Unpacking Risk Sharing and Alternative Pricing Schemes

Pharmaceutical CommercePharmaceutical Commerce - January/February 2010

Shared-risk or ‘pay for performance’ agreements between drugmakers and payers can represent uncertain rewards for both parties. Use strategic planning before entering into them

With increasing frequency in Europe, and now starting to show up in the US, biopharma companies and payers are entering into agreements to provide some form of risk sharing or price protection as new drugs are adopted into formularies. The best known among these include Pfizer’s Sutent (sunitinib malate) and Onyx/Bayer’s Nexavar (sorafenib) anti-cancer drugs; Novartis’ Aclasta (zoledronic acid), and Sanofi-Aventis/Procter & Gamble’s Actonel (risedronate sodium), both osteoporosis drugs. Manufacturers have agreed to various plans in Italy, Germany and the US to provide drug for free if no improvement is seen after initial treatment, or to reimburse health plans if bone fractures occur despite the osteoporosis therapy. There are numerous others, and more under consideration.

There is a lot of misunderstanding and controversy about risk sharing in the pharmaceutical industry. Some love it, others hate it, but most of us are just confused about the topic. What is the risk and who is sharing? Will we miss out if we don’t start closing these deals immediately? In this article, we will give you a structured four-step approach to help your decision making on whether you need to act, and for which opportunities.

What is risk sharing?

The fundamental idea of risk sharing is simple: in return for a pharmaceutical company’s guarantee of efficacy, a payer will add a new product to its formulary that it would not have added otherwise. The concept is similar to a “money back” guarantee for consumer products — they provide a perception of quality and confidence. However it does raise the question whether pharmaceutical companies should provide insurance to insurance companies? That sounds like something that one should be careful about.

For new drugs, risk sharing can make a lot of sense, as the manufacturer has better insights in the strength behind its claims with respect to yet unproven long-term health benefits. A deal can help overcome challenges in addressing payer hurdles in providing meaningful long-term outcomes data prior to launch. For drugs at a later stage of their life cycle, payers are likely to have much better data on outcomes than the drug company, and the deal could represent unjustifiable risk to the manufacturer.

Let’s call it ‘alternative pricing’

Most risk-sharing deals share no risk at all, if one takes the definition of “share” taught in kindergarten. It would be better to refer to this large group of risk sharing deals, outcomes-based contracting and performance-based agreements as “alternative pricing schemes.”

Alternative pricing schemes originated in Europe and Australia, where they served to overcome individual nations’ particular pricing and reimbursement approval hurdles. In the UK, for instance, risk-sharing deals have helped reduce cost per patient within National Institute for Health and Clinical Excellence (NICE) guidelines. As such, these deals are really poorly disguised price cuts.

Risk sharing continues to fascinate the industry, even though relatively few deals actually bridge risk inherent to a long-term outcome of a pharmaceutical product. Payers tend to love these deals as discount opportunities. Health outcomes specialists support the use of their data in structuring agreements. But drug pricing professionals are very skeptical. They know from experience that price concessions have a domino effect across markets, and once a payer in one country or region gets a risk-sharing discount, payers elsewhere will demand the same net price.

If the benefits are slender, why is the industry abuzz about these deals? Often, payers are directly or indirectly demanding these arrangements, particularly in Europe, where centralized mechanisms give payers power over market access. Enticed by demanding payers, pharmaceutical companies have engaged in arrangements that provide short-term local success, but can have major long-term bottom-line repercussions.

Understanding deal types

Many pharmaceutical executives are unclear what makes a good alternative-pricing scheme, one that is mutually beneficial to all parties instead of tilted towards one or the other. There are different types of alternative-pricing schemes, and it is in executives’ best interest to understand exactly how these deals work—and how to make deals work for them.

We have identified seven basic types of alternative-pricing/risk-sharing schemes. Each is based on two determining factors: is the deal based on population or individual outcomes, and is the agreement triggered by biomarker, short-term clinical, long-term clinical or financial data? Figure 1 gives an overview of the deal types.

1. The biomarker-linked reimbursement deal

In this type of arrangement, payers make reimbursement conditional on results from biomarker tests. Herceptin is a good example. The drug is particularly effective in HER2-positive patients. Payers have made reimbursement contingent on a positive biomarker test that screens for HER2-positive patients.

