Drug prices in America are high. Of course, putting that into the right context will depend on who you talk to. On one end of the spectrum sit the patients, who understandably believe they are paying too much for medications. On the other end are the manufacturers who have invested significantly in research and development and are tasked with striking a balance between being a for-profit business and providing patients affordable access to their products. In between these two extremes is a highly complex process involving various other stakeholders including: Pharmacies, pharmacy benefit managers (PBMs), payers, providers, and distributors who are entitled to a fair profit for their services. Needless to say, finding a balance between all of the competing interests and priorities of all the parties involved while lowering prices for patients is no easy task.

It’s All About the Outcomes

Over the years the industry has attempted to innovate and find pricing strategies that could bridge the divide between patients’ and manufacturers’ priorities. One such strategy is Outcomes-Based Contracting (OBC). While OBCs have been around for more than 10 years, it is increasingly showing up as a potential solution to many of the problems that plague the pharma industry today. At its core, OBC is about shifting from volume to value, and placing the focus on the common goal of helping patients have better results (i.e., outcomes) and aligning the interests of the different stakeholders more directly. Yet for all of its promise, companies have spent a decade trying out OBC in one form or another and while some have found success in specific cases, the inherent challenges of OBCs have held the industry back from broad adoption.

Understanding these challenges and how they can be overcome is an important step for companies that are considering adding OBCs to their pricing and contract strategies.

It may seem a bit obvious, but the significant challenge of OBC is the outcome itself. Which outcome is the best to measure? How can the outcome be measured and validated by all interested parties? Not to mention a host of issues related to quantifying the type of subjective patient-level data that would be needed to track most outcomes.

First Hurdle: Identifying Outcome Metrics

The outcome metric that can be used in an OBC depends on the indicators that the drug addresses. Some drugs have use cases that are highly suitable for tracking outcomes and being able to measure against the outcome in a way that can be validated by all parties, including the manufacturer. For example, a drug that treats osteoporosis may use an outcome metric based on a specified period of time that the patient does not experience a bone fracture while taking the drug. This is an objective metric which is highly indicative of the efficacy of the drug and makes for a suitable case for outcome-based agreements. In other cases, the drug does not have such a clear-cut or easily quantified outcome metric available. Consider certain cancer drugs, where the ultimate goal is to extend a patient’s life or improve quality of life. This is a much more complicated metric that cannot be as easily observed and many other factors impact the patient’s survival and quality of life, which may be subjective and not directly connected to the efficacy of the drug.

As companies consider how to set themselves up for success in an OBC world, it is very important that they identify the most suitable drugs, with outcome metrics that are easily observable and directly connected to the efficacy of the drug. On top of that, the drugs must also be able to be audited or validated by manufacturers. Starting off with the right drug will have a downstream effect and will enable companies to overcome the other challenges associated with OBC.

Second Hurdle: Measuring Outcome Data

For years, the pharma industry has worked to standardize the process for collecting, sharing, and processing data about utilization in order to pay rebates and chargebacks. Paying these types of utilization (i.e., volume) rebates has become the primary mechanism for manufacturers to obtain greater access to patients, as it gives them the ability to negotiate for better formulary status, or ensures their drug is covered by a specific plan. Under this existing rebate model, standards such as those set by the National Council for Prescription Drug Programs (NCPDP) or standardized electronic data interchange (EDI) feeds are in place that help all parties involved validate and verify the data. They also ensure it is easily measurable and reliable for purposes of calculating rebates and processing chargebacks.

When you introduce an outcome metric as the new measuring stick instead of volume and utilization, several challenges are introduced. The most glaring issue is simply that the majority of outcomes needs to be tracked at a patient level. The manufacturers, who need to have outcome data to determine rebate payments in an OBC scenario, do not have access to patient-level data. Using the osteoporosis drug example, information on hospital stays and detailed treatment information about a fracture, would only be available to the plan and providers. Outside of OBC, manufacturers had no previous need to access this information and there is no standard mechanism for sharing the data.

Furthermore, the incentives of the different parties involved gives all the power to those with access to patient data. Manufacturers are at the mercy of the plan and providers to provide reliable and accurate outcome information on a patient-by-patient basis, with little ability for the manufacturer to cross-check or audit this data. Given how the incentive structure lines up with who has the data, a significant trust issue has to be dealt with to enable manufacturers to ensure they are not overpaying rebates due to inaccurate patient data.

Adding to the difficulty is the fact that once the patient enters the equation so does the burden of HIPAA and patient privacy. By the time patient data can be shared with the manufacturers, it is likely that their revenue management system is not designed to process HIPAA-protected patient data, making it all the more challenging to process. In the end, processing patient-level data at a large scale would require modification and hardening of revenue management systems as well as new features to enable this type of shift in process.

No Easy Answer

Overcoming the data challenges in an outcomes-based agreement has no easy answers. For the time being, companies have to work through the unique challenges of each drug in the process of creating an OBC. By testing the waters and trying out OBCs with highly suitable drugs, companies may still face the challenges with data, but on a small scale, they can be overcome.

Companies should ensure that revenue management and other systems are adaptable and nimble in order to respond to the unique challenges presented by OBC. With the right tools in place, OBC contracts can be managed effectively and companies can ensure the contract provisions help to resolve the inherent trust issues with the payers and providers. While OBC contracts may require more initial effort and management, they will enable companies to gain experience with this type of contract and understand its potential value for their organization. As more and more companies enter into OBCs, the industry will begin to see the trends and tendencies that can give way to making attempts at standardization. This will, in turn, lay the groundwork to resolve the data challenges when operating at a broader scale.

As the pharma field gets increasingly competitive, manufacturers have to ensure the highest level of access possible to their products. OBC contracts are increasingly becoming a strategy that manufacturers will need to turn to. Whether it is a new life-saving and highly expensive drug that plans will not include, without the assurance provided by an OBC, or whether it is simply giving manufacturers a competitive edge when negotiating formulary status. In a world where access to patient data is key, OBCs are something that manufacturers should consider and seek opportunities to gain experience and ensure future success.

  • Melonie Warfel

    Melonie Warfel is Vice President and General Manager, Life Sciences at Model N. She is responsible for growing the life sciences vertical and developing the next-generation strategy and go-to-market processes to support continued expansion across the business. Prior to joining Model N, Melonie worked at Veeva Systems, Pegasystems, and Adobe Systems.


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