Case Study | October 2016
RETHINKING THE WAY DRUGS ARE PAID: THE OPPORTUNITY FOR PHARMA

Today we pay for drugs, not health outcomes. Given the high cost of specialty medicines, the rapid growth of this segment is challenging the sustainability of the current model of paying for medicines. Beyond the dollar value of drugs, the misalignment between when a drug is paid for and when the value of the spend is realized is further fuelling the quest for new value-based payment solutions.

In our view this provides a game-changing opportunity for pharmaceutical companies. They could leap-frog over the current rebate-based PLAs and develop value-based agreements with private payers. By tying the price of drugs to agreed-upon outcomes, pharma companies will be able to demonstrate the full benefits of their products. Further, if they proactively engage with private payers on defining value and metrics, they will shape the parameters of value-based agreement frameworks.

SOARING SPECIALTY DRUG COSTS: PRIVATE PAYERS FLEXING THEIR MUSCLES

Private payers are increasingly challenged by employers in the face of rapidly-growing drug plans. In Canada, the drug plan is the most important component of private payer benefit programs. And it will continue to gain in importance with the launch of drugs aimed not just at seniors but younger workers also. New costly treatments in areas such as MS and hepatitis C are largely prescribed to patients under 65, typically covered by private plans.

The growing importance of specialty drugs is further contributing to the rise in the cost of drug plans. Today, specialty drugs account for 2% of claims and represent 26% of the total drug costs. They are expected to reach 50% of the drug bill within 2 years, driven by price, utilization growth and an R&D pipeline dominated by specialty drugs. A growing number of non-specialty treatments targeted at large populations and the many emerging oncology treatments are also contributing to escalating drug budgets.

Payers have been flexing their muscles and introducing a number of initiatives focused on lowering costs. Public payers have taken the lead with the creation of the pan-Canadian Pharmaceutical Alliance (pCPA) in 2010 that has negotiated over 100 Product Listing Agreements (PLAs). These agreements include price rebates and caps which create significant price deltas with private formularies. Given the confidential nature of these agreements, private payers have not been able to secure these same prices in any systematic manner. This may change however with the recent release by the pCPA of the principles that will guide its approach to negotiating Second Entry Biologics (SEBs) and reference biologics. These negotiations will result in greater transparency for biosimilars at a time when biosimilar formulary listings in the US are rising sharply.

Faced with increased pressure from employers to reign in drugs costs, private payers in Canada have begun to negotiate PLAs with drug manufacturers (See related article: “Specialty pharma driving the emergence of “Access Hubs” for private payers”). For example, Manulife launched its DrugWatch program that focuses on high-cost drugs and uses information and listing recommendations made public by the Canadian Agency for Drugs and Technologies (CADTH) to negotiate with companies. Private payers are poised to more aggressively add this mechanism to their arsenal of cost containment measures.

DISRUPTING THE UNIT-BASED PRICING MODEL: VALUE-BASED PRICING

PLAs in Canada have mainly focused on lowering the drug acquisition cost. However, with the launch of high-cost drugs such as hepatitis C treatments and the PCSK9 inhibitors, there is a growing realization that even with a discount, these drugs could undermine the sustainability of drug plans if offered without restriction. Some utilization restrictions have been implemented such as offering hepatitis C drugs only to the most severely-impacted patients. However, this “rationing” approach could give rise to criticism given the demonstrated curative value of the treatment.

Beyond these two classes of drugs, a rich pipeline is causing payers to rethink the unit-based pricing model and to experiment with new ways of paying for innovative medicines. These models, interchangeably labelled “pay-for-performance”, “risk-based contracting”, “value-based reimbursement”, “outcomes-based contracting”, consist of linking payment for the product to the health outcomes achieved in a given patient population over an agreed-upon period.

Examples of such value-based plans include the recent agreement in the US that Cigna concluded with Sanofi/Regeneron and Amgen for the listing of PCSK9 cholesterol inhibitors (Praluent and Repatha respectively). Cigna tracks patients using Praluent and Repatha to monitor if they reach similar reductions in LDL cholesterol levels as patients in the clinical trials. If they do not, Cigna charges the manufacturers a discount for non- performance.

Pay-for-performance agreements are still limited, largely due to implementation issues, such as agreeing to the outcomes to be measured as well as the costs associated with building data collection and analytic capabilities.

Another issue that has impeded the deployment of value-based agreements is defining drug “value”. While current agreements such as the one referenced above by Cigna use LDL cholesterol levels as a marker for outcomes, outcome measures will increasingly become more sophisticated in terms of both real-world clinical and economic data. This is evidenced by a recently published study in JAMA that measured adverse cardiovascular events, incremental cost per quality-adjusted life-year (QALY) and the total effect on US healthcare spend over a five-year period.

With the launch of
high-cost drugs such as
hepatitis C treatments
and PCSK9 inhibitors,
payers are piloting
new ways of paying
for medicines, linking
payment to health
outcomes.

Interest in models that link payment to outcomes is growing. According to a 2015 Survey conducted by Avalere Health, a majority of US health plans are interested in outcomes-based contracts. The interest is especially high for hepatitis C and oncology drugs, but also extends to non-specialty drugs used to treat large populations like those for cardiovascular disease.

