Regulators have approved an extraordinary number of innovative treatments over the past several years. This has been a therapeutic boon for physicians and patients in clinical areas of unmet need. But many of these drugs come with a high price tag and uncertainty around real-world clinical outcomes, leading to questions around their relative value versus their cost. The situation has been most prominent for cell and gene therapies treatments, which have a high upfront cost with the expectation of a long-term benefit. Manufacturers and health plans have attempted to strike a balance to share risk, however, these type of agreements – value-based, outcomes-based or performance-based contracts — are hampered by internal and external factors including the Medicaid Prescription Drug Rebate Program, more commonly known as Best Price; patient portability; and trust.

What is needed is an approach that removes these impediments and mitigates risk for all relevant stakeholders — manufacturers, health plans, employers, government, and patients.

The Challenge

Drug development is rooted in the scientific method. Researchers come up with hypothesis of what may work and help treat certain conditions. As with any innovation, there is a lot of trial and error. Pharmaceutical companies spent $83 billion on research and development in 2019, according to the Congressional Budget Office, yet only 12% of drugs entering clinical trials end up being approved. As a result, R&D costs tend to balloon, ranging between $1 billion to $2 billion per new drug. And while the clinical trial process is intended to regulate the safety and efficacy of treatments, there is uncertainty regarding outcomes in the real-world environment. The high price and uncertainty of approved treatments’ efficacy creates a tension between manufacturers and insurers when the medium-to-long-term benefits have not been established.

Different contracting models have emerged over the past few years to address those tensions. The dual goal is to minimize risk for payers while demonstrating value of the drug for all stakeholders. Similar to what is happening in the payer-provider space, the most prominent experiment aims to tie payments to outcomes. There are benefits for both manufacturers and payers. For pharmaceutical companies, outcomes-based contracts help ensure stable reimbursement with payers who might be unsure of a drug’s effectiveness. For insurers, these contracts set a performance guarantee based on real-world outcomes.

While it’s a promising idea, tying payment to outcomes has proven difficult to execute. Several obstacles stand in the way, some of which are detailed in the graphic below. Additionally, studies have found limited evidence of their effectiveness in lowering costs and improving outcomes; data is often stuck in siloed and fragmented technology systems, making it difficult to synthesize results across stakeholders. Patient portability is also an issue whereby a contractual obligation of a value-based agreement does not follow patients who switch insurance plans.

A Different Way

An alternative approach has emerged to address these challenges — a warranty solution. While there are variations of this model and the participating parties, the most effective structure involves manufacturers offering payers a warranty based on a well-defined metric or set of metrics. If those aren’t met over an established timeline, an independent third party administers a payout.

For value-based contracts, the risks to the manufacturer and payer outweigh the benefit and prevent both parties from engaging in such agreements in a meaningful and comprehensive way. A warranty reduces those risks as manufactures have covered their fiduciary responsibility through a premium paid to the third-party administrator and the payer has the assurance of working with an independent third-party that is bound to the agreement. Most notably, the lack of a direct contract between the manufacturer and insurer removes the tension that exists between these two parties, allowing them to focus on the key objective — patient access. Importantly for patients, the warranty ensures that their outcomes are being monitored even if they switch insurance plans. And insurers are still made whole if the agreed upon metrics aren’t met.

Warranties are an emerging tool for pharmaceutical companies to provide confidence to payers that manufacturers are standing behind the safety and efficacy of their products. They could confer significant competitive advantages when structured and deployed correctly.