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The healthcare industry’s ongoing shift from volume- to value-based contracting has set a compelling precedent for forward-thinking healthcare marketing agencies.
Between 2015 and 2017, growth in not-for profit hospitals’ expenses outpaced growth in their revenues by a full three percentage points,1 resulting in a collective $6.8 billion of lost earnings. Thanks in no small part to their affiliated hospitals’ financial struggles, American health systems’ operating margins fell an average of 38.7%2 during the same three-year period-including a 15% drop in 2017 alone.
What’s more, health systems face a variety of factors-diminishing demand for inpatient surgical procedures, eroding standard Medicare and Medicaid payment rates, falling collection rates on private accounts in states that opted out of expanding access to insurance under the Affordable Care Act-that have made the prospect of turning things around using the mechanisms of the fee-for-service compensation model increasingly unlikely.
As a result, a growing number of health systems,3 and even many individual practitioners, are embracing a new operational paradigm that at once provides them with an opportunity to bolster their bottom lines and exposes them to greater risk: value-based contracting.
Value-based contracts can take any number of forms, but each strives to reconfigure the healthcare industry’s traditional incentive structure. Instead of being paid based on the volume of care they provide, under value-based contracts, health systems are paid based on the value of care they provide.
For instance, under the Medicare Access and CHIP Reauthorization Act of 2015,4 eligible health systems are able to opt into two payment tracks as part of the Quality Payment Program. The Merit-Based Incentive Payment System (MIPS)5 track provides payment adjustments based on standardized quality of care measures that health systems submit to the Centers for Medicare and Medicaid Services (CMS). MIPS rewards health systems with “bonus” payments for superior care and penalizes them with reduced payments for subpar care. Similarly, the Advanced Alternative Payment Models (APM)6 track allows a health system to tie its payments from CMS to the quality and cost-efficiency of its services vis-à-vis a specific clinical condition, care episode, or patient subpopulation.
In short, if a health system bound by a value-based contract like MIPS or APM is able to improve the outcomes of its patient population, it has a viable path to reinvigorating its margins. If, however, the health of its patient population does not improve, it risks sinking even deeper into a financial quagmire.
As health systems have shouldered this additional risk, they have sought assistance, and often even contractual assurances, from their partners throughout the healthcare industry. As such, for pharmaceutical companies, the shift toward value-based contracting between payers and health systems represents a clear opportunity to differentiate themselves from their competition by restructuring their own relationships with health systems along value-based lines.
To seize this opportunity, pharmaceutical companies must rethink the way they contextualize their products. Health systems are not interested in generic messaging that fails to articulate how a particular product will improve their patients’ health; they want real, tangible value. In order to deliver this value-and, by extension, align their operations with the incentives written into their value-based contracts-pharmaceutical companies need to start delivering solutions beyond the pill.
When improving patient outcomes is the goal, a good product and a good pitch are only half the battle. Patient outcomes depend as much on context as on inputs, meaning the best drug in the world will not lead to positive outcomes if it is taken incorrectly or prescribed to the wrong kind of patient. As such, it is incumbent upon pharmaceutical companies to build support ecosystems around their products to guide healthcare providers’ (HCPs) product use and foster medication adherence,7 and generally healthy behaviors, among patients.
These ecosystems represent the final link in the healthcare industry’s increasingly strong value-based chain. Payers are tying health systems’ compensation to patient outcomes, health systems are tying pharmaceutical companies’ level of compensation to the extent to which they help them improve these outcomes, and pharmaceutical companies are building support ecosystems to help HCPs and patients use their products in ways that will ensure these outcomes are as positive as possible.
This ongoing shift to value-based contracting has helped stakeholders across the healthcare industry recognize that more does not necessarily mean better, that there is not a direct relationship between volume and value. As payers, health systems, and pharmaceutical companies restructure their contracts with each other against the backdrop of this recognition, these stakeholders’ partners have a unique opportunity to do the same.
