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Four Ways Life Sciences Companies Can Engage in Value-Based Contracting with Health Systems


A main objective for any life sciences company is to demonstrate the value of their products in improving the lives of patients and ensure providers have access to the latest innovations in healthcare. But the process of ‘how’ has shifted as healthcare moves towards value-based care and away from the fee-for-service model.

In addition to proving value, value-based contracts (VBC) can help extract real-world insights that can dramatically shorten the regulatory approval process, improve research studies and clinical trials, conduct prospective research on the relative efficacy of specific care pathways and other interventions, and accelerate product development.

However, life sciences companies need to transform their approach to realize these benefits and be more collaborative with hospitals, health systems and clinicians. An ever-increasing trend in for life sciences companies and health system partnerships is to accomplish this through value-based contracting.

Let’s look at four ways providers and life sciences companies can engage in VBC.

  1. Evidence-based Care Discount
    In this example, life sciences companies connect their discount to the implementation of an evidence-based clinical intervention or measure that is an indicator of success towards a clinical outcome.

    This is a win-win situation. If the health system follows the evidence-based guidance, they get a discount on the products while implementing practices that improve outcomes and quality of care. The life sciences company is able to demonstrate the value of coupling their product with proven processes, and the patients benefit.
  2. Product or Service Guarantee
    This is a VBC where a life sciences company attaches their product to an outcome. If anything less than the intended outcome occurs, then the company provides a rebate to the health system that is associated with the cost of the product.

    For instance, if the life sciences company guarantees in the VBC that the product will reduce surgical site infections (SSI) by 30 percent but, instead, the product only reduces SSI by 20 percent, then the company provides a rebate to the health system based on the “nonperformance” in an amount that reflects the price of the product in relation to the gap of performance.
  3. Risk Share by Product
    This option is similar to the product or service guarantee with the difference being that the rebate is tied to another cost that the health system incurs by the “nonperformance” of the product, but not the actual cost of the product.

    If we take the same example from above, where the product that is promised to reduce SSI by 30 percent only reduces SSI by 20 percent, then the company selling that product could promise to pay the health system for the cost of treating an infection, should an infection occur within a certain time period after the product has been used.

    The common theme for these last two types of VBCs to work is that the product should deliver real value by doing what it is intended to do.
  4. Risk Share by Alternative Payment Model
    The fourth way of engaging in VBCs with a health system that Premier has seen in practice is through a process where both the health system and the life sciences company truly share both downside and upside risk.

    Typically, we see this type of arrangement when a health system is part of a risk-based payment model such as an accountable care organization. A life sciences company and a health system would enter into an agreement that recognizes a scenario where the health system has financial benefit that is even partly because of the life sciences company’s product, and then they share in the financial gain. '

    This idea of true shared upside and downside risk is an aspirational arrangement and hard to implement. Very few health systems and life sciences companies have figured out how to make this a reality.

For any of these VBCs to work, evidence and data are essential. Providers don’t want VBCs to be research studies and will require this due diligence before entering into the contract. They want to know exactly what outcome and total cost of care implications they should expect, and most will want a way to specifically understand the exact impact they will see based on their baseline performance.

Additionally, data transparency is required between health systems and life sciences companies to measure the results of the execution of a VBC. While VBCs are part of our present and future, negotiating these contracts takes time. It’s important that life sciences companies and health systems identify the right partners and figure out the best value-based arrangement that incentivizes both parties, improves outcomes, impacts total cost of care and benefits patients.

Find out more about these four VBC options in this Association for Health Care Resource & Materials Management webinar where I explain the options in detail: Value Based Contracting with Providers.

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