Eastman Kodak Co. was in its heyday just a few decades ago before making a fatal flaw: The film manufacturer failed to adapt its business model to the surrounding forces. The company was too focused on manufacturing to see that digital technology was advancing the camera industry by improving the “outcome” for consumers. Pharmaceutical manufacturers face a similar challenge today: The business model is focused on manufacturing drugs, but patients are asking for better outcomes.
U.S. healthcare consumers have been living in a warped reality where billions of dollars in rebates intended to influence formulary decisions are safe harbored, while at the same time, novel ideas that could improve health outcomes are seen as potential kickbacks and attract a big red flag from a compliance standpoint. The status quo can’t possibly go on for too long with the national debt at $22 trillion and healthcare spending as a percentage of GDP having tripled in the last 50 years (from around 6% in 1968 to more than 18% today).
Of course, in Kodak’s case, the company had the digital camera technology for more than two decades before being disrupted. At the time, company executives thought that they were playing it safe with a business model that was working. But consumers craved the experience that digital cameras afforded: instant feedback that the “shot” worked, and no cost to develop film and print pictures for the shots that didn’t. It was too late when the company realized that it had to change. How can pharma companies avoid creating their own “Kodak moment”?
The idea of taking unlimited “shots” at no additional cost recently played out on a healthcare stage when the Louisiana Department of Health rolled out a “subscription-style” payment plan for a hepatitis C treatment. To truly meet modern demands, manufacturers need to move beyond simply focusing on outcomes, which should now be a given. Instead, we should ask ourselves:
- What’s an ambitious, yet feasible, “value/outcome” to deliver?
- Which entities can I work with to create a value-based partnership (VBP) to achieve this outcome?
- What capabilities will be needed to do this type of VBP at scale?
To date, value-based partnerships predominantly have been established between payers and providers, and pharma’s involvement in the space has been relatively small and experimental in nature. For example, pharma companies have recently begun tying the payer rebates to whether the product’s real-world performance matches the label (meaning, that the results are in line with clinical trial results). This is a step in the right direction but will eventually become tables stakes. In all other aspects of our lives, we only pay for products that work so paying for pharmaceuticals that perform on par with the clinical trial results in the real world isn’t all that special.
There are at least three counterpoints that should motivate pharma companies to expand the reach of VBPs: 1) Consumers expect it. In our day-to-day lives as consumers, we expect the product that we’re buying, whether it’s a television or a smart phone, to match its label or we’ll return it for a full refund; 2) Pharma companies can do more. The scale of pharma’s recent VBPs is very small: Few patients are part of these agreements and the relative magnitude of dollars at stake is minuscule; and 3) There’s room for innovation. One can argue that most of today’s VBPs are still a roundabout way to stay within the traditional paradigm of rebates and formulary access by carving out a couple of rebate points and relabeling them as “value-based.”
When you consider some of today’s healthcare realities, there’s great opportunity for pharma companies to make a difference by establishing value-based partnerships. Pointing to a few examples, 50% of patients with diabetes who take insulin don’t have their diabetes under control, just 9% of patients with metastatic cancer are eligible for a genome-targeted drug, and 36% of deaths due to opioid overdose in 2017 were caused by prescription opioids.
Turning these challenges into audacious goals will first require pharma companies to create beyond-the-pill offerings. Next, it will require companies to engage with many stakeholders including the government, payers, providers, employers and patient communities. These partnerships might become quite complex as they’ll likely be structured as multi-stakeholder partnerships as opposed to a 1:1 partnership with a payer.
Beyond-the-pill offerings will need to get pulled through in the provider and patient “work flow” and pharma has a last-mile role to play in making sure that these offerings get implemented. Finally, manufacturers will need to change internal key performance indicators, and senior executive scorecards will need to include metrics associated with performance against the goals that they’ve set and go beyond the traditional revenue and brand share metrics. The KPIs in these scorecards shouldn’t exclusively focus on the number of VBPs executed but rather the ultimate impact of all these VBPs combined.
Executing a handful of value-based agreements (VBAs) in today’s healthcare landscape can be a time-consuming, “all-hands-on-deck” affair. Doing so at scale will require pharma companies to do the following:
- Evaluate the product portfolio. Companies need to determine whether their portfolios allow them to be credible value-based players. And that means influencing R&D efforts to account for the downstream payer/provider realities as well as creating beyond-the-pill offerings.
- Establish an alliance management function. This internal function will be responsible for a growing number of value-based agreements, including ones that could get quite complex in terms of bringing different stakeholders to the table.
- Upskill the KAM team. Companies will need to ensure that the KAM team is prepared to have value-based dialogue with their customers as opposed to the rebate negotiation focused dialogue they’re accustomed to today.
- Establish a collaborative model. Collaboration between the commercial, medical affairs and health economics and outcomes research groups will be critical to support VBAs.
- Empower the finance team. The finance team will need to be brought up to speed to handle the deal modeling of VBAs and to understand the implication across the portfolio. P&L accounting also will need to change as the cash flow from a VBA may follow a different timeline than the traditional way of recognizing the revenue.
- Create an enterprise patient data capability. Companies need to be equipped to handle patient outcomes data in a HIPAA compliant manner and also be able to link patient data from digital devices, claims, etc.
- Partner with the regulatory team every step of the way. As U.S. policies in this space continue to evolve, pharma companies will need help from the experts to stay abreast of policy changes and be prepared to shape the partnership specifics accordingly.
- Fine-tune the contract operations function. Manufacturers need to be able to quantify the post-deal financial implications of the VBA. This may mean bringing in a neutral third party that adjudicates the claims for all stakeholders involved.
How much time is needed to make a transition of this magnitude is anybody’s guess, but all signs point to a not-too-distant future. There are disruptive forces from the world’s tech leaders like Apple and Google. Likewise, we’re likely to soon see a world without rebates in the Medicare space which could then eventually extend to the commercial space, too. Pharma companies will be challenged by setting a high bar for themselves while also transforming their business models toward value-based care before they miss their “moment.”