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Value-Based Contracting: A Future for Drug Pricing, Access, and Reimbursement

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In May of 2019, the first gene therapy to treat spinal muscular atrophy (SMA) in children younger than 2 made headlines — for its novelty, and for its $2 million price tag per infusion. You may be wondering how a drug price can be set so high. What is the value of the therapy and how does our health care system afford this price tag? What if the therapy does not work? 

The number of high-cost gene therapies in the pipeline are continuing to increase. In fact, as of May 2021, there were 1,745 gene therapies in the gene therapy pipeline. Not only are these novel gene therapies expensive, but according to the AARP (The American Association of Retired Persons) Policy Institute Report from June 2021, “retail prices for widely used brand name drug products increased by more than general inflation for the majority of manufacturers in 2020.” The drug pricing landscape is clearly a challenging one to tackle and often hard to understand. You may often hear that pharmaceutical companies set drug prices based on “what the market can bear,” which is true, but it is important to understand the fragmented nature of our health care system. The supply chain is made up of intermediaries (wholesalers, pharmacy benefit managers, pharmacies, and government payers) that complicate the drug pricing landscape. One thing is clear: our current health care infrastructure, with so many stakeholders, cannot continue to support the high-cost drug therapies. 

Due to these expensive therapies and rising prices, interest has piqued in newer and innovative payment models and contracts. Manufacturers are no longer just being asked to prove a drug’s efficacy, but also a drug’s durability and value. Value is defined as the outcomes achieved per dollar spent, and manufacturers must justify higher costs with better outcomes in comparison to existing therapies on the market. These expectations can be accomplished through value-based contracts (VBCs), designed in an outcomes-based fashion or a “pay-for-performance” type of manner, where reimbursement or coverage of a medication is based on the value and durability that it adds when it achieves pre-defined outcome(s) for a patient in the real world. 

In a VBC, manufacturers and payers establish contracts and share in the financial risks and successes. VBCs not only force manufacturers to stand behind the durability of their therapies in the real-world setting, but it also results in manufacturers having to create strategies and infrastructure to collect real world evidence (RWE), something that is not true in a traditional volume-based pricing model. VBCs are not feasible in all scenarios. There are certain criteria that should be met in order for these contracts to make sense. First off, there need to be measurable clinical outcomes for the disease state that the drug is intended to treat, and these outcomes should be correlated back to the drug/product in discussion. Additionally, VBCs can provide pharmaceutical companies another opportunity to negotiate with payers in already-saturated and competitive therapeutic areas. Until early 2020, there were approximately 23 publicly disclosed VBCs in the U.S., with potentially more private VBCs in existence.

Many high-priced therapies that would benefit from VBCs tend to be first-in-class medications for an unmet need or are often indicated for rare diseases. These types of therapies can be granted one or more special review statuses by the FDA, (e.g., fast track, priority review, breakthrough designation, or accelerated approval) allowing for expedited development and review of drugs (depending on the designation granted). Furthermore, these designations can result in the use of surrogate endpoints in clinical trials which can make some clinicians and payers uncertain of a drug’s true clinical benefit. VBCs can provide confidence to these payers and clinicians through RWE and patients can have access to potentially life-saving/altering regimens. 

But the question remains: How can one justify the enormous price tag? As mentioned before, the gene therapy approved for spinal muscular atrophy approached the market with a number of innovative payment mechanisms and strategies, including an outcomes-based approach. The Massachusetts Medicaid program, MassHealth, entered into a VBC agreement which spread out the total drug cost over five years as long as it continued to work (annualized cost of $425,000 per year). The manufacturer explained that the chronic therapy management of SMA prior to the approval of the gene therapy often exceeded $4 million over the first 10 years (traditional therapy stops working if treatment is stopped), justifying the price-tag for the one-time gene therapy infusion. By July 2019, four Medicaid plans and 40% of commercial lives covered had similar policies in place. 

It is clear our health care infrastructure needs to find innovative contracts and models to withstand higher-priced and novel therapies. VBCs serve as one of the potential options to create a win-win situation for each stakeholder. Manufacturers can be reimbursed and even gain entry into competitive markets, payers pay for the durability and guarantee of a drug’s efficacy while better managing their budget, and patients gain access to therapies much earlier on. Keep an eye out for more VBCs and other innovative payment models moving forward.

What are your thoughts on VBCs? Share your experiences and opinions in the comments.

Dalga Surofchy, PharmD, APh, is an Advanced Practicing Pharmacist currently working as a Clinical Manager of Medical Affairs at a boutique pharmaceutical consulting group. He also teaches as an adjunct faculty at UC San Diego. He holds a Bachelor’s degree in Biology from UC Berkeley and a Doctor of Pharmacy degree from UC San Francisco. His interests are in precision/personalized medicine, preventative medicine, health equity, education, and market/patient access. His previous roles include a mix of outpatient and clinical pharmacy. Outside of work, he enjoys playing basketball, surfing, rock-climbing, skiing, and spending outdoor time with his family. Dalga is a 2021–2022 Doximity Op-Med Fellow. Dalga reports no conflicts of interest.

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