Increasing use of Value Based Contracts (VBC) in the pharmaceutical and healthcare industry

Over the past decade, the United States healthcare system has been transformed with many stakeholders tying payments to value, rather than volume.


Value Based Contracts between manufacturers and payers


Value Based Contracts (VBC), also known as outcomes-based contracts, is a type of payment model that ties the price of a drug to how it performs. This is in stark contrast to other healthcare payment models, where the price of drugs is determined by data collected during clinical trials, a limited environment that doesn’t always track with performance in real-world conditions. This arrangement is outside the traditional fixed-cost-per-unit and rebating practices (meaning flat-rate discounts and variable discounts based on total volume or share).

So, how do VBC models work? If a drug delivers the desired outcome, payers (insurers, provider networks) pay the full price. If not, the payer may receive refunds or price reductions from the manufacturer. VBC provide an opportunity to demonstrate the value medicines bring to patients by tying access to outcomes. A major part of these contracts involves the collection and assessment of real-world evidence (RWE), their outcomes used to judge whether contract stipulations have been met.


Benefits of Value Based Contracts

  • Reducing Financial Risk for Payers: VBC limit the payer’s exposure to financial risk by providing price reductions or refunds for ineffective treatment
  • Improvement in patient outcomes – As payers provide access to a greater range of medicines, patient outcomes could improve. VBCs can help generate real-world evidence for the efficacy of a drug, which could lead to better healthcare outcomes in the future
  • Reduction in medical costs – By helping to control diseases better, VBCs could lead to a reduction in medical costs through a reduction on hospitalizations, emergency room visits, and so on
  • Reduction in the cost of medicines – Under VBC, manufacturers may pay higher rebates for patients who don’t meet the agreed-upon outcome targets, which may potentially reduce the cost of medicines


Brand name drugs which have VBCs that landed them on at least one formulary, include Jardiance, Januvia, Stelara, Aimovig, Brilinta, Tecfidera, Simponi Aria, and Trulicity. They are among the published 77 VBC signed between 2009 and 2021.1 By 2015, there were 15 such agreements, so the bulk have come in the last four years. It is a small portion compared to those in the volume-based contract bucket.


Certain conditions make VBCs more appealing for branded drugs

  • Manufacturers need to differentiate their offerings against in-class competition – for example, Merck entered a VBC with insurer Aetna, for its drug Januvia, a branded diabetes medicine, in the highly competitive DPP-4 class of diabetes therapies
  • Well defined patient populations and clinical trial endpoints – for example, Hepatitis C therapies or oncology therapies have a precisely quantified patient population and unambiguous clinical end points (undetectable viral load/tumor) and are better suited for VBCs as compared to pain therapies or antidepressants, where it is difficult to measure outcomes objectively
  • Manufacturers are challenged to guarantee value as the medical benefit is longer term / unpredictable – for example, AstraZeneca entered a VBC with Harvard Pilgrim for Brilinta, a branded antiplatelet medicine, to measure hospital readmission rates. The product could lower costs in the long term by reducing hospital readmissions for acute coronary disease, but potentially increase near-term drug costs, creating a trade-off for payors to evaluate


There are many factors to consider when it comes to looking at the value of medicine. Beyond its clinical value, does the patient’s quality of life improve if they take the drug? Improvements in quality of life affect the overall economic output, as society benefits from reductions in healthcare costs.

Today, R&D organizations work hand in hand with payers earlier in the development process (prior to Phase II clinical trials) with the overarching goal of favorable coverage and reimbursement decisions.

In 2018, FDA provided its guidance on “Drug and Device Manufacturer Communications With Payers, Formulary Committees, and Similar Entities—Questions and Answers.” The guidance addresses common questions around how a manufacturer communicates healthcare economic information regarding their prescription drugs to payers and formulary committees. The early meetings with all stakeholders, including manufacturers, regulators and payers, are devised to bring all stakeholder expectations on the same page. The regulators discuss the amount of data they need to consider approval, and the payers discuss their need in terms of the data to get that drug on their formulary.


Challenges to implementing Value Based Contracts

Among the roadblocks in implementing VBCs, payers have cited data collection and sharing as key hurdles. To implement risk-based contracts tied to outcomes, payers must have access to large volumes of clinical data, pharmacy and medical claims. The mergers of PBM Express Scripts with the insurer Cigna, as well as CVS Caremark with Aetna, signal a potential to better integrate data to inform resource allocation decisions. In Europe, there has been more widespread adoption of VBCs, often referred to as managed entry agreements. But, many of these agreements are merely finance-based, aimed strictly at cost containment without a connection to evidence collection and assessment of value.

