Kimberly Westrich, MA

 To update an ongoing assessment of care pathway development, implementation, and evaluation, and to evaluate the emerging relationship between care pathways and other components of value-based care.

 Targeted literature review followed by an online survey and in-depth interviews.

 The PubMed/Cochrane databases and gray literature were searched for publications on care pathways (January 1, 2014, to March 3, 2017); a supplemental targeted search was completed in October 2017. Qualitative data were collected via an online survey and semistructured, in-depth interviews with payers, providers, pathway vendors, and opinion leaders.

 A total of 112 articles or posters were identified in recently published research. The survey and interviews included 32 and 19 respondents, respectively. Care pathways are increasingly driven by providers and provider networks. Overall, we found increased awareness of and adherence to codified best practices or standards, and prioritization of high-quality evidence during development. Research findings suggest stronger links between outcomes-based measures and both physician reimbursement and care pathway evaluation. Integration with other value-based care initiatives, including alternative payment models, is also gradually emerging.

 This study identified growing use of high standards of evidence and adoption of other best practices in the development, implementation, and evaluation of care pathways. As the influence of care pathways on patient care continues to expand, additional efforts are needed to increase transparency, disclose conflicts of interest, engage with patients, effectively align care pathways with improvements in patient outcomes, and integrate efficiently with other value-based care initiatives.

As the use of care pathways has expanded in the United States, development, implementation, and evaluation processes have evolved.

Research findings support notable increases in process transparency, codification of standards, and prioritization of high-quality evidence.

Provider groups emerged as the driving force behind development and implementation, although physician resistance and administrative burden remain barriers to adoption.

Despite efforts, patient education and engagement remain inadequate.

There are indications of stronger links between outcomes-based measures, rather than traditional compliance measures, and both physician reimbursement and care pathway evaluation.

The movement toward value-based care may significantly affect the development and expansion of care pathways.

In the last decade, the use of care pathways—designed to provide evidence-based treatment options for disease management, improve quality of care, reduce unnecessary variation, and lower costs&mdash;has expanded rapidly in the United States.

 Although pathway use is increasingly prevalent for chronic diseases,

 use in oncology is well known, with 58% of oncology practices reporting use of pathways in 2016,

 Best practices to guide pathway development, implementation, and evaluation have been established in oncology, and the American Society of Clinical Oncology (ASCO) has issued a policy statement and a set of detailed criteria to ensure the integrity and quality of oncology pathways.

At the same time, other value-based healthcare initiatives and alternative payment models (APMs) are being adopted. In 2016, approximately 31% and 28% of physicians across specialties participated in bundled payment programs and medical homes, respectively.

 Overall, 43% of physicians received some form of value-based reimbursement. With the goals of improving quality of care while reducing cost, care pathways not only have objectives similar to those of other value-based initiatives but also may be critical in the transition to value-based care.

A January 2016 landscape assessment of care pathways revealed a wide range of development, implementation, and evaluation methods but a critical absence of transparency.

 In this follow-up study, we assessed changes in development, implementation, and evaluation of pathways and reviewed the latest evidence on integration of pathways with value-based care initiatives in the United States.

Similar to the 2016 study, a targeted review of published literature was followed by an online survey and in-depth interviews. Results were compared with those of the prior study, providing a perspective on the state of care pathways today and direction for the future.

Our search covered the PubMed and Cochrane Reviews databases and selected conferences’ websites. Publications, posters, and abstracts discussing care pathways in US healthcare settings that were in English and published between January 1, 2014, and March 3, 2017, were reviewed. We further searched trade journals and websites of professional organizations, pathway vendors, payers, and major provider groups. A supplemental search was completed in October 2017.

In screening materials identified in our search, we again required that a care pathway have stated objectives defining goals or key elements of care and was limited to specific disease states in defined patient populations, used evidence-based medicine or clinical guidelines to develop treatment recommendations, included a monitoring and evaluation mechanism, and included criteria for the use of pharmacologic therapies.

 Between June and September 2017, we conducted online surveys (n = 32) followed by in-depth interviews (n = 19). Respondents were selected to represent a mix of payers, providers from a range of specialties and practices, commercial care pathway vendors, and opinion leaders. Although all respondents were screened for involvement in pathway development, implementation, evaluation, or use, questions were administered only to those with experience and knowledge relevant to given sections (rated ≥3 on a 5-point scale). Respondents were offered honoraria for survey and interview participation.

 The survey was structurally similar to the 2016 study, with new sections on value frameworks and APMs. Descriptive analyses were conducted in Microsoft Excel.

 Interviewers administered an hour-long, semistructured discussion guide with open-ended questions. Interviews were designed to supplement information from the survey with additional detail on key areas of interest.

We identified 750 unique citations. Full-text review was conducted for 138 publications; 68 full-length articles and 44 abstracts and posters matched the selection criteria. Key themes and gaps in the literature informed the design of the survey and interviews. We found more transparency and codification of the development process, particularly in oncology, where pathway use has matured and more research has been published.

 More studies documented pathway adherence, resource use, and patient outcomes,

 but implementation and evaluation are still inconsistently documented or communicated. Engagement with stakeholders, particularly patients, remains inadequate.

 Efficacy and toxicity still supersede cost as key considerations during pathway development, yet pathways are viewed as a means to provide downward pressure on rising drug prices.

 Nevertheless, closer linkages with features of value-based care have emerged. As payers experiment with linking pathways and APMs,

 barriers to such integration need to be further understood. Interest is also growing in incorporating value frameworks in pathway development.

Twenty-five providers and 7 payers completed the survey. Eleven providers, 4 opinion leaders, 3 payers, and 1 pathway vendor were interviewed (

 Among all respondents with knowledge of pathway development, cost of care was the most frequently identified consideration for therapeutic area selection when care pathways are developed (77% [20/26]), followed by clinical outcomes, variation in treatment patterns, and prevalence rates (

). In 2016, the internal selection process was most cited, followed by cost of care. Pathways for relatively prevalent cancers, such as breast, colon, and lung, remain common; however, interviewees noted that rare cancers with high treatment costs are being identified for pathway development, citing recent FDA approvals of chimeric antigen receptor T-cell therapies and advances in precision medicine. Over the next 5 years, most survey respondents expect pathway use to expand in both oncology (78% [25/32]) and nononcology (84% [27/32]) areas. Pathways have also broadened to cover the care continuum, including symptom management and palliative care. Further, respondents had experience with pathways for common or high-cost chronic diseases, particularly in the areas of rheumatology, diabetes, asthma, and cardiology.

 Nearly all provider respondents (96% [24/25]) had a role in developing, implementing, evaluating, or using 2 or more pathways. Among respondents who addressed pathway development, 92% (24/26) identified clinicians as stakeholders, with fewer indicating a role for health plans (46% [12/26]) or pathway vendors (12% [3/26]). Most providers with development experience (74% [14/19]) indicated that their practice develops or implements pathways separate from those developed by payers or vendors.

Evidence considerations and transparency in care pathway development.

 Treatment guidelines (88% [23/26]) and published systematic literature reviews (73% [19/26]) were identified as key data sources for pathway development (

). Fewer identified retrospective or observational studies than in 2016. Providers were less likely than payers to identify prospective studies (53% [10/19] vs 100% [7/7]) or randomized controlled trials (58% [11/19] vs 86% [6/7]) as influential.

