In late June, Susan DeVore asked an auditorium filled with medical-industry executives if any would be willing to link the prices of the drugs and devices they sell to how well those products work. DeVore, whose company, Premier, helps 3,400 U.S. hospitals make purchasing decisions, recalls seeing about a half-dozen hands go up. “I think it’s a little bit scary for them,” she says. But it’s a question they should get used to hearing, she adds. “Health systems and physicians are more interested in it today than they’ve ever been.”
The government and private insurers have been trying for years to move away from the fee-for-service system that pays doctors and hospitals based on the volume of tests they perform and treatments they prescribe. They want to replace it with contracts that reward quality and better outcomes. Medicare, the federal insurance program for seniors, plans to make half its payments through such arrangements by 2018.
The changes in the reimbursement model are rippling out to manufacturers of drugs and devices. The shift could help address a long-standing problem with medical advances: The benefits observed in carefully designed clinical trials don’t always materialize when a treatment is deployed in the real world.
But linking payment to performance, while appealing in theory, is tricky. “What metric are you going to select to measure performance? That can be challenging to select and agree on,” says Genia Long, a senior adviser at Analysis Group, which does consulting work for drug and device makers.
Premier is in discussions with a handful of suppliers about risk-sharing contracts for devices. ICU Medical promises that its connectors for central-line catheters—a tube inserted into a large vein to deliver medication—will reduce obstructions known as occlusions. It’s offering to pay hospitals back if they don’t. Another company Premier is talking to makes an antibacterial pouch aimed at reducing infections when pacemakers are implanted, DeVore says.
St. Jude Medical is offering all its hospital customers a guarantee on one of its products, an implantable cardiac resynchronization device called the Quadra CRT system that it introduced in 2011. St. Jude will refund hospitals 45 percent of the Quadra’s cost if a patient needs corrective surgery within a year.
Private insurers are also pushing drug companies to give some guarantee that high-priced medicines work. UnitedHealth Group’s drug benefits business, OptumRx, has negotiated pay-for-performance deals for hepatitis C drugs that can cost $1,000 a pill. Humana has struck 13 similar agreements with pharmaceutical companies on treatments for cancer, multiple sclerosis, diabetes, and other conditions, says William Fleming, president of Humana Pharmacy Solutions.
Humana wants to take the same approach to negotiate payments for costly new cholesterol drugs known as PCSK9 inhibitors. While the medications have been shown to lower harmful cholesterol, health plans care more about whether that translates into better health. “Do [patients] actually avoid heart attacks?” Fleming asks. Amgen, which makes one of the drugs, says it plans to link Repatha’s price to “expected” cholesterol reductions.
One challenge for drug companies: Patients need to take medications correctly and consistently for them to work. A drug’s benefit may also depend on other factors beyond the manufacturer’s control, like the patient’s diet. Technology companies are trying to develop ways to measure patient compliance. “To create the proof of the outcome, you need to know what’s going on with that patient on a regular basis,” says Rick Valencia, senior vice president and general manager of Qualcomm Life, the chipmaker’s 4-year-old health-care division.
Qualcomm is working on a combination of software and sensors to monitor whether patients are taking medications, getting needed tests, or adhering to other therapies, Valencia says. Despite the practical hurdles, he sees it as inevitable that drug and device makers’ reimbursements will eventually be tied to results. “If that’s the way the hospitals and doctors are going to get paid,” he says, “then the people they do business with have to be prepared to get paid that way as well.”
—With Zachary Tracer and Caroline Chen
The bottom line: Hospitals and insurers want drug and device makers to tie prices more closely to performance.