It’s little-known in supply chain circles that pharmaceutical companies have increasingly contracted with payers (e.g., Aetna for Merck’s diabetes drugs Januvia and Janumet) based on pay-for-performance (PFP) agreements. I believe this is a strategy supply chain professionals can learn from, as we as an industry enter new territory beyond the ACA law.
Specifically, hospitals, systems, and IDNs need to contract for their products, services, and technologies based on outcomes as they continue down the road to value-based purchasing. So, I thought that it would be helpful to examine three lessons that the pharmaceutical industry has learned since 2009 writing these performance-based contracts.
Overview of One Pay-for-Performance Drug Contract
As part of one contract, Merck assumes some financial risk for its type 2 diabetes medications Januvia and Janumet. If Aetna members with type 2 diabetes taking those drugs don’t meet certain goals, such as hitting their A1C or blood-sugar targets, Merck will pay a rebate to Aetna that increases depending on the number of patients who miss the targets. But if patients hit those goals, which are measured by analyzing data from Aetna’s claims database, Merck will not make any extra payments to Aetna. (*)
To summarize this strategy, Robert McMahon, President of Merck, says that, “You have to have aligned interests (with these performance-based contracts). You have to trust each other, and it has to be simple and clear when the contract is working and then how well it’s working.”
Three Things We Can Learn from the Drug Industry
Based on years of trial and error and experimentation, the drug industry has found these three guidelines to be paramount when writing and, more importantly, when implementing the terms and conditions of all the performance-based agreements they have signed to date. They are:
- Payers need the right data to assess real-world performance. If you can’t provide the data that your partners require to demonstrate increases or decreases in their product, service, or technology’s total lifecyle cost then you need to develop it to enter this new game that could emerge as a best practice.
- Payers need defined parameters of success. In Merck’s situation, the parameter for success was, let’s say, the reduction of A1C in Aetna members with type 2 Diabetes by 5% in six months. If Merck didn’t meet this parameter, they then would owe Aetna a rebate of say 5%. The key to establishing defined parameters is that they be agreed upon and be measurable by both parties.
- Payers receive rebates on a quarterly basis. As opposed to waiting for a year to adjust your agreements, quarterly reviews tied to your rebate payments are the ideal time to evaluate the implementation of your pay-for-performance agreements. Longer periods for reviews only risk runaway costs or performance issues.
We also need to understand that performance-based agreements might not work with every product, service, or technology that we are buying, since we don’t have the data to measure performance, or can’t define a parameter that makes sense to both parties. That doesn’t mean that we don’t continue to experiment with these contracts. It’s the wave of the future, since your suppliers need to have skin in the game.
Buy Products, Services, and Technologies by Their Outcomes
We know that the drugs that are purchased by health plans, hospitals, systems, and IDNs must be on an approved formulary. To be placed on a formulary today, a drug company must prove the efficacy of their products. But in the future, a pharmacy director at a commercial health plan says, “We want to see outcomes of a new therapy that are better than what is currently available, so we’re expecting a lot of comparable data. It needs to show the product has better outcomes than what’s already available, or a new product is going to help address unmet needs current therapies are unable to address.” This too should be your goal when comparing the products, services, and technologies you are contracting for today and the future.
(*) Excerpt from MM&M Magazine – February 2017