Interviewees identified experts and published or validated data from existing pathways as data sources for pathway development; survey results also confirmed that data from existing pathways informed development (77% [20/26]). Grading evidence quality appears to be less influential than in 2016 (58% [15/26] vs 81% [17/21]).

Efficacy (96% [25/26]), safety/toxicity (88% [23/26]), pharmaceutical costs (88% [23/26]), and medical resource use and costs (85% [22/26]) were the main factors considered when selecting treatments for the clinical algorithm. All (7/7) payers indicated considering medical resource use and costs versus 79% (15/19) of providers. In 2016, respondents identified safety (95% [20/21]), efficacy (86% [18/21]), and medical costs (81% [17/21]) as main factors. In both studies, efficacy was ranked as the most important. Although all interviewees indicated considering costs, particularly pharmaceutical costs, and clinical outcomes during development, less than half described cost as an initial consideration, and many indicated that clinical benefit precedes cost.

More than half (62% [16/26]) reported that their organizations followed best practices as detailed by ASCO’s policy statement; of these, 81% (13/16) noted that best practices, standards, or methodology were available to key stakeholders, including patients and payers. However, access may be restricted through means such as an intranet, patient portal, or membership. Further, awareness of processes for disclosing and managing potential conflicts of interest varied.

 Most (90% [28/31] with knowledge of pathway implementation) reported that pathways typically provide physicians with multiple treatment options for a given diagnosis, and 94% (29/31) reported that physicians have a choice about placing patients on a pathway. Compared with 68% (13/19) in the 2016 study, only 39% (12/31) reported a relationship between pathway compliance and reimbursement (

]). All of these respondents noted financial penalties or disincentives for noncompliance; 83% (10/12) indicated significant or extremely significant penalties. Interviewees expected incentives for performance, patient satisfaction, and other quality metrics captured in value-based care to receive traction in the near future. Process-oriented indicators, like compliance, were viewed as intermediate, surrogate measures. All payers (7/7) indicated that prior approval is required compared with 58% (14/24) of providers.

 Quality metrics (78% [18/23] with knowledge of pathway evaluation) were most commonly used to evaluate pathway performance, followed closely by readmission rates, compliance, and hospitalization rates (

). Quality metrics, readmission rates, and adverse event rates were each identified by 43% (10/23) as top 3 metrics. In the 2016 study, compliance was top-ranked and identified by most as a top 3 metric.

Interviewees observed that compliance remains an important measure. Target compliance rates of 75% to 80% were reported in 2016; however, only 43% (10/23) of respondents in the current research experienced 70% or greater compliance. Respondents reported challenges collecting or analyzing pathway data, including 75% (9/12) who encountered data collection issues.

 Some respondents (35% [11/31] with knowledge of pathway implementation) recognized changes in patient engagement over the last 3 years, among whom 91% (10/11) indicated that patients increasingly sought information on care pathways and 64% (7/11) observed increasing involvement of patient advocacy groups. Less than half of respondents (42% [13/31]) reported that on-pathway patients are provided disclosure or education about pathways; this included 46% (11/24) of providers, compared with 20% (1/5) of providers in 2016 (

). Interviewees also suggested that treatments may not be described as being part of a pathway. Financial incentives may not be transparent; 38% (5/13) of respondents who reported patient disclosure believed that patients were aware of financial incentives provided to physicians. Moreover, 26% (8/31) indicated that details on financial incentives are publicly available to all stakeholders, including patients.

Patient feedback on pathways is not generally mandated, with 30% (7/23), 43% (10/23), and 26% (6/23) reporting always, sometimes requested, and not formally engaged, respectively, among those with knowledge of pathway evaluation. Increased patient involvement is expected (78% [25/32]) in the next 5 years, particularly in evaluation (50% [16/32]) compared with development and implementation.

 The majority of survey respondents (93% [26/28] with knowledge of APMs [accountable care organizations, medical homes, and bundled payments]) and interviewees noted that care pathways are very or somewhat likely to be used in APMs; in APMs using pathways, 43% (12/28) estimated that greater than 50% of patients are on-pathway. Some interviewees noted that pathways could be key to value-based contracting and outcomes-based payments but also cautioned that costs could drive clinical care as a result. Even so, 57% (16/28) reported barriers to pathway use in APMs, including administrative burden (81% [13/16]) and lack of technological integration (75% [12/16]).

 Most survey respondents (74% [14/19] with knowledge of prominent US value frameworks) reported the use of value assessment frameworks in pathway development. Sixty-four percent (9/14), 57% (8/14), 50% (7/14), and 43% (6/14) noted value frameworks developed by the National Comprehensive Cancer Network (NCCN), American College of Cardiology and American Heart Association, ASCO, and Institute for Clinical and Economic Review (ICER), respectively. Interviewees often mentioned NCCN, ASCO, and ICER and generally advised considering value frameworks during development but not in isolation.

 Increased cost containment efforts (75% [24/32]), use of bundled payments (66% [21/32]), and applicability beyond oncology (47% [15/32]) may advance care pathway expansion and uptake. Other catalysts included the popularity of value frameworks (44% [14/32]), integration of clinical trials (34% [11/32]) and biomarker testing (25% [8/32]), and proliferation of medical homes (25% [8/32]). Interviewees additionally highlighted the value of standardization. In general, more providers reported the use of value frameworks in development; however, more payers felt that the popularity of value frameworks may expand the use of care pathways.

Physician resistance (pushback) remains the largest potential barrier to expansion (84% [27/32]), followed by administrative burden (

). Payers were more likely than providers to believe that administrative burden (71% [5/7] vs 56% [14/25]) and perceived implementation costs (71% [5/7] vs 32% [8/25]) are greater potential barriers, but more providers than payers found that the failure to demonstrate cost savings was a greater potential barrier (40% [10/25] vs 29% [2/7]). Reports of insufficient information technology (IT)/tracking systems and failure to demonstrate patient outcomes and cost savings have declined.

Care pathway development, implementation, and evaluation continue to play a significant role in utilization management in the United States, with cost considerations serving as a core motivation for these activities, collectively. During the development process, however, efficacy and safety continue to be prioritized overall. In large part, this trend continues to reflect efforts to manage care in the treatment of patients with cancer. Although pathways continue to be used in prevalent cancer types, primarily, we found a wider range of therapy areas for which pathways have been implemented, from rare cancers to chronic diseases.

We observed a higher bar for evidence during development, including greater emphasis on prospective studies and clinical guidelines, compared with the lack of codified standards and transparency in development we noted in our 2016 research. Although transparency has improved, access to specific development methodology remains limited to internal stakeholders, and disclosure of potential conflicts of interest is inconsistent. To some extent, challenges with transparency contribute to the difficulty in presenting a more definitive picture of conflicts or tension between pathways that guide medical care versus initiatives motivated by the imperative to manage expenditures, particularly in oncology.

