Brendan Shaw* outlines the benefits that greater adoption of outcome-based payment models for medicines can bring, highlights recent successful implementations, and explains why policy updates are so important to ensuring a more comprehensive rollout of these models around the globe.


We’re looking forward to being one customer of many customers in a robust commercial marketplace in low-Earth orbit, so we can drive down costs and increase access in ways that historically have not been possible

Jim Bridenstine, NASA Administrator


The launch of the Dragon space rocket to the International Space Station by Elon Musk’s company, SpaceX, earlier this year is an example of outcomes-based purchasing at work.

NASA is contracting out the transport of astronauts to and from the ISS to SpaceX through an outcomes-based purchasing approach to keep the costs as efficient as possible.

Whereas once upon a time NASA would specify top-down technical requirements and manage the hardware itself, today it sets broad requirements and gives the space industry wide flexibility to meet those requirements.

The same trends have been occurring for years in government and business contracts in areas like infrastructure, IT and aerospace.

Rolls Royce’s ‘Power by the Hour’ model, where airlines pay the company per hour of engine flying time rather than the cost of maintenance and parts, has become an industry standard of outcomes-based purchasing in the aviation industry.

The same trends have been developing in medicines reimbursement and purchasing by public and private sector payers.

Outcomes-based medicines purchasing is where health funders’ payments for medicines to pharmaceutical companies are linked to, or contingent on, patient outcomes.


What’s been the experience to date?

Developing this type of innovative payment system in medicines is a work-in-progress.

After a slow start, outcomes-based reimbursement models have become increasingly common over the last decade or so in markets such as the US, Europe and Australia.

Such models can be based on a range of possible health and economic outcomes for patients and broader society.


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In the US the number of such agreements has been on the rise.


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Recent examples where companies have negotiated such deals with payers in the US include:

  • Novartis’ pricing deal for its CAR-T treatment for leukaemia, Kymriah, with the US Centres for Disease Control and Prevention which meant that if patients did not respond in the first month of treatment Novartis would rebate the CDC
  • Amgen’s deal with payers on its new cholesterol reducing medicine, Repatha, where if a patient has a heart attack while on Repatha, the payer would be eligible for a full rebate for the medicine’s cost
  • AstraZeneca’s deal with UPMC announced in January for its heart-attack prevention drug Brilinta, where payment is linked to cardiovascular outcomes for patients following recent hospitalization for heart attack or unstable angina, and
  • Spark Therapeutics’ deal with Harvard Pilgrim on its gene therapy for treating some forms of blindness, where if patients don’t have long-term meaningful improvement Spark will provide rebates to Harvard Pilgrim.

In Europe, such outcomes-based reimbursement and purchasing models have been in use for some years and the expectation is that there will be increasing use over time.

For example, Spain has recently introduced a framework for outcomes-based payment models and Germany’s sick funds are moving towards this model as well.

In the United Kingdom, the National Institute for Care and Health Excellence (NICE) last year agreed to an outcomes-based payment model for rituximab for membranous nephropathy using real world data from its observational data unit to calculate payment. NICE has also announced other ‘pay by cure’ deals for medicines to treat hepatitis C and multiple sclerosis.

Also in Europe, Takeda will be adopting an outcomes-based pricing approach its cell-based therapy for Crohn’s Disease, Alofisel.

In Australia, after a slow start, the outcomes-based system of managed entry agreements is starting to be utilised since its system was introduced in 2011 as part of the first industry-government agreement on pharmaceutical pricing policy.


So why do it?

Generally, payers and companies have both taken a cautious approach in adopting such payment models but they are becoming more common.

One major reason payers are interested in outcome-based payments is the same reason NASA uses them to pay SpaceX for getting its astronauts to the ISS.

Namely, because it can be more efficient, leads to better outcomes and reduces risk for the payer.

Under such models the payers only pay the company when the medicine works, for example if the patient responds to treatment.

When patients do not respond, the company does not get paid or must rebate back some portion of revenue for those patients that failed to benefit.

