Risk Sharing: The Need to Think Differently

Dear All,

Olivier's and my article on risk sharing is finally published in this months edition of ISPOR Connections. For the full article with figures & tables click here.

Risk-sharing: The Need to Think Differently

Olivier Ethgen, MSc, PhD, Associate Professor, Department of Public Health Sciences, University of Liège, Liège, Belgium, and Senior Manager, Global Health Economics, GlaxoSmithKline Biologicals, Wavre, Belgium; and Ulf Staginnus, MA, Head, Pricing & Health Economics Europe, Novartis Oncology, Barcelona, Spain

Under continuing economic pressure, the assessment of new therapy now goes well beyond the three ex-ante regulatory hurdles (quality, safety and efficacy). The last several years have witnessed the emergence of payers and health technology assessment (HTA) agencies as key stakeholders in market access negotiations. In this context, cost-effectiveness analysis has been given a central role and is now likely the most searched and applied type of analysis.

Cost-effectiveness models are principally based on ex-ante and relatively scattered information. Models are built upon the combination of Phase III data, observational data and reviews, should they be systematic or not. Results are more than often positively reported and support the claim that the new technology is cost-effective at the prevailing threshold.

Real World
Considerable uncertainties remain in post real-world cost and effectiveness outcomes i.e., in the non-investigational, local and practical setting in which the product is effectively given. It is precisely in that setting that the real costs for the health care system are incurred. Those uncertainties are thus worrying for the payers, regardless of how well uncertainty has been factored in the ex-ante cost-effectiveness exercise. Payers increasingly require alignment of their payments with the real-world achievements of new products. Meanwhile, spurring innovation and providing access to innovative treatment for deserving patients remain a priority for any health care system.

Reference Pricing
From a pricing perspective, international price referencing (IPR) is increasingly used by many countries as a cost containment measure, notably in Europe. A specific country gathers and compares the prices from other countries and according to certain formulas (such as the average, the lowest, etc.) sets its price level. As a result, price modifications in one or more external markets have immediate implications on the price levels in other markets. This may trigger a spiral of cross-referencing and price adjustment, which usually results in a downward pricing spiral.

In this context of increasing ex-post value appreciation and price referencing system, there is now a call for new market access solution. This is where risk-sharing mechanisms or the so-called innovative pricing or market access agreement approaches come into play. Those new type of agreement are precisely a mean of ensuring access to innovation, while at the same time mitigating payers’ ex-post financial exposure and providing fair return on investment for manufacturer.

Practical Approach
A risk-sharing type of agreement basically consists in the form of contractual agreement between a payer and a manufacturer. The purpose is to share the whole or a part of the financial risk associated with the use of a new therapy in real-world or non-investigational conditions. The agreement is primarily set to advance patient’s access to the new therapy when the payer deems its ex-post financial risk exposure too high and consequently challenges the demanded price and/or reimbursement conditions.

A key feature of a risk-sharing approach lies in its practicality and expediency. These agreements are very flexible by nature and can take a myriad of forms, (from financial-based to performance-based type of agreement) and can be applied at different levels (at the population level or at the individual patient level). The refunding can also function according to different mechanisms, from price adjustment to rebate or to the funding of further evidence development.

A risk-sharing type of agreement might be expected to multiply over the forthcoming years in a market access environment where claiming cost-effectiveness on ex-ante data and sometimes complex models, seem less and less compelling in the eyes of payers. In addition, the flexibility given by risk-sharing can allow the manufacturer to optimally deploy its launch and pricing strategy under the budgetary constraints and the price referencing system increasingly imposed by payers. For instance, a manufacturer that is carrying out a new launch sequence in Europe may strategically secure a “high” visible price in a specific country while operating in the meantime a “rebate back” via a risk-sharing scheme to allow the new compound to meet the prevailing cost-per-QALY threshold in that country.

Uncertainty versus Risk
The risk-sharing approach calls for a fundamental difference between the concept of uncertainty and the concept of risk. Too often, risk and uncertainty are considered as similar construct and used interchangeably. In health economics models, we mostly focus our effort on the analysis of uncertainty in the cost-effectiveness ratio.

Uncertainty and risk, however, are different concepts, related concepts but different. Uncertainty is by essence a common feature of the universe and relates to variables (should they be qualitative, quantitative or behavioural) that are unknown and changing over time. On the other hand, risk is a matter of exposure to uncertainty, notably to the adverse realization of uncertainty.

In others words, uncertainty in the ex-post outcomes of a new intervention can be the same for both the payer and the manufacturer, but the risk of paying for disappointing ex-post outcomes (the adverse realization of uncertainty in the outcomes) is borne by the payer only. Payers are thus the one to be exposed to the financial risk of introducing a new intervention in real-world conditions, should adverse uncertainty be realized. They bear the financial consequences of the adverse realization of uncertainties. The purpose of a risk-sharing agreement is precisely to shift part of the financial risk from the payer to the manufacturer as a mean to hasten market access.