Key logistical hurdles remain in terms of how to arrive at a consensus definition of value, ways to pay for post-marketing data collection and analysis, and overcoming regulatory barriers, such as Medicaid’s “best price” policy. Medicaid best price stipulates that drug manufacturers must provide Medicaid programs the best price of a drug or biologic among all purchasers. This can be an obstacle that prevents VBCs from being signed if a refund would be triggered in case a drug or biologic doesn’t meet a pre-specified target outcome. At that point, whatever the de facto net price is becomes the best price for the entire Medicaid program.

If VBCs are to become a more widespread phenomenon, policymakers will need to address these logistical barriers. Invoking exemptions or waivers for the Medicaid best price policy may turn out to be the best solution.


Value Based Contracts between providers/PBMs and payers


There has been a discernible shift away from fee-for-service to value-based payment mechanisms in physician and hospital reimbursement. Fee-for-service contracts are very transactional, and don’t undertake population health management, health screening, EMR data management, and chronic patient care management.

VBCs come in all forms, from pay-for-performance to bundled payments for episodic care to full capitation for patient populations. The type of VBC organizations implement will depend on the type of care they deliver, the market in which they reside, and their patient population.


Pay-for-performance model

Depending on how hospitals score on the measures relative to their established baselines and if they have improved their performance, providers can either earn financial rewards on top of their fee-for-service payments or see their Medicare revenue decrease. For example, providers in Medicare’s Hospital Value-Based Purchasing program receive positive or negative payment adjustments based on their scores on quality and cost measures. CMS assesses participants using measures such as influenza immunization rates, Medicare spending per beneficiary, and performance on patient experience surveys.

Additionally, few arrangements are also intended to reduce hospital readmissions rate. For example, Medicare Hospital Readmissions Reduction Program has reduced hospital readmissions through penalizing hospitals with excess readmissions2.


Bundled payment model

Bundled payments are an example of incorporating shared savings in value-based reimbursement models. Under a bundled payment structure, providers are paid a fixed amount for all the services performed to a treat a patient during an episode of care, such as a specific condition or a defined period of time. If providers involved in the patient’s episode of care are able to deliver treatment for less than the set reimbursement amount, then they can keep a portion of the difference, depending on their contract with the payer. However, if healthcare costs exceed the set amount, providers lose out on the revenue they would have received from a traditional payment structure.

However, shared savings model can be difficult for providers to initiate and sustain. Providers may need to invest their own resources into the health IT and care delivery systems necessary to track healthcare spending, quality improvement, and care coordination. Shared savings payments also may not reimburse providers for related services, such as phone calls with patients, email consultations, and nurse care managers.


Capitation model

The capitation model requires providers to take on full financial risk for care quality and healthcare spending. Capitation models pay providers a fixed amount per patient, per unit of time, which is reimbursed to the provider for furnishing a set of services. If a provider produces healthcare savings, then he retains all of the payment. But if he cannot reduce costs below the payment amount, then he is fully responsible for the loss in revenue. Most capitation models also include value-based incentive payments and penalties based on quality and cost performance.

Providers may benefit from capitation models because the reimbursements are prepaid. Since revenue is already in the provider’s hands, organizations can invest in innovations that improve patient care.

However, providers in capitation models often face challenges with quality measures and data sharing. Without standardized healthcare data and interoperability, providers may experience difficulties acquiring health data and reporting it for payments.


Alternative models

Other arrangements are intended to improve cost predictability for contracting partners—whether payers, PBMs, or providers, but are not linked to health outcomes.  Examples include patient spending caps, case-rate arrangements, population- or volume-based spending caps, and subscription “per member, per month” arrangements. An example is Novartis’s agreement with NHS in the United Kingdom to place patient spending caps on Lucentis for wet age-related macular degeneration. Although the manufacturer’s recommended dose is 14 to 24 injections per patient, the NICE specified 14 doses as its cost-effective recommendation. To maintain reimbursement, Novartis agreed to cover the cost of any injections beyond the 14th dose.


Across all VBC models, the lack of alignment of quality metrics across payers represents a costly burden and an opportunity for improvement. However, using one of the VBC payment models, providers can find the most appropriate value-based reimbursement structure to maximize revenue. These models give providers an actionable plan for transitioning more healthcare payments to value-based care models as their organizations implement more sophisticated analytics systems to track patient data and health outcomes.


Image Credit:

  1. Pharmaceutical Research and Manufacturers of America (PhRMA)
  2. The American Journal of Managed Care, August 2016, Volume 22, Issue 8


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