In both cases, the payer is specifying the outcome it wants as the customer and the private sector takes on the responsibility to deliver the service the customer wants.

This incentivises the company to innovate by developing with new products, new services and new pricing models.

While there are variations, the typical outcomes-based contract sets out a payment model linked to an administrative mechanism to adjudicate the outcome and therefore the value of the medicine.

Such agreements can also provide a level of predictability for payers.

With the rising cost of specialised, targeted therapies, the costs of non-responding patients becomes more significant for payers, so the attractiveness of these types of payment models for payers increases.

They can also provide significant savings for payers and shift the risk of a medicine not working on to the company.

The US pharmaceutical industry association, PhRMA, identified that in one example outcomes-based plans saved patients 28 percent compared to normal coverage plans.

Such schemes can also help patients get quicker access to new medicines in areas of high need.

Typically, such agreements have been used for medicines that meet a high clinical need, are high cost and where the budgetary impact will be significant.

For companies, these types of arrangements help focus their strategic objective on what ultimately health systems are about, namely treating the patient, rather than on how many bottles or vials of medicine are sold.

For patients, the benefit is that the medicine can potentially be funded and on a payer’s formulary sooner than would otherwise be the case.


Problems in implementation

But it’s not all plain sailing when it comes to introducing outcomes-based payment models.

Some issues stem from problems in the policy and process systems surrounding the agreements.

For example, in countries like the US, rebates and discounts can trigger price reductions, which can dampen companies’ enthusiasm to offer them.

There’s also the problem that some expect such models be a panacea for the broader debate about the price of medicines, which they are not.

Companies and payers still need to argue over the starting price for a medicine.

It is just that with outcomes-based payment schemes the payer gets greater certainty over what they are paying for.

The complexity of the implementation and management of such payment models is also a problem.

Outcomes-based payment agreements between companies and payers are complex and the data requirements to monitor things like real-world patient impact over time can be challenging.

Getting the data to accurately and effectively manage these types of payment models has been challenging in the past, but that’s now starting to change.

Developments in computing power, health system data, patient e-health records, analytics and artificial intelligence are starting to address some of these challenges.

Then there is also the problem of the payer’s mindsets themselves.

For generations, the perhaps justified view of payers has been that the evidence from the classic randomised clinical trial has been more rigorous than real-world data collected from health systems once the medicine is on the market and being used in the community.

This may have been true once upon a time, but real-world data is rapidly becoming accepted in the regulatory space as justification for new approvals and is becoming more accepted in the payment space.

Finally, trust between the different stakeholders is important to the success of such payment models.

Trust isn’t something as tangible or concrete as evidence, data or policy statements, but it’s vital.

If payers do not trust companies to deliver on the outcomes they promise, or companies do not trust the payer to honour agreements to pay, talk of such innovative pricing arrangements will only remain talk not action.


The policy environment matters

Policies, systems and agreements need to be well-designed to ensure the right incentives and controls are in place for both parties under such payment and reimbursement plans.

If payers and companies don’t have a good relationship or there are complicating factors that cloud the operation of the system, it doesn’t matter how much scaffolding you put around an agreement, the agreements can run into problems.

In the Australian context, for example, the tentative start in the use of outcomes-based payment models was due in part to government and industry trying to get agreement on a framework for how companies and payers should work together in developing such contracts.

Separately, the recent example where the CDC in the US cancelled its outcomes-based payment agreement with Novartis for its CAR-T therapy for Kymera, possibly due to external political factors, shows the importance of the supporting policy and political environment.

With better dialogue between companies and payers, it is possible that both can reach new heights in innovation to deliver better outcomes for patients.

This can deliver greater predictability, efficiency and cost savings for payers, and give companies the opportunities to deliver new medicines and earn sufficient return from them.

Patients get access to new medicines sooner with more emphasis on their needs.

And that’s an outcome worth shooting for.


* Brendan Shaw is Principal of Shawview Consulting and Adjunct Senior Lecturer in the Pharmaceutical Management Unit at the University of New South Wales.