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Real-world evidence and value-based contracting – swipe left or swipe right?

As biopharma makes the shift toward a personalized healthcare system, it is also transitioning towards a pipeline full of innovative, high-cost therapies. We are moving to a value-based system, with two of the biggest ideas for this decade becoming more and more important: value-based contracting (VBC) and real-world evidence (RWE).

RWE and VBC are key parts of a new era in healthcare

RWE represents outcomes derived from a diverse patient population in a real-world environment. Data sources can include administrative claims, electronic health records (EHR), laboratory data, information and communication technologies (ICT), genomics, health app data, biometric devices and survey reports.

VBC uses RWE to allow both biopharma and health insurers to spread risk and make high cost therapies more available to patients. These arrangements aim to tie contracted drug prices and reimbursement rates more closely to clinical outcomes by collecting and analyzing RWE after a drug has been launched. Prices are linked to how a drug performs in the real world and an insurer will not pay the full cost of a drug that does not work as intended. Moreover, if a drug performs better than projected, the biopharma company may get a higher reimbursement rate.

RWE and VBC are becoming commonplace

Deloitte’s 2nd annual RWE Benchmarking Survey in 2018 found that 14 out of the 20 biopharma companies polled are currently engaged in VBC and 9 of these stated they are using RWE in contract design.1

In 2018, PhRMA reported that the list of publicly-announced VBCs had continued to grow over the last quarter from 39 to 43. In reality, this is a conservative estimate as many VBCs are not publicly announced.2 The U.S. government has shown interest in RWE as well. In December 2018, the FDA released its Framework for RWE3 which paves the way to use RWE to support the approval of a new indication for a pre-approved medicine and satisfy post-approval study requirements, as required by the 21st Century Cures Act of 2016.4 Key elements of the FDA RWE Framework include a broader consideration of RWE data sources, expansion of acceptable study designs (to include observational studies, pragmatic trials, hybrid designs, and RWE control arms), and the use of RWE to assess efficacy and effectiveness (beyond safety).

There are many ways to set up VBC arrangements

VBCs continue to emerge and evolve as payers and manufacturers gain experience in linking payments to measures of outcomes, utilization or spending. Most reviews categorize VBCs as outcomes-based or finance-based.5 RWE will play a pivotal role in outcomes-based VBCs, currently the most common type of arrangement.

Examples (outcomes based)

VBC is not limited to pharmaceuticals. Medical device manufacturers are also striking deals based on a product or service guarantee, or risk sharing. For example, Stryker, an orthopedics company, offered a guarantee to hospitals on the SurgiCount product to address retained surgical sponges, as well as $5 million in product liability indemnification.6

Rising to the risks and challenges of RWE and VBC

RWE and VBC bring risks and challenges for both biopharma and payers.

  1. Defining populations and outcomes
    1. It is necessary to collaborate with hospitals, providers, and professional societies to define inclusion and exclusion criteria and gain buy-in
  1. Collecting, linking and analyzing the necessary healthcare data
    1. It may be difficult to collect and link data from different sources
    2. Data may be protected by law or be costly
  1. Estimating causality between product and outcome
    1. There may be externalities that affect causality like compliance and provider error
  1. Measuring outcomes
    1. Infrastructure may be in place or it may have to be built
  1. Lack of clear financial incentives to participate in value-based contracts when financial risk may be associated with poor patient outcomes or underperforming products
  1. Trust among payers, providers and manufacturers needs to be created and maintained
  1. RWE data may be heterogeneous, incomplete, lack use agreements, run afoul of privacy regulations, lack data standards, and lack unique patient identifiers
  1. There is a lack of data scientists and outsourcing companies to process and work on RWE data to keep up with the fast growth of the industry
  1. Regulatory and legal barriers
    1. Even with the updates of the 21st Century Cures Act, it is still unclear how RWE usage will be integrated into the FDAMA 114 Act, which regulates the use of information for promotional activities by biopharma and has been the start of law suits about improper use of data for promotion
    2. Anti-kickback statutes in the Center for Medicare & Medicaid Services (CMS) complicate the ability of biopharma to enter into value-based contracts because they may be viewed as inducing providers to prescribe certain medications– additional safe harbor laws could be created by Congress and CMS to prevent this7 (kickbacks are currently being addressed by Health &Human Services Secretary Alex Azar)
    3. Medicare’s “best price” policy requiring that biopharma offer a price equal to the best commercially available discount price is a challenge in value-based contracting8

The RWE and VBC challenge: is there a way to help?

Procuring RWE in support of VBC is vital, complex, and multi-dimensional so it is imperative to find solutions that speed up the delivery of data and address the unique challenges of RWE. Several options are below.

