Factors Influencing the Implementation of Value-Based Contracting Between Pharmaceutical Manufacturers and Payers


 J Clin Pathways. 2018;4(4):27-30. doi:10.25270/JCP.2018.05.00018


Precision Value & Health, New York, NY


Precision Value & Health performs value and access consulting services and has provided those to entities that may be involved in value-based contracting. Marylou Buyse is vice president at Precision Value & Health. Stephen Carter is vice president at Precision Value & Health. Kyle Sarnataro is engagement manager at Precision Value & Health.

Value-based payments between payers and providers are growing steadily. Yet, despite apparently high interest, value-based contracting between payers and manufacturers appears to be growing slowly and more unevenly. Insights from payers and health systems shed light on drivers of the interest in value-based contracting, important barriers to implementation, and implications for manufacturers seeking to engage in successful value-based agreements.

In an era of rising health care spending and constrained budgets, both policymakers and payers have worked to shift the basis of providers’ financial incentives from volume of care to value of care. The shift toward value-based care was accelerated with the passage of the Affordable Care Act of 2010 and the advent of the accountable care organization model. Further impetus has arisen from the more recent introduction of the Merit-Based Incentive Payment System, which encourages providers to participate in risk-bearing arrangements and redesign their care programs. Some commercial payers also are employing metrics encompassing quality, utilization, and outcomes to incent providers treating commercial members in their networks.

In addition to the increased focus on value in arrangements between payers and providers, interest in value-based contracting between payers and pharmaceutical manufacturers is likewise on the rise. For this discussion, we define value-based contracts (VBCs) as agreements between a manufacturer and a payer, a pharmacy benefit manager (PBM), or health system in which rebate payments are based on shared risk. This shared risk can take the form of payments based on outcomes or clinical measures, indication-specific pricing, or shared cost risk. 

Growing Attention, Uneven Adoption

For payers, value-based agreements are attractive in that they reduce the risk associated with the uncertain performance of new therapies. Payment is greater for a drug when it works and less when it does not. These arrangements can also benefit the manufacturer who, while facing some downside risk, achieves greater access than could otherwise be attained. More important, value-based agreements can offer credible, visible reinforcement of a product’s value proposition in the form of appropriate guarantees.


Pharmaceutical manufacturers have begun to embrace the concept of value-based contracting. Over the past few years, a variety of VBCs with payers have been reported. One example is the agreement between Harvard Pilgrim HealthCare (HPHC) and Amgen for Repatha, which offered rebates based on low-density lipoprotein cholesterol reduction and evolved to refund the cost of treatment for patients experiencing a cardiovascular event.1,2 Recently, HPHC announced that it was the first health plan to successfully negotiate an outcomes-based contract with Spark Therapeutics to cover an innovative gene therapy for a rare form of blindness. The agreement provided a lower acquisition cost for HPHC and tied potential refund payments to both short- and longer-term vision outcomes in HPHC members.3

However, despite these forays, adoption still lags behind the optimism of BCs with manufacturers. Recently, publicized value-based agreements appear to be concentrated among a relatively small number of plans, with HPHC involved in ~30% of the value-based partnerships reported since 2012. A similarly small number of manufacturers has been successful in engaging in value-based contracting; Merck, Amgen, Novartis, and AstraZeneca are most frequently cited in deal announcements.4 For every successful VBC, there are likely many more instances of mutual interest that fail to produce an actual agreement. Why are there not more of these agreements? Is actual interest lower than perceived interest, or are practical barriers hindering more widespread adoption even where there is interest?

To better understand the willingness of payers to engage in VBCs, Precision Value & Health conducted a proprietary survey of 25 pharmacy directors representing payers from plans, health systems, and PBMs. All survey participants were individuals involved in negotiating and developing rebate contracts with pharmaceutical manufacturers. They shared their perspectives on the factors driving the attractiveness, feasibility, and challenges of these agreements.

Strong Interest

Although actual experience clinching value-based agreements with manufacturers appears to be limited but growing, interest and intent are strong. For example, 6 of the 25 survey respondents (24%) currently have in place at least 1 outcomes-based contract. All other respondents (76%) indicated an interest or intent to enter into one. Similar percentages also applied to agreements based on clinical performance and financial risk-sharing. Not a single organization polled indicated unwillingness to engage in VBCs.5

Their interest is not surprising. In addition to alleviating the uncertainty regarding the value of costly new therapies, these agreements help achieve many payer organizations’ goals of sharing risks with manufacturers. In fact, the second most frequently cited factor creating interest in these arrangements—noted by more than half of all respondents—was that there was an explicit organizational goal to enter into more VBCs (Figure 1).


A third prominent reason was the observation that VBCs can enhance the contracting relationship, which can benefit both payers and manufacturers. When done collaboratively, the process of determining and agreeing upon appropriate measures for VBCs can transform the contracting discussion from one focused solely on price to one that involves a mutual recognition of costs, risks, and objectives.

The Devil is in the Details

Given the widespread stated interest and factors driving this interest, why have only a minority of plans entered into VBCs to date? Our survey responses shed some light on this as well. The respondents cited several primary reasons for rejecting proposed VBCs, as shown in Figure 2.


