Regulatory Insights for Life Sciences and Health Care Investments: Value-based purchasing

Hogan Lovells

Hogan Lovells

Investing in the life sciences industry without an understanding of the key regulatory factors that could determine a product’s success or failure could cost you millions of dollars.

As the industry readies itself for the 2019 edition of the annual pilgrimage to the J.P. Morgan Healthcare Conference in San Francisco, our market-leading Global Regulatory Team has prepared a series of updates covering the following topic areas that we hope will help guide your 2019 investment decisions.

How value-based purchasing will disrupt the health care pricing market

Value-based purchasing is the talk of the health care industry. From manufacturers, to health care systems, to top commercial insurers, and even federal health care agencies, health care companies are clamoring to strike innovative deals offering greater value and better outcomes. Yet, in spite of rhetoric from the government surrounding a transition to payment based on quality, health care regulations do not always keep up with innovative ideas, and many investors are wondering whether value-based arrangements are legal, or worth the risk.

While formal guidance from the government remains sparse, investors should welcome business strategies that embrace the drive to pay for health care based on value, as pathways exist to manage regulatory risk. The best arrangements take a win-win-win approach, in which the provider benefits from lower pricing from vendors, the patient obtains better outcomes at a lower price, and the payers and manufacturers are each able to translate strong clinical performance into a more reliable reimbursement structure.

Health care payers and providers are demanding value, and innovators are rising to meet that demand

The days of paying the same flat rate for a hip replacement or a new prescription drug are gone. Today, more and more payers and providers are entering arrangements where prices (or discounts) for drugs, medical devices, and health care services are linked to value, as determined through voluntary contracts or mandatory government models.  For example:

  • Government and private payers alike are turning decisively away from fee-for-service health care and insisting that more health care providers and suppliers agree to share risk for patient outcomes through value-based contracts.
  • In the last few months, Medicare has begun a new five-year risk-sharing model that attracted 1,300 participating hospitals and physician groups, and Secretary of Health and Human Services Alex Azar announced the government’s intent to “revisit” mandatory and voluntary value-based models in clinical areas like oncology and cardiac care.
  • Providers – who are feeling the squeeze of value-based payment and are also seeking more bang for their buck – are pressing suppliers such as medical device and capital equipment manufacturers to enter into value-based purchasing arrangements.

Meanwhile, both established companies and innovative start-ups are actively looking for ways to tie payment for their products and services to the value and outcomes they produce, in an effort to get in front of the trend. Here are just a few examples of value-based deals that companies are striking:

  • Performance-based, or risk-share, pricing is the most common form of value-based contracting, where a buyer pays more or less for a product or service based on how well it performs against agreed-upon metrics and outcomes. 
  • Course of therapy pricing offers a single price across a defined time period or course of therapy, with the seller taking on risk if the patient needs more product to achieve the agreed-upon outcome.
  • Indication-based pricing offers the same product at different prices depending on the indication for which it is used, allowing sellers to calibrate prices to the clinical value offered in treating a particular condition.
  • Annuity pricing allows sellers to spread the cost of a product across all the payers that cover a patient over his or her lifetime.

Legal risks exist but can be managed

Health care fraud and abuse laws and other regulations are decades-old, and have not been modified to accommodate value-based purchasing and payment. For example, the federal anti-kickback statute was designed to apply to sales of health care items and services, using traditional reimbursement models that reward volume, not value or outcomes.

However, government agencies are slowly adjusting the regulatory structure to address the shift to value-based care, and the legal risks can be managed in the meantime. In addition, companies have found ways to engage in value-based contracts while complying with existing laws and regulations. For example, companies can reduce risk by ensuring there is a clear benefit to patients, such as improved clinical outcomes or expanded access, and by maximizing transparency of the arrangement to the government. At the same time, industry groups like AdvaMed and PhRMA are lobbying for clearer and stronger regulatory safe harbors for value-based arrangements.

In the long term, legal risk will become even more manageable as value-based purchasing expands and regulators refine their understanding. In the meantime, industry will continue to take the lead because such arrangements benefit all parties to health care transactions. Investors therefore should not shy away from companies that embrace value-based purchasing, but look forward to the future of greater health care value and outcomes.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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