Efforts to improve patient engagement with care pathways were among the most notable recent trends. About one-third of respondents observed changes over the past 3 years, noting increases in patient requests and patient advocacy group involvement, and more providers reported informing patients about pathway use. Most respondents anticipated future increases, with respondents also suggesting that patient engagement is becoming a feature of pathway evaluation, although this was not formally assessed in the prior study. Despite these efforts, a fundamental lack of patient awareness remains regarding the use of, and financial incentives associated with, pathways.

 We observed trends toward provider-driven pathways, the use of value frameworks during pathway development, and the growing relationship between pathways and APMs. Providers are increasingly central to the development and implementation of care pathways.

 In the 2016 study, providers were consistently identified as critical stakeholders, but the role of payers was often dominant. Pathway vendors still play an important role—particularly in serving payers that use pathways to manage plan member benefits&mdash;but providers are becoming the key drivers. Although we observed some trends distinguishing payer and provider behavior (data sources for pathway development, consideration of medical resource use and costs, requirement of prior approval, views on value frameworks, and barriers to expansion), further research in this area must be conducted.

Continued pressure to reduce costs has the potential to further expand the scope and development of care pathways. Value frameworks are often integral in the development process, ranging from being the primary approach for pathway construction to a reference for a component of treatment selection. The influence of value-based care was also noted in pathway implementation, with some respondents pointing to a shift in incentive structures. Now, fewer respondents indicated physician reimbursement being tied to pathway compliance; instead, reimbursement may become more directly linked to patient outcomes. Additionally, respondents believed that patient outcomes and other quality measures may eventually become standard pathway evaluation metrics. Pathways can be an effective tool in the delivery of value-based care, particularly in oncology.

 There is potential for more integration between pathways and APMs, which have similar objectives.

 Moreover, catalysts for pathway uptake include use of bundled payments and medical homes.

However, care pathways continue to face barriers to adoption. Although prior concerns with IT/tracking systems and the demonstration of patient outcomes and cost savings have decreased, concerns with physician pushback and administrative burden persist. Such concerns could be mitigated with provider-driven pathways and availability of evidence on patient outcomes, long-term efficiency, and reduced practice costs.

We utilized a hybrid approach with a targeted literature review followed by qualitative primary research, entailing survey and interview components, similar to the 2016 study. The survey and interview findings aligned with those of the literature review; however, the literature review findings are not exhaustive and are subject to the limitations of keyword-based searches of publication databases and ad hoc searches of the gray literature. Although survey and interview respondents had oncology and nononcology experience, the samples are not necessarily representative, and findings may not be generalizable to the wide diversity of care pathways. Several factors also limited our ability to cross-validate responses between the current and prior studies and perform statistical tests. The samples’ size and composition differed, and both the survey structure and responses to questions were updated to adapt to changes in the pathway landscape.

Articles

The authors examined the latest trends in development, implementation, and evaluation of care pathways and the impact of the movement toward value-based care.

US Care Pathways: Continued Focus on Oncology and Outstanding Challenges

 To better understand the prevalence of US value-based payment arrangements (VBAs), their characteristics, and the factors that facilitate their success or act as barriers to their implementation.

 Surveys were administered to a convenience sample of subject matter experts who were senior representatives from payer organizations and biopharmaceutical manufacturers. These data were supplemented with qualitative interviews in a subsample of survey respondents.

 Descriptive statistics, including percentages for categorical values and mean (SD) and median (interquartile range) for continuous variables, were assessed for quantitative questions. Trained reviewers collated responses to free-text survey questions and the qualitative interviews to identify themes.

Of the 25 respondents, 1 manufacturer and 4 payers reported not having explored or negotiated any VBAs. Subsequently, questionnaire results from 11 biopharmaceutical manufacturers and 9 payers who had experience with VBAs were analyzed. More than 70% of VBAs implemented between 2014 and 2017 were not publicly disclosed. Furthermore, although consideration of VBAs as a coverage and payment tool is increasing, VBA implementation is relatively low, with manufacturers and payers reporting that approximately 33% and 60% of early dialogues translate into signed VBA contracts, respectively. Respondents’ reasoning for VBA negotiation process breakdowns generally differed by sector and reflected each sector’s respective priorities.

 This study reveals that the majority of VBAs are not publicly disclosed, which could underestimate their true prevalence and impact. Given the effort required to implement a VBA, future arrangements would likely benefit from a framework or other evaluative tool to help assess VBA pursuit desirability and guide the negotiation and implementation process.

Little information is publicly available about the number and characteristics of value-based payment arrangements (VBAs) between biopharmaceutical manufacturers and payers, as well as the underlying reasons organizations do or do not enter these arrangements.

Previous estimates of VBAs, using only publicly available data, likely underestimate how many VBAs are currently being implemented.

Given the effort required to implement a VBA, future arrangements would likely benefit from a framework or other evaluative tool to help assess VBA pursuit desirability and guide the negotiation and implementation process.

The US health system faces increasing pressure to improve patient access to highly effective, yet costly, therapies. In line with the broader policy shift toward alternative payment models for healthcare delivery, there is ongoing interest amongpayers and manufacturers in exploring value-based payment arrangements (VBAs) for pharmaceuticals and medical devices. VBAs, also referred to as “outcomes-based contracts,” “performance-based contracts,” or “risk-sharing agreements,” link coverage, reimbursement, or payment for a product to a prespecified clinical or financial/utilization outcome or set of outcomes. VBAs can include contractual arrangements among manufacturers, payers, and providers to achieve these aims. For example, such arrangements could entail a rebate provided by the manufacturer to the payer when a drug or device does not perform as expected.

 VBAs have been discussed in the media and in the academic literature for drugs that treat hyperlipidemia, chronic heart failure, rheumatoid arthritis, and osteoporosis, among others.

Despite growing interest in and discussion of VBAs, there is relatively limited information currently available on the extent to which these arrangements are being pursued. A lack of public knowledge of these arrangements could (1) underestimate their use in the market and (2) limit what could potentially be learned from current experience that would advance the design and implementation of successful VBAs in the future. Recent research based on publicly available information suggests that a relatively small number of VBAs have been implemented in the United States (approximately 26), pointing to a range of contractual, procedural, and regulatory barriers that could impede their pursuit and implementation.

 Another study found that among 35 payers and 30 manufacturers, the average numbers of total pending/executed VBAs were 5.1 and 3.5, respectively, between 2012 and 2017.

 This study aimed to better understand VBAs in the United States, including both public and nonpublic arrangements, with a particular focus on gaining insights into their negotiation, operationalization, and impeding or success factors from the perspectives of manufacturers and payers.

This study used 2 data sources: an online survey and in-depth qualitative interviews. Target survey participants were subject matter experts from a cross-section of payer and biopharmaceutical companies and were identified through a snowball sampling technique based on existing working relationships, recommendations from others within the field, and internet searches. Senior representatives from 38 payer organizations and 37 biopharmaceutical manufactures were invited to participate between September 2017 and January 2018. Of those invited to participate, 26 representatives (13 each from biopharmaceutical and payer organizations) agreed to participate in the survey (response rate, 35%). Respondents were contacted for clarification when necessary to ensure validity of responses. Subsequently, 1 biopharmaceutical company’s responses were excluded due to a lack of response consistency, resulting in 25 analyzed respondents. Qualitative interviews, conducted with a subsample of survey participants, included 3 payers and 5 manufacturers. Study participants were not compensated for their participation.