In some cases, the payer or health system simply lacked the data infrastructure to implement the proposed deal (64%). This reality limits the types and complexity of arrangements that a number of plans/health systems can consider today. However, as organizations continue to improve their data management infrastructure, in part due to increased emphasis on quality- and value-based reimbursement, this barrier should diminish.

A more frequent reason for rejecting proposed deals was that the incremental value provided did not justify the effort required to adjudicate it (80%), which highlights 2 realities. First, these deals are inherently more complex than traditional rebate contracts. They involve tracking of clinical performance, outcomes, or other metrics, requiring incremental effort for data collection and analysis. That effort can be quite steep. Second, the value of the proposed deal, whether it is the expected incremental value (ie, incremental rebate) or the amount of risk shared by the manufacturer, could be too small. This can be particularly true in therapeutic areas with aggressive net price competition. Why undertake the significant effort to adjudicate a complicated deal when a traditional rebate deal of similar value can be implemented with less effort?

The most frequently cited reason for rejecting proposed deals was that payers and manufacturers failed to define a mutually agreeable outcome or clinical measure (84%). This suggests a significant gulf between the metrics on which manufacturers would ideally like to contract and the metrics that payers and health systems feel comfortable with (or can efficiently track in a manner suitable for contract evaluation).

Keep it Simple

These survey responses, as well as market observations to date, suggest several recommendations for manufacturers pursuing value-based agreements. The first and most important factor to consider is simplicity. Manufacturers would be wise to propose deals that are easy to understand, easy to monitor, and easy to adjudicate. This may be easier said than done. At times, it might require sacrificing the ideal outcome or clinical metric in favor of more practical, measurable substitutes. Alternatively, it may mean accepting aggregate metrics rather than those for a strictly defined patient subpopulation. This can be considered an anathema, given conventional wisdom that manufacturers should not stray from the most clinically defensible measures. However, given the practical considerations of payer and health system contracting, adhering to “ideal” contracting parameters is of little value if the result is a deal that cannot be implemented.

Share Meaningful Risk

Even the simplest value-based agreements are unavoidably more complex than traditional rebate agreements. To make the added complexity and effort worthwhile, payers and health systems need to realize real incremental benefit. Payers are reluctant to undertake complex data collection, monitoring, and analytical efforts for deals that amount to very little incremental value. The chances of a successful deal are improved when there is real risk on the table, whether in the form of an outcome, clinical, or cost guarantee. In addition to providing meaningful incremental value and predictability to the payer, such guarantees provide clear, credible reinforcement of the underlying value message that the manufacturer is trying to convey.

Transparency is Vital

Many survey respondents cited transparency and trust (60%) as meaningful ingredients for successfully engaging in value-based agreements. With not only the extra effort required but also the risk exposure, these types of arrangements require mutual trust—trust that the deal is structured fairly, data will be collected evenly, and endpoints will be measured accurately. Negotiations for value-based deals are typically lengthy, require frequent data exchange, and most important, involve a departure from a transactional relationship toward one based on mutual appreciation of costs and risks. All of this requires trust. It is extremely difficult to enter into a value-based agreement successfully if the relationship between the payer or health system and manufacturer has historically been frayed or has lacked good faith bargaining.

Manufacturer Concerns

Manufacturers have often expressed concerns regarding perceived barriers to risk-based contracting. A number of these concerns are regulatory in nature and can be addressed by carefully adhering to Food and Drug Administration regulations and state and federal privacy protections. However, the growth in VBC adoption suggests that these barriers are not insurmountable.

One of the most prominent concerns is best price exposure. As important as it is to address this risk, it need not be a deal breaker. There are a number of methods for mitigating best price risk, including paying rebates in aggregate (vs basing them on narrow subpopulations) or placing appropriate limits or caps on the amount of risk borne by the manufacturer, while still providing enough value to be worthwhile for the payer.

The Road Ahead

While implementation of value-based agreements with manufacturers is growing slowly, there remains widespread interest among payers for engaging in these types of deals more frequently. Done well, these arrangements can transform the contracting discussion from one focused solely on price to one appropriately focused on the value of care. Ultimately, value-based contracting involves appreciating concerns that payers and health systems have regarding costly new therapies, and credibly addressing those concerns. It follows that success in this endeavor also requires understanding the limitations of payers and health systems and designing deals that are feasible and worthwhile to implement.


1. Harvard Pilgrim cements risk-based contract for pricey cholesterol drug Repatha. http://www.modernhealthcare.com/article/20151109/NEWS/151109899/. Published
November 9, 2015. Accessed April 5, 2018.

2. Amgen and Harvard Pilgrim agree to first cardiovascular outcomes-based refund contract for Repatha® (evolocumab). https://www.amgen.com/media/news-releases/2017/05/amgen-and-harvard-pilgrim-agree-to-first-cardiovascular-outcomesbased-refund-contract-for-repatha-evolocumab/. Published May 2, 2017. Accessed
April 3, 2018.

3. Harvard Pilgrim is first health plan to directly negotiate outcomes-based agreement for groundbreaking gene therapy. https://www.harvardpilgrim.org/public/news-detail
. January 3, 2018. Accessed April 3, 2018.

4. Precision Value & Health Analysis.  Based on a tabulation and analysis of publicly announced value-based agreements between manufacturers and payers, 2012 through January 2018.

5. Precision Value & Health Survey of 25 Pharmacists from Payers, PBMs, and Health Systems. March 2018.