New Marketplace I

The Big Tent of Value-Based Care Has Room for Big Pharma

Article · September 14, 2016

At Intermountain Healthcare and other integrated health systems, prescription medications represent the fastest-growing expense category — rising by about 13% per year. Contrast that with increases in salaries and other types of expenses, which (along with revenue gains) are in the low single digits.

During the past 35 years, the percentage of national health expenditures on prescription drugs has increased from 4.7% to 9.8%, whereas the portion spent on hospital care has decreased from 39.4% to 32.1%. In some respects, that shift is good news: medications are improving health and prolonging lives, and the decline in hospital spending (as a percentage of overall health care spending) reflects successes in coordinating care and keeping patients healthier. But rising spending on prescription drugs also raises a fundamental question:

As payers and providers work together to improve value, will pharmaceutical companies join that effort, or will they act as vendors that merely maximize short-term profits for shareholders?

Pharma Knows It Holds a Stake

Payers and providers are realizing that the overall value of care will not improve unless they collaborate. Take Intermountain’s practice of embedding mental health professionals in its primary care practices: per member per year, the approach costs $22 up front but saves $115 in emergency department (ED) visits and other expenses down the road. Intermountain’s insurance company sees the savings for only a minority of patients, but focusing on overall value across all patients reveals the wisdom of the investment.

Integrated and non-integrated health systems that involve all stakeholders in improving value will fare better in the long run. Greater attention is focusing on Pharma as one of those stakeholders. So far in 2016, at least 14 U.S. state legislatures have considered bills to address the rising cost of prescription drugs and to increase transparency on how pharmaceutical companies price their products. If market forces cannot control costs, regulation will step in, as the pharmaceutical industry is aware. A recent article in Pharmaceutical Executive magazine notes, “Making outcomes-based arrangements simple and workable for payers will be critical to mitigate additional price regulation and access restrictions that are being proposed by public and private payers, politicians, and other stakeholders.” And in January 2016, Eli Lilly and Anthem made a joint announcement about legislative and regulatory options for promoting value-based contracting arrangements.

How to Integrate Pharma in Value-Based Care

Achieving value-based care will clearly be a joint effort. We briefly propose four ideas for fully engaging pharmaceutical companies in that endeavor:

  1. Rebates based on a drug’s effectiveness. A manufacturer could contractually agree that when a patient does not respond to therapy as expected (from results in pivotal clinical trials), the company will rebate the cost of the therapy. For example, in 2004, Novartis contracted with Intermountain’s Health Plan (now called SelectHealth) for such an initiative involving its valsartan (Diovan) blood pressure–lowering products. If a patient did not reach the target blood pressure set by his or her physician while taking the drug as directed, the patient was reimbursed for the copays or the cost of the medication. The initiative also provided adherence-enhancing initiatives (e.g., education kit, medication tracker, pill box, monitor, pedometer). This approach worked well for well-defined therapeutic endpoints while lowering the cost to payers (and patients) for poor outcomes. But it demanded resources for managing the rebated and refunded copays, collecting data and tracking outcomes, and overseeing complex data-sharing arrangements. This approach was also challenging in patients with multiple comorbidities taking several medications, as therapeutic success or failure wasn’t always clear. And in some cases, it was tough to ensure that patients were taking medication as directed.
  2. A capitated or fixed rate per patient. A manufacturer could contract with a payer for such a rate for each of its medications — or for any of its medications within a therapeutic category. With that rate as one data point, patients and their physicians could decide on the appropriateness and feasibility of treatment. Advantages include more-predictable expenses (for the payer) and copays (for the patient); challenges include how to pinpoint the best contracted price.
  3. Collaboration with health systems in bringing drugs to market. The average time from discovery to drug approval is about 12 years, at an average estimated cost of $2.1 billion. Integrated health systems, such as Intermountain, have the ability to aid in bringing new medications to market more quickly and economically. As drug therapy becomes more individualized, real-world data must augment evidence from randomized controlled trials. Intermountain can offer access to data from large numbers of patients, and widespread use of its electronic health record can facilitate data collection and analysis for regulatory decisions (e.g., about additional indications and populations).
  4. Joint analysis, with providers, of prescribing practices. This analysis, using national practice guidelines and care-process models as benchmarks, would help to track prescribing behavior, medication adherence, and related patient outcomes. Although medication adherence increases treatment costs, total-care costs usually decrease (thanks to fewer ED visits and hospitalizations). Drug makers could become more of a partner in formulary-management efforts that focus on long-term quality and costs.

These four proposals are not the only ways to involve Pharma in value-based care. Each health system will have to consider these and other possibilities — and then tailor them to its own needs and populations. But the overarching goal is perhaps best captured by an excerpt from a 1950 speech at the Medical College of Virginia, by George W. Merck. Then president and chairman of Merck & Co., he said, “We try to never forget that medicine is for the people. It is not for the profits.” All stakeholders in health care would do well to follow that sage advice from a pharmaceutical company executive. Achieving value-based care is difficult when some stakeholders operate outside the tent. Providers, payers, and patients are waiting with open arms for drug companies to come inside.

New Call for Submissions ­to NEJM Catalyst


A weekly email newsletter featuring the latest actionable ideas and practical innovations from NEJM Catalyst.

Learn More »

More From New Marketplace I

Predicting the Future — Big Data, Machine Learning, and Clinical Medicine

By now, it’s almost old news: big data will transform medicine. It’s essential to remember, however, that data by themselves are useless.

Caring for Older Adults in a Value-Based Model

Using patient stratification and more primary care visits, Chicago-based Oak Street Health aims to reduce hospitalizations.

Caring for High-Need, High-Cost Patients

Five foundations committed to improving U.S. care for complex patients outline promising program models and keys to success.

How 30 Percent Became the “Tipping Point”

Received wisdom for meaningful change in health care payment and delivery system reform.

Two-Year Costs and Quality in the Comprehensive Primary Care Initiative

Midway through this four-year intervention, participating practices report progress in transforming the delivery of primary care. But savings and improvements in the quality of care or patient experience are lagging.

The Coming Battle over Shared Savings — Primary Care Physicians versus Specialists

The way physicians are organized and reimbursed in the United States is undergoing a once-in-a-generation transformation from a fee-for-service system to alternative payment models. PCPs are well positioned economically and strategically, but specialists must adapt.

How a Pediatric ACO Coordinates Care for Children with Disabilities

Ohio-based Partners for Kids is charting new territory in care coordination for a high-need population.

My Favorite Slide: Transitions in Health Insurance Coverage Type Are the Norm

Age and income play a role in both short- and long-term fluctuations.

Mixed Early Performance of Medicare Accountable Care Organizations

The earliest participants in MSSP contracts reduced Medicare spending, but the second cohort did not. Meanwhile, some quality measures improved among MSSP participants, while others were unchanged.

Why UnitedHealthcare’s Withdrawal Is Not the Main Concern for Exchanges

United’s announcement will affect some local markets, but the giant insurer has not been a major player in health insurance exchanges. And exchanges are only one part of the complex payment reforms under way.


A weekly email newsletter featuring the latest actionable ideas and practical innovations from NEJM Catalyst.

Learn More »


What’s Your Competitive Differentiator?

If you’re doing the same thing as everyone else, the same way, you’re ultimately competing…

Bundled Payments

35 Articles

You Get What You Pay For

What is the necessity of moving toward more payer or provider risk in the Medicaid…

Value Based Care

122 Articles

New Marketplace Survey: What’s Next for…

As health care reform struggles to gain traction legislatively, health care professionals report that payment…

Insights Council

Have a voice. Join other health care leaders effecting change, shaping tomorrow.

Apply Now