Contracts to Mitigate Risks from Ultra High-Cost Drugs


The idea
Ultra-high-cost drugs, like gene and cell therapies, offer the promise of durable effects (at least 15 years) with only a single application. These novel therapies can cost hundreds of thousands to millions of dollars per dose. To mitigate against the financial risk for unproven therapies, purchasers of these products are exploring new financing models with manufacturers—with performance-based agreements and orphan reinsurance benefit managers gaining traction.

The promise
Innovative, risk-mitigating contracts for ultra-high-cost drugs offer stakeholders a chance to limit financial exposure without steering patients away from life-changing therapies. No single contract can remove the risks inherent to such cutting edge, expensive products. But performance-based agreements and orphan reinsurance benefit managers may offer the framework for manufacturers and purchasers to get these transformative therapies to patients.

Why now
Several biomedical and policy shifts have made ultra-high-cost drugs relevant over the past five years—leaving payers scrambling to meet the risks associated with these promising new therapies. Federal drug pricing regulations have limited the ability of payers and manufacturers to create new pricing models, but recent changes by CMS around Medicaid Best Price have made these models more feasible for manufacturers.

Reality check
While ultra-high-cost drugs pose a financial danger for payers, these contracts are extremely difficult to execute properly. A myriad of logistical, regulatory, and market factors prevent these contract models from gaining traction. That said, these contracts offer payers some protection against both the actuarial risk of increasing numbers of their members being prescribed these kinds of drugs and performance risk from unproven, but promising, treatments.


What is it?

Unlike other expensive specialty drugs that help patients manage chronic conditions, ultra-high-cost drugs promise long-term amelioration of the condition after a single application. Up to now, these gene and cell therapies have largely targeted orphan and ultra-orphan diseases. But over the next decade a wave of these drugs will enter the market with the potential to impact millions of Americans.


The contracts outlined in this piece represent a key tool in payers’ financial models to meet the considerable challenges presented by these drugs. An example in practice: There are likely to be durable therapies for sickle cell anemia and Duchenne’s muscular dystrophy by 2023, which together will be indicated for 1 out of every 1,100 Americans. Even a somewhat modest price tag of $200,000 per treatment for these therapies could severely challenge the bottom lines for many plans.

Payers have begun using some of the contracts outlined in this report to meet manufactures’ prices while shielding themselves from the performance and operational risks and that these therapies present. These strategies build on one-another, appealing to payers with different interests in the market. First, we’ll briefly touch on the status quo: stop-loss contracting and carve-outs within specialty pharmacies. Next, we'll turn to this report’s featured emerging ideas: performance-based agreements and Orphan Reinsurer and Benefit Managers (ORBMs).


Why is it useful?

To avoid serious financial strain from ultra-high-cost drugs, payers must identify a reimbursement structure that differs from the current fee-for-service system. On top of that impending financial risk, however, payers also must protect themselves against the prospect of these drugs not living up to expectations. We call this performance risk, a measure of the drug’s ability to meet the clinical outcomes stipulated in the purchasing agreements.

Health care systems must also be prepared to handle the unique care coordination challenges associated with gene and cell therapies, and be able to create a data infrastructure to coordinate the collection, storage, dissemination, and analysis of patient outcomes data. We call these hurdles the operational risk, which are potential secondary challenges associated with these kinds of risk mitigating contracts. Determining the right data to gather (that is, data that will be accessible and not contentious to adjudicate) is particularly essential for the successful implementation of any performance-based agreement.

While contracting strategies like stop-loss shield payers from financial distress—they don’t protect the payer from, for example, the drug not working (performance) or a dispute over who’s in charge of collecting data over the course of five years (operational).

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Why now?

Ultra-high-cost drugs are relatively new pharmaceutical products in the market, but their presence will almost certainly increase dramatically over the next decade. Current estimates indicate that there will likely be around 60 by 2030. Not only will there be more of these durable treatments in the next decade, but many hitting the market will treat more-prevalent illnesses than those currently available. There is likely to be a durable therapy hitting the market in 2023 for the treatment of hemophilia A in adults, which at only 30% market penetration would still cost plans hundreds of millions of dollars. Health plans have a limited window to prepare themselves for a problem which, while present today, will worsen in the coming decade.

