Value-Based Drug Purchasing

It is important for employers to learn more about value-based purchasing arrangements and consider encouraging their vendor partners to accelerate their adoption, where appropriate.


June 26, 2020

Drug pricing is notoriously opaque, and pharmaceutical purchasing remains largely in a fee-for-service model. Even as employers increasingly embrace payment reforms for medical services, patients and employers pay for drugs as they are filled, and payments are not impacted by the effectiveness, appropriateness or patient outcomes related to their use.

Health plans, pharmacy benefit managers (PBMs), pharmaceutical manufacturers and employers are beginning to implement value-based drug purchasing arrangements, with the hope of changing this paradigm. These arrangements have the potential to make pharmaceutical purchasing more efficient and cost-effective. Therefore, it is important for employers to learn more about them and consider encouraging their vendor partners to accelerate their adoption, where appropriate.

Common Specialty Rx Strategies

According to the 2018 Large Employers’ Health Care Strategy and Plan Design Survey, specialty pharmaceuticals are the number one cost driver for large employers.1 Of survey respondents, 26% said specialty pharmaceuticals are their number one cost driver, while 80% said it was in their top three. Employers are using several strategies to slow the growth of specialty pharmaceutical trend, including aggressive utilization management (71% of employers), specialty pharmacy requirements (68%), site-of-care management (44%) and specialty tiers in plan design (38%).

Value-based Drug Purchasing Strategy Opportunities

There are several options for better connecting the payment of a drug to its value.

Outcomes-based pricing (OBP)

Under OBP, a drug manufacturer will only be reimbursed for a drug if a desired health outcome is attained for the patient taking the drug. If the desired outcome is not fully achieved, the drug manufacturer has the option of agreeing to a rebate or discounting a significant portion of the price of the drug back to the patient and purchaser. Prices, rebates, discounts and target outcomes are all contractually defined and may vary by arrangement. This strategy requires drug manufacturers to take on financial risk and gives them a stake in ensuring that prescribing is appropriate and patients adhere to usage directions.

OBP is most likely to work well for drugs with clear health outcomes that are easily measured. All parties need to agree on how to measure outcomes, as well as on definitions of positive patient health outcomes, which aren’t always clear cut. For example, it is relatively easy to measure the effect of PCSK-9 inhibitor drugs on lowering cholesterol levels, but there is some debate about whether a positive outcome should be considered the cholesterol level itself (an “intermediate outcome”) or prevention of heart attack and stroke.

  • In 2016, Harvard Pilgrim Health System signed an outcomes-based contract with Novartis and will receive discounts on a congestive heart failure drug, Entresto®, if it doesn’t reduced hospitalizations.2
  • Cigna and Merck signed the first outcomes-based pricing arrangement for the diabetes drugs Januvia and Janumet in 2009. The arrangement gave deeper discounts to Cigna if the HbA1c scores of more patients improved. Under this arrangement, adherence and HbA1c levels improved for those patients taking Januvia and Janumet.3

Indication-based pricing (IBP)

Many drugs are used for multiple conditions (i.e., “indications”). One drug may be effective for one condition and not so effective for another. Or the drug might be effective when a patient has a particular gene, but less so when the patient does not have that gene. Under the predominant fee-for-service reimbursement model, an employer pays the same amount regardless of the evidence for the effectiveness of the drug for that condition. With IBP, reimbursement for the same drug would vary based on the diagnosis of the patient and the demonstrated effectiveness of that drug for patients with the same diagnosis.


  • Tarceva® increases patient survival by 3.4 months for those with non-small cell lung cancer, but only by 1.4 weeks for those with pancreatic cancer. Nonetheless, it’s used for patients with both conditions. Under the fee-for-service payment structure, employers are paying the same price – Tarceva® lists at $3,000 per month – regardless of which condition it’s being used to treat, despite the large discrepancy in effectiveness by condition. Implementing IBP for Tarceva®, or other drugs that have variable levels of effectiveness by condition, would likely result in a lower price for Tarceva® when used for pancreatic cancer to better align the price paid for the drug with the value it provides for that particular condition.4
  • In 2015, Express Scripts announced that it had entered into agreements with various manufacturers for various disease states, with the goal of setting different prices for different indications based on relative value.5

Indication-based formulary (IBF)

An indication-based formulary builds on the concept of varying payments depending on the clinical effectiveness of a drug for particular conditions. This is accomplished by adjusting the formulary tier (e.g. generic, preferred brand, non-preferred brand, preferred specialty, non-preferred specialty) for a drug based on how well it works for a given condition. In the Tarceva® example described earlier, an IBF might put Tarceva® in the preferred specialty tier when prescribed for non-small cell lung cancer, but in the nonpreferred specialty tier for treatment of pancreatic cancer.

