Value-Based Contracts

Value-based contracting has emerged as one of the most discussed strategies in pharmaceutical pricing and reimbursement to control costs and improve patient outcomes. Pharmaceutical pricing and reimbursement is the complex process of setting medication prices and determining how much of those costs will be paid by insurance companies.^1,2 Depending on how and where the medication is administered, the primary entities that ultimately get reimbursed include pharmacies, hospitals, and medical providers.^1,2Pharmaceutical pricing and reimbursement involve an elaborate and complex network of pharmaceutical companies, health insurance companies, pharmacy benefit managers, healthcare providers, and government healthcare programs.

Traditionally, pharmaceutical product pricing has relied on volume-based reimbursement or fee-for-service pricing.^3,4 Volume-based reimbursement involves physicians being paid based on the number of prescriptions dispensed, regardless of clinical performance.³Fee-for-service pricing involves physicians being paid for each individual service, procedure, or visit performed.⁴ Value-based contracts offer an alternative option to share risk and protect healthcare budgets. Value-based contracts combine reimbursement with real-world effectiveness, safety, or economic impact of a therapy. They are increasingly viewed as a mechanism to align incentives between manufacturers, payers, providers, and patients in an era of high-cost specialty and precision medicine products.⁵

The pharmaceutical industry employs a variety of value-based contracts. A helpful resource for further reading is a McKinsey & Company paper linked here. The paper discusses different types of value-based contracts and their role within health policy of US and international healthcare markets. Common value-based contracts are included below. An important disclaimer is that this list does not include all of the value-based contracts currently in use in the pharmaceutical industry. 

Clinical Outcomes-Based Contracts^6,7

1. Coverage with Evidence Development

• A payer covers the cost of a product for a specific population on the condition that the manufacturer collects and reports additional real-world data regarding clinical effectiveness.
• From the payer perspective, it is extremely important to identify patient populations where a product is most effective to reduce the risk of unnecessary financial and budget expenses.

2. Milestone-Based Payments

• The cost of the product is divided into payment installments that are tied to patients successfully achieving long-term clinical outcomes.

3. Pay-For-Performance

• A PBM works on behalf of a payer to negotiate with a manufacturer to set a price while also negotiating how to measure an outcome for the specific product. If patients experience adverse symptoms or need to discontinue treatment, the manufacturer will issue a rebate for all or part of the product’s cost.
• For example, agreements for diabetes or cardiovascular medications may link payment to reductions in HbA1c or cardiovascular events.

Financial Risk-Based Contracts^8,9,10

4. Indication-Based Pricing

• The price of a medications depends on the indication for which it is prescribed, and this pricing acknowledges that a product may not deliver equal therapeutic benefits across its FDA approved indications.
• For example, an oncology product might show strong efficacy in treating lung cancer, which results in a higher price for that lung indication. At the same time, the product is less effective in treating other cancers, which leads to a lower price for those respective indications.

5. Patient/Population Spending Caps

• The payer and manufacturer agree on a maximum total spend for a specific product. If the cost of the medication exceeds the agreed-upon cap across the population, the manufacturer covers the excess costs.

6. Subscription-Based or “Netflix Style”

• A healthcare system or insurance pays a flat lump sum to a manufacturer, and the manufacturer provides an unlimited supply of product to treat a defined patient population for a specific period of time.
• The potential growth this type of reimbursement model offers unique opportunities to meet access challenges by providing payers a more affordable option and manufacturers guaranteed revenues.

Executing value-based contracts remains complex and challenging. Stakeholders must agree on defining clinical outcomes that are measurable, meaningful, and achievable within a realistic timeframe. Outcomes must be clinically relevant to physicians, economically meaningful to payers, and operationally feasible for manufacturers to track. Variations in patient adherence, comorbidities, and healthcare access can also complicate the interpretation of real-world outcomes. 

Regulatory and legal considerations may also complicate executing value-based contracts. Medicaid Best Price rules have historically emphasized for manufacturers to not offer large outcome-based rebates because those discounts could unintentionally reset national pricing benchmarks. Anti-kickback statutes, reimbursement regulations, and differing payer requirements can also create complexity. The Center for Medicare & Medicaid Services has aimed to support more innovative contracting models through policy updates, but it remains to be seen how to best scale models across public and private healthcare systems. 

Technological advancements may improve the feasibility of value-based contracting in the future. Artificial intelligence, predictive analytics, and advanced real-world evidence platforms are increasingly capable of tracking outcomes and identifying patterns in patient populations. These tools might reduce administrative burdens, improve outcome measurement accuracy, and support more sophisticated pricing models. As healthcare data systems become more integrated, the operational complexity associated with value-based contracts may decline.

Overall, value-based contracting represents a significant shift in how the pharmaceutical industry defines and rewards innovation. The model offers a promising framework for balancing affordability with patient access to high-cost therapies. As biotechnology and the pharmaceutical industry advance, value-based pricing strategies may play a critical role in ensuring sustainable healthcare financing. The future success of these agreements may depend on continued collaboration among manufacturers, payers, providers, and regulators to create systems that accurately measure and reward therapeutic value.

References:

1. Berndt ER, Newhouse JP. Pricing and Reimbursement in U.S. Pharmaceutical Markets. NBER Working Paper Series. RWP10-039. 2010.
2. National Institutes of Health. Reimbursement Knowledge Guide for Drugs. NIH SEED Innovator. 2023.
3. Hernandez I, Hung A. A primer on brand-name prescription drug reimbursement in the United States. J Manag Care Spec Pharm. 2024;30(1):99-106.
4. Aledade. Fee-For-Service vs. Value-Based Care: What is the Difference. 2025.
5. Academy of Managed Care Pharmacy. Value-Based Contract Resources. 2026.
6. González J. Accountability Is Everything: Outcomes-Based Pharmaceutical Agreements. Am Health Drug Benefits. 2019;12(6):277-278.
7. National Pharmaceutical Council. Value-Based Contracts. 2026.
8. Gonçalves FR, Santos S, Silva C, Sousa G. Risk-Sharing Agreements, Present and Future. Ecancermedicalscience. 2018;12:823.
9. Verpora. Indication-Based Pricing: The Simplest Explanation You’ll Ever Read. 2026.
10. ISPOR - The Professional Society for Health Economics and Outcomes Research. Is the Subscription-Based Model for Drug Reimbursement the Future. 2019.

*Information presented on RxTeach does not represent the opinion of any specific company, organization, or team other than the authors themselves. No patient-provider relationship is created.