The potential for outcomes-based contracting

Outcomes-based contracting is one of today’s catchphrases in pharma commercialization. Government regulations and employer groups are now shifting the focus of healthcare and placing more pressure on manufacturers to prove their value to patients and dispensers. As a result, manufacturers and payers are structuring more contracting arrangements around a drug’s performance and the resulting patient outcomes.

This evolution in clinical and payment methodologies aims to create quality and cost outcomes and foster greater accountability. The contracting models are unique in that they rely on patient-level data to measure success as opposed to sales or utilization data. For example, an $85K specialty drug that treats hepatitis C will need to show proven value. A contracting arrangement should create a productive dialogue around whether the drug truly improves patient outcomes and will give solid data to help all stakeholders understand why.

The end result is an agreement between manufacturers, providers, and payers that puts the onus on manufacturers to prove the value of the drug. In the past, the payer has maintained responsibility for positive outcomes; new contracting arrangements now place some responsibility on the manufacturer as well.

This sounds like a win-win situation, but in reality, this process is very complex. Successful contracts can be difficult to achieve and in some cases, it can take up to a year to receive data that demonstrates if the contract was structured correctly. Furthermore, structuring such an agreement requires a deep understanding of health economics by many of the parties involved.

Concept to implementation

In order to implement outcomes-based contracting effectively, pharma manufacturers need to be aware of the potential for complexity and the risk of simply lowering prices without accurately evaluating the drug’s outcome. To give a program the best chance of success, there should be initial research and analysis of current patient-level data to determine the metrics for success. By engaging in a negotiation process with the manufacturing account manager, payer and provider (doctor, pharmacy, etc.), each stakeholder in the process can arrive at an agreed-upon goal that will provide the best chance of success. Manufacturers who can collaborate effectively with clinicians, who best understand what treatments can provide the best patient care, can make tremendous headway in creating an effective contract.

In fact, many rebate programs are set up to reward all parties: the manufacturer, the provider and the patient, for following the drug administration guidelines. We recently helped a manufacturer set up an agreement for a drug that needs to be taken every 29 days. Our client set up a rebate agreement that rewards providers who are properly administering the drug and ensuring patients are taking it on-schedule as it is prescribed. This allows the manufacturers to reap the benefits of proper compliance by patients, while also allowing them to communicate externally their commitment to proper administration. Finally, patients are encouraged to stick with a drug in order to give it the best chance of success.

In terms of managing these agreements, manufacturers should consider setting up a system that allows them to systematically view all of their rebates in a single location. This ensures they have a handle on reporting and government pricing. Revenue management technology provides an integrated system that also allows comprehensive reporting, tracking and managing of contract rebate processes (see box).

Measuring reality

There’s no foolproof way to measure patient compliance. Manufacturers usually have to rely on limited data from tracking prescriptions in order to either reward the provider with a rebate, or inquire about why metrics are not being achieved. Pharma manufacturers can also make revisions to the program after evaluating initial data. For example, perhaps the manufacturer set up an agreement that rewarded providers/clinicians who had 85% of their patients achieve their 13-dose requirement, but they were only achieving 75%. If 85% isn’t a realistic goal, they might revise it to 78%, which is more achievable, but encourages a reasonable improvement. In some cases, the contract may be deemed a success even if the numbers aren’t achieved simply because they are seeing the numbers headed in the right direction.

The lack of available automated technology solutions means evaluating these contracts is still a time-consuming manual process for many. It takes a lot of time to gather data and determine how to calculate success. Some manufacturers have more experience and may have established a streamlined set of processes. The advantage of bringing all data into a centralized application, such as revenue management, means that manufacturers have access to detailed reports and analysis that can be queried to track and compare customers and monitor trends. This allows them to determine quickly if an agreement is working or not.

Anticipating and managing risk

There are potential risks involved in creating a contract structure that may not accomplish the end goal and demonstrate the value of the drug. The most significant risk is the potential to waste time and effort creating, administering and evaluating a program that is not successful. Personnel are not always familiar with how to manage these contracts. Although rebate analysts are experienced in analyzing market share and interpreting contract data, they are typically not well versed in focusing on patient-level data. The learning curve can be steep and may require consultation with a third party.

Pharma manufacturers also need to be prepared for possible unknowns that could change a provider’s approach. A payer may make changes to its formulary and move a drug from one tier to another, resulting in a significant drop in participation by providers.

Furthermore, as these agreements become more popular, all parties should be aware of potential scrutiny from outside regulatory bodies, which may become critical of any contracting agreement that incentivizes clinicians inappropriately. Although outcomes-based contracting is not currently regulated, manufacturers should anticipate this possibility and ensure their programs truly have the patients’ best interests in mind.

The bottom line is that manufacturers should be selective when creating these programs. One way to mitigate risk is to set up a few test cases and build upon them. Once the programs are tried and true, they can be replicated and rolled out to different customers/payers.

Outcomes-based contracting is undoubtedly picking up steam as one potential tool to maintain a competitive edge in the marketplace. In fact, we have received feedback from some customers that health outcome rebates are one potential area of differentiation in a competitive marketplace. If these contracts are designed and administered appropriately, they can provide benefits to manufacturers by encouraging doctors, pharmacies and payers to participate, while also ensuring their drugs are utilized by patients as prescribed. This process should keep the individual patient top-of-mind with the goal of prescribing needed medications in a timely manner, ensuring medication is taken appropriately, and identifying potential gaps in care.

ABOUT THE AUTHOR

As Solution Architect at Model N, Kyle Forcier has worked with life sciences manufacturers to set up and manage processes surrounding outcomes-based contracting. You can follow his company on Twitter at https://twitter.com/modeln. Model N solutions enable customers to maximize revenue and reduce revenue compliance risk by transforming their revenue life cycle from a series of tactical, disjointed operations into a strategic, end-to-end process.