Confidential contracting – the road to flexible pricing

A post on drug pricing by Joseph Jimenez, then CEO of Novartis, attracted a lot of attention in 2016. Jimenez stated:

“We believe in the efficacy of our products, and by collaborating with payers on solutions for reimbursement, we hope to help start a shift toward value pricing in the healthcare system. We want to be rewarded for the tangible outcomes our products provide patients, not for simply selling pills.”

While this concept is clear, it brings a number of uncertainties for both payers and industry:

• How will the product perform in the real world?
• What will be the real cost of the product?
• What value-added activities can improve product performance dramatically?

Most of these uncertainties can be handled with three types of contract between payer and company, namely performance-based, finance-based, and value-added. However, in order to have any chance for success, contracting options must arrive at win-win agreements that meet the interests of decision-makers on both sides. Ideal contracting options will address a specific payer concern, create/use a competitive advantage, and, of course, fall within legal/regulatory boundaries.

Targeting specific payer concerns

Confidential discounts and rebates are frequently used to drive volume among price-sensitive payers. Payers like this type of contract, as they are easy to implement. Companies tolerate these contracts as they offer the opportunity to differentiate prices between customers without exposure; there is no risk for international reference pricing as these are based upon official list prices. However, discounts/rebates are not efficient for building a competitive advantage because they can be easily copied. Nevertheless, deep discounts on large volume products may create a hurdle for new entrants. Most US payers will not spend time in contracting discussions for products where they anticipate low utilisation.

Payer interest is not limited to low pricing, value for money, or per-patient cost, but also includes more specific concerns. Many private insurance firms are focused on growing and retaining their membership through patient support and formulary inclusion of innovative and effective medicines. Medco Health Solutions Inc. (now part of Express Scripts), for example, entered a partnership with Pfizer in 2011 to identify consumer subgroups and determine which products are most effective in each subgroup, therefore improving personalised care.⁵ The partnership has initiated precision medicine studies that comply with the Health Insurance Portability and Accountability Act of 1996 (HIPAA). It has also led to the creation of Pfizer Link, an online community for clinical trial participants from completed Pfizer-sponsored studies.

For some products, payers are highly interested in avoiding misuse, which can be costly and a potential legal problem. The use of growth hormones (GH) among adolescents is concerning, particularly if the patient is an athlete or has a bodybuilder relative who could abuse access to the drug.⁸ Merck Serono’s Easypod^®, an electromechanical injection device that delivers the GH deficiency drug Saizen (somatropin), captures each instance of product utilisation. This allows contracts that offer rebates for any tracked instance of misuse or other reasons for non-adherence.⁹ Using this opportunity, Merck Serono convinced some European clients to drop GH tendering for such contracts.

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