The Common Denominator for Manufacturers, Payers and Providers: Value Based Contracts

The health care system in the last decade has initiated a visible transition as policymakers attempt to tie more health care premiums to value rather than the amount of services rendered. One important purpose of this change is to guide the use of health care to where it is most efficient, increasing the effectiveness of health care expenditure. Meanwhile, manufacturers of bio- pharmaceuticals are facing an increasingly competitive environment and are developing more innovative medicines that cure diseases or dramatically improve patient outcomes.

In response to these dynamics, payers and manufacturers are developing a variety of new value-based contracts that more closely relate reimbursement of drugs to individual patients’ worth. These voluntary, private arrangements include performance-based contracts that link payment to proven patient outcomes, varying payment based on how a medicine is used and other forms of risk sharing. While existing performance-based contracts have likely benefited patients, a range of barriers have been identified by bio- pharmaceutical research companies that limit the scale and scope of value-based contracts on the market.

Value-based contracts have the potential to benefit patients and the health care system in several ways.

Improves patient results: This could happen if payers are willing to have wider access to new drugs, as manufacturers reduce the possibility of sub- optimal results from the payer. It may also be because these contracts encourage payers or suppliers to do more to promote the effective use of medicines by patients.

Significantly decrease care expenses: By avoiding hospitalizations, emergency visits or other expensive effects of poorly managed illness, drugs may reduce spending on medical care. Fostering better use of drugs by value-based contracts may help drive these savings towards medical costs. This could also minimise cost sharing for patients.

Cuts the price of the medications: It can also occur when suppliers pay higher rebates for patients who fail to reach agreed performance standards under a result-based contract. Often, patients can benefit if rebates are passed on to them or if the drug gets a better formulary role, thereby minimising cost sharing. Value-based contracts will shift prescription drug payments away from unit-based approaches and align stakeholder interests more efficiently around value.

Reimbursement measures outcomes

Aligned incentives can be gain-sharing opportunities and better focused clinically-justified procedures as well as encourage evidence-based decision making.

Pay-for-Performance (P4P): A financial model ties a portion of provider incentives or disincentives to quantifiable, calculated performance expectations or benchmarks for change to represent requirements for the process or outcome. Often in the form of a bonus for reaching and/or exceeding a specified metric or sometimes a clawback for falling short, the provider earns an adjustment to its FFS rate bases on results. P4P also needs less IT infrastructure and integration than other models which make this popular with smaller or newer provider organisations. However, the model typically includes the creation of a clinical quality benchmark, and the ability to track and report outcomes. Incentives may also be too small to inspire provider actions or the population of patients is too small to affect. It resembles an FFS model but providers earn higher fees to make services more acceptable. Expect that P4P will grow 3X in the next 5 years.


Patient Centered Medical Home (PCMH): Care model in which a primary care practise / group is responsible for the delivery of healthcare services for a given population. As a primary care-driven programme, Medical Homes focuses on developing a team of healthcare professionals (physician, RN case manager, and medical assistant) that coordinates patient care across a continuum and offers higher quality and improved care management, particularly for patients with chronic illness, to avoid readmissions and visits to hospitals. Medical homes are increasingly using to promote EMRs, Disease Registries and Data Repositories. Providers also demand an increase in the FFS premium or a payment per Employee per month (PMPM) on top of regular FFS payments to offset the costs of managing staff care and overhead infrastructure. This model also involves the implementation of additional and unique IT assets (e.g., EHRs). Today, for optimum effects, many IT programmes are not adequately compatible with VBR, and need additional clinical buy-in and dedication to VBR performance.


Bundled Payment/Episode of Care: The provider here acknowledges a fixed price for treating treatment episodes; this approach is mostly extended to acute episodes but can be adapted to chronic conditions. Bundled Payment / Episode Of Treatment includes a fixed rate for all services for a defined operation or illness including knee and hip replacement surgery, some medical procedures, pregnancy and birth and bonds Provider reimbursement amounts to established quality of care, risk stratification and complication allowances. It stimulates the performance of Provider based on a comprehensive scorecard. Providers benefit from the savings they produce within episodes through productivity and from preventing unnecessary service. Payers save money by paying less by episode or by patient than they have in the past. In addition, payers know in advance how much will be invested and don’t have to wait to see whether more savings can be made. A possible drawback for companies using this model is the expense of care for operations that surpass agreed-upon rates that are reimbursable. Providers also face the obligation to handle more incidents to raise their revenue and thus the Bundled Payment Model is equivalent to another type of FFS; others are currently designing Bundled Payment Systems for particular procedures like diabetes, congestive heart attacks, joint replacements, hypertension, etc.

Challenges with Structuring and Implementing Value-Based Contracts

There are several inherent difficulties in enforcing value-based contracts, especially those that are dependent on particular drug outcomes or indications. These fall into three main sectors: financial, communications and regulatory.

Operational issues: Considerable infrastructure is required for payers and providers to monitor a performance-based agreement. For example, payers do not have the capacity to control and track medication use and contract-related results due, among other concerns, to a lack of adequate information systems, data infrastructure, or personnel expertise. Without proper control systems in place, it can be difficult to stick to the prescription. Manufacturers are reluctant to consider financial repercussions if they are unable to regulate how they sell or use a drug. Moreover, it is difficult to agree on findings which are acceptable and observable within a realistic timeframe.

Communication concerns: Payers may be interested in decreasing expenses for a certain patient demographic, such as reducing hospital visits and costs. However, this kind of clinical or economic result may not be listed on the label of a medication, which the FDA would authorise.

As a result, payers and suppliers can’t commit to a deal based on an outcome not specified on the drug label, even though there are good evidence for that outcome and this restricts their ability to share risk effectively. The FDA is currently investigating how it governs knowledge exchange between payers and manufacturers, so this issue may be resolved in the near future.

Regulatory barriers: Medicaid Best Price has been enacted as a means of keeping federal spending in check and ensuring Medicaid gets the lowest price the manufacturer can afford to sell it, which is roughly one-fourth of the average manufacturer price of a drug.

Manufacturers are hesitant to create value-based contracts that may result in a greater effective discount than Medicaid Best Price, because the lower “discount” or price will apply not only to the population in the deal, but also to the entire Medicaid population.

Another reason some manufacturers and payers refrain from value-based contracting is the fear of inadvertently running afoul of the federal anti-kickback statute, which prohibits the exchange or offer of anything of value in an effort to reward the referral of business.

The innovative value based contracting system has taken the life science industry by a storm with it’s promising ideas of reduced cost liabilities for payers and patients while simultaneously enhancing opportunities for bio- pharmaceutical organizations to broaden their market presence and image. However, this does not necessarily cut short the still emerging prospective of traditional contracts. They are still considered to be present in the industry with a strong foot through many years to come. Undoubtedly the concept of co-payment has been exhibiting very high rates of adaptability within the life- science industry in turn also fostering stronger partnerships between payers and providers. This allows not just to work out a settlement that is beneficial for all parties but also effectively and very transparently map out the risks and long term needs that might be associated in the path through various innovative concepts and actively involving care providing organizations.