How Will Value-Based Contracts Influence the Pharmaceutical Industry?

The pharmaceutical industry is known for doing almost everything according to volume. Drug manufacturers, for instance, strive to build contracts with as many health insurers and pharmacy benefit managers (PBMs) as possible to widen their customer base and sell more products.

PBMs, on the other hand, work hard to expand their preferred network of pharmacies to reach more patients and increase their profits. The volume-based approach has worked well for big pharma companies in terms of sales and revenue, but it doesn’t really do much to improve the state of healthcare as a whole.

Fortunately, this is due to change with the arrival of value-based contracts.

What Value-Based Care Can Do

Through value-based contracts, health insurers pay drug manufacturers based on the efficacy of their products in helping patients manage their health conditions— not on the volume of medications they distribute.

By focusing on value-based care, manufacturers are forced to prioritize quality over quantity. In order to stay competitive, they will have to create medications that actually do what they are formulated to do and will bring positive results to those who take them.

These, in turn, will help patients get better faster and eliminate unnecessary hospitalizations. In the long run, this can contribute to lower healthcare costs (both on an individual and government level) and improve public healthcare as a whole.

Value-Based Contracts Are Taking Off

This is not exactly a new concept; insurers have used similar contracts when making agreements with hospitals and physicians for many years now. However, the usage of these contracts in the pharmaceutical industry has just started to take off.

Health insurers and drug manufacturers don’t have an easy road ahead of them since they have to deal with regulatory barriers and navigate a healthcare system that is used for volume-based pricing. But many insurers are now finding ways to get around these challenges and focus on value-based care. In fact, according to a survey by Avalere Health, 25% of health plans now have at least one value-based contract with a drug manufacturer.

One such example is Cigna, which has created outcomes-based contracts with companies that manufacture PCSK9 inhibitors that keep cholesterol levels under control. Specifically, Cigna signed the deal with Amgen, Regeneron Pharmaceuticals, and Sanofi-Aventis.

And it won’t stop there: according to Avalere Health, another 30% of health insurers are in negotiations for value-based contracts. This means that we’ll see more of these contracts in the coming months and years, and they might even become the future of the pharmaceutical industry if all goes well.

How It Works

It’s safe to assume that each contract is different, depending on what the insurer and the manufacturer will agree on. Harvard Pilgrim Health Care, for example, currently has 12 value-based contracts, one of which is with drug manufacturer Eli Lilly. In this contract, both companies agreed that Harvard Pilgrim Health Care will pay a lower price for Eli Lilly’s drug Trulicity (which helps manage type 2 diabetes), if patients show better results when taking competitor diabetes medications.

It remains to be seen if value-based care will receive a positive response among big pharma firms. With many of them comfortable with their volume-based strategies, it will require a lot of convincing before value-based contracts become the norm.

Joshua Pirestani is the president and founder of the American Pharmacy Purchasing Alliance.