Considerations for Manufacturers When Structuring Value-Based Agreements and Value-Based Pricing

In an effort to gain market access for new drugs and to shift the conversation from one of “volume” to one of “value,” pharmaceutical manufacturers are increasingly offering and agreeing to alternative payment models that set the price of a drug based on the value it brings to the plan and/or the patient. These value-based price models often take the form of outcomes-based rebates or price concessions with the existence or extent of a rebate being dependent on how well (or how poorly) a particular drug performed in terms of certain predetermined metrics. For example, in 2017, Harvard Pilgrim Health Care entered an outcomes-based contract with Amgen for its rheumatoid arthritis drug, Enbrel®.[1] The contract was based on an algorithm which measured the effectiveness of the drug product using several clinical criteria including patient compliance, switching or adding drugs, dose escalations, and steroid interventions. The criteria were used to determine the overall positive impact on Harvard Pilgrim members. If a member scored below a specified level, signifying lower effectiveness, Harvard Pilgrim would pay less for the drug.

Arrangements like these have continued to develop at increasing rates across various drugs and plan types. While value-based models may lead to lower cost of care or overall prescription drug spend for patients and payers, implementation is complex. For drug manufacturers working to implement these types of changes in their business, it is necessary to carefully consider relevant state and federal laws, follow applicable agency guidance and rules, report drug prices accurately, and adhere to data privacy laws.

Volume versus Value

Any discussion of value-based contracting must begin by looking at our current drug reimbursement structure. At present, traditional commercial and governmental insurance and health benefits programs are still tied to a “fee for service” approach, by which providers, pharmacies and manufacturers are compensated based on the number of services provided or how much of a product is sold (i.e., volume). This model incentivized not only large quantities of product being sold, but also high list prices for such products.

Conversely, value-based contracting seeks to shift to a payment model linked to value, where the price of a product is adjusted after purchase based on patient outcomes or cost savings. This endeavors to incentivize efficient and effective patient care and has worked especially well in cases involving higher cost, innovative therapies (e.g., hepatitis C, oncology, CAR-T gene therapy).

Notably, this payment based on value is not necessarily limited to arrangements between manufacturers and payers. In fact, it could include arrangements between manufacturers and providers (i.e., hospital and health systems), as well as between manufacturers and patients.

Types of Value Based Arrangements

While outcomes-based pricing to plans often forms the core centerpiece of value-based contracts, other forms of arrangements do exist. The following are several types of payment models which may also be considered value-based contracting:

Outcomes-Based Price Adjustments	The manufacturer pays a rebate if clinical outcomes are below expectations (e.g., outcomes are less successful than reported in clinical trials or compared to patients taking competitor drugs) or clinical costs are higher than expected (e.g., increased hospitalizations).
Shared Savings	The manufacturer shares any cost savings attributable to the drug (e.g., reduced hospitalizations).
Trial Periods	The manufacturer and plan agree to a “trial period” during which the drug is jointly funded or provided without charge, and outcomes are monitored; thereafter, the parties agree to a pricing structure based on the outcomes of the trial period.
Indication-Specific Pricing	The manufacturer and plan agree to differential pricing depending on different approved indications (i.e., the drug will receive a higher reimbursement if used for indication with stronger clinically proven effectiveness).
Fixed Duration	Payment is made for an agreed-upon standard duration of therapy, regardless of the duration actually required to achieve the desired outcome in individual cases.
Caps	The manufacturer and plan agree to a cap on total costs or number of doses for which the plan pays, with the manufacturer funding any and all additional expenses (e.g., per member per month fee to manufacturer to supply all drug needed).
“Financing”	While not technically payment based on value, the manufacturer and plan agree to finance the cost of the drug, extending the payment for the cost of the drug over a period of several years (e.g., annuity contracts).

In addition to these, other variations have also emerged, including direct-to-patient rebates, cost-per-cure models, and even money-back guarantees. With each of these models, however, there are various compliance concerns that must be taken into account.

Legal Compliance Concerns for Value Based Contracting

Value based contracts involve numerous touchstone issues that regularly captivates the attention of healthcare lawyers: rebate payments, free drugs, differential pricing, approved indications, data sharing, etc. Because of the complexities involved, it is necessary to carefully evaluate any potential value-based arrangement. The following are some of the core areas of compliance concern surrounding value-based contracts:

1. The Federal Anti-Kickback Statute (“AKS”)

The AKS prohibits knowing solicitation, offer, payment, or receipt of anything of value to generate business reimbursable (directly or as part of a service) under a federal health care program.[1] Because the primary thrust of the AKS is preventing financial considerations from interfering with clinical decisions, the provision of care, quantity, type, and so forth, value-based contracting models risk running afoul its prohibitions. The AKS has been further weaponized by the False Claims Act, which affords treble damages and fines and allows qui tam relators to bring whistleblower suits and share in any recovery. Fortunately, there are several safe harbors to the AKS that may protect value based contract arrangements. These include (i) the Discount Safe Harbor, which can protect rebates not given at the time of sale if the methodology is appropriately disclosed and other conditions are met; (ii) the Warranty Safe Harbor, which protects any payment or exchange of value under a warrant provided by a manufacturer of an item to the buyer; and (iii) the Personal Services and Management Contracts Safe Harbor, which protects certain arrangements involving the performance of services provided the compensation does not vary in volume or value and the terms are set in advance. Other safe harbors or exceptions may also exist, but these are the primary ones looked to by healthcare counsel.

