Rewarding Risk

The incremental financial burden required by this will loom over healthcare systems and impact budgets for years to come. In such uncertain times, holders of healthcare budgets strive to introduce some assurance of impact or outcome into their decision making. For instance, the past few years there has been a significant increase in the volume of outcomes or risk-based contracts across the globe. In the U.S., there were 77 value-based contracts (VBC) for biopharmaceutical products signed between 2009 and 2021 with over 60 of those signed after 2015—and though pricing is often significantly lower outside of the U.S., the proportional risk can be very similar.

Yet there continues to be debate within biopharmaceutical companies as to the necessity of risk-based contracting for premium priced drugs. The usual and reasonable push-back on the proposition is the payer’s inability or unwillingness to invest in the adjudication of these contracts. The big question to our biopharmaceutical clients as suppliers to healthcare providers and payers is, are they ready to share risk with their commercial partners?

New products in the industry have been steadily marching towards ever smaller specialty disease states where patients consume high volumes of healthcare resource and the prices of therapies reach into the high hundreds of thousands, to even millions, of dollars per year of treatment. Many of these therapies

are lifesavers, but while these therapies may work for many or most patients, they do not work for all. We have been expecting the payer to blindly assume risk (or play bad cop by denying access). We are asking them to make a leap of faith decision on cost effectiveness calculations based on a prior framework of expenditures not the decades long treatment with the innovative therapy.

In the US, almost 41% of all healthcare payments were from alternative payment models (APMs) and although more than half of those were upside rewards for appropriate care, over 40% were two-sided APMs with downside risk. Healthcare providers have offset rate cuts with rewards for better management of the most high-cost patients, but their next move to improve profitability and to offset further payment cuts will require the acceptance and management of downside risk. That, in turns, requires a deep level of understanding of the true costs of care. It involves organizations deeply engaged in performance management with an ability to make informed decisions quickly. All these capabilities are technology enabled, but more importantly, they change how organizations think and function. They change how decisions are made and how outcomes are measured. They change how they view their employees, their customers and their suppliers. Everyone is a part of the value equation.

We believe a rationale for simplified risk share may be flawed on three levels. First, the leading, digitally-enabled healthcare providers are logarithmically reducing the cost of generating data and exponentially increasing their ability to measure outcomes. These advancements create massive asymmetric information advantage permitting a more reasoned approach to outcome expectation and output.

Second, risk share may be the inappropriate approach. Certainly, every new product will not require risk-based contracting, but a better strategy would be to develop products with an optimal label and

value proposition positioned to reduce uncertainty in the future world of healthcare. Driving in this direction will not only change what an organization does, but how it thinks and makes decisions.

And third, what happens to risk and uncertainty if the biopharmaceutical company is willing to rep and warranty an outcome for the customer, but not have a full grasp on the potential downsides and missed upsides in the deal? If the biopharmaceutical company sells the provider/payer a forward contract on an outcome and is themselves just betting on that same outcome, are they speculating? Are they gambling on the potential downside risk? Worse yet, if the contract simply locks in a downside risk, it leaves money on the table to share in upside savings. Right now, providers/payers are taking on both upside and downside risk. If the pharma partner is willing to step in and share that risk, maybe they should also ask to share in the reward.

Addressing these three levels of change starts with a very different approach in early development. The biopharmaceutical industry co-opted the language of stage-gate development because of its similarities to the stages of clinical development. But there are huge differences between a true stage-gate process in other industries and biopharmaceutical development.

First, very early in development a business case needs to be developed. This is not a simple NPV model. This is a model that clearly identifies a possible value proposition by understanding the costs associated with the provider/payer managing the patient. Think about the provider/payer as a factory. You have a new product you’d like to introduce to their production process that you believe could lower their overall costs or improve the throughput of their lines or the features of their end-product. In this case, the patient is the raw material moving through their treatment line. You need to model everything you can about their production line. You need to understand the steps and the costs of the steps before your

product intercedes and you need to understand the steps and the costs that follow your product’s point of intervention. You need to understand the variability in those steps and costs across the different provider/payers and how your product will be affected.

