This article was by health care partner Eve Brunts and health care counsel Alison Fethke was originally published in Law360 on July 12, 2017.

Value-based health care and the high cost of drugs have both received significant attention in the ongoing debate on the future of health care. Value-based pricing for drugs may offer pharmaceutical companies an opportunity to validate the cost of their drugs and overcome obstacles to access. Over the past couple of years, pharmaceutical companies and private health plans have announced new value-based pricing arrangements linking the cost of drugs to their perceived value, receiving widespread media coverage.

Such coverage, however, has obscured the challenges inherent in implementing a successful value-based pricing arrangement. Such an arrangement must align with the strategic objectives of pharmaceutical companies and appeal to purchasers, health plans and other third-party payors, as well as address a number of legal and operational considerations.

Understanding Value-Based Pricing

Value-based drug pricing encompasses any arrangement between a pharmaceutical company and a purchaser or payor that links payment for a drug to the value provided by the drug, with the value typically measured by the drug’s impact on specified patient outcomes or health care costs. Value-based pricing arrangements generally reflect three structures: (1) initial drug prices are established utilizing data relevant to the value of the drug; (2) drug prices are adjusted after purchase or use to reflect value actually received; or (3) compensation is provided to purchasers or payors to address the impact of use of the drug (e.g., compensation for the costs of treating atypically high adverse events related to drug use).

Assessing Viability

Value-based drug pricing arrangements, as a potential alternative to traditional discounts (e.g., volume-based discounts), can be more complicated to administer and require a greater resource commitment, while offering uncertain benefits.

In assessing whether a value-based arrangement is appropriate, pharmaceutical companies and health care purchasers or payors should consider whether: (1) there is a need to demonstrate the value of the drug to overcome market access challenges (e.g., late entry to market in a disease state with a number of competing therapies) or otherwise resolve uncertainties about its value; (2) use of the drug aligns with existing initiatives of the purchasers or payors (e.g., reduces potentially avoidable hospital readmissions); (3) there is a viable methodology for demonstrating value (e.g., a clear causal relationship between drug use and specified patient outcomes or health care costs and a ready mechanism for measuring the impact); and/or (4) the drug pricing adjustments or other financial terms are sufficient to motivate to purchasers and payors to consider alternatives to traditional discounts.

The appeal of a value-based drug pricing arrangement may also depend on whether health care providers or payors are the intended participants. For example, health plans may be more likely to appreciate cost savings across the overall continuum of care, while cost savings achieved across a continuum of care is unlikely to appeal to a single provider.

Structuring the Arrangement

While value-based drug pricing arrangements vary, developing an arrangement will generally require: (1) defining the performance metric that will demonstrate the value of the drug; (2) determining how to measure the performance metric accurately (e.g., what data must be collected and how that data will be collected); (3) ensuring that the metric is affected only by drug use and not other causes; (4) defining the price adjustment or other financial terms if the expected performance metric is not achieved and ensuring those terms align with the resulting variation in drug value; and (5) identifying the resources necessary to implement the arrangement (e.g., training on product use or data collection software).

Addressing Legal Considerations

Pharmaceutical companies considering value-based drug pricing arrangements should be mindful of the following key legal considerations, which involve the application of traditional laws to new and innovative contracting arrangements:

