Drug warranties, outcome-based agreements, and barriers to costly therapies

Advanced gene, cell, and specialty therapies have the potential to transform patient lives. However, they come at a steep cost to patients, payers, and the healthcare system, with prices running into the hundreds of thousands, if not millions, of dollars. A relatively new concept known as a drug warranty is gaining traction as a means to offer some financial protection when these costly treatments are ineffective.

This is the second in a series of articles exploring the use of warranties in a pharmaceutical environment, designed to address drug manufacturers’ challenges, educate patients and end payers, and expand awareness about the value of warranty programs to the wider healthcare system.

Exploring other market access tools for advanced therapies

Therapeutic warranty solutions largely differ from other market access tools, such as value-based agreements (VBAs) and outcomes-based agreements (OBAs). While drug warranties establish agreements directly between manufacturers and end payers, VBAs and OBAs are typically made between manufacturers and intermediaries, such as administrative services organizations or pharmacy benefit managers. The intermediary — essentially a third-party administrator — works to negotiate the terms of the agreement between itself and the manufacturer. However, they typically do not assume financial responsibility for the treatment.

If a patient qualifies for reimbursement for a therapy that did not work as intended under the terms of a VBA or OBA, payment takes the form of a performance rebate, or a refund or discount provided by the manufacturer that should, in theory, go to the end payer. However, due to the involvement of intermediaries, the full value of the rebate often does not fully cascade down to the end payer, the entity that took on the true and total financial risk. Moreover, because the contract is typically between the manufacturer and the intermediary, the end payer may not even be aware that a rebate exists or even the terms of the VBA or OBA, should one exist.

Pharmaceutical manufacturers tend to strictly control rebate amounts and discounts, as these dollars are considered a concession to pricing and must be reported to the US government, where they are factored into the CMS best price calculation. This reality makes it even less likely that end payers will be fully reimbursed for the risk they are assuming — if at all.

Further, since these agreements are negotiated individually, with only a handful of intermediaries servicing a minority of end payers, many potential patients may not be able to easily access these expensive therapies because their payer has no recourse if the treatment is ineffective. Smaller and/or self-insured plans, particularly, may not have the ability to negotiate a rebate aligned with their risk tolerance, and ultimately decide not to cover the drug.

Drug warranties, on the other hand, are oriented directly between the manufacturer and end payer. As the payouts are not held against CMS best price (see box), pharmaceutical manufacturers are better able to provide payers with meaningful remuneration to the right counterparty. Rather than negotiating individual VBAs and OBAs with many parties, a warranty comes with all sales of the drug, which dramatically simplifies the negotiation process for the manufacturer. Once the drug receives regulatory approval and its label is known, the terms of the warranty can be clearly defined by the manufacturer.

The warranty accompanies every sale of the therapy, allowing all end payers to benefit from it, regardless of their bargaining power. By offering a warranty on their therapy, pharmaceutical manufacturers can increase the chances that payers, both large and small, may include the drug on their plans, in turn expanding access to more patients.

What are best price calculations?

Under CMS rules, manufacturers are required to report the best price they offer for their therapies. This best price is the lowest price at which a manufacturer sells their therapy to any purchaser, including wholesalers, retailers, and other direct purchasers — net of any rebates, price concessions, or other inducements. The purpose of this requirement is to ensure that Medicaid programs receive the benefit of the lowest price available in the market, and to make high-cost therapies more available and affordable to a larger pool of patients. Under the system, any money paid out in a rebate typically lowers the best price calculation.

Existing barriers to access for payers and patients

Warranties and rebates are both part of the effort to improve affordability, streamline reimbursement, and expand access to specialty therapies. As therapeutic warranties are a relatively new piece of the puzzle, it’s important to increase awareness about them as we discuss barriers to access for payers and patients.

