An emerging business model that rejects traditional fee-for-service pricing has caught the eye of Cigna Health Insurance, hoping to incentivize quality and accountability in pharma companies. Learn how this model might apply to your industry.
Also known as pay for performance, value-based contracting structures pricing, at least in part, on agreed-upon outcomes and overall effectiveness of goods or services. This is a familiar approach in government-funded healthcare, where providers are better-compensated if their patients stay healthy. Now Cigna is the first health insurance company to apply value-based pricing commercially, testing it in the pharmaceuticals market.
This model can be tricky and is not for every business, but a look at Cigna’s approach might help you avoid some common pitfalls.
> Start Small. Sweeping changes with any untested payment model can cause significant losses and even ruin a company. Cigna is testing the value-based model with makers of only two cholesterol-lowering drugs.
> Be Specific. Specifying desired outcomes in measurable terms—and avoiding ambiguous words like “better” and “improved”—prevents disputes over how and when the contract is paid. Cigna’s terms are clear: if outcomes for real-world customers are as good or better than specific trial numbers, the pharma company will be paid a higher price per unit.
> Assess Risks. Value-based payments are generated by future data, so the timing of this model can be a problem for some businesses. Drug companies that work with Cigna under value-based contracts must have the infrastructure and flexibility to compensate for delayed payments.
> Avoid Impropriety. The pay-for-performance model is supposed to improve accountability of contracts and efficacy of goods and services, but some companies mistakenly incentivize misconduct. Consider the recent Wells Fargo debacle, where employees illegally opened fake accounts to meet quotas. To avoid this problem, Cigna gathers outcomes data from independent lab results and not from the drug companies’ subjective reporting.
> Watch Trends. Sometimes an industry will give indications of what is to come. Recently, a coalition of private insurers announced its commitment to a 75% adoption of pay-for-performance contracting by 2020. Leading the pack, Cigna stands to control a market advantage for years.