1. Simulations of VBCs using RWE to reduce uncertainty

Optum and Merck are collaborating on a multi-year project using RWE to co-develop and test advanced predictive models that will reduce clinical and financial uncertainty for VBCs.10 This would reduce risk on both the pharmaceutical and payer side entering into VBC agreements, would could increase the uptake of these types of contracts.

According to Curt Medeiros, president of Optum Life Sciences, “this collaboration offers an opportunity to leverage our collective strengths to increase knowledge about the design and implementation of outcomes-based contracts in the U.S. health system.” The companies plan to share their findings. Seeing success in this kind of system could inspire other companies to follow suit.

2. Direct partnerships

Another potential solution is direct partnerships between players in the healthcare field.

Pharmaceutical giant Amgen is currently partnering with pharmacy benefit manager Magellan Rx Management and Texas-based health care system Baylor Scott & White Health (BSWH).11 This allows them to work collaboratively and move beyond a purely transactional model for a cooperation-based approach to problem solving in VBP.

Delivery organizations like Magellan and pharmaceutical companies like Amgen bring the opportunity to develop RWE to feed into these types of approaches to VBP.

In Andrew Masica’s, Chief Clinical Effectiveness Officer of BSWH, words, “I think there is a real opportunity for organizations to use their own data and work with industry partners to help answer [many] types of questions.”

3. A marketplace to connect researchers and suppliers

Another option is more efficient collaboration, using a resource such as the HEOR & RWE Marketplace for researchers and suppliers of RWE services, offered by HealthEconomics.Com and Scientist.Com. HealthEconomics.Com and Scientist.Com are two trusted life science brands who have partnered to connect researchers and suppliers in HEOR, RWE and related areas with the aim to facilitate research, overcome challenges, trim costs and bolster market access.9

As Deloitte’s 2nd annual RWE Benchmarking Survey said, “hiring experts to build and implement advanced systems … can help existing talent derive insights from structured and unstructured disparate RWD [real-world data] sources. But attracting this talent could prove difficult, given the current market demand for data scientists.”1The HEOR & RWE Marketplace is a way for biopharma companies to source that talent and a way for consulting and data companies to offer their services and products so that these value-based deals based on RWE can be implemented and assessed more quickly and efficiently.

Conclusion

VBC and RWE may not be the easy way forward for biopharma or for payers. But this path has the potential to contain costs and allow for the development of more personalized medicines that facilitates better outcomes. RWE holds the promise of collecting and utilizing the vast amount of available data to gain meaningful insight. Regardless, now we must focus on the challenge of how to structure VBC contracts that fairly share risk, how to source robust data and how to use resources like direct partnerships, VBC simulations and the HEOR & RWE Marketplace to drive faster insights.

Works Cited

  1. 2018 RWE benchmark survey. Deloitte Insights Available at: https://www2.deloitte.com/insights/us/en/industry/life-sciences/2018-real-world-evidence-benchmarking.html.
  2. Drozd, M. Number of value-based contracts continues to rise. PhRMA (2018). Available at: https://catalyst.phrma.org/number-of-value-based-contracts-continues-to-rise.
  3. FDA. Framework for FDA’s Real-World Evidence Program. (2018). Available at: https://www.fda.gov/downloads/ScienceResearch/SpecialTopics/RealWorldEvidence/UCM627769.pdf.
  4. 114th Congress. 21st Century Cures Act, Public Law No: 114-255. (2015).
  5. Policy, M. C. for H. Developing a Path to Value-Based Payment for Medical Products. Duke University (2017). Available at: https://healthpolicy.duke.edu/sites/default/files/atoms/files/value_based_payment_background_paper_-_october_2017_final.pdf.
  6. Parmar, A. Here’s four types of value-based contracting with providers that companies can pursue. MedCity News (2018). Available at: https://medcitynews.com/2018/09/heres-four-types-of-value-based-contracting-with-providers-that-companies-can-pursue/?rf=1.
  7. Hayes, T. Current Impediments to Value- Based Pricing for Prescription Drugs. AAF (2017). Available at: https://www.americanactionforum.org/print/?url=https://www.americanactionforum.org/research/current-impediments-value-based-pricing-prescription-drugs/.
  8. Comer, B. Pharmaceutical value-based contracting: Collaboration is key. PwC (2018). Available at: https://www.pwc.com/us/en/industries/health-industries/library/pharmaceutical-value-based-contracting-collaboration-is-key.html.
  9. HealthEconomics.Com, Scientist.Com Partner on RWE/HEOR Initiative. HealthEconomics.Com (2018). Available at: https://www.healtheconomics.com/industry-news/healtheconomics-com-scientist-com-partner-on-rwe-heor-initiative.
  10. Optum and Merck Collaborate to Advance Value-Based Contracting of Pharmaceuticals. UnitedHealth Group (2017). Available at: https://www.unitedhealthgroup.com/newsroom/2017/0525optumlearninglab.html.
  11. Value-Based Partnerships: Engaging in Value-Driven Innovative Collaborations. The American Journal of Managed Care (2018). Available at: https://ajmc.s3.amazonaws.com/_media/_pdf/AJMC_A818_06_2018_VBP_Whitepaper(1).pdf.
  12. Staton, T. Lilly’s Trulicity joins pay-for-performance trend with Harvard Pilgrim deal. Fierce Pharma (2016). Available at: https://www.fiercepharma.com/pharma/lilly-s-trulicity-joins-pay-for-performance-trend-harvard-pilgrim-deal.
  13. Staton, T. Novartis defies naysayers with newfangled pay-for-performance deals on Entresto. Fierce Pharma (2016). Available at: https://www.fiercepharma.com/sales-and-marketing/novartis-defies-naysayers-newfangled-pay-for-performance-deals-on-entresto.
  14. Teichert, E. Harvard Pilgrim Scores Discounts on Novartis, Lilly Drugs. Modern Healthcare (2016). Available at: https://www.modernhealthcare.com/article/20160628/NEWS/160629889.