First, we conducted an online survey using Qualtrics (

]). This survey, informed by a literature review and expert opinion, was designed to assess the key characteristics and proportion of public and nonpublic VBAs pursued between 2014 and 2017, as well as the factors that led to successful or, alternatively, challenged arrangement implementation. To guide exploration of VBA pursuit, we developed a process map describing 4 phases whereby manufacturers and payers (or providers) negotiate the terms of the arrangement, including (1) internal assessment and information gathering, (2) early dialogue, (3) formal negotiation, and (4) contract implementation (

). The process map and the survey were piloted and refined based on feedback from 5 experts representing both payer and biopharmaceutical organizations. Second, we conducted in-depth qualitative interviews with a subsample of survey respondents to expound upon key survey findings and address any gaps in information collected in the first phase of the study.

Descriptive statistics were assessed for each survey question by sector, including percentages for categorical values and mean (SD) and median (interquartile range) for continuous variables. A trained senior researcher (E.R.) collated responses to free-text survey questions and the qualitative interviews to identify key themes and substantiate main findings from the quantitative analysis, which were then vetted by the research team.

Of the 25 respondents, 1 manufacturer and 4 payers reported not having explored or negotiated any VBAs. Subsequently, questionnaire results from 11 biopharmaceutical manufacturers and 9 payers who had experience with VBAs were analyzed. Manufacturer respondents included 9 large firms (≥10,000 employees and annual revenues higher than $15 billion) and 2 medium-sized firms (5000-10,000 employees and revenues between $2 billion and $10 billion). Payer respondents included 1 single-state payer, 2 regional payers, and 4 national payers covering approximately 76 million lives. Of these payers, 6 offered both commercial and Medicare Advantage plans, and 1 was a public insurance contractor. There were also 2 pharmacy benefit managers covering an estimated 103 million lives.

Manufacturer and payer respondents reported implementing (phase 4) a total of 88 and 122 VBAs since 2014, respectively. However, there was considerable within-group variation in terms of the number of VBAs per firm, with manufacturers ranging from 1 to 15 implemented contracts (median of 9 contracts) and payers ranging from 1 to 40 implemented VBAs (median of 11 contracts) (

). Manufacturers and payers also reported that a majority of their company’s VBAs are not publicly disclosed (74% among manufacturers and 71% among payers). Additionally, 5 manufacturer and 2 payer respondents reported that none of their company’s VBAs are publicly disclosed (

). Respondents reported that laboratory value, medical encounter (eg, hospitalization rate/duration), financial, and drug utilization measures are the most common outcomes used in VBAs, whereas the most common payment mechanisms involved the manufacturer paying some portion of supportive product costs or providing a larger rebate or full refund to the payer if target outcomes were not achieved (

Both payer and manufacturer respondents also highlighted that there were no preferred therapeutic areas for VBAs, but rather that several factors make certain therapeutic areas (eg, asthma, cardiovascular disease, multiple sclerosis, hepatitis C, and diabetes) prime for VBAs, including validated and easily measured outcomes, uncertain value for high-cost products, limited competition, and availability of a diagnostic tool (eg, genetic testing) (results not displayed).

Direct provider engagement in VBAs is limited to date; only 3 manufacturers and 1 payer reported having engaged providers directly (eAppendix B). However, 91% of manufacturers and 78% of payers believe that incorporating providers is important for the future success of VBAs. Only 1 payer and 1 manufacturer reported that they have implemented a VBA in which a patient is reimbursed out-of-pocket costs for outcome failure. In contrast, patient adherence was a VBA component used by all payers and all but 1 manufacturer. Patient adherence was most commonly incorporated into VBAs by manufacturers and payers through patient selection (VBA only includes patients who have met a certain level of adherence) (55% and 63%, respectively), outcome terms (payment is explicitly tied to improvements in adherence [eg, proportion of days covered, medication possession ratio, and discontinuation]) (27% and 25%, respectively), and payment trigger (outcomes-based component does not take effect unless a certain adherence rate is achieved in the patient population) (18% and 38%, respectively).

Characterizing the VBA Negotiation and Implementation Process

The number of VBAs by sector in each stage of the negotiation and implementation process is detailed in the Table. The attrition rate across stages was high for both sectors. Manufacturers reported that only about one-third of the early dialogues conducted (ie, where 2 parties come together to informally discuss a potential arrangement) ultimately resulted in contract implementation. Payers reported that about 60% of the early dialogues with manufacturers resulted in VBA implementation.

Understanding VBA Negotiation Breakdown and Success

Respondents’ reasoning for VBA negotiation process breakdowns generally differed by sector and reflected each sector’s respective priorities (

). For example, manufacturers cited challenges related to data collection and evidence development (73%), the availability of appropriate outcome measures (64%), and implementation costs (64%) as major reasons for negotiation failure, whereas payers cited disagreement over incentive mechanisms tying payment to outcome (56%) and financial terms associated with the arrangement (67%). Both groups (64% of manufacturers and 78% of payers) cited Medicaid Best Price (generally, that a manufacturer must offer Medicaid programs the lowest or “best price” based on what is available to other purchasers) as a major reason for negotiation failure.

 In their top 5 negotiation success factors, both manufacturers and payers identified (1) the availability of measurable outcomes clearly tied to product use (82% and 100%, respectively), (2) a target patient population that is easily identified in claims (73% and 63%, respectively), and (3) a reasonable administrative burden (45% and 38%, respectively) (

). Manufacturers also prioritized having partners with the necessary data collection and analysis capabilities (91%), whereas payers emphasized the potential for high budget impact (75%) and having a reasonable data collection and analysis time frame (63%).

This study aimed to gain a better understanding of the prevalence and characteristics of public and nonpublic VBAs and to assess where in the negotiation and/or implementation process these arrangements fail and why. Importantly, we found that VBAs are far more prevalent in the United States than previously estimated, based on our sample of respondents. Manufacturer and payer respondents in our convenience sample reported having implemented (phase 4) a total of 88 and 122 VBAs, respectively, between 2014 and 2017. Significant variation in the number of contracts reported by each company was observed, suggesting that some companies may have more success than others in navigating the complexities of these arrangements. Both payer and manufacturer respondents reported that a majority of these contracts are not publicly known. This demonstrates that a substantial proportion of the activity related to tying payment to outcome measures is happening behind the scenes, which should be considered when evaluating the uptake and success of the broader movement to tie payment to value. However, when contemplating policy decisions associated with value-based payment, it is also important to contextualize the magnitude and potential of VBAs compared with more traditional payer—manufacturer contracts such as rebates (eg, success of VBAs in addressing health spending if they represent only a small proportion of overall contracts).

Follow-up interviews with payers and manufacturers suggested that publicizing VBAs can be beneficial, allowing a company to signal to customers and the public at large that value is an important issue for them, that they are at the forefront of the drug pricing debate, and that they have credibility and enough experience to advance value-based payment discussion and policies. However, the high proportion of nonpublic agreements indicates that many companies believe that the risks associated with publicly announcing a VBA, such as exposure to public scrutiny or yielding competitive advantage, outweigh the benefits. Additionally, contracts between manufacturers and payers are not typically publicly announced, and companies may be unwilling to challenge this norm.

