Value-Based Contracting: Manufacturer Considerations

Projected trends in population growth and size published by the U.S. Census Bureau indicate the U.S population is projected to increase by 98.1 million between 2014 and 2060. Over that same time span, the population aged 65 and over is expected to grow from 15 percent to 24 percent of the total population — an increase of 9 percent.  One can surmise from the statistics alone that a huge proportion of the population will switch from employer-sponsored health plans to government subsidized plans such as Medicare. While the expected enrollment increase in government programs underscores the need to identify cost drivers, a coterminous increase in the prevalence of chronic diseases and suboptimal health outcomes perpetuates public scrutiny. As a result, pharmaceutical manufacturers will need to be more transparent about observational studies and outcomes-based research to justify the price of their drugs.

For decades, manufacturers have relied on market access strategies that target payers and providers — as these strategies essentially determine a patient’s access to products.  But as healthcare markets become increasingly segmented and as healthcare providers have access to improved technologies allowing for better patient diagnosis, manufacturers should begin to migrate from these upstream supply-side connections.  Access strategies should be focused downstream on product markets and consumers, rather than upstream towards payers and providers. That approach will increase value and drive profits through sustainability.  

A retooled market access strategy now includes value-based arrangements, which may condition payment or drug price based on patient-level clinical or economic outcomes. This requires manufacturers to shift their mindset from the traditional sales-led approach to marketing to thinking of the market as a network of interconnected components centered on the patient. This approach will become more important, especially as healthcare providers continue to vertically integrate (e.g., Integrated Health Delivery Networks) to close gaps in patient care while, in parallel, concentrating their buying power.

In addition, manufacturers also need to invest more in developing “care models,” which follow patients pull-through with the drug, from when a patient self-identifies with the manufacturer that they may need treatment through the end of the patient’s drug regimen where the manufacturer assigns a “care nurse” to be with the patient virtually through the journey (via phone or email). This is another way a manufacturer can ensure, minimally, that the patient continues treatment and to at least optimize the outcome of the drug, while also maximizing the potential care outcome.

Overall, the goal of value-based healthcare is to promote access to high-value care, while reducing cost growth, thus creating savings in the healthcare system. In 2010, the focus on healthcare value was advanced by the U.S. Congress when they authorized the establishment of The Patient-Centered Outcomes Research Institute (PCORI). The institute’s focus is to help healthcare stakeholders make informed decisions. But, unless amended, existing price legislation and regulation may preclude a manufacturer from entering into value-based arrangements, regardless of the aims of PCORI.

A Deeper Analysis

As market access strategies shift toward demand-side propositions and value-based pricing, manufacturers should understand the implications to government pricing calculations. To date, value-based discounts could impact elements of AMP, BP, and ASP calculations. As a means to bridge value-based pricing strategies with compliance activities, we’ve documented some of the potential government pricing implications below.

Manufacturers are required to submit pricing and product data quarterly to the Centers for Medicare & Medicaid Services (CMS) to determine Medicare Part B payment rates and Medicaid rebate amounts.  Pursuant to 42 C.F.R. 414.904 “Average Sales Price as the Basis for Payment,” Average Sales Price (ASP) is used to set Medicare Part B reimbursement rates.

Under current regulation, payments from manufacturers to health plans under a value-based arrangement would be included in the determination of ASP and could lower reimbursement rates to healthcare providers, resulting in unintended effects on product marketability. Moreover, Pursuant to 42 C.F.R. 447.505 “Determination of Best Price,” those same types of payments would need to be included in the determination of Best Price (BP).

For example, if a manufacturer offered a health plan a rebate equal to 60 percent of the list price of a product for each enrollee who did not respond to treatment, and negotiated a payment rebate equal to 20 percent of the list price for patients who did respond, the 60 percent rebate would determine the product’s Best Price for all patients.

If the list price were $1,000, this would result in a Best Price of $400. Reductions in BP can result in significant Medicaid rebate and 340B liability to manufacturers. On July 14, 2016, CMS published Manufacturer Release No. 99 Value Based Purchase Arrangements and Impact to Medicaid where they indicated that a manufacturer’s BP will differ depending on the structure of the value-based arrangement. The release also indicated that manufacturers should continue to document the calculation of BP, including any reasonable assumptions made about the impact of their arrangements on BP, commensurate with 42 C.F.R. 447.510 “Requirements for Manufacturers.”

Additionally, a value-based arrangement could constitute a “bundled arrangement” pursuant to 42 C.F.R. 447.502 Definitions: Bundled Sale,” and require discount reallocation. Subsequent to reallocation over various periods, value-based discounts could impact AMP, BP, and ASP. Although discount reallocation can result in lessening the effect of steep discounts on AMP, BP, and ASP, it complicates government price reporting and increases the risk of calculation error.  

Long-Term Outlook

For the next decade, the thrust of the U.S. healthcare market will be one of connecting stakeholders and information sources in novel ways to drive effectiveness, as well as equity in the system. But in order to align the landscape shift with new market demands, such as value-based pricing, a clear understanding of all stakeholders — including regulators — is paramount to successful implementation. The U.S. government has expressed enthusiasm for value-based arrangements and moving payer programs towards a model that rewards quality of care instead of quantity of care. However, the complicated discounting structures inherent with value-based arrangements and their associated impact to government prices has yet to be fully addressed by regulatory authorities.

Follow our blog for regulatory updates pertaining to how value-based arrangements are treated within government pricing calculations.