Writing the Value-Based Contract

sovaldi sovaldi

The kiss in the song from classic movie Casablanca is, at its essence, the seal of approval on a relationship.  The kiss is meant to symbolize shared reward (love, potentially) and risk (two souls who share a common set of values but now have new lives) built with other people. The recognizable phrase provides a frame for distilling the rewards (opportunities) and risks in true health care innovation.

Innovative health care solutions, such as new value-based benefit designs or emerging treatment for complex chronic diseases, often deliver tremendous value, but they take time (usually 2-3 years), do not deliver consistent benefits across populations (based upon severity of disease) or reduce total costs consistently (based on geographic influences, for example). Generics are often described as an equal substitute for branded drugs, but this is not always the case. Commercials advertise drugs that purport to make quality of life better (the contract for care), but then the rapid-fire “potential adverse effects” statement overtakes the “superiority message,” in effect reducing the value of the contract.

So when Gilead launched a new drug, Sovaldi, that promised a cure for Hepatitis C (cure = contractual promise, or “kiss”), the market place was excited. Then the spell was broken as obvious risk, the US$84,000 price tag, was revealed.

Gilead has a huge opportunity here.  It can become the true innovator that it claims to be.  It can be the value-driven company that calls for aligning the risks and rewards so that all the parties involved achieve reasonable outcomes.

Curing the highly infectious HepC is a lofty goal for care innovation.  Gilead’s new drug purports to cure HepC within 12 weeks (for certain patients) at the cost of $1000/per day in the US.  The FDA approved the drug and it launched in January 2014. CMS agreed to fund it for Medicare patients with the right profile, which tends to open the door for legitimacy to coverage in the commercial marketplace.

Without going to deeply into the business case for Sovaldi (you can read more here and here), the bottom line summary is this:  the costs of advanced liver disease from HepC can be $200,000/per person per year; HepC-related liver transplants can be $500,000 for the first year and $250,000 per year afterwards, as shown in the table below.  Screen Shot 2014-08-07 at 11.42.21 AM

There are approximately 4 million people already diagnosed with HepC.  The total costs of liver damage leading to cancer have been estimated at $360B for the diagnosed population.

If Solvadi and other drugs in the pipeline really do deliver as promised, the manufacturers and the broader health care community would be best served to enter into a value-based contract based upon improved outcomes over time.  We call that contract an outcomes-based contract, or quality-based contract.

Developing the Value-Based Contract for Measurable Outcomes

Since value-based designs achieve predictable and sustainable dividends within 2-3 years, it’s appropriate to split the payments for highly-effective or high-cost drugs and procedures into a 3-year contract with yearly deliverables.  Outcomes-based contracts (sometimes called quality-based contracts) use the same value-based design steps that are used in a value-based insurance design (data, design, delivery, dividends) to identify opportunities for managing modifiable risk in both the patients and delivery system.  “Delivery system” includes the pharmaceutical providers and any other services or treatments that are required for the positive outcome.

In an outcomes-based contract, the key metrics should be calculated on items that are important to both parties:  adherence over time, lifestyle adjustments (if needed for the particular drug or disease), treatment check-ups (such as blood tests or, in the case of diabetes, urinalysis).   Not all metrics need to be achievable in the first year.  They can be sequenced to be achieved over several years, as you will see.

One caution: this is a very simple, high-level demonstration.  Multi-stakeholder contracts depend upon agreement in metrics and timelines.

Let’s assume the negotiated price of the treatment will be held at $57,000 (the price of Sovaldi in the United Kingdom).

In the first year, $27,000 is the negotiated rate per member per year, assuming one 12-week course of treatment.  For this, the purchaser (health plan, government, VA, self-insured employer, etc.) agrees that $27,000 will be paid for all patients who complete the full course of treatment. Call this the “Engagement and Treatment Adherence clause.” But, the risk of not completing should fall to all the stakeholders:

  1. Gilead (who will discount the drug and accept payments over 3 years),
  2. Health Plan (who will track adherence in the data and provide care management),
  3. Provider (who will provide care coordination to ensure the patient’s adherence, and a portion of this expense will be reimbursed by Health Plan), and
  4. Patient (who agrees contractually to adhere to the full regimen, including any nutrition or other lifestyle changes).

In the second year, $20,000 is the negotiated portion.  Health Plan agrees to pay for coaching, and patient agrees to attend coaching (online, phone, web, in person) as directed.  Testing is done with the Provider to confirm no evidence of HepC or liver cancer, as well as any unexpected developments.

In the third year, $10,000 is the final payment.  Testing is done to confirm no evidence of HepC or liver cancer.

To review the shared risks and rewards of treatment:

One caution: this is a very simple, high-level demonstration.  Multi-stakeholder contracts depend upon agreement in metrics and timelines.

Let’s assume the negotiated price of the treatment will be held at $57,000 (the price of Solvadi in the United Kingdom).

To review the shared risks and rewards of treatment:

Screen Shot 2014-08-07 at 11.55.56 AM

As the table shows, the estimated investment advantage of solving HepC before the development of cancer is a savings of $357B.  Investing in health outcomes by focusing on modifiable risks is the heart of any value-based design. But this drives a secondary question:  how do we subsidize the lost revenues for health systems and providers?

Any shared risk-reward contract has to consider the “win” for all of parties, in this case, the health system and providers. Lost revenue is a leverage point for driving down the cost of the drug, perhaps to the UK negotiated price of $57,000, which would lower the cost of the drug and create a win for the stakeholders, particularly if they are in bundled payments or an accountable care organization.

