Prescription drugs are on their way to eating up the biggest slice of Puerto Rico’s $3.4 billion Medicaid budget. To head off rising costs, the island turned to what is still a relatively new trend in the pharmaceutical world — value-based contracting.
At its most basic level, a value-based contract emphasizes the quality of care rather than the quantity. In the case of pharmaceutical firms, it means tying reimbursement not just to how many pills patients take but also to whether patients get better. The risk is that they don’t, or that they get better on a competitor’s medication.
Puerto Rico’s first-ever value-based contract for Medicaid was launched in 2017 in partnership with Cambridge, Massachusetts-based Biogen and a pharmacy benefit manager called Abarca. It is the first publicly disclosed value-based contract to cover Medicaid patients, according to Abarca, which recently revealed some details of the program. The contract covered two Biogen drugs, Avonex and Tecfidera, used in treating multiple sclerosis.
“We want to make sure that what we’re buying is actually something that is resulting in better outcomes for our patients,” said Jorge Galva, executive director of the Puerto Rico Health Insurance Administration, which runs the island’s Medicaid program. It is known by its Spanish acronym, ASES.
An analysis showed that for the most part, patients adhered to their prescriptions under the contract but when they did not, Puerto Rico received rebates.
While simple in theory, value-based contracts are complex in practice covering everything from the quality outcomes to be measured to whether certain patients should be excluded, said Chance Scott, a director in the life sciences practice at Washington, D.C.-based consulting firm Guidehouse.
If a cardiac-drug patient suffers a heart attack, for example, the medication could have failed or there could be another contributing factor, Scott said. “That’s where it just becomes really tricky.”
Payment terms also may vary. Some contracts call for rebates, while others might require payers to make a large upfront payment followed by smaller payments at regular intervals as long as the drugs keep working, Scott said.
Regardless of the complexity, value-based contracts are likely to become more common as payers seek to control costs, Scott said. Pharma companies go along or risk seeing payers reduce or restrict use of their therapies.
“The payer demand is what is going to push this forward,” Scott said, noting that cardiology and oncology are among the areas where value-based contracts will become most prevalent.
For ASES, Abarca and Biogen, the value-based contract rested on a simple metric — prescription compliance. The costs and compliance results were not disclosed although Abarca did reveal in its case study that only a small number of patients were prescribed the two Biogen drugs. If the patients stop taking them, ASES gets a rebate on the cost.
The structure gives Biogen an incentive to ensure patients are compliant and to figure out and address any reasons why they are not, said Javier Gonzalez, chief growth officer for Abarca, which is based in San Juan, Puerto Rico. Abarca collected data that helped Biogen accept the grounds for giving a rebate, often a sticking point in value-based agreements, Gonzalez said.
“We’ve also given Biogen some incredibly valuable feedback to think how they structure value-based arrangements in the future,” Gonzalez said.
Biogen did not make an executive available for an interview. In a statement, Alisha Alaimo, president of Biogen’s U.S. organization said:
“Value-based agreements further support our commitment to people living with MS by connecting real-world patient choice and outcomes to the cost of the therapy. We are proud to partner with Abarca to help ensure their members receive effective and safe therapies.”
ASES or Puerto Rico Health Insurance Administration, had few qualms about the arrangement, Galva said, since it shifted some of the cost risk to the manufacturer and the PBM.
“Having something that would guarantee full compliance with the medication regime was very interesting,” Galva said. “What was put on the table … was an agreement where we all had skin in the game.”
The Puerto Rico Medicaid program is now exploring more value-based contracts for medication in areas such as hemophilia and rheumatoid arthritis, he added.
In addition to medication compliance, the program is weighing how to measure whether patients actually get better, Galva said. “With rheumatoid arthritis, for example, you want to ensure people can go to work and move and stay active.”
That represents a higher hurdle for value-based contracts, said Michael Rea, CEO of Rx Savings Solutions, a company based in Overland Park, Kansas, that helps payers save on prescription costs.
Health plans and employers don’t always agree with pharmaceutical companies when it comes to defining value, he said. “That is where the conversation breaks down and what sounds perfect in description doesn’t play out perfectly in real life.”
Even if a common understanding of value emerges, other risks reman for value-based contracting
Privacy laws are one potential hurdle, depending on the data that is needed to determine price concessions from a manufacturer, said Marcy Imada, a managing director in the risk and financial advisory practice at Deloitte & Touche.
“Ideally manufacturers would not have to touch or get access to protected health information or personally identifiable information,” said Imada, who is based in Los Angeles. She focuses on the life sciences industry and regulatory compliance.
Another major barrier could the interplay between government and private payers.
Under its drug rebate program, Medicaid calculates rebates for branded drugs dispensed to its members using what it calls the Medicaid Best Price. That price represents the lowest price paid by commercial customers for a drug in a specific timeframe.
In a value-based contract, the lowest price could be zero, even if that stems from one patient who did not take or respond to a medication or some other undesirable outcome, depending on how federal rules are interpreted. A zero-dollar Medicaid Best Price translates into significantly higher rebates, potentially resulting in no profit or net loss on related drug sales.
Some manufacturers have tried to work with regulators so they can move into value-based contracts without that concern. Others are taking a wait-and-see approach.
“It is a huge risk if the Medicaid Best Price ends up being zero dollars,” Imada said.
John Balestriere is an entrepreneurial trial lawyer who founded his firm after working as a prosecutor and litigator at a small firm. He is a partner at trial and investigations law firm Balestriere Fariello in New York, where he and his colleagues represent domestic and international clients in litigation, arbitration, appeals, and investigations. You can reach him by email at john.g.balestriere@balestrierefariello.com.
Kathryn Rubino is a Senior Editor at Above the Law, and host of 
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