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What is value-based contracting?

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Last editedMay 20202 min read

Over the past decade, the United States healthcare system has begun a serious transformation, with many stakeholders seeking to tie payments to value, rather than volume. That’s why we’re seeing an increase in value-based contracting, and while there are still serious barriers to widespread adoption, it’s likely that we’ll see more value-based contracts in the future. But what is value-based contracting? Find out everything you need to know about value-based contracting models with our definitive guide.

Value-based contracting definition

Value-based contracting, also known as results-based contracting, is a type of payment model that ties the price of a drug to how it performs. This is in stark contrast to other healthcare payment models, where the price of drugs is determined by data collected during clinical trials, a controlled environment that doesn’t always track with performance in real-world conditions. So, how do value-based contracting models work? It’s simple. If a drug delivers the desired outcome, payers (insurers, provider networks) pay the full price. If not, the payer may receive refunds or price reductions from the manufacturer.

Benefits of value-based contracting

Now that you know a little more about value-based contracting models, let’s look at the benefits of this payment model in more detail. First off, it’s important to note that value-based contracts limit the payer’s exposure to financial risk by providing price reductions or refunds for ineffective treatment. Beyond that, there are a couple of other key benefits associated with value-based contracting:

Improvement in patient outcomes – If payers can provide access to a greater range of medicines (since manufacturers are reducing their risk of exposure to suboptimal outcomes), patient outcomes could improve.
Reduction in medical costs – By helping to control diseases better, value-based contracting could lead to a reduction in medical costs through a reduction on hospitalizations, emergency room visits, and so on.
Reduction in the cost of medicines – Under value-based contracting, manufacturers may pay higher rebates for patients who don’t meet the agreed-upon outcome targets, which may potentially reduce the cost of medicines.

In addition, value-based contracting can help generate real-world evidence for the efficacy of a drug, which could lead to better healthcare outcomes in the future.

Barriers to implementing value-based contracting

There are a broad range of value-based contracting challenges that are limiting implementation in the United States. For example, questions have been raised around how value-based contracts will affect price reporting metrics, while there’s also uncertainty around the federal anti-kickback statute and rules about manufacturer communications from the U.S. Food and Drug Administration. Further regulatory issues may be found in Medicaid’s requirement for manufacturers to offer a price that’s equal to the best commercial discount price available.

It’s also worth thinking about the other value-based contracting challenges linked to implementation. Not only is it a challenge in itself to find agreed-upon outcomes that are measurable within a practical timeline, but in many cases, the infrastructure needed to monitor results-based contracts simply doesn’t exist. As you can see, while value-based contracting models may be beneficial for both patients and payers, there are still numerous barriers that need to be overcome.

Value-based contracting moving forward

By addressing some of the value-based contracting challenges identified in the previous section, it’s very possible that the number of value-based contracts could grow exponentially. Furthermore, the type of healthcare contracts available in the market could evolve and we may see a greater level of flexibility from policymakers, which could enhance the healthcare system and massively reduce costs.

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