Paying for prescription medicines based on their value to patients is increasingly seen as a promising technique to combat rising medication costs. But while other parts of the health care sector are moving rapidly toward value-based arrangements, why are biopharmaceutical manufacturers and payers holding back? Especially when there is growing evidence that these arrangements can save money and yield better patient outcomes?
We asked leaders in the biopharmaceutical and payer industries why they’ve been slow on the uptake, and received a consistent response: Federal regulations are standing in the way. The current administration, however, has indicated its willingness to consider reducing regulations, and that creates an opportunity to move forward.
Based on recent interviews with key stakeholders, four regulations need changes or clarification before we can begin connecting price to value for prescription drugs. The most significant barrier is the ability to contract outside of the Food and Drug Administration (FDA) label, although Medicaid’s “best price” rules and Medicare’s Average Sales Price (ASP) and Anti-Kickback Statute (AKS) are also problematic.
Let’s take a closer look at the barriers and consider the benefit of removing them.
The biggest regulatory barrier has to do with what’s included in the FDA label. The idea is for manufacturers and insurers (payers) to negotiate contracts based on how well a treatment works. But they can’t consider outcomes, such as hospitalizations, if they weren’t examined in clinical trials, and they are therefore not included in the FDA label. This is problematic because the outcomes included in the FDA label are often not the most effective way for the payer and manufacturer to share risk. For example, it may be difficult to measure the included outcomes. Also, the link to the payer’s budget, and therefore the financial risk, may not be clear. We modeled what a value-based arrangement might look like if it could include such an outcome and found potential savings to both parties.
Federal regulations for Medicaid create disincentives for value-based contracting. Biopharmaceutical companies are required to provide rebates to Medicaid based on the maximum rebate in the market or 23.1 percent, whichever is higher. Essentially any commercial rebate above 23.1 percent also must be applied to Medicaid. This regulation incentivizes manufacturers to cap rebates at 23.1 percent due the increased costs from Medicaid. We modeled the impact of this regulation on a value-based arrangement with a rebate of 23.9 percent. We found that when the additional costs from Medicaid are considered, the rebate increases to 27.1 percent.
Another problem exists for medications that treat multiple conditions. Under the FDA approval process, most medicines have a single brand, even if they provide greater value for one indication over another. Medicare calculates the ASP, but doesn’t consider the value of each indication when the medicine is administered by a physician. We modeled a medicine that treats three distinct conditions, and found that an indication-based arrangement lowered the ASP for this treatment by $700 in six months, from $10,000 to $9,300. The drop in ASP created a significant downside for physicians, who lost $421 per month per patient for this product, assuming that the medication acquisition costs remained flat.
Finally, if drug manufacturers are going to take on the financial risk of successful outcomes, they will need to utilize risk management tools without fear of running afoul of the AKS. Such tools include patient education, nurse coaching, case management support, benefit assistance, adverse event monitoring and outcomes monitoring. But the statute deters manufacturers from using these tools, even though they could bolster patient outcomes and save money. The current statute threatens large penalties for providing anything of value that could be seen as incentivizing providers to drive business their way.
Value-based contracting holds great promise in addressing rising treatment costs, but only with changes to existing federal regulations.