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Healthcare Focus Shifting to Performance, Not Just Pricing

As pharmaceutical companies introduce new therapies to the U.S. market, they respond to risk-sharing agreements (RSAs) from healthcare providers, which increasingly involves negotiating pay-for-performance agreements. UnitedHealth’s pharmacy benefits business, OptumRx, recently struck a pay-for-performance deal with Gilead Sciences Inc. for its $1,000 a pill hepatitis C treatment, and is negotiating similar deals with other companies for its high cholesterol drugs.

Other healthcare and pharmaceutical companies are following suit. After winning U.S. approval for its new heart failure drug Entresto, Novartis AG announced in July that it was talking to healthcare customers about up-front discounts; providers would pay Novartis additional fees if the drug works, as clinical trials suggest, reducing costly hospital visits. While industry insiders don’t see these agreements becoming commonplace in the near term (in the U.S. market), there is growing sentiment that a changing healthcare landscape will continue to abrade the fee-for-service model. Novartis’ head of pharmaceuticals David Epstein told Reuters that performance-based payments will become more common: “Our industry is a bit unique because historically if the drug doesn’t work it still gets paid for. I think that model will have to shift.”

While performance-based RSAs will most likely remain the exception given the decentralized nature of the U.S. healthcare system, the use of RSAs in the U.S. is expected to grow as providers and payers gain experience. To compete for premium pricing, manufacturers will have to demonstrate their drug’s ability to deliver economic and clinical value (ECV), and be able to effectively communicate it. Given increasing drug costs and countervailing cost containment strategies, the need to demonstrate value will require the pharmaceutical industry to restructure development efforts to capture ECV data.

Many pharmaceutical companies are doing so by partnering with companies that track, sequence and analyze patient and genomic data to guide R&D and improve treatment adherence. These partnerships, similar to those among medical device and technology companies, will likely increase; though, it will take time for healthcare providers, payers and consumers to see the value and personalized care that they can potentially provide. Part of this effort includes examining data to better determine how products will impact different patient populations in the short and long term.

Using this type of information, pharmaceutical companies should ideally focus on product candidates that have a likelihood of economic success and will drive innovation. In addition, it will be increasingly critical for life science organizations to closely monitor regulatory developments that may affect R&D hubs and distribution, while also working with heath technology assessment agencies (HTAs) and payers to understand what should be submitted at each stage of development.

Companies are already addressing the shift to pay-for-performance in different ways. For example, some companies are simply lowering prices or offering rebates to decrease costs for consumers. Other companies are restructuring R&D processes to focus on quality and innovation in certain therapeutic areas—which may involve closing those that are less profitable or that are no longer complementary. As such, many are seeing improved quality, and more drugs are entering later stages of development.

While pricing and pay-for-performance debates will likely continue and strengthen, there is substantial opportunity for companies to enhance the ways that they utilize data, focus and develop their pipelines, and communicate therapeutic and economic value. The evolution towards a pay-for-performance model encourages a more collaborative approach to improving therapeutic effectiveness and adherence, as well as the U.S. healthcare system as a whole.