In effect, this requires a complete understanding of the patient pathway, downstream clinical and social benefits, as well as the route to access. This is no minor undertaking, and it will require a comfort level with incomplete information and estimation. As much as possible, you also need to understand the costs and the value to your customer’s customers. How does the outcome affect the patients, their families and/or caregivers, and the community around them? We’ll touch on this broader framework shortly.

In the end, if you build this model and continue to inform and revise this model through your development process you will have a deep understanding of the value you can create for the provider/payer and their customers. The harsh reality is that healthcare is complex and this undertaking will be greater than what is required to add a new ingredient to a toothpaste line at P&G, but the discipline is the same. In the end, you have the potential to improve an outcome and improve the final product, reduce a cost (by reducing time and/or dollars) and improve returns.

Assuming you believe you can achieve any or all these outcomes with the product you are developing how could this impact your development strategy? It is not trivial to say that biopharmaceutical therapies are not widgets. In industrial products you can be fairly assured that you can produce and deliver what you can design. There may be some innovation required, but that is usually clearly identified. In biopharmaceutical products the characteristics of the product reveal themselves through development (and even after). Understanding the boundaries of value creation in the previously

described business case is key to managing uncertainty as the product characteristics unfold. Using the model to identify reasonable options based on possible final product features will avoid the pitfall of driving down one path and then needing to make a hair-on-fire pivot should results differ from the assumed.

The model should also be used to speak with providers/payers as soon as possible. These should be exploratory discussions. It should be made very clear that your goal is to develop products that will create value for them, their customers, and you. Being able to ask pointed questions and test assumptions should avoid the classic payer research where you could write the answers before you start. The goal would be to engage the payers in solving the problem and help them to believe that if you achieve your goal, they will benefit.

Second, in the quest for certainty, and a better guarantee of a positive developmental outcome, one must be wary of not playing into the hands of the risk averse payer, who will seek every opportunity to limit access or uptake of a new medicine. Study inclusion criteria, while providing a clean dataset, may be used to limit a patient population in the real world. Care must be taken to use factors that can be easily and cheaply implemented in medical practice (avoid screening with an academic biometric assay or expensive non-reimbursed genetic test). Response criteria should be objective and easily measurable. Be careful of not providing a route to stop/start rules or a shortened length of therapy by setting the bar so high for a “responder” such that the “non-responders’ are taken off treatment (even though they may be experiencing some benefit). It is more and more important to negotiate and plan with payers to allow early access to new medicines. Expanded or Post Trial Access is becoming more widely available to both maintain patients on much needed innovative treatments and at the same time generate important information on the effectiveness of the medicine in the real-world setting

Third, think about developing products that create benefits for the entire healthcare vertical and securing contracts that allow you to share in those benefits. We recognize that healthcare innovation can lead to wonderful outcomes with greater costs and no immediate savings to the payer and we believe for the benefit to our societies those innovations are important. But there are still ample opportunities to drive innovations that improve health and reduce costs on a much broader level than maybe first anticipated. For example, while reducing obesity using a weight-loss medicine may have cost saving cardiovascular benefits, it could also provide significant gains in other therapy areas, such as in rheumatology (preventing joint wear and tear) and reducing the need for downstream surgeries. Going forward there must be some mechanism and opportunity to capture the full spectrum of costs and benefits for a single medicine, extending far beyond its licensed indication.

Finally, with the biopharmaceutical industry targeting diseases that cause significant morbidity and mortality, consideration of societal costs become more and more important and influential in decision making. We live in a world where human resources are now constrained. What is the value of keeping a parent of a disabled child in the workforce with a therapy so impactful the child no-longer needs round-the-clock care? What social services are avoided by keeping an adult from becoming disabled with a new therapy? What is the impact of a healthier employee on a company’s ability to compete?

In order to share risk, we need to understand it fully – along with the entire spectrum of potential payoffs. However, in the search for clarity and quick wins, we must also consider whether we, in effect, have limited our ability to generate rewards for our companies because we are wary of accepting the very risk we are trying to avoid.