Based on our analysis, successful VBAs—in which initial discussions between interested parties resulted in implementation of an arrangement&mdash;possess a range of similar characteristics, namely the availability and measurability of outcomes, uncertain value for high-cost products, and clear patient identification (eg, diagnostic tools), which have been corroborated in previous studies.

 The considerable discrepancy in the reported proportion of early dialogues that ultimately led to contract implementation between the 2 sectors was surprising, and it is unclear why payers report a higher rate of negotiation success. This could be due to certain limitations of our study, detailed later, or differences in interpreting negotiation success, but it could also reflect the relative importance of payer buy-in to achieve VBA implementation.

Although many contracts have indeed been implemented to date, this study underscores the significant effort required to successfully progress through all 4 VBA process phases. Manufacturers and payers reported that approximately 67% and 40% of early dialogues, respectively, do not reach implementation. Next, we discuss a number of major barriers that were highlighted that impede successful negotiation and implementation of VBAs, supporting previous findings.

First, both payers and manufacturers mentioned the need for clarification, and potential reform, of certain legislation and regulation, most notably the Medicaid Drug Rebate Program’s Best Price calculation requirement.

 Second, both payers and manufacturers indicated that data collection and analysis issues pose a significant challenge to VBA implementation due to a lack of data infrastructure, which could be addressed through common data standard principles to allow for not only interoperability across platforms for data of the same type (eg, electronic health record [EHR] data) for aggregation, but also linking across data types (eg, EHR, laboratory, and claims data).

 Notably, in the follow-up interviews, all respondents predicted that enhanced data sharing/analytic capabilities would result in not only more VBAs, but also more sophisticated arrangements. In the interim, and perhaps even as more advanced evidence-generation capabilities exist, respondents emphasized that contracts should be designed as simply as possible, including the data collected, outcomes measured, time horizon, and contract terms (eg, payment structure). Third, aligning with prior studies, follow-up interviews revealed that a lack of trust and understanding between payers and manufacturers can impede the negotiation process, particularly disagreement resolution.

 As a result, stakeholders often partner with organizations with which they have a history of positive, successful relationships to mitigate this risk. In new partnerships, it is essential to establish mutual trust by being transparent with regard to respective goals, notably in the early negotiation stage, which may be facilitated by using frequent communications.

 Additionally, to enhance trust, partners may consider either working with a third party to research, design, implement, and validate the VBA, or involving a greater range of stakeholders.

 For example, we found that most VBAs are between a payer and a manufacturer, with limited provider and patient partnerships. Increased provider engagement may enhance shared accountability and data measurement, but it could also introduce conflicts between new and existing provider-risk agreements, including alternative payment models, as well as add complexities to the contract negotiation process due to lack of medical benefit/pharmacy benefit integration.

 Although patient adherence was frequently used as a VBA component (eg, for patient selection), follow-up interviews suggest that there is uncertainty about whether VBAs improve patient outcomes or benefit patients more broadly, at least in terms of how they are currently designed and executed. For instance, existing VBAs appear to rarely integrate patient-reported outcomes and/or incorporate avenues for patients to share in any savings associated with the arrangement. Greater patient involvement could perhaps address this concern and align with broader efforts to mitigate high patient out-of-pocket costs. As an example, United Healthcare/OptumRx, CVS Caremark, and Express Scripts publicly announced recently that rebates would be directly shared with certain beneficiaries at the point of sale.

Overall, this study suggests that the VBA process is complex, requiring different points of alignment to successfully progress throughout all 4 of the suggested phases. As investment in these contracts by payers and manufacturers continues to increase, further research is needed to understand the scope, processes, and impact of VBAs. The study also highlights additional areas for future research, including the development and collection of VBA outcome measures, incentive mechanisms for participation, and the potential feasibility and impact of provider and patient incorporation into VBAs. However, focusing solely on publicly known VBAs greatly underestimates their prevalence and potential impact in the market, highlighting the need for research on all VBAs in a manner such that organizations can be transparent without disclosing confidential information. More transparent information exchange may also enhance trust among involved stakeholders and broaden participation in VBAs to providers and patients, where warranted. Additionally, more open discourse could help navigate the potential for overlapping contracts to enhance potential collaboration and efficiency of value-based payments.

Considering the various barriers along the path to implementation, it may also be beneficial to develop a tool or guidance document that can help manufacturers and payers assess the desirability of pursuing a VBA and optimize the difficult negotiation process. In particular, such a planning or evaluation tool could outline key components of a VBA (eg, technology characteristics, data collection and outcome measurement plan, level of risk) to consider at different phases of the process, with a view to highlight those features known to facilitate success. Furthermore, given the current diversity in VBAs, including how they are defined and conceptualized, a guidance document or the like could support greater consistency and quality across arrangements, reduce administrative burden, and increase adoption of VBAs throughout the healthcare system. As more information on VBAs becomes publicly available, such a tool or guidance can be refined and/or expanded to accommodate different types of VBAs.

Although there are several strengths to this study—including that it is the first study, to our knowledge, that focuses on understanding the extent to which these arrangements are being fully disclosed to the public and made transparent &mdash;there are limitations. Generalizability of these results may be limited because the questionnaire was administered to a small convenience sample with a low response rate, and the follow-up interviews were conducted on a selection of this sample. Next, although we provided a definition of VBAs and a framework for the negotiation and implementation process, there may be heterogeneity in respondents’ interpretations. Additionally, the questionnaire collected information only on newer VBAs administered from 2014 to 2017 to provide a feasible and realistic range for respondent recall. However, given that we collected information only from 2014 to 2017, we likely have not captured the full trajectory of previous or impending VBAs. Finally, the extent to which there was overlap between the contracts reported by manufacturers and the contracts reported by payers is unknown. To address this limitation, we surveyed a sample of both payers and manufacturers independently to cross-check validity and corroborate responses.

As VBAs are still broadly in the experimental stage, their ability to deliver on their promise (ie, increased value and/or improved patient outcomes) is yet to be determined. However, it is important to recognize the progress made in transitioning from volume- to value-based payment. This study reveals that the majority of VBAs are not publicly disclosed. Focusing solely on publicly known VBAs greatly underestimates the prevalence and potential impact of these arrangements in the market, highlighting the need for research on the proportion of VBAs among more traditional rebate contracts in a manner such that organizations can be transparent without disclosing confidential information. Although many negotiations never lead to a signed agreement, pursuit of these arrangements increasingly occurs between payers and manufacturers, highlighting that value considerations are being incorporated into stakeholder decision making. Our study identified several opportunities to address outstanding barriers to VBAs and further accelerate the transition toward value-based payment for biopharmaceuticals. Given the amount of work required, future negotiations would likely benefit from a framework or other evaluative tool that can help manufacturers and payers to assess the desirability and feasibility of pursuing a VBA for a product.

Duke-Margolis Center for Health Policy, Washington, DC (NM, ER, GWD, JQ), and Durham, NC (CS, HC, MM); UNC Eshelman School of Pharmacy (NM), Chapel Hill, NC; National Pharmaceutical Council (LB, KW, RWD), Washington, DC.

