Session 181 PD - Value-Based Contracting for Drugs and Medical Devices

Moderator:

Gabriela Dieguez, FSA, MAAA

Presenters: Maggie Alston, CHFP Patrick Cunningham

SOA Antitrust Compliance Guidelines SOA Presentation Disclaimer

Value-Based Contracting for Pharmaceutical and Device Manufacturers

October 18, 2017

SOA Annual MeetingBoston, MA

Gabi Dieguez, FSA, MAAA

Principal & Consulting Actuary

Maggie Alston, CHFP

Healthcare Analytics Consultant

Agenda

I. From volume to value: incentives for value-based contracting

II. Value-based contracting options for pharmaceuticals and devices

III. A manufacturer’s perspective

IV. Q&A

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The Shift from Volume to Value

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Value-Based Contracting Differs from Fee-for-Service

Under fee-for-service arrangements, a health plan or other payer pays an assigned fee for each covered item.

Providers are incentivized to provide more services or more aggressive services, particularly costly inpatient services like surgery.

In fee-for-service, the payer bears the risk, not the provider.

Value-based contracts are an attractive alternative to traditional drug and device contracting for payers and risk-bearing providers as the industry moves from volume to value. However, these contracts require a significant amount of data analytics.

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FFS is no longer perceived by payers as providing value, nor is it likely to be financially sustainable given the already large share of the economy consumed by healthcare.

Key Factors Driving Value-Based Contracts

Rising Healthcare Costs with Perceived Poor Value

• Since 2000, health insurance premiums for a typical family have increased by 114%

Backlash against high prices

• Life science companies are facing sharp criticism for some of their pricing strategies

More government dollars

• Expansion of Medicaid + low-income subsidies in Exchanges + aging of “baby-boomers” = increasing government spending.

• This gives the government greater leverage and incentive to try to manage rising costs.

Constrained Budgets for Healthcare Spending

• In 1980, healthcare represented 9.2% of GDP. In 2010, that share nearly doubled to 17.9%.

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Common Concepts in Value-Based Contracts

Value-based arrangements have many names:

Risk sharing contracts Advanced contracts

Alternative contracts Outcomes-based contracts

Payment reform Risk contracts

Shared risk contracts Pay-per-performance contracts

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How Can Pharmacy and Device Manufacturers Benefit from Value-Based Contracts?

A manufacturer may be able to meet its goals by doing one or more of the following:

Using caps or limits to shift some of the risk away from the payer or life science company

Taking on price or volume risk to lower the payers’ risk

Offering financial guarantees of effectiveness in the real world to allay payer or provider fears.

Value-based contracting has a market value

Dialog about advanced contracts can help a payer understand a product’s value.

The result may be a traditional contract at more favorable terms.

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How do Stakeholders Define “Value”?

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“Value” Defined Differently by Stakeholders

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Quantitative

• Economic Value• Medication Cost• Total cost of care (may include

cost avoidance)• Enhanced reimbursement (quality

adjusted FFS premium)• Quality-adjusted life years

Qualitative

• Clinical outcomes not monetarily linked

• Patient experience• Societal impact

“Value” Defined Differently by Stakeholders

Manufacturer: Competitive edge

Payer:Controlling costs

PBM:Steer utilization

Different from / create

barriers for competitors

Accelerate / retain

market acceptance

Leverage stronger

products to promote

weaker products

Obtain better formulary

placement

Build a better

partnership with

customers

Reduced uncertainty

around products

─ Cost of product /

class

─ Product performance

Align product cost with

clinical value

Potentially improve

outcomes for patients /

members / employees

Lower medical costs

through increased

adherence

Steer utilization to

profitable channels

(mail order or specialty

pharmacy)

Increase utilization

(additional revenue

through rebates)

Positively market to

payers

Receive additional

rebates

Encourage

manufacturer

competition

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Examples of Value-Based Contracts

Contracts between a pharmaceutical company and a payer

A company that manufacturers PCSK9 inhibitors (a class of cholesterol drugs) entered into a value-based contract with a national health plan.

The manufacturer offered the health plan deeper discounts on the drug if patients using the drug do not reduce low-density lipoprotein (LDL) cholesterol levels at least as well as demonstrated in clinical trials.

If the drug lowers LDL cholesterol to the expected level—or better—the negotiated drug price remains the same.

