No one can argue that the US health care system is changing at an epic pace. Not surprisingly, these changes also impact contracts between pharmaceutical manufacturers and their various trading partners. The evolving environment around contracts requires that a manufacturer must be willing to do more than just issue the familiar discount, rebate, or coupon to reduce the “listed” price of the product in exchange for its purchase.
New kinds of contracts (sometimes labeled as “Outcomes” or “Value-Based”) promise to change the basis for exchange from a simple “discount off of list price” to a “value to the purchaser” in exchange for its price, discounted or not. Contract language always attempts to define difficult terms between the parties. The parties themselves are undergoing unprecedented changes in terms of how they select and use pharmaceutical and device products; it is possible that the number of contracts will expand as the manufacturer tries to reach more local or regional customers with a next generation contract.
Contracting with New Customer Types for Different Reasons. Brand, bio-similar, and generic products will certainly continue to be contracted with traditional risk-holding parties for pricing discounts: Medicaid, Medicare Part D, Commercial, Distributors or GPOs. However, in addition to standard deals with those parties, next generation contracts may involve the exchange of more than price discounts for purchases. These new contracts will provide payments for time and materials spent in proving value, exchanging data or evidence, and analyzing anonymized patient feedback. These contracts may involve providers or Accountable Care Organizations, Hospital systems, or other provider entities. They may also involve health plans and other payers providing a fee in exchange for working toward a shared goal of adherence or positive health outcomes, rather than just a price discount.
Price Transparency Factors Driving Prescriber Behavior Changes. A key change driver that executives must fully grasp is what is going on at the physician level as the system moves away from “fee for service” care where the physician is unaware of the component costs associated with drugs or devices and into the “accountable care” arena where product cost has real consequences to the practice of medicine and possibly to the physician’s own compensation.
More than ever, hospitals and health plans are using data to examine the cost effectiveness profiles of individual physicians to confirm that doctors included in their risk-based contracting arrangements are providing good member outcomes while holding down costs. This means that manufacturers are going to have to convince an increasingly skeptical physician of the VALUE of their product.
“During a recent panel discussion on analytics and accountable care organizations, Darren Shulte, MD, MPP, president of Apixio, stated that cost transparency can have a powerful effect on practice patterns. By showing physicians how their costs stack up against their colleagues, Shulte said, they have a chance to see how the choices they make for a patient affect the total cost of care.” (See: http://www.healthcarefinancenews.com/blog/using-cost-transparency-change-physician-practice-patterns )
Defining Squishier Terms in Contracts. A manufacturer’s current and next generation contracts will need to consider “price” but also the definition of “value” or “outcome”. Further, the definitions of these terms and the impact of the contract will need to be rational to the prescriber. This will continue to be particularly challenging and will probably vary by contract, based upon the context of the product options, the disease states, and the parties. These contracts themselves must also address how success metrics will be calculated, what data is necessary to prove the metric is accurate, and how the data itself will be gathered and disseminated. Thinking ahead now about how to define the terms, measure the results and verify or “audit” the results is critical to achieving a successful contract outcome.
Never sign a contract that you don’t know exactly how you would be able to audit the terms or payments!
Be Pragmatic. There are a number of practical concerns you should address before you jump into these next generation contracts. You may want to pose a few key questions to your legal, managed markets, and trading partner teams. Among these:
• Can you define the terms you and your contracting partner are aiming for under your contract? Or is the definition overly “squishy”? How do you tighten the definitions?
• Can you agree on the metrics that will define the relative success or failure of your objectives?
• Can you quantify the “return on the contract” for your organization? For your trading partner’s?
• What is the monetary value based on? A percentage of “list” price? A “Fair Market Value” for services or data or something else?
• Are you confident that your Contract Operations team can actually administer the new agreement, either in the contract management system or outside of it?
• How will you audit and confirm compliance, so that you are not just paying blindly and trusting without verifying?
• How will regulators view these payments? Do they contribute to or trigger a government pricing rule for the product? If so, how? Do they need to be reported as part of the Sunshine Act?
• Are the parties compliant with HIPAA and other data security or privacy rules?
The time to plan is now, before you find yourself behind the competition in next generation contracting; however, the time to anticipate compliance and regulatory challenges is also now or maybe even yesterday.
