Pay-for-Performance (P4P) contracts have long been thought of as an effective way to address the disconnect between high drug prices and sub-optimal patient outcomes. Plans want to verify that data from clinical trials translates in a realistic way to their insured population, and PBMs want to highlight the value they create for their members. And of course, pharmaceutical manufacturers would like nothing more than the opportunity to generate real world evidence that supports their marketing claims.

Although P4P has been a persistent buzzword, the interest hasn’t always translated to practical implementation. A few reasons explain this stalemate:

  • Tracking patient outcomes requires extensive resources and technology infrastructure
  • Pharma does not want to pay for situations where suboptimal outcome is the result of factors outside of their control (adherence etc.)
  • PBM clients prefer up-front guaranteed rebates rather than back-end conditional discounts
  • High cost drugs often reflect a smaller patient population that doesn’t justify a complex contract since the impact to the pharmacy benefit budget is not meaningful

With the advent of several expensive drugs targeting large patient pools (Hep C, Heart Failure etc.), P4P is back in vogue and this time payers and manufacturers have followed through with some high profile contracts:  Amgen’s Repatha contract with Harvard Pilgrim, Novartis risk based contracts for Entresto etc. As specialty spending increases, P4P contracts are likely to become more common. While this promises to be a welcome development, it is important to reassess if P4P contracts will truly help align drug prices to the delivered value.

P4P contracts generally grant manufacturers the favorable formulary access they want for a relatively modest upfront rebate followed by an additional rebate if and when the drug fails to achieve a pre-agreed clinical outcome across the payer’s patient population.

Let’s consider the benefits to the payer from this contract structure:

  • Payer is able to expedite P&T review and provide faster access to critical drugs for their insured population  
  • Efforts to measure clinical outcomes will likely be paid for by the incremental rebates from the contract if the drug fails to live up to expectations
  • Payer is able to recoup some of the pharmacy benefit costs if outcomes do not justify the high price of the drug

Now, let’s consider the benefits to the manufacturer from this contract structure:

  • Manufacturer obtains their targeted formulary status at the beginning of the contract, and are able to hold on to this status until the contract adjudication milestone is reached
  • The outcome adjudication milestone is likely to be anchored to a contract renewal date, thus guaranteeing positive formulary coverage for 1-2 years regardless of actual outcome
  • Manufacturer is able to generate real world evidence which would otherwise be more difficult and expensive to obtain
  • If the outcome matches expectations, manufacturer would able to leverage the positive evidence for their benefit given the mutual incentive for the payer and manufacturer to showcase the contract. At the same time, a failure to match expectations will likely be protected by contract confidentiality
  • Once signed, manufacturer is able to leverage the mere existence of the contract to signal to other payers that their drug is worth the cost; perhaps winning additional formulary coverage in the process

Now consider what is likely to happen in the absence of a P4P contract?

  • The manufacturer will be under higher pressure to justify the drug price and the payer may not be willing to provide access unless a high rebate is offered (a rebate that in all likelihood will be higher than the initial rebate offered with a P4P contract).
  • If there are multiple drugs involved, payers are able to do a more accurate apples-to-apples comparison rather than having to figuring out the differences between two different P4P contracts

Still not convinced that a P4P contracts may not have the intended effect?

Well, here’s a thought experiment. If you originally plan to price a drug at $100, would the ability to offer a P4P contract encourage you to price at $100 or a price greater than $100?