 This work was funded by the National Pharmaceutical Council.

 Dr Mahendraratnam was a University of North Carolina—Bristol Myers Squibb Worldwide Health Economics and Outcomes Predoctoral Fellow during the completion of this work. Dr Daniel receives consulting fees from AbbVie. Ms Buelt, Ms Westrich, and Dr Dubois are employees of the National Pharmaceutical Council, a policy research organization supported by the major research-based pharmaceutical companies in the United States. Dr McClellan is a board member of Johnson & Johnson, Cigna, and Alignment Health Care, LLC. The remaining authors report no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.

 Concept and design (NM, CS, GWD, LB, KW, JQ, HC, MM, RWD); acquisition of data (ER, GWD, JQ, HC, MM); analysis and interpretation of data (NM, CS, ER, GWD, LB, KW, JQ, MM); drafting of the manuscript (NM, ER, GWD, LB, KW, JQ, MM, RWD); critical revision of the manuscript for important intellectual content (CS, GWD, LB, KW, JQ, MM, RWD); statistical analysis (NM, JQ); provision of patients or study materials (MM); obtaining funding (GWD, MM); administrative, technical, or logistic support (JQ, HC, MM); and supervision (GWD, KW, MM).

 Mark McClellan, MD, PhD, Duke-Margolis Center for Health Policy, 1201 Pennsylvania Ave, Ste 500, Washington, DC 20004. Email: mark.mcclellan@duke.edu.

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6. Daniel GW, Barker T, Rai A, et al. Overcoming the legal and regulatory hurdles to value-based payment arrangements for medical products. Duke-Margolis Center for Health Policy website. healthpolicy.duke.edu/sites/default/files/atoms/files/overcoming_legal_and_regulatory_hurdles_to_value-based_payment_arrangements_for_medical_products.pdf. Published December 2017. Accessed August 27, 2018.

We surveyed biopharmaceutical manufacturers and payers to understand the prevalence and characteristics of value-based payment arrangements, as well as their implementation obstacles and success factors.

Value-Based Arrangements May Be More Prevalent Than Assumed

To estimate the long-run average cost (LAC) for a typical drug, accounting for the effects of generic competition and medical cost offsets. 

Descriptive analysis of retrospective cross-sectional survey data.

 We estimated the LAC for a drug as the average price per unit paid over the lifecycle of the drug, discounted across all time periods using Medical Expenditure Panel Survey data, and accounted for the effects of generic competition and medical cost offsets attributable to the use of pharmaceuticals.

 The average market-weighted price fell rapidly after generic entry. As a result, the brand price in the year prior to generic market entry was 39% (95% confidence interval [CI], 37%-43%) higher than the LAC per 30-day supply or package. When accounting for medical cost offsets, the brand price in the year prior to generic market entry was 75% (95% CI, 69%-79%) greater than the LAC per 30-day supply or package. The brand price at launch was 11% more than the LAC, and 40% more than the LAC net after adjusting for medical cost offsets. 

 Branded drug prices might overstate the true long-run cost of pharmaceuticals by 40% to 75%, accounting for generic price reductions and medical cost offsets. To ensure that all drugs providing long-run value end up entering the marketplace, market access and other policy decisions should consider the full range of long-term costs—and not just prices&mdash;at a particular point in time.

Using Medicare Expenditure Panel Survey data (1996-2013), this study estimated the long-run average cost (LAC) for an average pharmaceutical, accounting for the effects of generic competition and medical cost offsets. 

Focusing on branded drug prices may significantly overstate the LAC. 

Accounting for patent expiration, the loss of exclusivity price and the launch price overstate the LAC by 39% and 11%, respectively, and the LAC net of medical cost offsets by 75% and 40%, respectively. 

To ensure that all drugs providing long-run value end up entering the marketplace, value assessments or related market access decisions should consider these long-term costs.

The policy debate over the price of prescription drugs continues to intensify. For example, the recent introduction of very expensive and highly effective treatments for hepatitis C, along with innovative therapies for many cancers, has deepened concern about patients’ ability to afford innovative medicines.

 However, the debate does not consider the effect of patent expiration and the loss of exclusivity on drug prices. The price of prescription drugs depends on the nature and consequences of generic competition. Criticism has swirled around a cadre of generic drug manufacturers inflating prices for long-established compounds that, for various reasons, lack generic competitors. For instance, the price of digoxin, an “ancient” treatment for heart failure and atrial fibrillation, deemed an essential medicine by the World Health Organization, doubled over 6 months.

 However, for many widely used drugs, generic competition reduced prices significantly—and swiftly. Patent expiration lowered the price of simvastatin by 89% in 5 years and the price of clopidogrel by 46% in 1 month.

 These conflicting anecdotes provide little guidance to policy makers about the extent to which patent expiration lowers the long-term cost of drugs. Much has been written about the ability of drugs for specific diseases to reduce the need for other medical costs, yet little is known about the extent these “cost offsets” lower long-term costs associated with the average drug.

To address these knowledge gaps, we estimated the long-term cost of prescription drugs to patients, accounting for patent expiration and medical cost offsets. Focusing on the price of a drug at a given point in time can help inform discussions on which patients should use a drug and what the aggregate costs will be at that point

However, the value of innovation depends on the long-term cost of a new drug, and this has not been quantified previously. 

Drugs add long-term value to society when each unit sold produces a long-term benefit that exceeds long-term cost. To facilitate the assessment of long-term value, we estimated the long-run average cost (LAC), defined as the long-run cost per unit of the drug. We derived a formula for the LAC that formalizes this intuition (

The formula expresses the LAC as an average cost per unit of a drug. To illustrate, imagine that a branded drug costs $5 per fill and its generic equivalent costs $1 per fill. Imagine further that, over the lifecycle of the drug, 1000 branded prescriptions are filled and 5000 generic prescriptions are filled. The LAC is given by the weighted average cost per fill, which equals: ($5 × 1000 + $1 × 5000) / (1000 + 5000) = $1.40. 

Apart from generic price reductions, there are 2 additional factors we incorporated into this simple framework. First, a given drug may be produced as multiple dosages or by multiple manufacturers. Thus, the LAC calculates prices and quantities across a number of different dosages and product types. Continuing with the example above, suppose the drug comes in 5-mg and 10-mg doses, and each dosage accounts for half of branded fills; the 5-mg dose costs $2.50 and the 10-mg dose costs $7.50. In this more complex setting, we continued with our principle that the LAC was given by the weighted average cost per fill, which equals: ($2.50 × 500 + $7.50 × 500 + $1 × 5000) / (500 + 500 + 5000) = $1.40.

Second, timing matters. Using a prescription today is worth more than delaying until tomorrow. In economic analysis, this is known as the social discount factor, which measures the rate at which consumer well-being decreases from delaying consumption. Following the economics literature, we employed a 3% annual discount rate.

 Continuing with the earlier example, suppose that our hypothetical drug was on patent for 1 year only, generics entered after that year, and all drugs sold in year 2 were generic. The discount factor would enter our LAC calculation (in italics) as follows: ($2.50 × 500 + $7.50 × 500 + $1 × 5000 

) = $1.68. Discounting lowers the contribution of future prescriptions and thus shifts up the LAC in the direction of current period prices. In the eAppendix, we demonstrated proof that the LAC, as formulated here, possessed the following desirable and intuitive property: a drug adds incremental value to society if, and only if, the value per prescription exceeds the LAC.