  • Federal Anti-Kickback Statute: Participants in value-based drug pricing arrangements typically look to structure their arrangements to comply or substantially comply with existing protections under the Federal Anti-Kickback Statute (AKS) and implementing regulations, including safe harbors for discounts, warranties and managed care contracts. The scope of protection for value-based drug pricing arrangements, however, remains uncertain in the ongoing absence of specific government guidance. As the pharmaceutical industry association, Pharmaceutical Research Manufacturers of America, recently noted in calling for new or modified safe harbors that more clearly protect value-based arrangements: “Existing AKS safe harbors, developed under a fee-for-service regime, do not reflect many emerging arrangements designed to promote value, quality, and cost-containment. This misalignment results in uncertainty about the applicability of existing AKS safe harbors and may impact the decisions of payors, providers and biopharmaceutical companies to enter into beneficial arrangements that, if properly structured, could improve patient care without raising risk of fraud and abuse.”1 This uncertainly is compounded by the U.S. Department of Justice’s recent statements2 challenging the availability of safe harbor protection for discounts linked to performance requirements, in particular because many value-based drug pricing arrangements may incorporate a performance element (e.g., requiring use of the product consistent with labeling and accepted clinical protocols, or collection of data necessary to track patient outcomes or health care costs).
  • Government Pricing and Price Reporting: Value-based drug pricing arrangements must be appropriately accounted for when calculating drug prices reported to the government, including best prices reported under the Medicaid Drug Rebate Program. The appropriate calculation may not always be clear. For example, for arrangements that involve a lump sum payment to a purchaser if the use of a drug across a patient population fails to achieve certain established metrics, a company must decide how to apply that payment as a discount to specific units purchased. In the context of the Medicaid Drug Rebate Program, the Centers for Medicare & Medicaid Services has recognized the value of such arrangements and the need for specific guidance.3 CMS has nonetheless “concluded that the impact on a manufacturer’s best price will differ depending on the structure of the arrangement” which provides little helpful concrete direction.4 Absent specific guidance, pharmaceutical companies will need to apply reasonable interpretations; consider seeking agency guidance regarding specific proposals; and remain cognizant of the fact that subsequent government guidance could require modification of existing approaches.
  • U.S. Food and Drug Administration Promotional Restrictions: Value-based pricing arrangements should be carefully considered in light of the applicable drug’s approved label (i.e., prescribing information), in order to mitigate potential FDA off-label promotion risks. In selecting the performance metrics that will be measured in order to demonstrate value, pharmaceutical companies should analyze whether such metrics may evidence a new intended use of their drug (e.g., a rebate is provided when a certain rate of reduction is achieved across the total population, and this event rate is not included in the label, or compensation is provided by the manufacturer in the event of adverse events resulting from off-label use), particularly in light of the current uncertainly regarding the FDA’s stance on what can be used to establish a manufacturer’s intent with respect to off-label use.5 In addition, the generation and analysis of real-world data as part of the value-based pricing arrangement may result in increased adverse event reporting obligations for manufacturers, as well as raise questions about whether the data generated from such arrangements meets the “competent and reliable scientific evidence” standard set forth in Food and Drug Administration Modernization Act Section 114, as amended by the 21st Century Cures Act, and the FDA’s recent guidance documents on “Payor and Label-Consistent Communications.”6
  • Privacy: Implementation of a value-based drug pricing arrangement may require the collection and analysis of patient information protected under the Health Insurance Portability and Accountability Act or other federal and state privacy laws as part of performance measurement of value-based outcomes. Specific patient authorization for the disclosure of the information to pharmaceutical companies is rarely a viable option. Alternatively, parties can consider approaches such as: (1) structuring arrangements to require disclosure by a health care provider or health plan of only nonprotected information (i.e., “de-identified” information under HIPAA); (2) taking the position that disclosure is permitted as a disclosure for “payment” purposes; or (3) arranging for a mutually agreed third party to serve as a “business associate” to the health plan or health care provider and undertake the collection and/or analysis necessary for implementation.

In addition to the key considerations above, other legal considerations implicated by value-based pricing arrangements may include other fraud and abuse laws, transparency laws, antitrust laws, and state corporate practice of medicine.

Ultimately, there is no perfect “recipe” for the designed successful implementation of value-based drug pricing arrangements. Pharmaceutical companies as well as health care purchasers and payors should assess whether value-based drug pricing aligns with their respective strategic objectives and then ensure that any proposed arrangement is carefully crafted to achieve those objectives consistent with applicable law and evolving government guidance.