Contracts between a pharmacy benefits management company (PBM) and pharmaceutical companies

Express Scripts has been engaging pharmaceutical companies in value-based contracting discussions for certain oncology drugs.

Under the proposed pay-for-performance arrangements, companies’ payment would be based on the effectiveness of their products.

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Developing and Implementing a Value-Based Contract

A Framework to Build Effective Contracts

While contracting is not “one size fits all”, a consistent approach can be helpful.

Understand the payer’s environment

Current challenges / opportunities

Emerging challenges / opportunities

Typical contracting style

Evaluate the payer’s contracting capabilities

Consider the product characteristics

Determine the appropriate value-based contracting approach

Definition of value

Possible challenges

Ability to collect measurable data

Indicated population

Label considerations

Other legal considerations

Outcomes based vs. financial based

Timing, data, legal considerations

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What Questions Should Manufacturers Consider for Designing Value-Based Contracts?

What risks does the customer (payer or provider) have that the company can address by taking on risk?

What is the customer’s primary concern? Do they want to manage spending for the entire therapeutic class or just the company’s product?

Are they concerned about high spending for individual patients or high aggregate demand for the product? Is the customer concerned with how the product will perform in the real word versus clinical trials?

What contracting strategies can be used to manage inappropriate use?

All of these questions can be approached quantitatively, with models, simulations, and real-world data.

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How Companies Develop and Implement Value-Based Contracts

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Value-Based Contracting Options for Pharmaceuticals and Devices

Financial and Adherence/Clinical Outcomes

Deciding Whether or Not to Engage in a Value-Based Contract

Should have designated experts in place with the skills to develop and evaluate proposed value-based contracts for key products.

Things to consider when vetting potential value-based contracts include:

Does the company have the expertise necessary to develop and execute these types of contracts? Have they engaged in value-based contracts with other pharmaceutical or device companies?

What market challenges could be solved by entering into this value-based contract with this company?

Does entering into the value-based contract make since and financially?

Are the outcomes being measured meaningful?

Can the contract be executed?

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Defining “Value”: Possible Outcomes

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Financial

Per Member Per Month (PMPM), fully capitated

Per Patient Cap

Free or Discounted Scripts

Adherence & Clinical

Proportion of Days Covered (PDC)

Proportion of Patients Reaching a Target

Utilization

Financial Value-based Contracts: Potential Challenges

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Alignment Between Payers and Manufacturers

Challenge: Payers and Manufacturers need to agree on the financial parameters:

Which patients are eligible

How to measure the outcome

How the data will be collected, processed, and analyzed

Potential Solution: Identify what parameters can be calculated from the data available – many financial

parameters are already being calculated by payers or can be easily calculated using claims data. Third

party data validators can be retained to verify results.

Multiple Indications

Challenge: If a drug has multiple indications, manufacturers could face losses if utilization exceeds

what was used to calculate the caps and PMPMs.

Solution: Create a bundled price to accommodate variation in prices and dosing amongst multiple

indications.

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Free or Discounted First Scripts for Patients Who Stop Treatment

Example: Health Plan does not pay for a patient’s IBS drug scripts if that patient stops taking the drug

within three months of starting treatment.

Per Patient Cap

Example: PBM does not pay for a patient’s macular degeneration drug scripts after they hit the pre-set

individual cap of 10 scripts.

Per Member Per Month (PMPM) Contracting

Example: Health Plan pays a fixed PMPM for a portfolio of heart failure drugs produced by the

manufacturer, which allows patients to receive as many scripts as necessary.

Regimen-Based Pricing

Example: Two lung cancer drugs that are supposed to be taken together are priced lower if purchased in a

bundle versus individually.

Potential Financial Value-Based Contracts

Adherence/Clinical Outcomes: What to Measure?

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Identifying Meaningful Clinical Outcomes

Challenge: Even if data is available, it is not always easy to identify and define a clinical outcome upon

which to contract.

Potential Solution: Identify clinical outcomes that are tied to payments/cost since they will likely be

coded in claims data and will likely result in a positive financial outcome for the payer.

Example: Reduction in inpatient hospital utilization

Alignment Between Payers and Manufacturers

Challenge: Payers and Manufacturers need to agree on which outcome(s) to select, which patients are

eligible, how to measure the outcome, and how the data will collected, processed, and analyzed.