Currently, the most significant roadblocks to accessing specialty therapies for patients and payers include:

Affordability: As the number of available high-cost treatments grows, end payers must decide which therapies to prioritize, given limited budgets. The upfront costs associated with treatment strain the end payers responsible for footing the bill if the treatment does not work. Even if a million-dollar gene therapy is 95% effective, end payers cannot ignore the 5% of patients who do not experience the expected outcome for medicines that cost hundreds of thousands of dollars or more.
Durability: Although advanced therapies are typically priced based on the reasonable assumption that they will provide long-term benefits to patients, many are approved after relatively short clinical trials. Therefore, it can be difficult to know if benefits will be long-term. Even if the risk of therapeutic inefficacy is extremely low, payers do not want to take on this risk alone, or at all, for a drug that costs them millions of dollars.

According to a survey of small and large commercial and public plans covering 84 million people, payers increasingly demand a performance guarantee for advanced therapies.

A trifold solution for patients, payers, and manufacturers

Introducing a comprehensive drug warranty program is an opportunity to benefit the following parties in substantial ways:

Patients: By offering performance guarantees, manufacturers take responsibility for the quality and efficacy of their products with meaningful reimbursement options. This setup not only encourages patient trust and confidence in the medication, but also helps alleviate the financial burdens associated with ineffective treatments. Therapeutic warranties can potentially contribute to increased medication adherence and compliance, improved health outcomes, and greater patient satisfaction.
End payers: Taking on the financial risk associated with a million-dollar dose of treatment can be an untenable option for payers. Warranties may offer payers meaningful financial recourse in the event of therapeutic inefficacy. The financial protection gives them more confidence and reassurance when covering potentially life-altering therapies, equipped with a robust performance guarantee.
Manufacturers: Warranty programs help manufacturers increase patient access and adoption of expensive therapies. By providing assurance to payers that therapies will deliver on their clinical objectives and offering financial recourse if they fall short, warranties can influence payer behavior and establish a superior value proposition from their peers. Payers will be more apt to provide coverage for a therapy with a robust performance guarantee than one without. A well-structured and compliant warranty, in conjunction with advanced therapies, mitigates risks by leveraging insurance strategies and helps motivate manufacturers to continue developing innovative solutions.

Expanding patient access through partnership

Marsh and Octaviant Financial, Inc., a recognized innovator in novel drug warranty and payment models, joined forces in 2023 to create a specialized warranty platform that enables pharmaceutical companies to expand patient access to their life-changing gene, cell, and specialty therapies.

Together, the Marsh and Octaviant warranty platform can support pharmaceutical manufacturers in developing customized therapeutic warranty solutions from concept to execution. Through our partnership, we ensure compliance with the latest CMS guidelines and state insurance regulations, allowing for meaningful reimbursement of the therapy. In addition to the warranties, the Marsh/Octaviant program provides clients access to strategic insights and proprietary tools, such as therapeutic actuarial services and Octaviant’s precision finance platform, to bring highly competitive warranties to market.

Pharmaceutical Optical Ampoule / Vial Inspection Machine.

Article

Drug warranties, outcome-based agreements, and barriers to costly therapies

Exploring other market access tools for advanced therapies

What are best price calculations?

Existing barriers to access for payers and patients

A trifold solution for patients, payers, and manufacturers

Expanding patient access through partnership

Our people

Eddie Albers

Related insights

Using drug warranties to mitigate financial risks of costly therapies

Product and clinical trials liability webinar

Four actions to mitigate rising product recall risks

D&O risk mitigation insight series

Marsh.com Sign in

Drug warranties, outcome-based agreements, and barriers to costly therapies

Exploring other market access tools for advanced therapies

What are best price calculations?

Existing barriers to access for payers and patients

A trifold solution for patients, payers, and manufacturers

Expanding patient access through partnership

Talk to us

Our people

Eddie Albers

Related insights

Using drug warranties to mitigate financial risks of costly therapies

Product and clinical trials liability webinar

Four actions to mitigate rising product recall risks

D&O risk mitigation insight series