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«Promoting Value-Based Contracting Arrangements While the rest of the healthcare system is paying for value, payments for drugs largely continue to be ...»

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Promoting Value-Based Contracting Arrangements

While the rest of the healthcare system is paying for value, payments for drugs largely continue to be stuck in a 20th century construct that focuses on price,

regardless of the health outcomes of each patient. Anthem and Eli Lilly and Company are collaborating to help accelerate the transition towards a valuebased system with policy proposals that will help drive payment innovation. Read more at ThinkAnthem and LillyPad.

Promoting Value-Based Contracting Arrangements Eli Lilly and Company and Anthem | January 29, 2016 The following memorandum outlines Eli Lilly and Company and Anthem’s joint perspective on creating legislative and regulatory options designed to promote value-based contracting arrangements for manufacturers and commercial health plans.

POLICY GOAL: Create a policy environment conducive to allowing health plans and manufacturers to enter into a variety of value-based contracting arrangements, aligned with the shift toward value-based payment and the goal of promoting access to high-value care. This may include creation of legislative/regulatory exceptions for Best Price and all other relevant government pricing calculations and requirements as they relate to products sold or transferred under value-based contracts, as well as additional safe harbors to the federal Antikickback Statute (AKS) that protect value-based contracts from AKS liability.

Background and Context Policymakers and industry are looking for opportunities to drive quality, create savings, and slow cost growth in the healthcare system.

In particular, stakeholders are increasingly focused on value and increasing the use of treatments, products, and services that are both clinically effective and efficient. In fact, by 2018 the Department of Health & Human Services intends to link 80 percent of Medicare payments to value, and 50 percent to alternative payment models like bundled payments.1 While there has been substantial innovation in how health plans and the government reimburse for hospital and physician payments (with physician payments moving further in this direction following the recent Medicare and Children’s Health Insurance Program (CHIP) Reauthorization Act), payment for prescription drugs is often based on more traditional outcomes (e.g., volume of product purchased).

Given the role that prescription drugs play in the treatment of and spending for many complex and chronic conditions, health plans and manufacturers seek greater opportunity to align payment with quality, accountability, and coordination. Ultimately, these arrangements can encourage access to high-value medicines and treatments and ensure that patients are getting the best value for their healthcare dollars.

However, existing legal and regulatory barriers are stifling this innovation.

Traditional drug pricing contracts typically establish a fixed price for the product that remains in place throughout the benefit year. This may include flat pricing (e.g., price per unit) or volume arrangements. For example, a health plan and manufacturer may agree that if spending for a particular medicine exceeds a certain level, the manufacturer will offer the health plan a discount or rebate on the unit price. In contrast, value-based arrangements may condition payment or drug price based on patient-level clinical or economic outcomes (e.g., a 1 percent reduction in HbA1c levels for certain patients with diabetes). As illustrated in Appendix A, these arrangements represent a fundamental departure from traditional contracting and may require investment from both manufacturers and health plans. In order to design a contract that makes payment for a therapy contingent on patient outcomes, for example, the manufacturer and the health plan must agree on how to reliably, accurately, and appropriately measure outcomes and categorize patients as “responders” or “non-responders.” In addition, both plans and manufacturers need to designate staff to monitor and execute the agreement, a further investment by both parties.

HHS.gov. “Better, Smarter, Healthier: In historic announcement, HHS sets clear goals and timeline for shifting Medicare reimbursements from volume to value.” 26 January 2015.

Available at: http://www.hhs.gov/news/press/2015pres/01/20150126a.html Promoting Value-Based Contracting Arrangements Value-based arrangements allow both parties to share in the risk associated with individual patient outcomes and spending for a particular medicine. These contracts offer important benefits for consumers, health plans, and manufacturers. Consumers, in particular, may enjoy earlier or less managed access to new medicines when payments are aligned with value. Over time, identifying and encouraging use of the highest-value products could both improve patient outcomes and curb healthcare spending growth. Although manufacturers and health

plans seek opportunities to invest in these innovative models, existing legislation and regulations raise concerns, including:

• Anti-Kickback Statutes: Federal and state fraud and abuse laws are designed to protect patients, health plans, and the healthcare system overall from fraud, waste, and abuse. The Anti-Kickback Statute (AKS) prohibits offering or receiving remuneration (broadly defined) to induce or reward referrals for items or services paid for by federal healthcare programs. Statutory and regulatory safe harbors protect certain arrangements from AKS liability, but it is unclear how enforcement agencies would apply these safe harbors to value-based arrangements.2 AKS violations carry significant financial and other penalties.

• Government pricing: Manufacturers are required to report pricing data to the federal government to determine Medicaid rebates;

Medicare Part B payment rates; the 340B program ceiling price; and the maximum price that certain government agencies can be charged. Because these reporting requirements did not foresee and were not designed to be compatible with value-based contracting, they could make it exceptionally difficult for a manufacturer to enter into a value-based contract. For example, current Medicaid rebate regulations would require that rebates paid to a commercial health plan in the context of a single valuebased contract be made available to Medicaid programs, even though Medicaid programs would not be subject to the key design features of the value-based arrangement (for high level examples of value-based arrangements, please see Appendix A).

In order to capitalize on the potential of value-based arrangements for consumers, industry, and other healthcare stakeholders, policymakers should adapt standards related to kickbacks and government pricing to accommodate these novel contracts. Absent such clarification, legislation and regulations that reflect traditional contracting will continue to impede innovation.

Promoting Value-Based Arrangements

The goals of value-based contracting approaches align with the shift toward high-value care. Such agreements seek to make more efficient use of healthcare resources, potentially reducing costs throughout the system, encouraging use of the most efficient and effective care, and improving patient outcomes.