Potential Solution: Leverage existing payer industry reporting infrastructure to select outcomes

Examples: HEDIS or Medicare Star Rating measures

• Potential Solution: Choose metrics considering payers’ ability to influence real world performance

• Example: Medication adherence

Potential Adherence Outcomes-Based Contracts

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Proportion of Days Covered (PDC)

Example: Manufacturer of a heart medication pays a lower rebate if 80% of patients have a PDC of at least 80% in a given year.

Medication Possession Ratio (MPR)

Example: Manufacturer of a heart medication pays a lower rebate if 80% of patients have a MPR of at least 80% in a given year.

Scripts per Patient - Individual

Example: Manufacturer of a HIV drug pays an additional rebate if the average number of scripts per patient in a given year is greater than or equal to 7.

Scripts per Patient - Aggregate

Example: Manufacturer of a HIV drug pays an additional rebate for each patient who uses more than 7 scripts in a given year.

Daily Average Consumption (DACON)

Example: Manufacturer of an insulin drug pays a lower rebate if the average DACON is less than the maximum units/day on the label.

Persistency

Example: Manufacturer of a diabetes drug pays a lower rebate if 80% of new patients fill a script at least 180 days after their first script.

Potential Clinical Outcomes-Based Contracts

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Proportion of Patients Reaching a Target

Example: Manufacturer of an anti-hypertension drug pays an additional rebate if less than 75%

percent of eligible patients reached their target blood pressure.

Absolute Target

Example: Manufacturer of an anti-diabetic drug pays an additional rebate if the average HbA1C

level for eligible patients was above 8.0.

Free or Discounted Scripts for Non-Responders

Example: Payer would be reimbursed for the first three months of a weight-loss medication for

eligible patients who fail to lose 5% of their body weight in the same time period.

Utilization

Example: Manufacturer of a multiple sclerosis drug would pay an additional rebate if eligible

patients did not have a 5% decrease in hospital admissions.

Events

Example: Manufacturer of a cholesterol-lowering drug would pay an additional rebate if more

than 10% of eligible patients experienced a myocardial infarction.

Value-Based Contracting Data Considerations

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Implementing a value-based contract will require using clinical and

administrative PHI to determine the outcome of interest for eligible

members.

HIPAA

Pharmaceutical and device companies’ contract administration areas aren’t used to handling private

health information, which will be required to administer a value-based contract.

Sample Size

A measure’s sample may be too small to achieve statistical stability, especially if the measure has

strict eligibility requirements.

There may not be enough dollars at stake to justify the overhead required to implement the contract.

Clinical Data

Clinical data can be difficult to collect for all eligible patients due to how it is collected and stored.

Value-Based Contracting Regulatory Considerations

Medicaid Best Price

Concern that steep rebates from value-based contracting will trigger an additional rebate due to a

new low price.

Particularly a concern for “free” promotional scripts or scripts for “non-responders.

Price Reporting

Pharmaceutical and device companies are unsure of how to report the variable rebates, and in which

fiscal year to record them.

If the contracting is done on a bundle of drugs, how should the rebates be allocated, and will this

trigger an additional rebate due to Medicaid Best Price?

Anti-kickback

Could value-based contracting be considered constitute influence on the spending on a federal

program.

Off-label Use

Concern about value-based contracting promoting off-label use.

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Successful Implementation of a Value-Based Contract

During contract development, models should be leveraged that can:

Measure the contract’s outcome variability

Quantify the potential contract’s risk

Allow the user to determine the potential contract’s feasibility

Work proactively to setup channels to collect and process the data for a contract.

Need regular activity and commitment to making the contract work—launching and waiting to see the results is generally not a viable strategy.

Engage with third-party vendors to help develop modeling tools, setup data warehouses, perform reconciliation, etc.

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Competitive Landscape of Value-Based Contracting

When considering whether or not to engage in value-based contracting, companies need to pay close attention to their competitive environment.

For example, if a competitor offering to bundle several of its diabetes products into a value-based contract, your company may need to consider offering a value-based contract to customers as well, or risk losing significant market share.

Need to consider products pipeline products how new launches might affect the competitive market, including in future renewal years.

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Caveats

This slide deck has been prepared solely for the purpose of illustrating the topic of value-based contracting for pharmaceutical products and devices. It may not be appropriate for other purposes.