2. The Health Insurance Portability and Accountability Act (“HIPAA”)

The primary laws governing the access to, and use, disclosure, and transmission of, confidential patient data is HIPAA. In the context of a value-based pricing arrangement, any analysis of patient data transmission, confidentiality, and communication must be done with HIPAA in mind. Recall that quality data is the bedrock of many value-based arrangements and determining performance benchmarks. When quality data includes identifiable information such as name, diagnosis, age, gender and other details, participants to the arrangement must comply with HIPAA privacy provisions.

3. Government Price Reporting

The Centers for Medicare & Medicaid Services (“CMS”) has spent considerable resources assessing the impact of value-based contracting on government price reporting and rebate requirements. For example, under the Medicaid Drug Rebate Program (“MDRP”), in calculating its Medicaid rebate liability, drug manufacturers must account for—and report to the government—the lowest price offered to any qualified purchaser for the drug during the rebate period. This “Best Price” must include the lowest price any qualified purchaser pays for the drug, including hospitals, health plans, providers, pharmacies, wholesalers, and so forth. Historically, the potential impact of value-based contracting on government price reporting has impeded willingness by manufacturers to enter into value based contracts (this is especially so when setting up private sector arrangements involving capped price, per course of therapy price, and pricing that varies by indication).

In its efforts to support innovative value-based pricing arrangements, however, CMS has recently loosened the rules around Best Price. In a rule that took effect in January 2022, CMS codified a broad definition of value-based payment, allowing manufacturers to report multiple best prices instead of a single best price, provided it offers the same value-based payment arrangements to state Medicaid programs.

4. Food & Drug Administration (“FDA”) Considerations

In structuring value-based arrangements, manufacturers must be cautious in ensuring compliance with FDA requirements. For example, arrangements based on the actual use of a product, including off-label uses, may be perceived as promoting off-label uses. Communications by manufacturers in establishing outcomes measures must be in line with the product’s approved labeling and supported by evidence. The FDA has issued guidance to drug and device manufacturers on how to communicate healthcare economic information to payors and formulary committees under the Food and Drug Administration Modernization Act of 1997 (“FDAMA”). In addition, manufacturers must be aware of adverse event reporting requirements, which require manufacturers to report to the FDA when they possess evidence of adverse drug experiences. These requirements may be inadvertently implicated to the extent that the manufacturer has enhanced access to adverse event data generated in connection with the measurement of outcomes.

5. Antitrust Considerations

As in any arrangement involving manufacturers seeking favorable formulary placement, manufacturers need to be cognizant of antitrust considerations and anticompetitive principles. For example, does the arrangement have the potential to exclude manufacturers of competing drugs from the market? Likewise, does the arrangement require a payor to purchase certain products as a condition of getting access to another product? These exclusionary and tying principles could implicate state and federal antitrust and/or anticompetition principles, and careful consideration must be made.

6. State Law Considerations

Lastly, manufacturers must be cognizant of the various state laws that could impinge on value-based arrangements. These include state kickback laws, the reach of which may not be limited to government beneficiaries, and its safe harbors may not always exactly mirror those present in the federal context. Likewise, manufacturers mut consider whether value-based arrangements implicate state insurance laws to the extent the manufacturer shares in the financial risk or otherwise protects customers from risk. While state level enforcement has not been as prevalent as compared to the federal level, manufacturers must take care to thoroughly examine state law requirements.

Conclusion

Value-based arrangements have the potential to improve upon traditional fee-for-service and market-based drug pricing models, all while benefiting patients, payers, and drug makers. However, designing a value-based pricing program is not without legal and compliance risk. Thus, it is essential to work with experienced counsel and develop a program within the parameters set forth by CMS and other relevant authorities.

How Frier Levitt Can Help

Frier Levitt counsels pharmaceutical manufacturers in structuring and implementing value-based arrangements that are compliant with applicable federal and state laws and reporting requirements. Contact us to discuss potential avenues for your business while ensuring compliance with applicable laws and regulations.

 

[1] Harvard Pilgrim Signs Outcomes-Based Contract with Amgen for Enbrel (Feb. 22, 2017), available at https://www.harvardpilgrim.org/public/news-detail?nt=HPH_News_C&nid=1471912468296#:~:text=Enbrel%20is%20administered%20by%20self,impact%20on%20Harvard%20Pilgrim%20members.

[2] 42 U.S.C. § 1320a.