ACROSS MOST CONSUMER GOODS INDUSTRIES—outside of health care—the price of a product or service is determined by the value it creates. Plainly stated, you would not pay for something that does not work or is only partially effective. In health care, however, this is not always the norm. In the current system, manufacturers set drug prices at a static point, first justifying as a return on their investment in research and development, and then periodically increasing them regardless of how much patients benefit.

We are, however, increasingly seeing a movement toward value-based care and away from fee-for-service reimbursement models. This is evidenced by the greater emphasis from CMS on alternative payment models, including accountable care organizations, which incentivize high-quality care and better patient outcomes.

The shift toward value-based management is also evident in the pharmacy benefit, with new models emerging that tie reimbursement for a drug to the value it delivers, not its sales volume or a preset price. Such approaches are increasingly important because the current growth in drug prices is simply unsustainable, especially regarding specialty drugs.

The goal of value-based management is 2-fold: better health outcomes and lower costs. Value-based management attempts to incentivize quality and efficacy, and when successful, it is a win for payers, patients, and the entire health care system.

Next-Generation Value-based Management
The introduction of preferred formulary status for lower-cost generics was the first foray into value-based pharmacy benefit management, and it remains the cornerstone of cost containment without compromising quality of care. However, the drug pricing landscape continues to evolve, becoming increasingly complex. Specialty drugs are coming to market at ever higher launch prices and acquiring multiple supplemental indications (post launch), which adds to their potential market. Coupling those factors with double-digit price inflation on several existing branded specialty drugs has resulted in a rise in specialty drug spending in recent years, according to CVS Health data. The drugs are priced the same regardless of their efficacy in treating each specific and distinct indication.

Emerging value-based models aimed at addressing these issues include:
  1. Indication-based management: in pharmacy benefit management, rebates and pricing discounts have traditionally been negotiated for a specific drug or an entire therapy class. As a result, no matter what a particular drug’s efficacy may be for an approved indication, payers are charged the same price.
In the autoimmune category, for example, Humira is indicated for a range of conditions, from rheumatoid arthritis and Crohn’s disease to plaque psoriasis and ankylosing spondylitis. Should we pay the same for this drug across all indications, especially when its efficacy varies by condition?

In a value-based approach, pricing and rebates are much more targeted based on the condition being treated. This maximizes value by ensuring that a drug’s cost aligns with its relative value for treating a patient’s condition and that the right patient gets the right drug for the right condition. It can also increase competition among the various products that are safe and effective for patients with a common condition, helping to lower costs.

A drug could also be placed on a formulary for only the specific indication(s) for which it is most effective or included for all proven indications, in which case the manufacturer would be required to pay a higher rebate when the drug is used for an indication for which the evidence is less developed or for which it has been proven less effective or beneficial to patients. In competitive conditions (with multiple available treatment options), a manufacturer of a less effective drug may offer lower pricing in order to have it included as an alternative on the formulary. Meanwhile, manufacturers of more effective drugs for the same indications may provide more favorable pricing and rebates in return for preferred formulary placement. Altogether, this approach helps promote greater competition by indication and to lower prices for all drugs within a category on the basis of that competition.

Hepatitis C and autoimmune diseases are 2 categories in which indication-based pricing is being tested. For hepatitis C, preferential formulary placement could be granted by genotype, making sure patients are receiving the treatment most beneficial to them. In autoimmune conditions, a medication may demonstrate lower efficacy for the treatment of 1 condition than it does for other indications (eg, psoriasis vs rheumatoid arthritis). Formulary placement could be determined based on efficacy for a given indication rather than the same placement for the entire therapy class. 
  1. Outcomes-based contracting: this value-based approach aims to maximize value by tying drug reimbursement to actual health outcomes or outcome measures. For example, diabetes is a top drug trend driver for payers each year, with double-digit, year-over-year price inflation determined by the drug manufacturers. With outcomes-based contracting, a manufacturer may be required to show that glycated hemoglobin levels would be lowered by a certain percentage that is in line with the evidence used to support FDA approvals. If that goal is not achieved, the manufacturer may have to pay an incremental rebate.

This method is still evolving and has some inherent challenges, including how to determine and measure appropriate clinical outcomes and efficiently get access to relevant data. This may not be the right approach for all drug classes, as some lack measurable clinical markers. Lifestyle and other external influences that are outside of the control of manufacturers and payers can affect outcomes and compromise the integrity of the value-based agreement. The lag time between treatment and reliable outcome data can also pose a potential barrier.

While the specifics are still being explored, this type of arrangement holds promise for improving population health outcomes and controlling costs. Pharmacies that offer high-touch, holistic care will be integral in this type of value-based arrangement, where clinical monitoring, or tracking, of outcome measures, such as medication adherence, is critical to driving the best health outcomes at the lowest cost.
  1. Cost cap-based contracting: this type of value-based arrangement is likely to be an important tool for therapy classes with large patient populations in which a new drug comes to market at a much higher price than other incumbent drugs in the class. In this case, the pharmacy benefit manager would negotiate formulary placement and a maximum per-member-per-month (PMPM) cost of the drug. In addition to a favorable price and/or rebate, the manufacturer may also provide additional value if the PMPM cost exceeds the threshold. 

This approach holds promise for therapy classes such as oncology, which is dominated by high-cost drugs and drives a large portion of annual spending. Oncology medications may also demonstrate vastly different outcomes and have other significant challenges, including side effects, adverse drug interactions, and variations in tolerability. Additionally, prescribing patterns and preferences among oncology specialists can vary greatly, so utilization of advanced technology can assist in carefully monitoring the regimen selection, duration of therapy, and use of generics and supportive agents.

A cost cap-based contracting approach could help mitigate payer risk by encouraging providers to prescribe more clinically appropriate, cost-effective drugs with performance-based incentives. Another potential opportunity to deliver value in oncology care is effective site-of-care management. Ambulatory infusion sites and at-home infusion are often safer and more convenient for stable patients, at a lower cost for payers, compared with outpatient or hospital-based facilities, as noted in a March 2017 study published in Healthcare.

Although there are multiple ways to think about value-based management, the goal remains the same: incentivize quality and better outcomes by aligning the price for a drug with the value it delivers.