The American Academy of Actuaries requires its members to identify their credentials in their work product. Gabriela Dieguez is a member of the American Academy of Actuaries and meet its qualification requirements to issue this communication.

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Society of Actuaries2017 Annual MeetingAugust 18th, 2017

Patrick CunninghamVice President, Commercial Development – Onduopatrick@onduo.com

Value-based contracting:A manufacturer’s perspective

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The views and opinions expressed in this discussion are my own and do not necessarily reflect the position any current or former employers.

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Healthcare and the shift from volume to value

Efficacy-Effectiveness gap

Value-based contracting

Scientific progress is leading to novel therapies to treat or even cure previously unmet medical needs

4Source: US Food and Drug Administration. "Novel Drugs Summary 2016." FDA website. http://www. fda. gov/Drugs/DevelopmentApprovalProcess/DrugInnovation/ucm474696. htm (2017).

• All FDA-approved products are required to meet our rigorous safety and efficacy standards

• New drugs are being developed to treat diabetes, various forms of cancer, Duchenne muscular dystrophy, and hepatitis C among others

Increased spending on drugs, especially branded drugs, will continue to put pressure on overall healthcare spending

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8%

1%

$259

45%

4%

17%

8%

2010

$265

3%

28%

28%

43%

4%

17%

1%

24%

2013

$253

46%

1%4%

18%

23%

8%

19%

$253

2009

46%

4% 1%41%

$496

1%3% 0%

12%

34%

10%

2022

3%

33%

2020 2021

42%

12%

1%3%

$466

10%

33%

10%

12%

10%

2019

3% 3%

$412

32%

12%

42%

2018

43%

$387

$438

31%

1%1%

10%

43%

12%

43%

1%

2017

31%

$360

3%

10%

13%

30%

2016

$341

1%3%

12%13%

10%

3%

30%

43%

10%

2015

1%

$298

3%

14%

1%

8%9%

1%

43%

$325

29%

10%

15%4%

2014

41%

11%

$597

0%

10%

2025

3%

35%

2024

43%

2023

41%

0%

41%

$561

10%

$528

11%

34%

22%

2012

8%

2011

26%

$259

44%

1%

16%

3%

Medicaid

Other Health Insurance Programs

Medicare

Other Third Party PayersPrivate Health Insurance

Out-of-Pocket Payments

Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group. For definitions, sources, and methods for NHE categories, see CMS.gov. National Health Expenditure Accounts methodology paper, 2017

Total U.S. prescription drug spending, in $ billions

CMS and private payors are leading the transition from paying for volume to value for all healthcare stakeholders, including manufacturers

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• 85% of FFS payments tied to quality

• 30% of payments through alternative payment models

2016 2018

• 90% of FFS payments tied to quality

• 50% of payments through alternative payment models

Source: US Department of Health and Human Services. "HHS reaches goal of tying 30 percent of Medicare payments to quality ahead of schedule [news release]." (2016). Centers for Medicare & Medicaid Services. "CMS proposes to test new Medicare Part B prescription drug models to improve quality of care and deliver better value for Medicare beneficiaries [news release]." Press Release (Mar. 8, 2016), available at: https://www. cms. gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2016-Fact-sheets-items/2016-03-08. html (2016).

HHS announced goals for value-based payments

• Regardless of what happens with ACA, MACRA had strong bipartisan support when it passed, and the legislation’s shift toward value continues to have backing in Congress

• The Center for Medicare and Medicaid Innovation (CMMI) is developing new payment models for healthcare delivery (e.g., ACOs) as well as drugs (e.g., Oncology Care Model)

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Healthcare and the shift from volume to value

Efficacy-Effectiveness gap

Value-based contracting

Post-approval ResearchPhase I-III

Efficacy-Effectiveness Gap: Patient populations and the clinical trial infrastructure used for FDA approval are not representative of real-world utilization of drugs

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Populations studied

Util

izatio

n

Variances in populations utilizing drugs versus the populations studied• Differing age groups• Race, ethnicity, gender• Unstudied comorbid conditions• Differing concomitant drugs• Lifestyle variances• Differences in disease severity• Varying levels of compliance

For FDA approval, a product’s safety and

efficacy are tested within a well-defined

population of patients

Randomized controlled clinical trials are

conducted within well-organized and well-

supported clinical research environments to

eliminate confounding variables and assess the

impact of a drug

Post-approval, drugs are used a much broader

set of patients that may nor may not experience

the same impact

Source: Adapted from Pollock, Mark Cziraky Michael. "Real-World Evidence Studies." (2015).

