the negotiations of those prices.”

Since VBCs don’t fit the rebate model commonly used by PBMs, this could help pharma companies and payers regain some control over the process.

Ultimately, to make VBCs work, drug manufacturers and payers need to have reliable data collection and analysis
methods. For a variety of reasons, there is a surge of new companies boasting novel AI- or machine learning-based programs designed specifically for pharma companies to analyze data. Fernando provides the example of placing many prior authorizations of a drug.

“This makes it much more difficult for doctors to prescribe that drug,” he explains. “A formulary more based on value would help health insurance [companies] to remove those barriers and prescribe the real value-adding drugs. Doctors can benefit from more evidence and real-world data demonstrating the value of the drug rather than just relying on clinical trials.”

Widespread adoption of VBCs

Bagchi believes it makes sense for companies to utilize VBCs across the board and not just for CGTs for rare conditions. Despite this, he acknowledges the difficulties with trying to use these contracts on more traditional drugs and treatments.

Tracking the results of a treatment used for rare diseases is relatively easy for a variety of reasons. The most obvious one is the sample size. Not surprisingly, the eligible population for a rare disease treatment is going to be much smaller (and, therefore, easier to track) than that for a medicine to treat cholesterol or hypertension, for example, which is being prescribed to many more people across the planet.

For many CGTs, the treatment either works relatively quickly or it doesn’t. Bagchi gives an example of a cancer cell treatment, where the patient responds within a month’s time and as such is suitable for setting up a VBC, whereas many traditional medicines have a much longer window of time within which they may show response, and often the results may not be as cut and dry. Analyzing results for these treatments in a value-based system will take significantly more time and resources.

“Is the cost of doing this worth the return on the benefit that you’re getting? Some might argue for big problems, minute contracts that come with guarantees might not be feasible. They might be desirable, but they might not be feasible,” says Bagchi. “If you focus on rare diseases, where the numbers are much smaller, mortality is very high; chances are a stronger case can be made compared to that for more common diseases.”

Incentivizing value

The current pricing model in the pharmaceutical industry is often accused of not valuing drugs and treatments the right way. Due to incentivized rebates and negotiations with PBMs, a treatment’s success may not depend on how effective it is, but if it’s well positioned. The current system also provides several methods to restrict the use and administration of a drug.

CGTs are a new way of treating patients that require a different approach to determining the product’s cost. VBCs might provide some challenges to the industry, but many also believe they may be the best way to allow doctors to start prescribing these complex, yet potentially curative therapies.

Mike Hollan is Pharm Exec’s editor and can be reached at


  1. Borden, B. The Price of Innovation: ‘Paying for a Cure’ Remains Costly Proposition. Pharmaceutical Executive, August 10, 2022. https://www.pharmexec.com/view/the-price-of-innovation-paying-for-a-cure-remains-costly-proposition
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