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In addition to the scientific breakthroughs bringing more of these drugs to market, recent policy changes have made several of the contracts discussed in this report more feasible. Medicaid Best Price (MBP) stipulations currently stand as a massive hurdle in the path to developing performance-based agreements for ultra-high-cost drugs. Poor outcomes in any one of these contracts would threaten to derail all contracts to which Medicaid is a party. If a drug fails to meet the therapeutic milestones laid out in the agreement, the final price paid by the purchaser to the manufacturer could be significantly reduced, thereby setting a new, extremely low MBP. Yet in 2022, two new regulatory definitions are set to take effect: bundled sales, which bases the MBP on the aggregated average of final prices across performance-based agreements (PBAs), and variable best price, in which a manufacturer is required to offer Medicaid the same PBAs it offers to commercial entities (or else offer Medicaid the standard best price discount pegged to non-PBA arrangements).

The Status Quo: Stop-Loss and Pharmacy Carve-outs

At present, health plans mitigate the risks bought on by ultra-high-cost drugs through two main strategies. These are commonplace throughout the market of reimbursement for pharmaceuticals.

  1. Stop-Loss: This approach to protecting against catastrophic losses is regularly used to shield payers from unexpected costs in ultra-high-cost drugs. In exchange for premiums paid by the insurer, the company’s potential losses in any given field (in this case ultra-high-cost drugs) are capped a certain, predetermined amount. This strategy, while not innovative, is used by most payers in the ultra-high-cost drug space at the moment.
  2. Specialty Pharmacy Carve-outs: When specialty drugs are “carved-out” from the traditional pharmacy benefit, they are administered by a third-party vendor. The justification for this strategy is simple: specialty pharmacies have experience in the market and, through their high-volume purchasing, can offer the ultra-high-cost drug at a less-expensive rate than if the payer negotiated with the manufacturer alone.

Early adopters

Application 1: Performance-based agreements

Performance-based agreements are contracts created between manufacturers and purchasers to create a rebate structure around clinical milestones, which are typically spread over a period of one to five years. Contracts of this type ensure that purchasers (usually payers, but potentially providers as well), who seek to bring these potentially curative therapies to their members, protect themselves from the financial risk associated with clinical underperformance. Also, by spreading out the payment of the drug over time, these contracts prevent purchasers from facing liquidity issues as new, high-impact drugs enter the market.

Generally, PBAs take two forms: short- and long-term contracts. Both typically involve a rebate structure around patient outcomes (clinical or otherwise) and begin with an up-front payment from the payer. Afterwards, payers are responsible for annual payments based on that predetermined set of criteria.

  1. Shorter, year-long contracts measure patient data for a year. If the patient has reached the “milestone” set in the criteria, the manufacturer will receive payment in full. These milestones could be more than just a single marker of success.
  2. Longer-term contracts also measure patient data, but payers pay year after year, sometimes in an arrangement half a decade long. Instead of finalizing the contract after only one year of patient analysis, long-term PBAs pay depending on how well the drug does over a long stretch of time. This payment structure is built around the fact that ultra-high-cost drugs are designed to have long-lasting, durable effects.

Case in brief: Aetna and Novartis

Entresto is a high-cost drug which, when administered in the course of treatment, can significantly reduce the risk of heart failure. Novartis’s pay-for-performance deal with insurers links the financial terms of the contract to a reduction in the portion of its customers who are hospitalized for heart failure.

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Application 2: Orphan Reinsurance Benefit Managers

Orphan Reinsurer Benefit Managers (ORBM) innovate by integrating health care delivery and the financing of ultra-high-cost drugs into a single entity. These entities bring three services together: reinsurance/risk pooling, drug contracting/purchasing, and care coordination. ORBMs act as an ultra-high-cost drug carve-out for payers who subscribe, which allows the ORBM to pool the actuarial risk of multiple therapies hitting the market across multiple payers.