We next incorporated medical cost offsets in the LAC. We took the average reduction in cost per prescription occurring as a result of avoided nondrug medical costs from the literature. We applied this cost reduction to the LAC to derive the LAC net of medical cost offsets (LAC net). A formal expression for the LAC net can be found in the eAppendix. As an example, we supposed that our hypothetical drug saved 25 cents in medical costs per prescription sold. This cost offset would enter our calculation (in italics) as follows: ([$2.50 — 

] × 5000 × [1 — 0.03]) / (500 + 500 + 5000 × [1 – 0.03]) = $1.43. Notice that adding the cost offset brought down the LAC by exactly 25 cents. In our empirical analysis, we were particularly interested in how the LAC and the LAC net compared with the price of the drug at the time of generic entry and at launch. 

The first step was to estimate prices for a wide sample of drugs. The host database for the price analysis was the Medical Expenditure Panel Survey (MEPS) Prescribed Medicines File from 1996 to 2013.

 The MEPS data are nationally representative, with detailed information on healthcare use, expenditures, sources of payment, and health insurance coverage. It has a household component that provides respondents’ self-reported information, including utilization of prescribed medicines. 

We defined the year of loss of exclusivity (LOE) as the first year we observed utilization of a generic National Drug Code (NDC) for a drug. The sample of medicines included those drugs whose LOE occurred in 1997 or later. Within this sample, we observed drug prices as early as 17 years before LOE and up to 16 years after LOE. For example, if a drug lost exclusivity in 2000, we observed prices for 3 years pre-LOE and 14 years post LOE. There were no biologics present in the sample because we did not observe LOE before 2013. We also excluded vaccines, medical devices, prescribed vitamins, and drug classes not meant for immediate patient use. 

The MEPS Household Component and pharmacy follow-back surveys measured pharmacy transaction prices. Rebates paid by the manufacturer to the insurer (eg, through the Medicaid Drug Rebate Program or contractual agreements negotiated between manufacturers and private insurers) were excluded. Prior literature has estimated that MEPS aggregate drug spending figures are modestly higher (3%) than national benchmarks,

 possibly due to the exclusion of rebates and other potential sources of measurement error. We conducted a sensitivity analysis to assess the potential effect of passed-through rebates on our estimates by lowering MEPS branded drug prices by 10% during the exclusivity period.

For each instance of drug utilization in the MEPS, the database records the associated NDC. As a single drug may have multiple NDCs, we used the Medi-Span Electronic Drug File to create a crosswalk from the NDC number to a drug—dose level identifier and linked this crosswalk to the MEPS data by NDC. Medi-Span is a database of drug and clinical information including active ingredients, generic equivalents, and therapeutic class. 

Prices were aggregated from the NDC level up to the drug—dose level in 3 stages. First, as each MEPS respondent could have had multiple purchases of the same NDC within a year, we calculated the average price paid per individual by year and NDC. Then, we constructed the national average by computing the survey weighted average price for each NDC by year across users of that NDC. Lastly, we calculated the NDC utilization weighted average of each drug by dose (or package size), type (brand or generic), and year.

Our sample included 132 therapeutic classes, 259 drugs, and 1229 different drug—dose combinations. The sample contained all drugs that experienced LOE during the sample window, with the exception of the exclusions noted above. This covers a broad set of drugs for a wide variety of diseases. We observed prices and utilization of these drugs from 1997 to 2013. 

We measured quantity as the number of prescription fills of a drug, dose (or package size), and type (brand or generic) per year. Quantities were aggregated up to the national level by summing the product of the MEPS survey weight and number of fills for each unique individual using a particular drug, dose, and type by year. 

Lastly, we estimated the direct medical cost offset per prescription fill. We conducted a targeted literature search for reviews and meta-analyses on the effects of pharmaceutical use on direct costs or medical/nonpharmaceutical spending. The goal was 2-fold: to estimate the direct cost offsets associated with pharmaceutical use and determine a plausible range of effects for medical cost offsets. We searched for estimates of the reduction in direct costs/medical expenditures associated with the use of a wide group of drugs, rather than only a few specific classes, for 1 month (30-day supply). 

Pharmaceutical Utilization and Prices Over Time

 illustrates that the average number of brand fills declined significantly after LOE (year post LOE of 0) and was more than offset by a concomitant increase in generic users in the following years. In the year generics entered the market, they captured 33% market share on average. This rapid capture of market share is consistent with previous research.

 After 5 and 10 years, generics possessed 74% and 77% of the market, respectively. 

 depicts the year-to-year time series for average brand or generic price relative to the price in the year before generic entry (LOE price). The average brand price increased throughout the drug’s lifecycle, but the average generic price tended to decrease for at least 10 years. The average generic price was 66% below the LOE price 5 years after generic entry and 80% below 10 years after generic entry. 

 presents the implications for the price of the average prescription (generic or branded) sold in the marketplace. This Figure demonstrates that the average market-weighted price fell rapidly after generic entry. In the year generics entered the market, the market price was 6% lower than the LOE price. After 5 years, it was 55% lower than the LOE price, and after 10 years, it was 71% lower.

Next, we explored the extent to which medical cost offsets reduced the long-term cost of pharmaceuticals. Our targeted literature search generated 13 articles on direct cost offsets associated with pharmaceutical use and/or pharmaceutical spending.

 Four of these studies contained information and estimates that allowed for the calculation of the effect of pharmaceutical use on medical (nonpharmacy) spending. Only 1 study, from the Congressional Budget Office (CBO), was representative of a large population (Medicare beneficiaries) and a broad set of therapeutic classes.

In 2012, the CBO estimated that a 1% increase in the number of prescriptions filled per year resulted in a 0.2% (95% confidence interval [CI], 0.1%&shy;-0.4%) decrease in medical expenditure per year. Based on the 2012 CBO study

 and information on the aggregate number of prescription fills and total healthcare expenditures in 2014, we estimated that each additional prescription filled (30-day supply) reduced medical expenditures by $94 per year ($8/month) (

 The cost savings in Medicare for specific chronic conditions, including diabetes and hypertension, were even higher.

We first calculated the LAC, which reflects the effects of generic entry and price declines. We reported this as a fraction of the LOE price and estimated that the LOE price was 39% (95% CI, 37%-43%) higher than the LAC per 30-day supply or package (

We calculated direct medical cost offsets of $94 per year ($8/month) then estimated the LAC net after applying this cost reduction to the drug prices in the data. On average, the LOE price was 75% (95% CI, 69%-79%) greater than the LAC net per 30-day supply or package. 

Pharmaceutical Costs Relative to Launch Prices

The analysis above compared the LOE price with LAC and LAC net. Another relevant comparison was to the brand price at launch. This calculation was more difficult, because the length of our sample window did not allow us to follow many drugs from launch well into the post—patent expiration period. As a rough approximation, we calculated the average percentage difference in price between the year prior to generic entry and the average year of launch. Using the FDA Orange Book Data, we found that for the average small molecule, 14 years elapse between the drug launch and the LOE. Moreover, according to Figure 3, the (real) brand price 14 years prior to generic entry was 80% of the price in the year just prior to generic entry. The LOE price was 39% more than the LAC and, thus, it follows that the launch price was 11% (= 1 – [0.8 × 139%]) more than the LAC. Similarly, the launch price is 40% (= 1 – [0.8 × 175%]) more than LAC net. 