Real-world feedback from payers

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Clinical benefit

• Payers are concerned that the real-world experience would not show the same level of clinical benefit as to what was seen in the clinical trials for the same patient population in the trial

• Payers are concerned that adjacent patient populations will not show the same level of clinical benefit as to what was seen in the clinical trials

Financial exposure

• With the Hepatitis C products in mind, payers are worried that a new drug or class of drugs will grow at the same rate and create a budget crisis

• Medication non-adherence may lead to increased costs without any corresponding clinical benefit

Efficacy-Effectiveness Gap and Utilization management

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• The prospective use of a product within in a larger, heterogeneous population creates new risks that may not have been accounted for in the clinical evidence development process.

• This is especially true in the case of diseases which require adherence to complex regimens, require patient lifestyle changes, and/or require ongoing engagement with a healthcare team.

• For high-cost specialty products, the negative budget impact of over utilization and/or reduced clinical benefit lead to monitoring and utilization management

• Prior authorization, step-edits, quantity limits, and other processes limit the utilization of a new drug

Source: CVS/caremark. Repatha (evolocumab) FEP Clinical Criteria [Internet]. Lee's Summit, MO: CVS/caremark. http://www.caremark.com/portal/asset/FEP_Criteria_Repatha.pdf.CVS/caremark. Praluent (alicrocumab) FEP Clinical Criteria [Internet]. Lee's Summit, MO: CVS/caremark. www.caremark.com/portal/asset/FEP_Form_Praluent.pdf. Accessed October 16th, 2017.

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Healthcare and the shift from volume to value

Efficacy-Effectiveness gap

Value-based contracting

Value-based contracting can create a win-win-win for patients, payors, and pharma by mitigating the efficacy-effectiveness gap

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• Beyond the fixed and hostile negotiating positions that manufacturers and payers have gotten locked into, there are innovative means to bridge the information and trust gap that exists between these two groups.

• Value-based contracting holds the promise of contractually mitigating the risks from over utilization (e.g., product use among patients for whom a product is not indicated) or reduced clinical benefit (e.g., a clinical benefit less than observed in well-structured trials) so that more patients are able to achieve better clinical and economic outcomes.

Source: Sachs, Rachel, Nicholas Bagley, and Darius N. Lakdawalla. "Innovative Contracting for Pharmaceuticals and Medicaid's Best-Price Rule." (2017).

Developing a business case for value-based contracting:

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Increase Access/Reduce Barriers

Increase Reimbursement/Reduce Rebates

Competitive Differentiation/Pressure

Developing New Capabilities

Governments, health plans, employers, and patients are demanding greater value, especially real world value, for their substantial healthcare investments.

Eli Lilly, Abbvie, Sanofi, Novartis, GSK, Merck, and others have begun to enter into value-based contracts, especially for novel specialty products in competitive therapeutic areas.

Utilization management programs can create significant barriers patients and physicians to benefit from a new product. Value-based contracting may influence these administrative hurdles.

The design, development, valuation, execution, and settlement of value-based contracts requires skills and experience.

The legal and regulatory challenges are substantial but can be addressed with prudent planning and coordination

Federal RegulatoryConcerns

Government Price Reporting

Anti-Kickback Statute

Medicare Part B and Part D Requirements

Patient Privacy (HIPAA)

Off-label promotion/unsubstantiated claims

Operational Concerns

Financial Accounting

Data Analytics

Gross-to-Net Impact

Contracting Complexity

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The full benefit of value-based contracts for patients, payors, and other healthcare stakeholders has been limited by outdated regulatory requirements

Last thoughts

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• The shift from volume to value is advancing for all sectors of healthcare, including for pharmaceutical and medical device manufacturers

• Pharmaceutical and medical devices manufacturers still have attractive financial margins as many products have been priced based on a product’s clinical trial efficacy

• Efficacy-Effectiveness Gap: Patient populations and the clinical trial infrastructure used for FDA approval are not representative of a product’s real-world utilization

• Value-based contracting can create a win-win-win for patients, payors, and manufacturers by rewarding the real-world benefit of innovative products

• The financial, legal, and operational challenges of value-based contracts are significant, but the short-term and long-term benefits are compelling

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