New Type of Model
The distinction between uncertainty and risk is fundamental. During the negotiation phase, modeling the financial implications (the financial risk!) of uncertainty in the real-world setting can be helpful. From a modeling standpoint, uncertainty is as we know accounted in through probabilistic sensitivity analysis. A financial risk analysis, however, necessitates further work. The basic principle is to combine the evolution of uncertainty over time with the related consequences of the adverse realization of uncertainty.

The size of the target population and its evolution, the market dynamics (the adoption and the diffusion of the new compound in clinical practice) and the implementation costs are just as many additional features that need to be accounted for. As compared to cost-effectiveness models, the modeling of a potential risk-sharing agreement is at the interplay of 3 dynamics. Cost-effectiveness deals with clinical dynamics and pathways, through cohort-based types of models that reflect individual-based clinical decisions and outcomes. Risk-sharing scheme simulations need the additional consideration of both the target population and the market dynamics (Fig. 1). Practically, a risk-sharing model intended to aid both parties in negotiating a scheme would need the 3 components (Fig. 2):

Defining — both parties need to define the uncertainty at stake, the adjacent risk and the potential scheme terms and conditions, i.e. the risk-sharing equation;
Forecasting — the evolution of uncertainty and the consequent risk over time need to be forecasted. This can be done through multiple scenario analysis with different population, clinical and market dynamics; and
Sharing — the financial risk to be shared can be simulated through the application of the risk-sharing equation defined earlier to the results of the forecasting exercise.

This is a back and forth process. The results of the third “sharing” step can lead the parties to redefine the risk at stake and the sharing equation, and so on. In addition, the schemes implementation and administration costs (fixed and variable as per the number of patients enrolled) need to be accounted for in the modeling endeavour.

All these practical things and resulting impacts on both the payer budget and the manufacturer return are simply not possible within the cost-effectiveness analytical framework. Therefore, when contemplating a risk-sharing agreement, it is important to bear in mind that there is a need to think about new type of models and not only about cost-effectiveness cohort-based models. Table 1 stylizes the opposition between risk-sharing modeling and the current cost-effectiveness modeling approach where much of our decision-making modeling efforts is devoted to the ex-ante appraisal of the iCER only.

To Share or Not to Share?
A risk-sharing model can help both the payer and the manufacturer to address a fundamental question: should we share or not; and if yes, under which set of optimal conditions for both parties? Admittedly, payers and manufacturers have the choice among multiple strategies during the market access negotiation. For instance, to mitigate its financial ex-post exposure, a payer can deny to cover the new compound, can slash the price or the reimbursement rate, can restrict the indication or the reimbursement criteria, can ask for patients’ copayment, etc. In most instances, payers have legally the discretionary power to do so. On the other side, if the manufacturer challenges the payer decision, the manufacturer can sponsor the development of further evidence at the cost of delaying its access to market or can propose a risk-sharing type of agreement to enter the market earlier.

The outputs of a model that depicts the financial implications of a risk-sharing schemes can be imported into a cost-benefit analysis (from a payer perspective) or a capital budgeting analysis (from a manufacturer perspective) to help both the payer and the manufacturer to find and propose an optimal win-win solution to each other.

Conditions for Success
Last but not least administration cost and logistics need to be minimized in order not to overburden the scheme. IT improvements both on payer and industry side and new technologies for patient tracking and data reporting will improve the transaction cost of these schemes over time. It is through practical risk-sharing models and micro-costing pilot studies that these costs can be accounted for in the overall evaluation of the proposed schemes.

Willingness to explore new ways of engagement between payers and manufac-turers as well as a de-regulation of IPR and other legal obstacles to risk-sharing are important prerequisites for success. Risk-sharing and innovative pricing should not become an additional hurdle for market access. In such a system there is no place nor need for cross-border price referencing as the bilateral risk sharing agreement is exactly designed to create the individual win-win solution that is desired.

The current market access context is encouraging recourse to a new type of agreement and negotiation base. Payers increasingly emphasize the importance of the real-world value delivered by new products. In the meantime, they also seem willing to negotiate alternative approaches with the objective to mitigate as much as possible their ex-post financial risk exposure. Therefore, manufac-turers face harder access hurdles but also more flexible negotiation conditions that leave room for innovative access and pricing strategies. Risk-sharing agreements represent an opportunity to link volume, quality and payment in delivering innovative health care solution to patients within increasingly budgetary constrained health care systems. In addition to cost-effectiveness, some new and practical form of modeling can be used to help in the design of efficient schemes, benefiting all parties at stake: the patient, the clinicians, the payer and the manufacturer. In all instances, the proposed scheme implemen-tation and administration costs are to be factored into the model. Considering the current health care environment and macroeconomic conditions, risk sharing and alternative pricing are important opportunities to take differences in relative wealth between countries into account and to overcome access barriers thereby improving and speeding up patients’ access to innovative medicines

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