As we explore below, the core appeal of value-based contracting is that, insofar as it guarantees perfect incentive alignment, it positions contractual partners in such a way that when one’s business grows, so does the other’s business. No more trade-offs. No more zero-sum games. No more “one for me, one for you.”
In the healthcare marketing agency world, this is a radical-and immensely appealing-proposition. And, thanks to the shifts outlined above, agencies’ pharmaceutical clients have now been primed to think in value-based terms-arguably for the first time. Extending the healthcare industry’s value-based revolution to healthcare marketing will ensure that the incentives for every player in the healthcare space, those who are directly involved with administering care and those who are not, are not only aligned, but aimed toward what matters most: helping people get the right treatment at the right time.
Since the middle of the 20th century, the billable hour has been the default metric of agency contracting. However, much like the fee-for-service compensation model incentivizes health systems to provide more care instead of better care, hourly contracting incentivizes agencies to perform more work instead of more efficient or more effective work.
For decades, the hourly compensation model has incentivized agencies to expand their services to provide pharmaceutical companies with progressively more robust suites of offerings. In some cases, these new offerings have generated a great deal of value; in other cases, they have not. Either way, the hourly compensation model does not provide a clear mechanism for taking account of this marginal value generation (or lack thereof). Irrespective of the outcomes an agency manages to produce, the more services the agency performs, the higher its fees.
It is, therefore, unsurprising that many agency-pharmaceutical company relationships have come to be defined by negotiations over minute adjustments to hourly rates or person-hour ceilings. The great irony is that, more often than not, neither pharmaceutical companies nor agencies are well-served by agency contracts that are built exclusively around billable hours. While, objectively, a pharmaceutical company and its agency partner(s) share the same high-level goal (i.e. improving the company’s business outcomes) the pressures hourly contracting exerts on the agency-pharmaceutical company relationship prevent easy alignment on the pursuit of this objective.
As an example, imagine an agency that is preparing to deliver a pitch to a pharmaceutical company whose goal is to increase the volume of HCP trialists of one of its products. A traditional approach to driving this increase might entail launching a broad, multichannel campaign designed to raise awareness of the product-in other words, a campaign aimed at the top of the marketing funnel. The issue here is not that such an approach would be entirely ineffective, but rather that it may not be the best approach.
By opting for a top-of-the-funnel campaign, the pharmaceutical company would inevitably end up dedicating resources to raising awareness of its product among HCPs who, for one reason or another, have absolutely no interest in the product. The campaign might succeed in raising overall product awareness, but with such broad targeting, this increase in awareness might not translate into an increase in trialists.
As an alternative, the company could leverage a machine learning-powered predictive analytics tool8 to target only the HCPs who have the highest propensity for becoming trialists of the company’s product (based on the machine learning algorithm’s calculations). By concentrating its resources on nudging these HCPs-and only these HCPs-further down the marketing funnel, the company would dramatically increase its return on ad spend.
Despite the clear opportunity for value generation presented by this latter approach, because fine-tuning a machine learning algorithm demands fewer billable hours than manually managing a sprawling multichannel campaign, our hypothetical agency would be disincentivized to pitch such an innovative, highly efficient approach. In other words, the approach that would drive the best results-in both the agency’s and the pharmaceutical company’s eyes-is precisely the approach that appears the least attractive within an hourly contracting paradigm that prioritizes the volume of services performed over the value they create.
Such missed opportunities for innovation- and efficiency-driven value generation underscore the ways in which hourly contracting can be detrimental to healthcare marketing agencies and pharmaceutical companies in equal measure. When both parties fixate on hour-counting, the core objective of the agency-pharmaceutical company relationship is inevitably sidelined. Pharmaceutical companies start looking at their agency partners as cost centers instead of as what they really are: investments.
The entire practice of marketing is premised on the expectation of a greater than 1:1 return, yet, as illustrated above, hourly contracting often undermines an agency’s ability to pursue this baseline benchmark. In short, the billable hour model incentivizes agencies to act contrary to their raison d’être. Rectifying this borderline-paradoxical state of affairs will require an approach to contracting in which agencies’ incentives are aligned with value generation and, in turn, with their clients’ business goals-which is to say, value-based contracting.
