Understanding Risk-Sharing Agreements: Setting the Stage

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Risk-sharing agreements have emerged as a popular mechanism to balance increased payer focus on managing costs and the manufacturer’s need to gain market access for new products.  In Europe, variations of these agreements are common and in the U.S., they are gaining more prominence. However, a lot of confusion exists among payers and manufacturers on terminology. This article aims to clarify the confusion by providing background on the emergence of risk-sharing agreements, definitions of “risk,” and perspective on payer and manufacturer objectives when entering these agreements.

Background

The current surge in risk-sharing agreements is driven primarily by two factors: the specificities of the healthcare market and the shift in the balance of power between manufacturers and payers. The healthcare market is unique as you cannot buy, sell, or trade health. When payers decide to buy drugs, they are, in reality, buying a probability of achieving health for the relevant patient population.  However, drugs are approved, launched, and reimbursed under conditions of uncertainty. This uncertainty can involve many unique dimensions:

  1. Uncertainty that the efficacy of drugs under clinical trials will translate to diverse markets, patient populations, and treatment settings
  2. Uncertainty related to safety and side effects
  3. Uncertainty related to the correlation between surrogate markers of the disease and long-term outcomes
  4. Uncertainty related to off-label use
  5. Uncertainty related to cost effectiveness

All these factors translate to payer risk in terms of either paying too much for the desired health benefit or not getting enough benefit for the cost or going over budget versus expectations. From a payer perspective, at the time a reimbursement decision is made, there is also a lack of clarity in terms of actual health produced by a medicine and what the overall budget impact of providing access is.  There is some indication from clinical trials and health economic evaluations. But thorough risk mitigation requires several costly long-term studies, which payers and manufacturers are reluctant to fund.

In addition, the ethical and public relations implications of denying access to potentially life-saving drugs, while awaiting study completion can be horrendous. Payers want to provide patient access to new therapies, but they also want to ensure they only pay for the benefit they are expecting to achieve.

Historically, pharmaceutical manufacturers held the upper hand in reimbursement negotiations. Payers accepted the risk of making a bad buy as the cost of doing business. But with the increase in expedited approval for orphan and expensive drugs for therapeutic areas such as oncology, payer appetite for providing reimbursement to drugs with high-budget impact, but low real world effectiveness is very limited.  Manufacturers have a limited window of market exclusivity and access for new products, both of which are critical for pharmaceutical companies’ revenue.  Especially outside the U.S., most reimbursement decisions are made by central agencies and any delay in access is incredibly costly.

In summary, payers engage in risk-sharing agreements as a means to improve the cost effectiveness of new therapies. This is achieved by reducing uncertainty related to drug performance and cost impact. For a pharmaceutical company, risk-sharing agreements are a mechanism to gain or fast track market access by addressing payer concerns. Outside the U.S., it is also a mechanism for manufacturers to protect prices by offering back-end discounts: thus reducing global impact due to reference pricing.

Also, increasing manufacturer acceptance of risk-sharing agreements is a result of the industry’s recognition of the changing reality that patient access for drugs will be severely limited unless steps are taken to mitigate payer concerns about effectiveness and budget impact.

Definitions and Alternative Names

Risk-sharing agreements are known by multiple names: Managed Entry Schemes (MES), Outcomes Based Schemes, Risk-Sharing Agreements, Coverage with Evidence Development, Access with Evidence Development, Patient Access Schemes, Conditional Licensing, Pay for Performance Programs, et cetera. However, the common denominator across these types of agreements is that an explicit perceived payer risk gets addressed through the contract and that there is an acceptance of obligation to share the risk between payers and manufacturers in a defined manner.

Towse and Garrison, academics from the University of Washington, defined risk-sharing agreements as 'agreements between a payer and a pharmaceutical company where the price level and/or revenue received is related to the future performance of the product in either a research or real-world environment.’ However, the definition, in practice, has evolved to also include alternative pricing arrangements that mitigate perceived payer risk brought about by either the uncertainty of the value of the medicine and/or the need to work within finite budgets.

Conclusion

Although known by multiple names, risk-sharing agreements have emerged due to a number of external factors: limited evidence base and associated uncertainty at the time of drug introduction (especially due to accelerated approvals), increased cost pressure from payers, increased use of reference pricing, and emphasis on Health Technology Assessment programs. The agreements are increasing in popularity due to the potential to alleviate the negative budget and value consequences that arise from uncertainty related to patient population, product effectiveness, and long-term outcomes.

Future articles, which will be published on this blog, will dive deeper into the types of risk-sharing agreements, key considerations (as manufacturers seek to enter such agreements), present challenges, case studies, and recommendations for implementation.

 

References

  1. Paying for Outcomes: Innovative Coverage and Reimbursement Schemes for Pharmaceuticals; Journal of Managed Care Pharmacy
  2. Performance based Risk Sharing Agreements for drugs and other medical products; University of Washington
  3. Linking payment to health outcomes: A taxonomy and examination of performance-based reimbursement schemes between healthcare payers and manufacturers

 

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