Pharma APMs: Can the Industry Learn To Play Well With Others?

Pharma is used to risk, but adoption of alternative payment models would mean learning to navigate shared risk with payers.

Maggie Alston
Bruce Pyenson

First of two parts

An alternative payment model (APM) is a nontraditional financial arrangement that rewards health care providers who deliver cost-effective, high-quality care. APMs facilitate the sharing of risk between health care provider organizations and insurers for the cost and quality of care for their patients.

Now we are facing the possibility that pharmaceutical manufacturers and insurers will embrace APMs as a payment mechanism in some situations. The dynamics of APMs suggest a potential win for insurers, pharmaceutical manufacturers, and patients through an emphasis on reducing cost and improving outcomes.

Maggie Alston

Bruce Pyenson

In the provider–insurer realm, APMs can no longer be dismissed as a health care fad. CMS is running several APMs, including the Medicare Shared Savings Program (launched in 2012), the Comprehensive Care for Joint Replacement model (launched in 2016), and the Bundled Payments for Care Improvement Advanced model (starts on October 1). The Health Care Transformation Task Force, a consortium of health care providers and insurers that includes Aetna, Anthem, the Cleveland Clinic, and the American Academy of Family Physicians, has committed to transitioning at least 75% of its business to APMs by 2020.

APMs transform the way health care providers and insurers have typically done business with one another, because they align the successes (and sometimes the failures) of the parties through risk sharing. Many health care entities bear insurer-like risk; for example, employer-sponsored, self-insured benefit programs and some providers assume financial risk for the clinical or financial outcomes of patients. When they bear risk, these entities strive to operate within a budget, because, when spending is under budget, they enjoy surpluses, and when it’s over, they suffer losses.

In contrast, pharmacy benefit contracts usually specify prices, discounts, and rebates, which means PBMs, pharmaceutical manufacturers, and wholesalers earn higher revenue for higher use. This is exactly the incentive that provider-insurer APMs seek to reverse when it comes to medical benefits.

Can shared incentives work?

Risk is nothing new to pharmaceutical manufacturers. They fund the development of experimental products knowing that most will fail to reach the market and also face the usual business risks associated with operations.

But taking on financial risk for patients’ clinical or financial outcomes would be a whole new ballgame for pharmaceutical manufacturers. APM risk is not something they can directly control, and it would tie their financial fate to that of payers.

In theory, the main advantages of APMs—the alignment of financial results to quality and budgets—could work out for both pharmaceutical manufacturers and insurers, but pharmaceutical manufacturers will likely need to assume a meaningful portion of the insurer’s risk. Otherwise, the cost of administering the pharmaceutical APM may be more than the contract’s potential savings and payouts. Ensuring that a pharmaceutical APM addressed a meaningful portion of the insurer’s budget could be a challenge. For the most part, individual pharmaceutical products make up a tiny sliver of any insurer’s spending. Pharmaceutical APMs could be written to cover entire drug classes or conditions, which could be important enough to support pharmaceutical APMs. For example, for a typical commercial population, insulins are over 2% of total pharmacy spending and all diabetes products can be over 6%.

Are the shared incentives of pharmaceutical APMs compatible? Insurers want spending certainty and a competitive advantage. Pharmaceutical manufacturers want to expand use of their products to underserved markets. If pharmaceutical APMs are going to be successful, pharmaceutical manufacturers will need to manage the risk of higher demand while minimizing increases to variable and fixed costs. Increased volume, even at lower prices, could mean higher revenue as provider APMs demonstrate.

Pharmaceutical manufacturers will likely need new skills to manage pharmaceutical APMs. For starters, they will need to adopt insurer-like risk and actuarial thinking. The FDA is approving new therapies at a record pace. Pharmaceutical manufacturers in APMs will need to know the financial gains or losses in a particular pharmaceutical APM—and the more granular their understanding, the better. If pharmaceutical APMs take off, a pharmaceutical manufacturer’s financial staff will be asked to evaluate when to enter, modify, or leave pharmaceutical APMs—a whole new challenge. Such evaluation requires risk management tools such as the actuarial control cycle, which supports proactive risk management by creating a feedback loop for the life cycle of a contract. The actuarial control cycle is the exact opposite of taking a wait-and-see approach

Modernizing clinical trials

With the shift to pharmaceutical APMs, pharmaceutical manufacturers should consider including metrics that can be found in insurer claims data in their clinical trials, such as heart attacks, emergency room visits for chemotherapy complications, postsurgical opioid use, and admissions for heart failure. While clinical trial metrics—typically clinical outcomes (e.g., lab values) and clinical observations (e.g. frailty and weight)—may be in electronic medical records, the information is not uniformly structured and is not routinely utilized by insurers. Modernizing clinical trials to include real-world endpoints that also appear in insurer claims data would help to support pharmaceutical APMs.

Leveraging insurer claims data through a pharmaceutical APM could help ring in a new era of less expensive, more effective health care. Pharmaceutical APMs could provide real-world evidence for cost effectiveness and value. Most importantly, pharmaceutical APMs would produce outcomes data in the context of insured populations, real-world adherence, and insurance finances. And they might also ease concerns about the flood of pharmaceuticals getting accelerated approvals because payment would rise and fall with their real-world success or failure.

Provider APM contracts usually last for several years because both sides need to learn how to operate in a new terrain and invest in the staff and systems necessary for shared risk arrangements. Currently, multiyear contracts are not common for pharmaceuticals. Multiyear pharmaceutical APMs might help to stabilize insurer financial results and pharmaceutical manufacturer sales on a net price basis. The intermediary role of PBMs in traditional contracts could change dramatically if pharmaceutical APMs facilitate direct contracts between manufacturers and insurers. A move toward direct contracting between manufacturers and insurers on a multiyear basis could also help to promote price stability.

Pharmaceutical manufacturers and insurers have recently begun experimenting with value-based contracts, a type of pharmaceutical APM, that tie discounts to patient outcomes. Pharmaceutical APMs will require pharmaceutical manufacturers to take on certain insurer-like financial and actuarial risks. Concepts and experiences from provider APMs will help, as would updating certain regulations that govern pharmaceutical manufacturer business affairs.

But let’s not get ahead or ourselves.

It is unlikely that pharmaceutical APMs will become the dominant contracting strategy for pharmaceuticals any time soon. But the status quo is not tenable, either, especially with the current debate about prescription drug prices. Insurers will be asking pharmaceutical manufacturers to engage in pharmaceutical APMs more often, and more pharmaceutical manufacturers will begin offering pharmaceutical APMs to insurers.

Maggie Alston is a senior health care analytics consultant at Milliman. Bruce Pyenson, FSA, MAAA, is a principal and consulting actuary at the company. The research for this piece was funded by Pharmaceutical Research and Manufacturers of America.


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