Just as health systems are agreeing to tie their compensation not to the volume of care they provide, but to the patient outcomes their care produces, and pharmaceutical companies are agreeing to tie their compensation9 not to the volume of products they sell, but to the improvements in patient outcomes their products (and support ecosystems) facilitate, agencies should consider tying their compensation not to the number of person-hours they log, but to the business outcomes they help their pharmaceutical clients achieve.
To be clear, this does not mean every agency contract-nor every stipulation of any given contract-must be tied exclusively to conversions (however they are defined). There are a wide variety of indicators of “value” in this space, most of which fall into one of three categories-attitudinal, behavioral, or transactional (i.e. conversion-related)-and all of which can be used to define a value-based contract.
While our hypothetical pharmaceutical company would want to tie its agency’s compensation to a transactional indicator of value, specifically, the number of HCPs who agree to try the company’s product, a newer pharmaceutical company (or, more likely, a newer brand within an established company) might want to tie its agency’s compensation to an attitudinal indicator of value like positive brand awareness. A third pharmaceutical company, one in the process of revitalizing its digital presence, perhaps, might be best-served by tying its agency’s compensation to a behavioral indicator of value like duration of engagement with key content or landing page bounce rate.
Of course, in practice, due to the complexity of the healthcare industry,10 value-based agency contracts are never going to be as straightforward as any of these three options-nor should they be. Nevertheless, the salient point is that as payers, health systems, and pharmaceutical companies gravitate toward value-based compensation models, it is in healthcare marketing agencies’ best interests to follow suit. By agreeing to make their fees at least partially contingent on whether they successfully recruit HCP trialists for their clients’ products or increase awareness of their clients’ brands or drive visitors to their clients’ websites-not on the time and materials they dedicated to trying to do so-agencies will dramatically boost their appeal in the increasingly value-based healthcare market.
For pharmaceutical companies, the benefits of value-based agency contracting are clear. First and foremost, it limits their risk. Within a value-based paradigm, a company need not worry about its agency becoming a cost center, as the agency will be compensated based on its ability to drive a mutually agreed upon value outcome. This makes the calculus that drives the company’s upfront contractual negotiations all but painless, reducing it to a question as simple as, “Is the realization of the value outlined in the contract worth the proposed fee?”
However, the reason value-based contracting is a viable alternative to the hourly compensation model is that it has the potential to be beneficial not just for pharmaceutical companies, but for agencies as well. Provided agencies exercise strategic restraint as they begin to experiment with value-based contracting-immediately tying every stipulation of every contract to the delivery of value would be a mistake-they will find that this new paradigm provides them with a wealth of opportunities to grow their own business in tandem with their clients’ businesses.
While hourly contracting works against agencies’ interests in efficiency and innovation, value-based contracting incentivizes the pursuit of these interests-just as it does for health systems and pharmaceutical companies. When an agency ties its compensation directly to its performance, it has every reason to think outside the box and develop new solutions that will enable it to deliver better outcomes (read: greater value) on shorter timelines.
Within a value-based paradigm, a 10% increase in HCP trialists or a 15% increase in medication adherence will earn an agency the same fees regardless of whether it took the agency 50 hours or 500 hours to achieve it. Thus, as agencies become increasingly adept at innovation-and, in turn, become increasingly efficient-they will be able to take on more work with the same staff, boosting their revenue streams.
And ultimately, it is this opportunity for mutual, even symbiotic, growth that makes the shift in focus from volume to value so appealing. Value-based contracting incentivizes agencies to help pharmaceutical companies deliver real, tangible value to health systems, HCPs, and patients alike, which in turn drives improvements to outcomes across the industry. To the casual observer, helping pharmaceutical companies help practitioners help patients may seem like a contribution that is too convoluted to have any import, but in reality, it is the linchpin of the intricate process by which real people get the right treatment at the right time. In the world of healthcare communications, there is arguably nothing quite so valuable.
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