Budget Neutral Payment for Pharmaceuticals – Tying Value to Outcomes

May 18th, 2015 / By Norbert Goldfield, MD, Richard Fuller, MS

We believe there are two core principles that should be adhered to when implementing payment reform initiatives. First, that measurement of performance change should be directly quantifiable in dollars where possible; and second, that performance change should directly translate into improved patient outcomes. We adhere to these principles by encouraging payment incentives tied to potentially preventable events – rate-based outcomes performance measures with clearly quantifiable costs.

This same approach can and should be adopted when measuring value in a more complex component of health care – pharmaceuticals. As with any negotiation, the seller (pharmaceutical company) seeks to maximize returns while the buyer (payer) attempts to minimize their spending. However, the backdrop to this negotiation is markedly different from those conducted in other industries due to time considerations. While tactical use of time during negotiations is commonplace, pharmaceutical companies are uniformly driven by short windows in which to capitalize on the monopoly power afforded to them through intellectual property rights. Conversely, payers treat additional drug costs as medical loss impacting the bottom line, and know that resisting patient and provider pressure to cover new drugs will run down the clock to the day they become cheaper (generic). And, this is where quantifiable outcomes come in.

Quantifying the value of a pharmaceutical in relation to a reduction in health care spending from other parts of the health care system changes this dynamic. Take for example the recently approved drug Corlanor (Ivabradine) used in the treatment of heart failure patients. Use of this drug is estimated to add $4,000-$5,000 to the pharmaceutical budget for a patient. However, studies have shown that its use also reduces hospitalizations, tangible events that convey measurable costs. In theory it is possible that there can be a net savings on total health care costs as a result of paying more in one area, namely drugs. If this sounds familiar, it should, since it is the same proposition embedded within a patient-centered medical home and other shared savings programs. If cost-based performance targets are established, then improvements relative to those targets can fund drug acquisition on a budget neutral basis through the reduction of preventable services and commensurate quality improvement. But there remains a great deal of complexity to address.

The value proposition made for Ivabradine was not achieved in Europe as the expected improvement in outcomes related to savings was not achieved. This was blamed upon the use of the drug both outside its approved dosage parameters and its target population. Further, the expanded patient cohort resulted in a higher risk of death and non-fatal MI – not the outcomes that manufacturers seek but an all too likely occurrence when physicians prescribe drugs off-label. Recently published studies purport to show that use of this medication, Ivabradine, results in fewer recurrent hospitalizations1,2.   However, it’s important to note that the two articles referenced here include research conducted by individuals paid for by the drug developer and there was clear disagreement as to whether or not readmissions decreased.

In response to the lessons learned in the European release of Ivabradine, we would suggest that payment mechanisms be designed such that manufacturers remain engaged with the use and efficacy of their products after they are approved and prescribed. We specifically suggest that payers reimburse manufacturers at a price (during the on-patent period), that is set to equal or less than the anticipated level of total health care spending in the absence of the drug and that the drug price be modified if expected outcomes are not achieved. Put simply, we believe that pharmaceutical manufacturers can and should be required to commit to decreasing PPEs on an ongoing basis as part of the reimbursement guarantee. Potentially preventable readmissions (PPRs) and potentially preventable initial hospital admissions (PPAs) are critical to success of the value proposition for this drug – and, as we have documented in previous blogs, pharmaceutical manufacturers can use reductions in PPAs and PPRs to demonstrate the total cost impact of their new offerings.

For many drugs, reductions in PPRs and PPAs may not be sufficient to meet the expected returns of manufacturers.  Instead, they may be able to (justifiably) point to quality of life enhancements or reduced mortality—aspects that are not captured in health care costs alone. This may warrant additional funding – though it should be clear that those dollars come from somewhere if they exceed the displaced cost from within the health system itself. However, for drugs that displace sufficient dollars to fund their acquisition cost, this approach affords a new dynamic.  Both payer and manufacturer should be interested in covering the drug sooner rather than later – the manufacturer faced with the ticking clock until patent protection winds down and the payer with higher expenses (and lower quality) than would otherwise be necessary. As we await the next “blockbuster” drug to come along—with the potential to change patient outcomes and break budgets –we can only hope that coverage decisions take into account the bigger picture of whether improved patient outcomes will actually be a boon to overall health system spending.

Richard Fuller, MS, is an economist with 3M Clinical and Economic Research.

Norbert Goldfield, MD, is medical director for 3M Clinical and Economic Research.


  ¹Borer JS, Böhm M, Ford I, Komajda M, Tavazzi L, Sendon JL, Alings M, Lopez-de-Sa E, Swedberg K; SHIFT Investigators Effect of ivabradine on recurrent hospitalization for worsening heart failure in patients with chronic systolic heart failure: the SHIFT Study. Eur Heart J. 2012 Nov;33(22):2813-20.

²Borer JS, Böhm M, Ford I, Komajda M, Swedberg K, Tavazzi L. Effect of ivabradine on early readmissions after hospitalization for worsening heart failure. JACC Heart Fail. 2015 Mar;3(3):268-9