Value-based contracts key to solving U.S. drug pricing ‘crisis’

AUSTIN, Texas—Paying for certain high-cost drugs based on the patient outcomes they deliver is becoming increasingly necessary in the face of skyrocketing drug costs in the U.S., the CEOs of a health insurance company and a pharmaceutical giant agreed Thursday.

The two industries rarely see eye to eye. Harvard Pilgrim Health Care CEO Eric Schultz and Eli Lilly CEO David Ricks joked Thursday at the 2017 AHIP Institute and Expo in Austin, Texas, that they almost called off their panel discussion for fear of having to sit next to each other. But the two found common ground on value-based agreements.

“We in the health insurance industry have used payment for value, payment for performance, for many years with physicians and hospitals,” Schultz said during the session. “Applying it here makes an awful lot of sense.”

“There couldn’t be a more important concept to embrace,” Ricks said, adding that such deals “open up access and availability of new therapies to the appropriate patient, and deliver better outcomes for the people we’re serving.”

Value-based drug agreements, in which insurers pay for the cost of a drug based on how effective it is, are uncommon, but more deals are popping up as insurers look for ways to get a handle on rising drug costs. Still, regulatory barriers and a healthcare system oriented to paying for care based on volume stand in the way of the deals becoming widespread any time soon.

Harvard Pilgrim is one plan leading in the charge toward such outcomes-based deals. It has struck 12 contracts with pharma companies, including Eli Lilly and Co., who the Boston-based health plan will pay for medicines based on patients’ outcomes or adherence to the medication, Schultz said. National health insurers Aetna and Cigna Corp. have also touted the outcomes-based deals they have reached with drugmakers such as Novartis.

In one of the deals between the two, Harvard Pilgrim pays Eli Lilly a lower price for its Type 2 diabetes drug Trulicity if patients do better on competing diabetes drugs. We’re “putting our money where are mouth is—not just making claims about superiority, but measuring outcomes,” Ricks explained.

The two CEOs see the value-based contracts as one answer to the rising cost of drugs in the United States, which are causing health insurers and employers to raise premiums and shift more costs to the patient.

Harvard Pilgrim sees the deals as a way to improve clinical outcomes and get the right drug to a patient who will respond well, Schultz said.

“Does it save money at this point? It’s very modest, but I do believe there’s an opportunity down the road,” he said.

The U.S. spent $3.2 trillion on healthcare in 2015, nearly $10,000 per person. About 10%, or $325 billion, of that spending came from prescription drugs, according to the CMS’ latest figures. Part of that is being driven by the increasing prices of drugs, which Schultz characterized as a “crisis.”

At the same time, drugmakers are developing groundbreaking therapies that can improve patients’ lives and even cure them from some chronic diseases.

The U.S. is in the midst of a push to pay for healthcare based on value rather than the volume of services delivered. Not only does Medicare reward doctors for good care and ding them for high readmission rates or infections, private insurers have been shifting more risk to providers and holding them accountable for the cost and quality of care. Now half of healthcare systems are getting some or most of their reimbursement from value-based payments, a recent KPMG survey showed.

Value-based drug agreements seem like a natural next step in the evolution. But the deals aren’t easy to administer. It takes time and a lot of resources to capture and analyze an immense amount of data, which health plans need to determine if the drug produced the promised outcome.

“Of course it’s easier to build and have fee-for-service agreements in pharmaceuticals as well as other segments,” Ricks said. But it’s becoming necessary for pharma to strike up value-based deals as health insurers increasingly resist paying for new drugs because of the price tag, he said.

In that case, “The patient doesn’t have any therapy available; the health plan isn’t achieving its goal, which is also to advance patient care; and the innovator is stuck—we don’t have a market for our products.”

Several regulatory barriers are keeping companies from creating more outcomes-based contracts. For instance, some discounts negotiated under such contracts could run afoul of federal anti-kickback statutes, he said. And Food and Drug Administration rules surrounding communication between a payer and drugmaker before a drug is approved make striking the deals difficult.

A robust FDA pipeline of drugs, especially cancer drugs, will present new opportunities for plans and manufacturers to strike outcomes-based deals because the new drugs have little data to establish their value, Schultz said.

“Right now, of the 12 contracts that we have, we have them because . . . a new drug was coming out, so there was an incentive for a pharma company to sit down with us and negotiate,” he said. “The real challenge is to believe this is the right thing to do and sit down and negotiate a value-based contract even though there may not be a competing drug or biologic coming out.”

Schultz also pushed for greater transparency in how drugmakers set their prices. Health insurers, he said, are held accountable by regulators and employers to outline deductibles, premiums—all the components of a health plan’s price. Holding drug akers to the same standard would put “economic pressure on the pharmaceutical companies when they’re sitting in their pricing strategy rooms and saying, ‘What should we set this price at?’ ” he said. “We don’t have that today.”

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