Demystifying Commercial Contracts: Developing an Evaluation Framework

Bridging Physician and Contracting.jpg

Commercial contracting within the pharmaceutical industry has undergone a dramatic transformation over the last decade. Payers have become more sophisticated and are applying additional pressure on manufacturers to “put their money where their mouth is.” But there is still a lot of confusion and misunderstanding about the different contract types, objectives, and associated risks. In this article, we provide a simple framework to classify an organization’s commercial contracts and we outline key metrics to develop a more effective contract inventory.

There are a variety of contract types across the industry that depend on product profile, geography, and commercial strategy, among other factors. But we can still group them using two primary dimensions:

  1. Population and Patient: Whether the agreement terms are dependent on individual patients or a group of patients.
  2. Non–Outcomes and Outcomes: Whether some aspect of product impact on a patient (effectiveness, compliance, et cetera) is embedded within the contract terms. Non-outcomes based contracts do not take drug impact into account. Its primary focus is typically product performance from a sales or market share perspective.

Using these two dimensions, a simple 2X2 matrix can be utilized to classify both common and emerging contract strategies. Based on available literature review and direct client experience, we have attempted to classify the most frequently observed contract types. The classifications, however, are by no means comprehensive, as both manufacturers and payers are constantly innovating. But it should provide you with an understanding of the most prevalent contracting structures.

Dimensions

Non-Outcomes

Outcomes

Population

  • Price, Volume rebates
  • Market Share rebates
  •  Formulary rebates
  • Coverage with evidence         development
  • Escrow agreements
  • Short-term effectiveness
  • Population-based guarantee
  • Sales Capitation

Patient

  • Utilization Caps
  • Adherence-based rebates
  • Manufacturer paid patient initiation
  • Others (Time to Fill, Fulfillment, et cetera)
  • Outcomes guarantee (clinical or surrogate marker)
  • Patient outcome warranty
  • Per-patient cost capitation
  • Prospective pay for performance

 

Although the two-dimensional classification is a good start when developing a structured evaluation framework, the approach is relatively limited. Understanding contracting strategy also requires an awareness of key objectives, stakeholder perspectives, measurement variables, risks, and implementation nuances, as well as the organizational value of each strategy. That said, we propose the following additional classification criteria, which can be used to provide a detailed perspective on contract types.

 

Classification Criteria

Summary

Objective (Business Rationale)

What is the purpose of the contract?

Company Value Driver

What is the manufacturer benefit of entering into this contracting strategy?

Payer Value Driver

What is the payer benefit of entering into this contracting strategy?

Operational Strategy

How is the contracting strategy operationalized?

Data Markers

What are the data markers used to measure performance?

Time Frame

Is the strategy short term or long term? What is the typical measurement period?

Payer/Manufacturer Benefit Classification

Is the contract payer mandated, manufacturer motivated, beneficial to both, or ineffective?

Risk

What are the risks of entering into the contracting strategy?

Operational Burden

How difficult is it to operationalize and monitor the strategy?

Alternatives

Are there alternatives that address payer concerns while maximizing manufacturer benefits?

Penetration

Prevalence in industry

Therapeutic Class

Therapeutic class(es) in which the contract strategy may be more prevalent

Sample Contracts

An example of the particular strategy

 

In subsequent articles, a detailed analysis will be conducted for each contract type based on the proposed classification criteria. That includes a deep-dive into risk-sharing agreements. Stay tuned!

 

Tags: Life Sciences, pcma

   

Recent Posts

Tag