As it is well understood that generic entry lowers prices, policy makers should consider the long-term cost of pharmaceuticals, rather than the cost at a particular point in time. We showed that these price reductions meaningfully lowered the average cost per prescription that patients pay over a drug’s lifetime. Branded drug prices were 11% above the LAC at launch and 39% above the LAC at patent expiration. Incorporating cost offsets brought these differentials to 40% and 75%, respectively, above the LAC net. Noting that long-run generic prices lie 80% below the branded price at patent expiration, the LAC net was roughly halfway between the pre-expiration branded price and the long-run generic price. 

Branded prices, generic prices, and the LAC all play important roles in economic decisions, which are made on the margin. Prices at a point in time matter to payers, who must decide if the benefit of treating 1 more patient outweighs the cost. The LAC and the LAC net, however, should matter to regulators, policy makers, and payers assessing whether a new drug can be marketed or reimbursed. In this context, overstating the eventual cost of a drug may lead to fewer drugs being made available, weaker incentives to innovate, and ultimately, fewer new drugs discovered. The use of the LAC and the LAC net could mitigate these effects by informing decision makers about the true value drugs add to society along all their lifecycle. For example, health technology assessments (HTAs) could include an assessment of the cost-effectiveness ratio that discounts the launch price—the most frequently used measure of drug cost&mdash;by 11% (excluding cost offsets) or 40% (including cost offsets). Not only should HTAs incorporate medical cost offsets, but they should also consider the long-run unit cost of a drug. 

As research has demonstrated, robust generic drug markets play a key role in holding down the LAC of drugs. Thus, policy makers should aim to mitigate barriers to entry for new generic drugs and ensure the continued safety of the generic drug supply. This is particularly relevant for specialized products that do not attract significant generic entry or competition. Recent events (eg, the 5000% overnight price increase of daraprim) demonstrate the importance of preserving competition within those market segments.

Medical cost offsets play a material role in holding down the LAC. This suggests the importance of taking an integrated view across pharmacy and medical benefits. Some have argued that standalone prescription drug insurers offer less-efficient benefit designs because they fail to internalize spillovers between prescription drugs and medical care.

Our estimate of the LAC may have overstated the actual LAC because we lacked data on rebates paid from manufacturers to payers. These may have been significant during the period of patent protection. Our analysis was also limited by the timeframe of the MEPS data. We were only able to characterize trends in price and utilization for drugs that lost exclusivity in 1997 or later; thus, we could only observe the first 15 years after LOE, even though many drugs were used for more than 15 years following LOE. On the other hand, we observed up to 16 years prior to LOE, likely covering the vast majority of the patent-protected period when market prices are highest. Therefore, our estimate might overstate the LAC. 

Our estimate covered only the population of drugs for which generics end up being used. Although this is not fully representative, this represented the vast majority of drug utilization. In 2013, for instance, drugs with generic alternatives represented at least 86.4% of prescription drug utilization in MEPS and these generic alternatives presented 81.0% of prescription drug utilization in MEPS. As some of the remaining 13.6% will inevitably include some patent-protected drugs that will eventually go generic, this is a conservative estimate of the fraction of use due to drugs with generic utilization. 

Another limitation concerns the estimate of direct cost offsets. Our estimate is based on a CBO study of medical cost offsets over a broad sample of drugs for Medicare beneficiaries.

 It is possible that cost offsets within Medicare may be different from the effects in the non-Medicare population. Future research might consider estimating cost offsets outside Medicare in a broad-based sample for comparison. We also took a conservative approach to measuring the cost offset effects of drugs. For example, the results of several studies suggest that pharmaceuticals produce financial benefits for employers by increasing the productivity of workers with chronic illnesses. Biologics for rheumatoid arthritis, antihistamines for allergies, selective serotonin reuptake inhibitors for depression, and triptans for migraine are commonly studied treatments that have been shown to increase productivity.

 However, as productivity estimates are highly specific to particular classes of drugs, we excluded them from our analysis and our estimate of the LAC net. Future research might explore drug class or disease state—specific LAC and LAC net values that reflect direct and indirect cost offsets.

This study found that brand price at launch and generic entry overstates long-run average pharmaceutical costs, with and without accounting for medical cost offsets.

What Do Pharmaceuticals Really Cost in the Long Run?

Care pathways are used widely in US healthcare settings and are expected to have greater influence on quality of care and patient outcomes in the future. We conducted qualitative research to evaluate the state of care pathways and their impact in the United States.

 Targeted literature review followed by an online survey and in-person interviews.

The PubMed and Cochrane databases were searched for publications on care pathways (January 1, 2005, to July 21, 2014) to inform the subsequent surveys and interviews with payers, providers, and pathway vendors regarding care pathway design, development, and management. A targeted hand search was completed in May 2015 to supplement the earlier review.

Twenty-nine publications, posters, or abstracts on specific care pathways were identified; the online survey and follow-up interviews included 26 and 18 respondents, respectively. Positive trends in current care pathways development and implementation include prioritization of high-quality evidence, enhancing the role of providers in development and implementation, and flexibility for providers to tailor treatment decisions to patients’ needs. Nevertheless, there are some limitations in methodology for development and implementation, in criteria for evaluation, and in the degree of transparency surrounding these activities.

 Our research confirms that high-quality evidence of efficacy and safety are expected to be central to future pathway development, and that physicians play a major role in development and implementation. To achieve the goals of improving quality of care while managing costs, further efforts are required regarding systematic development and evaluation, consistent implementation and compliance metrics, and transparency in implementation outcomes and financial motivators.

Care pathways are developed to manage patient care, improve quality, reduce variation, and increase efficient use of healthcare. They provide a mechanism for integrating evidence-based medicine into clinical practice. However, formal best practices to guide development, implementation, evaluation, and monitoring are needed. 

Often, pathways are implemented to manage drug utilization, particularly specialty drugs.

Trends in development and implementation have not been investigated systematically. 

Pathways will have more influence in the future, particularly with bundled or episode-based payments.

Research findings support implementation of standards and increased transparency in all dimensions of pathway development, implementation, and evaluation.

Care pathways, sometimes referred to as clinical pathways or integrated care pathways, are used widely in US healthcare settings. The concept goes as far back as 1985, with roots in efforts to codify or formalize patterns of care that were initiated at the New England Medical Center in Boston, Massachusetts.

 Although without a uniformly accepted definition, care pathways are typically characterized as a method for managing patient care based on clinical practice guidelines, with the main goals of improving quality of care, reducing variation in clinical practice, and increasing the efficient use of healthcare resources.

 Care pathways are generally expected to reduce the overall costs of treatment related to the condition for which a pathway is developed.

Care pathways influence quality of care and outcomes. Despite positive trends in development and implementation, further efforts in process transparency and evaluation are required.

Author | Kimberly Westrich, MA

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