Formulary placement is important to the patient because it affects cost-sharing and incentives, while pricing has a bigger impact on the manufacturer, payer and purchaser (though of course patients are substantially affected by the price of the drug regardless of their percentage cost-sharing responsibility.) This strategy shares the same challenges as indication-based pricing, and additional patient education may be necessary.


  • Harvard Pilgrim contracted with Eli Lilly to put its type 2 diabetes drug Trulicity® in a preferred formulary tier as long as it performs better than competing drugs.2
  • In 2016, Novartis entered into pay-for-performance agreements with both Aetna and Cigna for its medication for heart failure, Entresto. Aetna and Cigna pay a discounted amount for Entresto if the medication reduces hospitalizations for their patients with congestive heart failure. In exchange, Novartis will grow Entresto’s market share through its position as a preferred drug, subject to prior authorization, on both Aetna and Cigna’s formularies.5


There is nothing simple about how drugs are priced and delivered to patients, but value-based arrangements can add complexity that all parties need to overcome to benefit from these arrangements. A 2016 Institute on Clinical and Economic Review (ICER) report goes into much more depth on each of these challenges.6

  • Agreement on Quality and Outcomes Metrics. All parties need to agree on what constitutes success and how to measure it.
  • Data. To vary payments for drugs based on demonstrated clinical evidence or patient outcomes, all parties need transparent access to clinical trial and outcomes data. This data will likely need to be accessible in claims because the payer needs a holistic view of the patient; accessing clinical records across thousands of patients and providers is difficult.
  • Policy. By law, drug manufacturers must provide Medicaid with the lowest price they offer to the rest of the marketplace, including all discounts and rebates.7 This is called the Medicaid “best price” program. It is unclear how value-based arrangements that dramatically discount the price of a drug if it is ineffective for a patient could impact the application of the “best price” for Medicaid.

Alternative Strategy – Addressing Provider Incentives for Prescribing

Total costs are equal to price multiplied by volume. The value-based arrangements in this Issue Brief mostly focus on the price element of this equation, but volume is also important. Through their prescribing patterns, physicians have significant influence on the volume and type of drugs patients take, but there are few incentives to prescribe the best possible drug for a patient. Instead, for many physicians, prescribing the most expensive drug will yield the greatest reimbursement.

This is beginning to change, with commercial payers and Medicare partnering with health systems and physicians to change reimbursement structures. The goal is to reward care that improves population health and controls costs for conditions with high pharmacy spend.

Examples include Medicare’s Oncology Care Model that funds greater cancer care coordination through episode-based payments, UnitedHealthCare’s cancer bundle program with MD Anderson (which held outcomes steady while reducing costs by 34%) and Priority Health’s cancer bundling with oncology practices in Michigan.8,9 When providers have incentives to control costs, they may prescribe a smaller number of high-cost drugs, while focusing on patient adherence to equally effective, lower-cost therapies.

Early Results – Is This Working?

Most value-based purchasing arrangements for drugs are only a few years old. Results are either confidential or have not yet been finalized. Therefore, it’s hard to tell whether these approaches are working. Several recent partnerships among health systems, health plans and drug manufacturers are now in place and could result in better information in the coming years.

Talk to Your Partners About Opportunities

Value-based purchasing for pharmaceuticals is relatively new, and results are scant. However, examples of these types of contracting arrangements are becoming more common, and they could prove to be another useful tool for employers looking to get a handle on cost increases for pharmaceuticals. Employers should seek information from their plan administrators and PBMs on what efforts are being made to advance value-based pricing agreements with manufacturers.

In particular, look for:

  • A formal, well-defined, easily understood and described consensus value metric;
  • Value attributes that can be collected, measured, valued, aggregated and evaluated to determine whether the value metric was achieved;
  • A price linked explicitly by formula to the value metric defined within the agreement;
  • A HIPAA security agreement for responsible and compliant data exchange; and
  • An established payment or reimbursement mechanism.

These elements will not guarantee success, but they are necessary for it. Like so many other components of a health care benefit strategy, value-based purchasing for pharmaceuticals is no silver bullet. But it is another promising strategy for employers to have in their arsenal.

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More in Benefits Strategy


  1. Value-based Drug Purchasing Strategy Opportunities
  2. Challenges
  3. Alternative Strategy – Addressing Provider Incentives for Prescribing
  4. Early Results – Is This Working?
  5. Talk to Your Partners About Opportunities