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Pharmacy benefit managers: a mechanism for containing costs or a contributor to rising drug prices?

While pharmaceutical companies are often the focus of conversations about high drug prices, more recently pharmacy benefit managers (PBMs) have come under increased drug price scrutiny. The American PBM business model, developed in the early 2000s, was designed to identify treatment-eligible patients, reduce health insurer administrative burden, and price negotiate with the pharmaceutical manufacturer. By managing these prescription drug programs on behalf of health plans, PBMs exert wide-reaching influence on drug formularies and rebate negotiations with manufacturers.

A PBM’s revenue comes from upfront and secretly negotiated discounts and rebates following sales for including the pharma company’s medications on their formulary (a powerful leverage for negotiating prices), as well as through charging health plans a higher amount than they reimburse pharmacies. The latter practice is called “pharmacy spread”.

The Pharmaceutical Care Management Association (PCMA), the national trade association representing America’s pharmacy benefit managers, claims that PBMs reduce prescription drug costs for consumers, employers and government programs.1 However, the National Academy for State Health Policy (an independent academy of state health policymakers)  summarizes concerns around the PBM business model, highlighting anti-consumer practices including2:

  • Drug formularies that may benefit PBMs but not patients;
  • Gag clauses that restrict pricing information pharmacists can share with consumers;
  • Restrictions on drugs purchases to PBM-controlled pharmacies; and,
  • Lack of fiduciary transparency in operations.

Are PBMs contributing to high drug prices?

One key question is whether PBMs actually help contain costs for insurers and consumers. Theoretically, their pricing power should benefit insurers, which then pass on savings to their customers through better benefits and lower premiums. In actuality, only a portion of the rebate is passed onto insurers, so the impact at the health plan (and consumer) is diluted.

Moreover, the Medicare Payment Advisory Commission raised concerns that PBMs are not choosing the lowest-cost drugs.3 Since the rebate received by the PBM is based on the drug price, the higher the price of the drug then the higher the rebate. This business model results in conflicts of interest because rebates have the potential to shift incentives towards drugs with the highest rebate rather than the most cost-effective price. DHHS Secretary Alex Azar went further to suggest that PBMs prevent pharmaceutical companies from lowering list prices in order to secure a higher rebate by threatening to remove drugs from their formulary.4

PBMs pushed back, with the PCMA releasing a report that lays the blame for high prices on drug makers, asserting that list prices are rising even when there are no rebates to PBMs.5

The Ohio Department of Medicaid criticized PBMs after an audit found they used the practice of “pharmacy spread” to collect over $208 million from generic prescriptions during a single year by charging Medicaid more than pharmacies were being reimbursed.6 CVS Health and its PBM, CVS Caremark, hit back, claiming that PBMs have saved Ohio taxpayers $145 million annually.7

If PBMs do lower costs, are these savings being passed on to patients? Dan Leonard, President & CEO of the National Pharmaceutical Council (a health policy research organization representing American biopharmaceutical companies), pointed out that while PBMs have been able to keep commercial plan drug spending slow, out-of-pocket spending by consumers was at the highest level in a decade in 2016.8 This suggests that even if PBMs are saving money for insurers, these savings are not being passed on to patients.

