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Deloitte's Life Sciences & Health Care Blog

A little less conversation (a little more action) in outcomes-based contracts?

I’m recently back from AdvaMed’s annual conference where, as always, I was struck by the deep commitment to bring innovation to patients. But innovation is in the eye of the beholder. When it comes to medtech offerings, there are many stakeholders who decide if an innovation is going to deliver differentiated results, and what value is merited in return. We highlighted this in our work with AdvaMed and the industry on Effective Value Assessment. And innovation isn’t limited to devices or technology, or even services – innovation can also include novel contracting and business models.

During the conference, I participated on a panel – Risk Contracting: Putting Your Money Where Your Value Is. We began by outlining the transition from a volume-based reimbursement system to one where provider payments are tied to the value achieved. We then looked at whether this change in payment models is beginning to play out in novel outcomes-based payment arrangements for life sciences manufacturers. Clearly, the full extent of change has been coming slowly to medtech. In a separate session, one speaker quipped “value based care represents about 95% of the discussion, but only 1% of our business right now.” With apologies to Elvis, are we going to see a little less conversation and more action?

Why (and why not) move to value-based contracting?

Arguing for a rapid switch to outcomes-based contracting models is often misleadingly simple. For such arrangements to succeed in medtech, a number of strategic and operational hurdles need to be overcome. The starting point may be having sufficient interest from payers and providers in exploring new models as the overall shift from volume to value takes hold. Despite uncertainties in the broader health policy reform environment, there seemed to be consensus among attendees and panelists that providers and health plans are now at a tipping point in switching from volume to value. Many providers realize they are facing what could be an unsustainable financial position, and they are looking to value-based contracts with health plans as a key lever to change the status quo.

But providers are at different stages, with many of them still choosing business models, building out capabilities, and driving change throughout their organizations. Taking on the additional challenge of designing and administering new types of contracts with medtech companies, and embedding the necessary practices into care delivery, may simply not be worth it (or at least not yet). There needs to be a compelling argument on the value that can be captured by partnering with medtech in a different way. It is typically much easier to measure cost, so intensifying scrutiny and increasing demands for evidence or the threat of commoditization are the new reality for medtech.

For many medtech companies, and in life sciences more broadly, there are also complexities to consider when pursuing outcomes-based contracts. Even in biopharma – with a more direct therapeutic intervention than in many medtech product categories – examples of outcomes-based contracts in the US have often been relatively hard to find until recently. Over the past two years, there has been an uptick in such contracts among biopharmaceutical firms in several therapeutic categories.1

However, at the same time, there are multiple publicly cited examples of outcomes-based biopharma contracts that haven’t worked out as planned, or have been abandoned before completion due to the amount of work required to design and execute.2

One reason outcomes-based models have been relatively scarce in life sciences might be concerns about regulations. AdvaMed has been working with federal agencies to rethink some of these regulations, in particular safe-harbor regulations and the anti-kickback statute. The statute makes it illegal to receive anything of value to induce or reward the referral of federal health care contracts. It was created in a fee-for-service environment but may pose barriers for medtech companies to enter into value-based arrangements. Lawyers and a CEO on the panel described progress on the regulatory front. They offered examples of what is now possible, including several “performance guarantee” models where a manufacturer reached an agreement with a provider to share financial risk if patients didn’t achieve certain pre-defined outcomes.

However, the regulatory hurdle may not be the biggest one that medtech companies face. Our panel talked about our experiences with potential outcomes-based contracts that “collapse under their own weight” because the strategic and operational business conditions break the deal, not the lawyers. In particular, it is critical to make the right choices upfront so that the value is real and measureable. Which product, for example, might be suitable for an outcomes-based contract? Which patient populations are most appropriate, and what outcomes and metrics should be used and are practical to implement?

What can medtech learn from health plans and providers?
Many health plans and providers have been testing a range of value-based models over several years that offer useful lessons for life sciences companies. Here are a few tips to consider when developing a value-based contract:

  • Keep the model simple (but not simplistic). Don’t try to be so elegant in design that nothing gets done.
  • Include quality and utilization-management targets as well as incentives that are aligned with strategic goals.
  • Define targets, parameters, and results, and be sure they are measurable.
  • View innovative contracts as long-term commitments rather than a transactional relationship, with a process for revision as the experience evolves.
  • Communicate clearly and act to consistently build trust amongst all parties.

With mounting pressure on providers and health plans to rethink their operations – including their adoption of medical technologies – we anticipate continued interest in novel contracting models that align interests to improve patient outcomes and reduce system costs. Many medtech leaders who are able to make the right choices for outcomes-based arrangements are more likely to succeed and build trust with provider partners. This advantaged position could lead to new insights that help companies invest in innovation that delivers real value to patients and to the overall health system. Meanwhile, for many products that won’t have an outcome-based contract near-term, the need for a robust value proposition with credible supporting evidence is ever more essential to avoid commoditization.

1University of Wisconsin School of Pharmacy Performance Based Risk Sharing Database

Author bio

Mary Cummins is a principal with Deloitte Consulting LLP, in the Life Sciences and Health Care strategy group and is leading multiple cross-sector initiatives for the Value-Based Care practice. Mary works with CEOs and management teams to redefine strategy and achieve operational transformation in the changing health care ecosystem. Her track record spans more than 20 years of delivering growth and improved profitability for a broad portfolio of life sciences clients as well as providers and payers, and her experience covers global leaders as well as earlier stage growth companies and non-profit organizations. Mary has authored several papers including a report developed in collaboration with NEHI on delivering medical innovation in a value-based care world. She also is a co-author of the Value Framework which was produced with AdvaMed.