A view from the Center

Deloitte's Life Sciences & Health Care Blog

When the music changes, so does the dance: Time for biopharma to get in step with value-based contracting

There is a well-known African proverb, “When the music changes, so does the dance.” I was thinking about this recently when I was a panelist on SAP’s Changing the Game in Life Sciences radio program, “Outcome-Based Pricing: Cure for An Ailing Healthcare Industry.” The moderator asked me for a quote that I felt best represented what was happening in the industry related to emerging pricing and payment models. This one came to mind – and I compared it to what you sometimes see at a wedding where the DJ is playing the Electric Slide, and it looks like some of the guests are doing the Funky Chicken! 

There is a shift in the music that is playing in the industry, and biopharma companies should listen to it carefully so they can best adopt their dance – or their approach – to be in synch with the beat.

Traditionally, insurers have paid for prescription drugs based on the volume of pills for the prescriptions from providers that the patient filled—whether or not the medicines helped as intended. Mounting pressure on health system stakeholders to deliver real value to patients, together with new financial incentives for providers driven both by government and commercial payers, are changing the music. This new value-based rhythm changes the dance for payers and providers with biopharma—the way we calculate, measure, and differentiate biopharma solutions—because, increasingly, drug pricing will likely be determined by value delivered as measured by clinical, economic, and patient-defined outcomes.

With the increasing scrutiny on drug spend, coupled with the continued innovation pipeline from biopharma, we are seeing interest in contracting models that focus on improving patient outcomes and reducing overall health care costs. As posted recently in “A little less conversation (a little more action) in outcomes-based contracts?”,  there has been an uptick over the past two years in such arrangements for biopharma manufacturers in several therapeutic categories.1 With a growing backlash against high drug prices, and with the need to have a compelling value proposition to put new drugs on formulary, pharmaceutical companies are more often considering strategies to proactively offer to tie a portion of their reimbursements from insurers to how well drugs work in patients.2

As my colleague Mary Cummins wrote in the blog , “…at the same time, there are multiple publicly cited examples of value-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.”3 We see the growing viability of these arrangements as regulatory barriers are amended and expertise among contacting parties grows, but as my recent panel discussion emphasized, there is no one-size-fits-all approach to value-based deals. Rather, the contract type should reflect the value drivers and objectives of the parties involved. Also, panelists agreed that it’s important for biopharma companies to understand that not every drug in their portfolio is a candidate for a value-based contract, and therefore, it is critical to make strategic choices on where to invest in designing and executing these types of arrangements.

So which biopharma products might be a good fit for value-based contracting?  Contenders and conditions could include:

  • Products that are in competitive drug classes which are expected to be heavily utilized for the foreseeable future (e.g., PCSK9s, immuno-oncology, GLP-1 receptor agonist and SGLT2 inhibitors for type II diabetes), as well as next-generation immunology therapies (e.g., interleukin therapies). These have high inherent value potential (because of the cost to the system and the opportunity for outcomes improvement) that can be shared between stakeholders.
  • Products with perceived clinical uncertainty, which represents an opportunity to share risk with external stakeholders along the value chain. Indication-based pricing is gaining traction to address immunology and oncology products where the evidence available on impact may differ by indication and thus create an opportunity to stratify risk.
  • Biosimilars, which may represent an opportunity for their manufacturers to demonstrate that the products achieve the same outcomes as the innovator products in a real-world setting and realign perceived risk.
  • The definition of value corresponds to a metric that is objective and can be captured through routine clinical practice. For example, outcomes that are linked to a reduction in downstream health care complications and costs can be captured through claims data. However, outcomes based on metrics that are not collected as part of routine treatment may not be practical if they require the patient to undergo an increased number of tests and additional recording of data in the clinical workflow by staff.
  • The opportunity represents a “win-win” situation for all parties involved in the contract. The product should deliver value to the patient and to the relevant stakeholders along the care continuum. For example, do pharmacy benefits managers (PBMs) really benefit from a reduction in ER visits? Does additional utilization from improved adherence translate into sufficient value for the payer in the timeframe that they will retain the patient as a customer?

Oncology is a good illustration of these factors and one of the spaces where value-based contracting is attracting interest given the high cost of treatments and the significant impact of the disease for patients and their families. In October, the US Food and Drug Administration’s (FDA) approval of Kymriah (tisagenlecleucel) for certain pediatric and young adult patients brought first-in-class gene therapy to the United States;4the manufacturer of this new CAR-T therapy signed a value-based contract with the US Centers for Medicare and Medicaid Services (CMS) in which the agency will tie payments to the drug’s performance. If the product doesn’t work for a patient, CMS doesn’t pay the drug maker. CMS has indicated that it is continuing to explore the development of other innovative payment arrangements for new and potentially life-saving treatments.5 This too should accelerate the shift to value.

As the new value rhythm takes hold, providers and payers likely will demand that the pharmaceutical products they use be measured on clinical and economic outcomes, just as their own services will be. Even if a value-based contract may not make sense for a particular product and set of stakeholders now, manufacturers should be prepared to provide evidence of differentiated value and the rationale for a pricing and contracting strategy. Biopharma companies could benefit from getting in step with health care’s new music and making smart choices on value-based contracting.

1 University of Wisconsin School of Pharmacy Performance Based Risk Sharing Database
2 Drug Companies Tie Costs to Outcomes,” The Wall Street Journal, September 12, 2017,
https://www.wsj.com/articles/drug-companies-tie-costs-to-outcomes-1505268421
3 Drug Companies Tie Costs to Outcomes,” The Wall Street Journal, September 12, 2017,
https://www.wsj.com/articles/drug-companies-tie-costs-to-outcomes-1505268421
4 FDA approval brings first gene therapy to the United States,” FDA news release, updated August 30, 2017,
https://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm574058.htm
5 CMS: Innovative treatments call for innovative payment models and arrangements,” news release, CMS, August 30, 2017,
https://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2017-Press-releases-items/2017-08-30-2.html

Author bio

Joe is a director in Deloitte Consulting LLP’s Life Sciences practice, where he serves as practice leader for Commercial Operations. With more than 25 years of operational and technology strategy consulting experience, his experience lies primarily in the commercial, distribution, pricing, contracting, and general council functions. Areas of specialty and thought leadership are in commercial and managed markets analytics, and enterprise contracts management operational excellence.