Biomarkers inherently limit a drug’s eligible patient population, but can significantly enhance the product’s value through a demonstrated higher effectiveness—it can command a higher price and market share, provided that the biomarker is available and reimbursed at the time of launch.

2. The surrogate endpoint-based reimbursement deal

This is the most-liked—and loathed—type of deal. Some argue that the surrogate endpoint deal is sometimes necessary to bring a product to market; others say it is a problematic precedent-setting price discount. These deals link reimbursement to meeting short-term surrogate endpoints, such as tumor response rates. However, clinical risk is not associated with surrogate outcomes, but rather with the predictability of long-term outcomes that the deal does not address.

Sutent and Nexevar in Italy were introduced using this kind of deal and show some of the hazards of engaging in it. The Italian government reimbursement agency now frequently insists upon agreements that link reimbursement to demonstrated efficacy; Sutent and Nexevar have been approved for partial reimbursement for the first three months of use. After three months, the government only pays for patients who respond under agreed-upon patient response definitions.

Government insistence to not pay for non-responsive patients creates objections with many pharmaceutical pricing executives. It seems unfair to first reference a drug price to other countries and then to insist on paying only for a subset of treated patients.

3. The patient outcomes warranty deal

Patient warranty deals are based on explicit guarantees regarding long-term patient outcomes. This agreement makes intuitive sense—it provides the payer an explicit guarantee that a product works as advertised. An example of such a deal is the deal between Novartis and some German sickness funds, where Novartis refunds cost of its bisphosphenate Aclasta for osteoporosis, for patients who suffer from a fracture despite taking the drug.

The warranty deal has several merits, but one stands out: the drug company is making a claim for which they have better information than the payer. From that perspective, it is truly a “risk sharing” partnership. A population-based deal (discussed later) may be more practical, as it may reduce administrative burden.

4. The short-term performance-based deal

This type of deal is rare. At launch, a pharmaceutical company usually knows a product’s short-term clinical performance, diminishing the need for complicated risk-sharing deals.

However, an arrangement between Merck and Cigna for diabetes drug Januvia is an interesting exception. This partnership involves guarantees on HbA1c as well as patient compliance, key in achieving longterm health improvements. The partnership component of this deal may be of great use in other situations.

5. The population-based performance guarantee deal

In many ways, this is an ideal agreement, as it brings drug innovations to needy patients, thus benefiting health policy objectives and the pharmaceutical innovator. As its name suggests, reimbursement is based upon longterm outcomes of a patient population, rather than individual or short-term population outcomes.

The multiple sclerosis deal in the UK was one of the first true risk-sharing deals. The situation was ideal for a population-based guarantee deal: the British government wanted to address high patient demand for MS treatments, despite a negative NICE ruling, while pharmaceutical companies were willing to guarantee longterm outcomes of new products. Both parties stood to gain and mutually bear risk.

The concept of this deal type is actively explored on many fronts in the US under the Coverage with Evidence Development (CED) classification. Garrison et al (L.P. Garrison, 2008) attribute a number of device- and drug-reimbursement agreements with CMS to the CED concept. Under this agreement, reimbursement coverage is provided by CMS, under the condition that the patient is enrolled in a registry in which further evidence on the treatment’s efficacy and safety is gathered over time.

The recent Sanofi-Aventis/Proctor & Gamble deal with Health Alliance in the US for its Actonel osteoporosis treatment deal is a variation on the Novartis-German sickness funds deal guaranteeing outcomes. However in this deal, for patients taking Actonel and suffering fractures, Sanofi-Aventis will reimburse the medical cost for treating a fracture rather than just the cost of the drug treatment. It is unclear if an uncertainty of clinical outcomes forms the basis for this type of deal, rather than tactical life-cycle marketing objectives.

6. The per-patient cost capitation deal

In general, the per-patient cost capitation deal ensures payers that cost will not exceed a certain limit. This is particularly important for payers concerned that a pharmaceutical product can support sustained use beyond what the payer may find reasonable. For example, in a deal with the Department of Health in the UK, Novartis agreed to pay for macular degeneration drug Lucentis when patients require more than 14 injections of the treatment, beyond which evidence suggests that it is not clinically useful.

