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Now you’re speaking my language: Value-based contracting should push health care stakeholders to understand each other’s business models and value drivers

We all want to offer better value to our customers. Pharmaceutical companies, health plans, hospitals and health systems, and physicians want to provide better health outcomes for lower costs to patients…and to each other. But to each stakeholder, the definition of value can be quite different. Before pharmaceutical manufacturers consider a value-based contract, they could benefit from becoming fluent in the language of each stakeholder and understand how each potential partner defines value.

Today, I am moderating a panel at Asembia’s annual Specialty Pharmacy Summit in Las Vegas. During this session—Value is in the Eye of the Beholder—we will look at value through several different lenses. In many types of value-based contracts, pharmaceutical companies assume some level of risk that their products will achieve the desired results in a real-world setting. From the company’s perspective, a therapy that lowers costs in the health care delivery system, while improving patient outcomes, offers value. That seems simple enough, but when it comes to contracting around that value, other stakeholders might have a different interpretation of value based on their perspective.

  • How do health plans define value? Consider a new therapy that promises to reduce a health plan’s total cost of care over five years. For the manufacturer, this product has a clear value and business case. But the health plan might not see it that way. Members tend to switch insurance carriers every couple of years, which means a five-year return on investment (ROI) has limited value to a single health plan. With all else being equal, the health plan would prefer a 12-24-month ROI. If a new therapy can help reduce short-term costs, the health plan might be able to offer better rates than its competitors, which could translate to higher enrollment. In addition, if there are longer-term retention benefits that extend the average enrollment beyond 24 months, the health plan can see more aggregate revenue. In Medicare Advantage, for example, a drug that helps to improve a plan’s quality scores can translate to higher payments or better accreditation scores.
  • How do providers define value? The design of new payment models for hospitals and physician groups creates financial incentives to reduce costs and increase the quality of care. This is pushing them to carefully consider the clinical and economic impact of their prescribing decisions. On the one hand, even if reducing costs while improving outcomes may be an overall objective for providers, achieving this goal could result in fewer services and a loss of revenue.

On the other hand, a provider with better outcomes than a competitor might be able to attract more patients. Moreover, lower costs can make a provider more likely to be in a health plan’s preferred network, which also could increase patient volume. These considerations can become critical in the valuation of a provider entering into a value-based contract with a pharmaceutical company.

  • How do patients define value? While patients are generally unaware of arrangements between health care stakeholders, they are at the heart of every value-based contract. The patient defines value typically in terms of outcomes. A patient suffering from arthritis, for example, might value the ability to walk without pain as long as the treatment is affordable or covered by the health plan. Patients who see value in a drug are more likely to demand that product from their prescribers and their health plans. That can drive volume for the pharmaceutical company.

Can everyone win in a value-based contract?  

Stakeholders want to demonstrate their commitment to value, but the nature of business commonly creates the need to generate a competitive advantage. Creating a win-win value-based contract often requires that pharmaceutical companies understand the business model and value drivers of the other stakeholders. If each stakeholder gains an advantage from the deal, the contract is more likely to move forward.

Case in point: Last year, the manufacturer of a first-in-class therapy inked a risk-based arrangement where the US Centers for Medicare and Medicaid Services (CMS) ties payments to the drug’s performance. Under the agreement, the manufacturer receives payment only for patients who show significant improvement within a month after treatment. In this arrangement, each stakeholder can realize value.

  • Value to manufacturer: Increased drug volume if the drug proves to be effective
  • Value to CMS: Improved treatment outcomes for beneficiaries, which can lead to lower medical costs
  • Value to patient: Improved quality of life

Volume still matters

What should drug manufacturers consider when evaluating potential value-based contracts? First, they should consider the business model and value drivers of each stakeholder involved. Costs and outcomes are at the heart of any value-based contract. But, such contracts should also help to drive volume to health plans, providers, and manufacturers. Even as we transition to value-based care, volume through competitive advantage still matters.

While value-based contracts have seen an uptick over the past two years, they remain relatively rare. And it can be challenging to build contracts that can generate value for each stakeholder. Stakeholders continue to encourage conversations around value-based contracting, but unless everyone learns to speak the same language, these deals probably won’t realize their potential.

PS. If you are attending the Asembia Specialty Pharmacy Summit, please come and check out the panel discussion this afternoon, “Value is in the Eye of the Beholder—What is the True Value of Value-Based Contracts?” I hope to see you there!

Author bio

Joe is a Managing Director in Deloitte Consulting LLP’s National Life Sciences practice. He is the leader of the Commercial and Market Access practice. He has over 30 years of operational and technology strategy consulting experience; 25 of them serving Biopharma and MedTech companies in the Life Sciences industry; primarily in their commercial, market access, pricing, contracting, distribution, and general council functions. Areas of experience and thought leadership are in Commercial Performance Analytics, Managed Markets Analytics, Value-based Contracting, and Enterprise Contracts Management Operational Excellence.