Lack of transparency has also been a key point of contention with PBMs. In a September 14, 2017 Health Affairs brief, Cole Werble of the health care policy firm Prevision Policy, LLC called PBM price negotiations, “…opaque by design,” suggesting that PBM leaders believe that full transparency around rebates could prevent future discounts. 9This black box surrounding rebates and net pricing makes it difficult to know what role PBMs have in increasing drug prices and whether they are passing on rebates to consumers and insurers.

The landscape is moving towards increased regulation of PBMs

How is the healthcare ecosystem reacting to criticism of PBMs?

At the federal level, the Senate recently voted to ban ‘gag clauses’, a practice where PBMs prevent pharmacists from telling customers when prescriptions would cost less if purchased outside their plan.10 State legislatures are also pushing for more transparency and fewer anti-consumer practices, with over 80 PBM bills introduced into state legislatures to address concerns ranging from gag clauses to making rebate amounts publicly available. The National Academy for State Health Policy has drawn together these bills to create a model for PBM legislation.2 After its audit controversy, Ohio plans to ban spread pricing, only allowing PBMs to charge small administrative and dispensing fees while requiring rebates to be passed back to the state.11

Some PBMs are responding to criticism with increased cost control measures. CVS Caremark announced in August that it would allow self-funded insurers to exclude any drug launched at a price greater than $100,000 per QALY with the reasoning that this would push pharmaceutical companies to lower launch prices.12

How federal and state legislation will evolve remains to be seen. However, mandating increased transparency promises to clarify the role of PBMs in rising drug prices, making it easier to address any anti-consumer practices. With the pressure to contain costs rising, scrutiny towards all players in healthcare will only increase.

Let us know what you think by commenting on the blog. To stay up on news related to pharma pricing and healthcare value around the globe, subscribe to the HealthEconomics.Com weekly newsletters.


  1. PCMA. Our Mission. (2018). Available at: https://www.pcmanet.org/our-industry/.
  2. 2.  Horvath, J. Pharmacy Benefit Manager Model Legislation: Questions and Answers. (2018). Available at: https://nashp.org/pharmacy-benefit-manager-model-legislation-questions-and-answers/.
  3. MedPAC. Factors increasing Part D spending for catastrophic benefits. MedPAC Blog (2017). Available at: http://www.medpac.gov/-blog-/factors-increasing-part-d-spending-for-catastrophic-benefits/2017/06/08/factors-increasing-part-d-spending-for-catastrophic-benefits.
  4. Sweeney, E. Senators press PBMs to clarify Azar’s ‘extremely disturbing’’ drug pricing allegations’. Fierce Healthcare (2018). Available at: https://www.fiercehealthcare.com/payer/elizabeth-warren-tina-smith-pbm-alex-azar-drug-prices-optumrx-express-scripts.
  5. PCMA. Reconsidering Drug Prices, Rebates, and PBMs. (2018). Available at: https://www.pcmanet.org/wp-content/uploads/2018/08/Reconsidering-Drug-Prices-Rebates-and-PBMs-08-09-18.pdf.
  6. Ohio Auditor of State. Auditor’s Report: Pharmacy Benefit Managers Take Fees of 31% on Generic Drugs Worth $208M in One-Year Period. (2018). Available at: https://ohioauditor.gov/news/pressreleases/Details/5042.
  7. CVS Health. CVS Health Statement on Ohio Auditor of the State’s Report on Pharmacy Benefit Managers. (2018). Available at: https://cvshealth.com/newsroom/press-releases/cvs-health-statement-on-ohio-auditor-of-the-states-report.
  8. Leonard, D. PBM rebates’ impact at the Rx counter. Chain Drug Review (2018). Available at: https://protectaccessandinnovation.org/pbm-rebates-impact-rx-counter/.
  9. Werble, C. Pharmacy Benefit Managers. Health Affairs (2017). Available at: https://www.healthaffairs.org/do/10.1377/hpb20171409.000178/full/.
  10. Firozi, P. The Health 202: Senate passage of ‘gag clause’ ban is just a tiny step to lowering drug prices. Washington Post (2018). Available at: https://www.washingtonpost.com/news/powerpost/paloma/the-health-202/2018/09/18/the-health-202-senate-passage-of-gag-clause-ban-is-just-a-tiny-step-to-lowering-drug-prices/5ba012221b326b47ec9596b8/?utm_term=.6da753bc8a40.
  11. Inserro, A. Ohio Tells Medicaid PBMs That 2019 Will Be a Time for Transparent Contracts. (2018). Available at: https://www.ajmc.com/newsroom/ohio-tells-medicaid-pbms-that-2019-will-be-a-time-for-transparent-contracts.
  12. CVS. Current and New Approaches to Making Drugs More Affordable. (2018). Available at: https://cvshealth.com/sites/default/files/cvs-health-current-and-new-approaches-to-making-drugs-more-affordable.pdf.

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