On Tuesday, the Senate Finance Committee will hold its second hearing in a series on drug pricing. Led by chairman Senator Chuck Grassley (R-Iowa) and ranking member Ron Wyden (D-Oregon), this hearing is a follow-up of the widely publicized grilling in February of CEOs and senior executives of seven major pharmaceutical companies.

This time around, five executives from major pharmacy benefit managers (PBMs) will be in the hot seat.

The February meeting took a surprising turn when Pascal Soriot, CEO of AstraZeneca, raised the concept of value-based agreements (VBAs), in which the price of a medicine is directly linked to the value it provides to patients, payers, and the health care system. “Value-based agreements have the potential to transform how medicines are priced and reimbursed in the U.S.,” Soriot told the committee.

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Value-based medicine isn’t a new concept, but it has made the leap from white paper to working construct in a matter of years, and value-based agreements continue to evolve rapidly in an industry known for its conservative approach. These agreements have the potential to disrupt the entire health care reimbursement system, including free-standing PBMs that aren’t able to evolve as quickly as reimbursement plans.

Cell and gene therapies nudging the rise of value-based agreements

At a recent conference in Washington, D.C., hosted by MIT’s NEWDIGS think tank, Gigi Hirsch, executive director of MIT’s Center for Biomedical Innovation, told the crowd that the drug reimbursement system “needs to catch up to the science.” (The organization has published an exemplary report detailing the issues surrounding value-based agreements.)

Gilead’s development of cures for hepatitis C a few years ago illustrates Hirsch’s warning. The company’s drugs, Harvoni and Sovaldi, offered a cure for hepatitis C, a chronic condition that had been difficult and costly to treat. This, of course, attracted a great deal of pharmaceutical interest and competition from both Merck and AbbVie, which introduced rival products in a relatively short time. These drugs would save thousands of lives and millions of dollars that the health care system was spending to care for individuals with hepatitis C. But the system wasn’t prepared for the drugs’ $84,000 price tags, and there were fears that state Medicaid programs could go bankrupt paying for it.

As a society, we figured out ways to compassionately and humanely treat people with hepatitis C who needed this treatment, and do so without breaking the bank. But it raises important questions: What if cures for several other diseases had emerged when the hepatitis C cures came out? What if Merck’s and AbbVie’s therapies had failed to gain approval and there were no competitors? Could the system have borne the cost?

We’ve entered an age in which sophisticated approaches to medicine — gene, cellular, and immunotherapies — could potentially cure or dramatically improve the lives of individuals with otherwise intractable diseases. Forms of hemophilia, a condition that can cost health plans $500,000 to $1 million a year per patient, could soon be cured with a single treatment. Some cancers might no longer be certain killers with CAR-T therapies.

Drug developers are taking extraordinary risks to invest in these complex therapies. The health care and reimbursement system, however, isn’t currently structured to support the price of these therapies — which could easily reach $3 million per patient — as they become commercially available.

Biopharmaceutical companies understand that in order to put a $3 million price tag on a therapy, the reimbursement system must change. That’s where value-based agreements come into play.

Here’s a hypothetical example: Say a biopharmaceutical company develops a therapy that can fix with a single treatment hereditary angioedema, a rare and potentially life-threatening genetic condition that causes swelling in various parts of the body, including the face, airway, hands, and feet. The $1 million treatment cures 60% of patients, while 30% have varying degrees of success and 10% derive little or no benefit from it. Under a value-based agreement, payers would agree to pay $1 million upfront for each patient. The biopharma company keeps the entire sum for each patient who is cured and remains disease free, but returns between 80% and 100% of the fee for patients who do not respond to the drug. For those who experience varying degrees of effectiveness, the company refunds payers between $200,000 and $500,000.

Another approach is an installment payment method, much like Bluebird Bio is envisioning for its therapy. Payers would provide an upfront payment that covers only part of the therapy’s cost. As it continues to show a durable effect, the payer would continue to make milestone payments.

Some of the gene therapy companies that my company advises are even contemplating a subscription-based approach tied to value as a pricing model.

Value-based agreements are garnering policy support and legislative action because they are being backed by two important groups: drug manufacturers focused on the development of new therapies for rare and orphan diseases that need to be more flexible in their pricing approach, and payers who want access to these therapies as a way to reduce their financial burden over time for treating costly diseases. Novartis, AstraZeneca, Spark Therapeutics, BioMarin, and Bluebird Bio are just a few of the players supporting value-based approaches to pricing, and the list is growing.

Pharmacy benefit managers have historically relied on legislative inaction to protect their position in the health care ecosystem, but consensus building around value-based agreements is threatening the status quo.

The need for orphan and rare disease benefit managers

The movement toward a value-based approach to reimbursement is being driven by biopharmaceutical companies and payers to cover the most expensive drugs in history. Under this model, contracts between drug manufacturers and payers require an entirely new support structure that is missing from today’s landscape.

Some entity, for example, will be needed to independently track patient progress and outcomes during treatment to certify value between manufacturers and payers. Another will be needed to manage the performance rebate if a therapy fails or shows limited efficacy. Yet another will need to manage and track complex contracts as patients move from one insurance company to another, as so often happens.

While existing pharmacy benefit managers could be in a position to provide these types of services, the largest ones can no longer act as independent arbiters and the smaller ones do not have the capacity or scale to do it. While independent pharmacy benefit managers will undoubtedly continue to exist, I don’t believe they will thrive as they once did.

This shift will allow new models, like the orphan and rare disease benefit managers discussed in a NEWDIGS report, to emerge. These could provide much of the support services that drug manufacturers and payers would need to service value-based agreements. Models for this are already on the horizon.

CareMetx, for example, is a privately held hub services company known for its analytics approach to patient engagement. It seems to be taking a long view on value-based agreements, having recently started a subsidiary called OutcomeRx that will focus exclusively on engaging with biotech companies to think through, structure, and manage value-based agreements.

Hub services companies like CareMetx could easily evolve to become orphan and rare disease benefit managers, replacing traditional pharmacy benefit managers by providing patient engagement services, data analytics, and PBM-like pharmacy and medical benefit services, as well as contract and performance rebate management services. As the industry continues to develop ways to generate value-based agreements, such companies will become more common. They will develop new methods to contract, quantify, and value treatments, eventually moving beyond a focus on orphan and rare diseases.

Reengineering the reimbursement system

Although Tuesday’s Senate Finance Committee hearing will likely focus largely on rebates and drug pricing transparency, the committee members must come to the realization that the current drug reimbursement system is structured to support the development and commercialization of relatively inexpensive small molecule drugs. If, as a society, we plan to rely only on the small molecule drugs of yesteryear, then we should keep the system as is. But if we want to take advantage of innovative approaches to treating and curing diseases like advanced cell and gene therapies, we must reengineer the reimbursement system to support the development and use of those drugs.

As AstraZeneca’s CEO pointed out in the committee’s February hearing, value-based approaches to providing important medicines could revolutionize our entire system.

Steve Brozak is the managing partner and president of WBB Securities LLC. The author and WBB have no financial interest in any of the companies mentioned in this article.

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