Clearer safe harbors and guidance for all stakeholders could promote the adoption of value-based models. For example, stakeholders

could benefit from:

• Expansion or creation of new statutory or regulatory safe harbors, including by the OIG, to the AKS that more clearly protect innovative, value-based contracting arrangements (under a defined set of requirements);

• Amendments to the statutory and regulatory definitions of certain prices reported to the government (e.g. Best Price) to define the terms for excluding payments made pursuant to value-based contracts;

• Regulations clarifying how manufacturers can incorporate value-based contracts in their price reporting calculations; and,

• Pilots or demonstration programs with commercial health plans that adapt the government pricing rules to test how value-based contracts impact reported government price figures, and in turn, Medicaid rebate amounts and 340B ceiling prices.

Existing Legislative and Operational Barriers


As described above, current fraud and abuse guidance may have a chilling effect on value-based arrangements. For example, if a manufacturer and health plan entered into an arrangement under which the manufacturer accepted risk for treatment failure (e.g., the health plan would only pay for a drug for patients with positive treatment outcomes), this could be viewed as remuneration offered to encourage the health plan to favorably cover the manufacturer’s product. Additionally, the OIG has not issued sub-regulatory guidance addressing value-based contracting arrangements, leaving stakeholders with little to no insight on OIG’s position on the risk of fraud and abuse they pose.

To alleviate stakeholder concerns related to fraud and abuse, regulations and guidance could be updated to establish regulatory3 safe harbors, and the OIG could update guidance4 in order to explicitly protect these arrangements when certain criteria are met. Congress could also consider establishing a statutory safe harbor. The safe harbor eligibility criteria can be designed to minimize risk of fraud and abuse in these arrangements. For example, the OIG could require that value-based payments be determined in advance, and could not vary during the term of a contract.

42 C.F.R. § 1001.952 66 Fed. Reg. 23731 (May 5, 2003) Promoting Value-Based Contracting Arrangements


Manufacturers’ government price reporting obligations may also have a chilling effect on the development of value-based contracts. Largely, this is a result of the way pricing, discounts, and contracting arrangements affect government price reporting, and in turn, manufacturer obligations under a variety of federal programs.

Best Price and Average Manufacturer Price Implications for Best Price are the most immediate, important factor to consider with respect to manufacturer incentives created by value-based contracting. Best Price is the pricing benchmark Medicaid uses to ensure state Medicaid programs never pay more than the lowest price offered for a particular therapy. Best price is set based on the single “lowest price available from the manufacturer during the rebate period to any entity5 in the United States.”6 Best Price is affected by manufacturer rebates, discounts, or other price concessions to commercial health plans, and setting a new Best Price can lead to significantly increased Medicaid rebate and 340B program liability for manufacturers. Under the current regulations, payments from manufacturers to health plans under a value-based contract would almost certainly need to be included in Best Price calculations. For example, if a manufacturer offered a health plan a rebate equal to 60 percent of the list price of a product for each enrollee who did not respond to treatment, and negotiated a payment rebate equal to 20 percent of the list price for patients who did respond, the 60 percent rebate would determine the product’s Best Price for all patients. If the list price were $1,000, this would result in a Best Price of $400 (assuming that there were no greater discounts/rebates in the market; if so, Best Price would be even lower). As the example below shows, reductions in Best Price can result in significant Medicaid rebate and 340B liability.

–  –  –

* Assumes no additional “inflation-based” rebate These reductions may create negative returns on value-based contracts for manufacturers. The Best Price statute and regulations could be updated to exclude from Best Price certain rebates and other price concessions paid from manufacturers to health plans that are the result of value-based contracting (e.g., additional rebates paid if a patient does not respond to treatment). CMS could also be authorized to create pilot programs to test how value-based contracts and alternative approaches to Best Price impact reported government price figures, and in turn, Medicaid rebate amounts and 340B ceiling prices.

Further complicating compliance with the price reporting rules is the fact that many value-based arrangements could constitute “bundled arrangements,” which require complicated re-allocation of price concessions, either across products or across periods, and trigger additional disclosure obligations.

Average Sales Price Best Price is not the only price point that would be impacted by value-based contracts. For medical benefit drugs (in general, those that are physician-administered), manufacturers are required to report Average Sales Price (ASP) to the Centers for Medicare & Medicaid Services (CMS) on a quarterly basis; ASP is used to set Medicare Part B reimbursement rates.9 ASP is defined as “the manufacturer’s sales to all purchasers…in the United States for a drug or biological in the calendar quarter [excluding exempted sales] divided by…the total number of such units of such drug or biological sold by the manufacturer in such quarter.”10 Like Best Price, rebates to commercial health plans are included in ASP, but unlike Best Price, ASP is an average price and is not determined by a single sale.11 Manufacturers of medical benefit products may be concerned that substantial rebates offered to commercial health plans under valuebased contracts would reduce ASP, and in turn, Medicare Part B reimbursement rates for their products. Relatedly, CMS may substitute Average Manufacturer Price, or AMP, for ASP under certain conditions. AMP is also used in determining Medicaid rebates, and a product’s With certain exceptions, including most government purchasers and Part D plans.

42 C.F.R. § 447.405 Assumes AMP = 95% of List Price.

As BP is used in this particular example, it is assumed that this price (AMP-BP) is greater than statutory requirements in this particular scenario.

42 U.S.C § 1395w–3a(b)(1).

42 U.S.C § 1395w–3a(c)(1).

42 U.S.C § 1395w–3a(c)(2). The ASP statute references the statutory definition of Best Price in defining what rebates and discounts are excluded from ASP; in other words, the same rebates and discounts that are excluded from Best Price are also excluded from ASP. Therefore, changes to the definition of Best Price would also impact manufacturer’s ASP calculations.

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