Outcome-based contracts for medicines: What’s the deal?

J Pinching 13 March 2018

Words by Dr Duncan Jenkins




Outcome-based contracts for medicines – is there enough financial headroom to attract pharma?


In the January and February issues of Pf Magazine we discussed the potential opportunities for pharma as accountable care systems develop. Since then the terminology has also evolved – no longer should we refer to the new inner workings as ‘accountable care systems’. The latest marching orders refer to ‘integrated care systems’. ACS is now ICS; do keep up! A variety of models are emerging under this broad banner which have four common characteristics; outcome focus, long term approach, integration of services and delivery at scale.

In the February issue, we explored how partnerships based on outcome-focussed commercial arrangements might develop. This piece explores the financial feasibility of long-term contracts with incentives linked to population outcomes. 



With the flow

The developing frameworks for financial incentives, in the multispecialty community provider contract for example, will rely on ‘deal flow’ from the main contractor through to sub-contractors and other partners. In terms of financial value, we could be talking about £15 to £20m being conditional to outcomes being achieved in a mature contract worth £250m per year. This sounds like a lot, but this incentive will be linked to a broad range of outcomes from population life expectancy to patient reported outcomes, lifestyle metrics, social care and performance, such as relating to access.



Let’s examine a possible scenario. It’s not difficult to imagine the characteristics which might form the basis of a commercial scheme: 


•          High-spend on a product or portfolio of products based on either low volume/high cost or high volume/lower cost

•          Measurable outcomes which relate to product performance

•          Evidence that products will impact on these

•          Time period compatible with product or portfolio life-cycle.



Given these characteristics, a potential commercial scenario could look like this:


•          Product A costs £50 per month, list price

•          It is a new product with good evidence, though proxy outcomes, phase IV trial are in progress

•          There are 20,000 patients who are prescribed the drug in the ICS 

•          The cost to the NHS is £1m per year, minus 7% discount claw back

•          The ICS negotiates a deal whereby a rebate of 5% of list price is paid by the company for a five-year period – £250,000

•          At the end of that period if disease related mortality rate has decreased by 5%, then the ICS will pay the manufacturer 10% of the list price as an incentive – £500,000

•          The manufacturer receives an extra £250,000 income divided over five years

•          If the disease-related mortality remains the same, the company receives no incentive payment.



Financial times: The key questions


1. Is the integrated care system (ICS) able and willing to pay £250,000 extra over five years to one stakeholder, possibly out of many, for achieving an impact on one outcome?


2. Is this sufficient margin for the pharma supplier to merit the allocation of meaningful resources to the quality improvement process by which care is refined and outcomes optimised?


3. Is the £250k risk associated with failure to improve outcomes prohibitive to pharma involvement?


Question 1 is complex. At first glance, one assumes the NHS’s answer would be a resounding ‘no’. Given that there are likely to be only a limited number of these deals that any ICS would be willing to enter into, this figure actually represents a small percentage on, for instance, a £50m drug budget (0.1%). Furthermore, depending on the therapy area and outcomes, costs may be avoided elsewhere. Perhaps a more pertinent question is whether the ICS will be willing to pay over the list price for full achievement. The earlier scenario is constructed so that the difference between minimum and maximum achievement spans the product list price. That is, if the outcomes are fully achieved, then pharma gets more than the list price, but if there is no achievement, then the price paid is lower.  This seems like a reasonable approach, however, for completeness we should always ensure the full payment price is one which keeps the health economists happy.


Question 2 is perhaps easier to answer and one which pharma is used to grappling with, albeit in a slightly different context. A re-jigging of the marketing budget to align with the ICS needs seems feasible and with £100k bonus payment at stake, also seems attractive.


Question 3 is the most difficult to answer. This represents true risk share. As with most deals and partnerships, the devil will be in the detail. As we discussed in the previous article, the combined effort of a number of parties is required to achieve the desired outcomes and, in some cases, a good sprinkling of luck. Do you feel lucky?   



Dr Duncan Jenkins is a Director at MORPh, specialist training providers for CCG, clinical, practice and GP pharmacists. Go to morphconsultancy.co.uk




Make a comment

To voice your opinion, please Log in or Register.

Pf Magazine

Your resource for news, features, interviews, careers and events in the pharma industry.

Click here for the latest issue and to subscribe.