INNOVATIVE FINANCING MODELS TO ADDRESS COST/BENEFIT MISALIGNMENT OF NEW DRUGS

Beyond the rising cost of medicines, there is a second important consideration driving new ways of paying for drugs, namely the misalignment between when a drug must be paid for and when the value (however defined) is realized. The introduction of hepatitis C meds Sovaldi and Harvoni is an eloquent example. These new medicines offer a cure rate upwards of 95% at a price tag of $70,000 per patient.

With the promise of science never having been greater, we are on the brink of many more drugs launches that have the potential to treat and even cure once devastating diseases. These high-cost treatments which have dramatic positive impacts on the wellness and productivity of patients, as well as the healthcare system, are paid up front while benefits are reaped over time.

Annuity models along the line of impact or performance bonds could be an interesting option to address the cost/benefit misalignment. In such models, a pledge is secured from a public or private entity which then is leveraged to sell bonds in capital markets thus making funds immediately available. The amount of repayment or return is not fixed but rather contingent upon specified outcomes being achieved. Such mechanisms would be similar to outcomes-based models except that they could capture downstream benefits over a much longer period of time.

Annuity models already exist in the form of “vaccine bonds”. The International Finance Facility for Immunisation (IFFIm) uses long-term pledges from donor governments to sell “vaccine bonds” in the capital markets, making large volumes of funds immediately available for the Global Alliance for Vaccines and Immunization programs. This offers the “predictability” that developing countries need to make long-term budget and planning decisions about immunization programs.

Novel value-based financing mechanisms are still in the nascent stage. To-date, these have focused more on tying short-term outcomes to cost. However, as expensive medicines that provide long-term benefits to the individual, the health system and society continue to be launched, the pressure will be tremendous to fund such medicines and will spur the development of the next-generation of value-based funding. Pharma companies will need to explore such annuity-like mechanisms if they wish to fully align the benefits their medicines procure with the price charged.

With growing access restrictions, there is a clear opportunity for pharma to engage with private payers to develop value-based agreements. Payers need predictability of expense. Pharma needs listings that reflect the benefits their medicines provide.

WHAT THIS MEANS FOR PHARMA

The major challenge for pharma companies in recent years has been to successfully negotiate the patent cliff, notably by optimizing product launches. However, the traditional launch model is changing as pipelines are increasingly delivering more targeted drugs (“niche busters”) in markets with heightened access restrictions.

Pharma companies are largely unprepared for this sea-change in access. While they routinely develop public payer access strategies as part of launch plans, few have explicit private payer plans. However, there is a clear opportunity for pharma to proactively engage with private payers rather than wait for mandatory listing conditions. The emergence of value-based agreements provides an opportunity to collaborate more closely to overcome the challenges associated with such agreements.

The first area where payers and pharma need to align is the definition of the value the drug provides relative to existing and future competition, over what time horizon and to which patient population. The second area is on the identification of outcome metrics as well as how and by whom the data will be collected, analyzed and tied to payment.

This will be no small feat, in part given the technological challenges of tying prescription/claims data to outcomes, but perhaps more importantly given the absence of a culture of collaboration between payers and pharma.

It could be argued that given the impact of specialty meds on drugs plans, such collaboration will need to happen. Drug plan sponsors need predictability of expense. Failing to secure such predictability through value-based agreements spells disaster for pharma companies as payers will ensure predictability through restrictive barriers or outright formulary exclusions. Pharma companies would not only stand to lose revenue from lack or restricted access to patients. They would also not be providing the drugs to healthcare professionals at launch, which will make it more challenging to engage them in these treatments later.

CONCLUSION

Paying for value will not happen overnight nor will it be feasible for all specialty or high-spend drugs. Still, given the high prevalence of risk-sharing agreements in Europe and their increasing use in the US, it would be fool-hardy to believe they will not become more common in Canada. Competition in therapeutic areas such as hepatitis C and PCSK9 creates levers for payers and incentives for manufacturers to conclude agreements that correlate a drug’s formulary price to the value it delivers. And more opportunities will arise with the impending launch of high-profile drugs in asthma, oncology, neurology and immunology.

Pharma companies can choose to partner with private payers or resist. Our view is that pharma companies that elect to be part of the solution will have an important first-mover advantage and create goodwill with private payers. It may even be the case that successful implementation of value-based agreements in the private space will pave the way for such agreements with public payers. This would likely be beneficial for pharma companies as they would be able to demonstrate the value proposition of their products and thus secure payments that more closely align with the benefits stemming from their medicines.

CONTACTS

For further information on how Pivot Strategy can help develop innovative growth strategies contact:

Michel Bernier PhD
Managing Partner
michel.bernier@pivotstrategy.com

Kathy Megyery MA,
MBA Partner
kathy.megyery@pivotstrategy.com

ABOUT PIVOT STRATEGY

Pivot Strategy is a strategy boutique specializing in the financial services and healthcare sectors.

Pivot’s articles explore the impact of important disruptions in the Payer and Pharma sectors. We offer insights regarding ‘early warnings’ in the industry that may be signaling disruptions on the horizon. Our goal is to help executives focus on the most critical issues and how their organization can seize the opportunities that change presents.