Outcomes-Based Contracting: The Next Step to Better Patient Care

The healthcare industry undergoes a lot of scrutiny - in part because the business is so complex that it is hard to get a clear picture of each of the players and what they are doing, not doing, and to whose benefit. The contracting process and the contracts themselves are complex and have traditionally focused on the relationships amongst the key stakeholders in the agreement: manufacturers, distributors, payers, and providers, all the while ensuring adherence to government regulations and guidance. Indeed that comprises enough complexity to manage, but the downside is that focusing on this group of stakeholders can inadvertently fail to account for the true key constituent in this industry: the patient.

While the primary focus of any pharma company is the results for the patient, other players in the industry introduce challenges in being able to focus purely on the patients’ results. With complex payment schemes and rigid processes and protocols, payers have made it difficult for healthcare related payments to be transparent and directly tied to the results experienced by the patient. While pharma companies have been performing value assessments for many years, the pharmaceutical manufacturers and payers have begun to seek ways to work together to shift their focus to the end-goal of healthier patients, and one of the trends is outcomes-based contracting (OBC). Through OBC, pharmaceutical manufacturers are able to acquire the necessary information regarding patient care that enables a payment system driven by the ultimate results for the patient.

While the OBC model is still considered new, parts of OBC, such as performance-based programs have played a significant role in recent healthcare reforms.  For instance, an important part of The Patient Protection and Affordable Care Act was the provision that tied compensation for providers to the outcome experienced by the patients.  While they do not represent the essence of OBC, these provisions acted as a catalyst to cause stakeholders to think about patient care more holistically. OBC is a contract and sales model that enables pharmaceutical manufacturers to take a more holistic approach, including use of performance-based contracts that include risk-sharing arrangements in an effort to place and maintain certain drugs in the formularies of payers.  Under OBC, if a drug does not perform as clinical trials promised, the manufacturer is often obligated to provide the payer additional rebates and discounts based on the agreed upon outcome criteria for the patient, ensuring that the appropriate patient receives the appropriate treatment to produce the expected outcome.

From volume to value

In its simplest form, OBC can be thought of as a shift from volume to value, the change in paradigm from “who can sell the highest quantity” to “who can produce the most value with the best, most effective drugs to improve patient health.” This shift begins with the increasing trend in drug development toward narrow indications, restricting it to more appropriate patient populations such as autoimmune disorders and rare forms of cancer.  In fact, industry experts predict that there will be an average of 45 new drugs launched per year from now through 2021 with an emphasis on these more focused groups of patients.  Given the high impact and efficacy of these types of drugs, manufacturers will price them to reflect higher R&D costs and the previously unmet clinical need.  However, while the ultimate price will be higher, the relative increase in value is much more significant than the increase in prices.

Through OBC, all interested parties benefit as the risk associated with these higher prices can be shared between both the payer and the manufacturer.  Meanwhile, the manufacturer enjoys a more predictable investment, with increased penetration of the drug on formularies.  The final result is the patient ultimately receiving the best possible treatment and a chance to immediately try drugs that fit their specific needs, placing value over price.

OBC drawbacks and challenges

Of course, there are two sides to every story.  In a recent survey performed by Avalere, 70 percent of attendees polled said this form of contracting is not a widespread solution and not to expect major changes in how drugs are administered in the next few years.  While this is an intuitive and simple concept, making it a reality, given the highly regulated and complex environment, is not at all simple.

Here is a look at some of the challenges of OBCs:

● Drug Suitability.  Not every drug is a candidate for an OBC.  Manufacturers and payers must agree which drug is a good match.  For instance, the drug should have an agreed upon measure for success, such as a reduction in hospital readmissions.

● Clinical Trials vs. the Real-World Evidence.  Clinical trials are highly controlled, making it difficult to predict a drugs’ success when applied to a large demographic in the real world.  On top of that, every patient is unique and may respond differently to the same drug as another patient with the same illness, this can all complicate the contract process when assessing outcomes is a key contract term.

● Significant Trust Needed. For OBCs to work, manufacturers, payers, and providers must collaborate closely and change their business processes which is sometimes not easy. Mutual trust must exist amongst all three parties.

● The Convincing Game. Manufacturers must convince payers that the controlled clinical trial results will be similar to those in the real world.  With real money on the line, manufacturers will need to have a high level of confidence in their drug’s performance.

● Tracking and privacy. The payers are responsible for tracking the patient’s progression, but with today’s strict privacy concerns, getting access to electronic health records is very difficult.  Leaving them with little more than their own claims data to measure a drug's success.

Amidst all of the life-changing potential benefits and the seemingly endless roadblocks along the way, the success of OBC starts with pharma manufacturers correctly identifying the drugs that are candidates for this type of contracting model. Once contracts are entered into, effectively managing the evaluation period is paramount to ensure that the outcome of the treatment is accurately and appropriately measured in order to determine which contract terms are applied.  Both payers and manufacturers will need to have appropriate systems and processes in place to measure the outcome experienced by patients and to accurately track and manage the processing of the contract terms.  Software packages in the market can intelligently identify transactions subject to OBC and can be configured, based on contract terms, to automatically apply discounts or additional processing.  Thereby enabling payers and providers to confidently exchange information and agree upon the overall outcome.

While there are challenges at every turn, the promise of OBC is a level of care for patients that might otherwise not be possible, while striking just the right balance of shared benefits and risks for all parties involved. 

Melonie Warfel is Vice President and General Manager, Life Sciences Industry at Model N.