Can You Reduce Risk Through Outcomes-Based Contracting for Pharmaceuticals?

I recently attended the Pharmacy Benefit Management Institute’s (PBMI) Annual Drug Benefit Conference where one of the keynote speakers, Ed Schoonveld of ZS Associates, shared his point of view on the merits of outcomes-based contracting.  As you can read in his 2010 article on the subject, Ed advocates to pharmaceutical manufacturers for judicious use of these contracts given their potential complexity and potential risk for being nothing more than a thinly veiled price reduction. 

While I found his article and presentation insightfuI, I was struck by Ed’s comment questioning the wisdom of pharmaceutical companies providing insurance to insurance companies via outcomes-based contracts.   From a literal perspective, a large percentage of employers purchase pharmacy benefits on a self-insured basis through their health plan or PBM so the organization bearing the risk for the pharmaceuticals is often the employer and not an insurance company.  Second, while the price paid to the manufacturer is certain, the uncertainty and accordingly, risks to the employer and health plan are many, including:    

  • Uncertainty about effectiveness under real-world conditions of use that often lacks close monitoring and quick dose adjustment;
  • Uncertainty about the nature and extent of side effects in the broader population and over the long-term;
  • Uncertainty about the extent of use for off-label conditions lacking scientific support;
  • Uncertainty about the extent to which the new product will replace older, equally efficacious alternatives
  • Unknown medication compliance rates under real-world conditions; and
  • Ultimately, unknown cost-effectiveness in the real-world.

There is no shortage of examples of the impact that this uncertainty can have on clinical and economic outcomes for patients and payers; and while employers can mitigate some of these risks through benefit design choices, most are beyond their control.   Certainly outcomes-based contracts can be messy.  However,  the much higher unit cost of specialty medications and even greater uncertainty on these various dimensions relative to traditional medications makes outcomes-based contracting a logical alternative for sophisticated plan sponsors who want to mitigate uncertainty.


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