ORBMs then offer a per member per month (PMPM) subscription service to payers, which allows for greater actuarial predictability among subscribers. Included in this PMPM subscription is holistic disease care (medical and pharmacy)—from provider network management to patient care coordination services—which shields payers from operational challenges as well as financial risk. ORBMs act as a pharmacy benefit managers (PBMs) as well, engaging in performance-based agreements with manufacturers as needed, while ensuring maximum manufacturer rebates through high-volume purchasing. Because of their position as both the contracting agent for performance-based agreements and manager of the provider network, ORBMs can coordinate the flow of patient outcomes data essential to the performance-based agreement. Even if a patient subsequently switches plans, an ORBM can still gather their diagnostic data to fulfill the terms of the performance-based agreement.

Case in Brief: Embarc

Introduced by Cigna in September of 2019, Embarc is designed to coordinate the drug procurement and care management required for two specific drugs: Zolgensma and Luxterna. Organizations that subscribe to the service pay a PMPM fee for the gene therapy network, and all out-of-pocket expenses for patients are waived as part of the agreement. Pharmacies and other sites of care are paid for the drugs through Embarc as well.

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Should you pursue this idea?

Performance-based agreements protect plans against the financial risk arising from clinical underperformance, but they don’t address the operational challenges associated with the unique care coordination needs of patients receiving gene and cell therapies. These challenges include the expense and complexity of both the delivery of the drug itself and its administration by a provider—unless specifically stated otherwise, payers are on the hook for these charges. As such, PBAs should work well for health plans with experience in care coordination for the diseases often treated by ultra-high-cost drugs.

ORBMs build on PBAs to take on a more holistic set of responsibilities for a patient’s entire care continuum. Payers without the capacity to coordinate care for members receiving these kinds of therapies, and who are particularly vulnerable to the various types of risk discussed above, will benefit the most from an ORBM.

The success of these models doesn’t depend on plan size. A health plan that can coordinate care might still lack the market experience to get the cost savings that ORBMs draw from their high-volume purchasing. But a plan that is simply interested in mitigating the risks brought on by a few specific gene and cell therapies might best be served by a PBA.

As mentioned above, while ORBMs are complex to form and operate, their client-facing contracts and functions are simple, and for patients they are invisible. The ORBM carve-out allows subscribers to manage the financial risk from ultra-high-cost drugs, as well as the operational challenges that go along with their care coordination and data management. ORBMs can be especially beneficial to self-funded employers and smaller plans that are particularly vulnerable to these financial risks and/or may struggle with the operational challenges we’ve detailed.


What we’re keeping an eye out for

Policy shifts can be the greatest opportunity or threat facing the ultra-high-cost drug contracting market. The Medicaid Best Price regulations mentioned above were delayed once by the Biden administration—and they may be delayed again or changed in a manner not supportive of performance-based agreements.

As pharmaceutical benefits managers face growing calls for increased transparency in contracting, rebates, and drug prices—combined with the policy changes that have made PBAs more feasible—we expect PBMs to move towards PBAs to appease both shareholders and critics.

It’s also crucial to consider the reality that some patients might not want these drugs, even if they are curative. Safe and effective chronic disease management is prevalent enough to limit uptake of experimental therapies. Moreover, some patients or providers might not want to take a treatment without robust, real-world evidence. This is true in hemophilia patients, for whom chronic management is well-tested and proven safe. However, this will not be the case for many diseases, especially those involving children or young adults (like SMA, Duchenne’s, or Leber’s), ensuring that payers must actively address their approach to contracting and finances for ultra-high-cost drugs.

Things that change the calculus:

  1. Policy shifts
  2. Development of novel payment structures or contracts
  3. These contracts become normalized as their typical implementation eases
  4. New drugs entering the market
  5. Patient appetite
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