The “win” could be the shared re-allocation of resources to treat those patients who are not compliant with their chronic care management, thereby scaling care to other vulnerable patients in the system.  Other resource re-allocation ideas could be the updates required for ICD-10 or hiring onsite care managers.

At the end of the day, investing in the most-vulnerable population (those on a path to liver cancer) with a dividend of lower total costs for the affected population is the very essence of a value-based design.

A Brief History of Outcomes-based Contracts 

The attraction of value-based design led to the concept of outcomes-based contracting, first presented in a summit on value-based design in 2009 (update here).   As it began to grow, several health plans created their version of outcomes-based or quality-based contracts:

The Cigna-Merck contract focused on improved adherence of patients to prescribed medications without regard for the brand or generic drug prescribed.

WellPoint published results of two studies using value-based benefit designs and outcomes-based contracting.  One, using a holistic approach to managing diabetes and hypertension, included contracts for pharmacy coaching in the population.

CMS created the outcomes-based contract for avoidable hospital readmissions, now going into its third year and showing savings through care coordination and medication therapy management.

To escalate the movement to value-driven pharmaceuticals, the costs of enrolling, treating and measuring outcomes must be shared by all those affected by the high cost of treatment. Providing the drug to the patient should cure the HepC and remove the risk of future liver cancer at the lowest negotiated price.   PharmaCo (Gilead) receives the negotiated price of the drug; Health Plan lowers total cost of care within 3 years (the average time most beneficiaries remain on any one health plan); Provider-Health System receive payment for services and, because of lowered total cost of care in a usually-high-cost patient population, has dollars to use for other care.

In each outcomes-based contract, all stakeholders must share in the risk and reward following the value-based design fundamentals:

  1. Identifying the most vulnerable populations using DATA.
  2. Creating the DESIGN that aligns the players with the goal, identifying metrics over time.
    1. Contracting for the DELIVERY of services (providers, HIT, communications, coordination) that will support the patients’ journey to goal in the most efficient manner.
    2. Identifying and sharing the DIVIDENDS for each of the players in the contract.

Modeling a New Model

This kind of outcomes-based contract can be used for current treatments as well.  As an example, patients who are adherent to a brand-name statin and have failed on other statins would be given a contract offered at the matching lower-price that generics enjoy on the formulary.  Staying adherent to the brand drug would sustain the lower the copay for the patient–in effect, the brand cost would be held at the lowest level so the patient is not penalized for requiring the only drug that works for him/her.  This benefits all of the stakeholders because an adherent heart patient is less costly than a non-adherent heart patient.

Re-thinking health care innovation in a value-based system means considering options for investing in long-term dividends, one of which is a predictable cost trend over time.   The “secret sauce” of a value-based design is creating a predictable ramp to improved health and economic status with defined steps and estimated timeline to achieve milestones.

Purchasing on value does not mean the cheapest or the generic version of the drug, at least not for everyone. It may mean buying the more expensive treatment that leads to a predictable level of adherence (staying on prescribed treatments) over time.  It may mean lower levels of absence, or lower numbers of people who acquire the disease (as in the case of HepC or flu).  It may even mean more dollars for the patient to use for non-clinical issues, such as affordability for drugs, rent or fuel.

We need to look at the entire network of health care influences to understand what drives health. If cost is the major deterrent, thengeneric drugs may be the best value-based answer. If the generic drug has a side effect profile that is uncomfortable, or if it has a complex dosing regimen, then brand value may be greater than generic value.

Moving Toward Value-Driven Payment in Pharma

We acknowledge that rebate-based formulary placement will not be abandoned within the pharmaceutical sector as the millions of dollars that are received into the system are candy for payers and for Wall Street.

But if we are truly building a value-based system of health care, then we need to speed up the alignment of goals and reimbursements to get there.  We must rethink the contracts to derive as much upside in the health system (including patients, without whom there is no health system).

This requires a database to support the monitoring of metrics and payment for milestones, and it requires that data be shared with the patient.  Without the data, patients are not fully a part of the process, informed decisions cannot be made and accountability topples.

Keeping patients engaged, truly participating, in their treatment is primary for the pharmaceutical industry as well as the health services sector, the employers, the families.

It is incumbent upon payers and purchasers–typically employers and health plans–to pursue these value-based contracts. Traditional contracting wholly built on rebates and formulary positioning will not support the accountable care that the US system deserves and is moving towards.  Innovation must be embedded in all that we do, from development to production to contract.

Innovation drives better treatments, information drives better decisions, and activation makes families and communities healthy. Pharmaceutical innovation must be met with system innovation.  Already this is happening in the value-based insurance designs of health reform.  Now, we need innovation in contract design and outcomes measurement that will drive health.  As time goes by, health is the goal.


2 replies »

  1. Shut up Burns. This was an incredibly well-written article on a highly-complex topic. Kudos to the authors for comprehensively covering the entire ecosystem (plan, provider, patient, pharma) as well as the short and long term goals and vision required to achieve this state in our currently topsy-turvy system.

    Burns, Sovaldi works and was a perfect example to use in this case because of the increased pushback right now on its pricing versus the short-sided and selfish nature of those arguing (health plans including Uncle Sam) for regulations limiting Gilead’s pricing.

  2. WOW!
    That was obviously an article dedicated to justifying and rationalizing the cost of Sovaldi.

    Has it been decided that Sovaldi does actually work as reported by the manufacturer? I have not seen any reports that the manufacturer’s claims have been scrutinized or verified.

    The misleading cost comparisons that are used makes me very suspicious.