“Pay for performance” healthcare is gaining momentum

A line of medication cannisters

In March of this year, we published an interview with one of our EAB members, Quentin Roach of Merck. The interview covered a range of topics such as expanding access to medications for the world’s poor, to what he saw as the most interesting innovations impacting healthcare over the next five years.

One area where Quentin saw enormous opportunity for innovation was in payer pricing models:  “How we will develop innovative medicines with great efficacy and safety for the benefit of people around the world while getting an acceptable return on investment in face of increasing pricing pressures is going to be one of the top priorities in the pharmaceuticals and healthcare industries over the next five to seven years.”

We are starting to see more and more experimentation when it comes to these pricing models.  Within the past year, pharmaceutical giants such as GSK, Amgen, Novartis and Eli Lilly have all entered into value-based contracts with payer organisations. There is a degree of customer-centricity in these arrangements that we haven’t seen from this industry during the height of the “fee for service” era of healthcare.

In a recent study we conducted on customer centricity, we see just how valuable understanding what customers themselves value is to the forward-looking supply chain strategies of companies.

Chart visualizing the results of a survey regarding customer insight. "Customer insight is valuable, but difficult to access".

Both demand information and knowing what customers value and will pay for are thought of as extremely valuable, yet extremely challenging to come by. Healthcare, with its labyrinthine administrative information flows and multiple intermediaries, has been a notoriously challenging environment from which to extract demand information.

However, the cost-quality-outcomes movement that has been gaining momentum in the United States since the Affordable Care Act was signed in 2010 has made it clear what “customers” in healthcare value and what they are willing to pay for: health outcomes that improve patient conditions and are more effective than the next alternative.

These value-based contracts are beginning to put into practice what has only been theoretical to date. Let’s look at a few of these agreements a little more closely:

GSK Strimvelis—This gene therapy treats a very rare disorder impacting the ability of a patient to fight off infections. It is priced at €594,000 and is essentially a cure for the condition. Working with the Italian Medicines Agency, GSK is providing the therapy with a money back guarantee. While the drug has been shown to cure most people with the condition, it didn’t work for everyone. If it doesn’t work, GSK refunds the cost of the therapy.

The price tag for this treatment does seem large, but consider that a bone marrow transplant, the current treatment pathway, can cost upwards of $1 million. The agreement is even more interesting when you consider that GSK does not expect to make money on this therapy since the condition is so rare and the treatment is effectively a cure. But as a model of the future of medicine – gene therapy coupled with pay for performance contracts – GSK will learn a great deal about treating patients with gene therapies and the type of supply chain models that can cost effectively serve these patients.

Novartis Entresto—Entresto treats coronary artery disease and is considered one of the best treatments in use today for this all too prevalent condition. However, it also comes with a high price tag, and many payers have resisted placing it on its formularies. However, Novartis struck deals with two payers, Cigna and Aetna, on “pay for performance” criteria in the contracts. For instance, level of payment will be based on the rate of hospitalisation for patients taking the medication. Less hospitalisation leads to larger payment to Novartis.

More interestingly, Novartis has spent a great deal of time and effort on the commercialisation strategy for Entresto, meaning that it has taken on more and more of the administrative hurdles that clinicians need to jump in order to prescribe the medication and get it reimbursed by payers. For instance, Novartis helps clinicians work through all aspect of prior authorisation required by payers. In effect, it takes the administrative elements off the plates of the clinicians.

These novel payment models are extremely important to the long-term viability of advanced health systems, and speak directly to Quentin’s thoughts on where innovation needs to happen in healthcare.


Author Barry Blake

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