7. The overall sales-volume capitation deal

The final type of risk-sharing/alternate pricing agreement ties prices to sales. As part of a launch price negotiation in France, annual sales volumes must be agreed upon for several years. If the maximum volume is exceeded, the pharmaceutical company will pay penalties, be it in terms of rebates or price reductions. Sales-volume capitation deals are designed to address government budget concerns, but form a disincentive for innovation, as additional demand following better data can be punished severely.

Finding the deal that makes sense

Pricing and health outcomes disciplines need to engage in close collaboration to ensure that the right strategic deal is pursued. There are some truly great opportunities for alternative pricing schemes. However, as with the “disease management” phenomenon in the 1990s, many health care companies are jumping on the risk-sharing bandwagon because they do not want to feel left out, no matter the benefits in any given deal.

A simple measurement of a deal’s viability is when both payer and pharmaceutical company see a benefit. The multiple sclerosis agreement in the UK is a role model example for a perfect fit of a risk sharing deal. The payer and pharmaceutical companies truly shared the risk, and, despite some implementation difficulties, patients gained access to the drugs and a difficult situation for the NHS was averted.

True “risk sharing” agreements can be pursued for two reasons:

  • A pharmaceutical company has in-depth information on a new product’s characteristics; i.e. at or prior to launch.
  • Availability of key data to back up pharmaceutical company claims is dependent on the company’s commitment to plan and execute these trials.

Whether the deal is a true “risk sharing” deal or not, we should evaluate every opportunity for an alternative pricing scheme in a logical and structured fashion:

  • Have a clear goal What are we trying to achieve? When the objective of a deal is vague, we are not likely to come up with a meaningful deal that makes sense in the long run. Good deals resolve issues rather than create them.
  • Look for the win-win What is in it for the payer? If it is not a win-win deal, it is less likely to be successful or it may not be a good deal for one of the parties. Are we pursuing the right kind of deal?
  • Consider longer-term impact What is the longterm strategic impact on our business? Will we impact pricing in other countries? Are we just increasing the cost of doing business through admin and data collection cost?
  • Make sure it is real Can it be implemented? Even the much heralded MS deal in the UK has been facing great implementation issues.

A deal that gets a positive report card after review on the above four criteria, is likely to be worthwhile pursuing.

Implementation considerations

Even when a biopharma company negotiates a deal that looks good on paper, it can easily fall apart over implementation issues such as data collection complexities and administrative burdens related to validation of claims related to the deal. To reduce longer-term cost and administrative burdens, it is important to have an exit strategy after a sufficient evaluation of the risk elements.

Ensuring transparency on both sides is essential, as is making sure that the deal will not distort the market elsewhere. Global brand management needs to have oversight over the actions of regional managers who might seek a deal that makes sense in one country, but can affect the drug’s market elsewhere. Some deals that seem useful initially may form a substantial barrier to entry for new follow-on drugs. Such a deal may be an attractive tactical move, but is not in the interest of maintaining a competitive market.

Underlying all of these conditions is the answer to a fundamental question for pharmaceutical companies: is the deal adding any fundamental value to the company, or providing a competitive advantage? Pricing professionals need to convincingly answer “yes” before embarking upon a complicated and hard-to-implement deal.

The future of alternative pricing

It will be interesting to see how alternative-pricing schemes will evolve. Outside the US, existing practices on alternative pricing arrangements are likely to continue, as government payers identified a way to demand prices outside international pricing bands that were previously guarded carefully.

In the US, deals have so far been sporadic and with limited numbers of payers. They have the nature of experiments. However, there is a lot of flux behind the Coverage with Evidence Development (CED) concept, which fits within the population-based performance guarantee category. Ongoing federal healthcare-reform discussions are likely to further impact support for this initiative. We can help establish a meaningful place for alternative pricing schemes by focusing on deals that make sense. PC


Ed Schoonveld is Principal and Leader of the Market Access and Pricing Practice at ZS Associates, a global management consulting firm specializing in sales and marketing consulting, capability building and outsourcing. Schoonveld has previously held positions at Bristol-Myers Squibb, Wyeth and Eli Lilly. He can be reached at [email protected].

Stefan Kloss is a Manager with ZS Associates in New York City and a member of ZS’s Global Market Access & Pricing Practice Team. He can be reached at [email protected].

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