Warranties Can Help Mitigate Risk for Payers, Manufacturers Alike

As manufacturers continue to bring more advanced therapies onto the U.S. market, payers are grappling with how to afford these agents. And while the products may be life-changing for some patients, they may not have the desired outcome in others, leaving payers on the hook for an unsuccessful treatment. This has resulted in various contracting opportunities, including warranties.

While such agreements can make payers more confident in their coverage of treatments, particularly high-cost ones and products whose effectiveness or durability are uncertain, they also are beneficial for pharma companies, which are seeing utilization of their therapies.

Warranty-based arrangements function similarly to ones offered for other products, such as cars or appliances. A risk-bearing entity — for example, an insurer, a self-insured employer group or a stop-loss insurance carrier, perhaps even a patient — pays for the treatment up front and then is reimbursed if the product fails to produce a particular outcome. Manufacturers or third parties may administer the offerings, which usually cover a certain period of time.

Several drugmakers offer warranties, including Pfizer Inc. for its metastatic non-small cell lung cancer (NSCLC) drug Xalkori (crizotinib), as well as Panzyga (immune globulin intravenous [human]) for people with chronic inflammatory demyelinating polyneuropathy. The company is not actively advertising the Xalkori offering anymore, but when the program was live, Pfizer would refund both patients and payers when the drug was discontinued within three months. With Panzyga, Pfizer will refund patients and payers if the agent is discontinued within the first four doses.

And Takeda Pharmaceuticals U.S.A., Inc. entered into an agreement with Point32Health for its metastatic NSCLC treatment Alunbrig (brigatinib) by which the drugmaker will offer a “significant” rebate if a patient discontinues treatment within the first three months due to efficacy or tolerability. Takeda also agreed to refund patients for their out-of-pocket expenses.

Warranty-based arrangements also have become increasingly popular among cell and gene therapies. For example, the drugmakers of all three hemophilia gene therapies offer them. When the FDA approved Pfizer’s Beqvez (fidanacogene elaparvovec-dzkt) in April 2024, the company said it would offer a warranty program “based on durability of patient response to treatment.” That agent’s price is $3.5 million for a single dose.

That price is the same as the one for CSL Behring LLC and uniQure Inc.’s Hemgenix (etranacogene dezaparvovec-drlb), which was approved in November 2022. CSL Behring has said it will offer “a substantial rebate” if patients have to use prophylactic factor IX within the first three-and-a-half years after Hemgenix administration.

Approved in June 2023, BioMarin Pharmaceutical, Inc.’s Roctavian (valoctocogene roxaparvovec-rvox) is priced at $2.9 million for a single dose. BioMarin has said it will reimburse payers on a prorated basis if a patient loses response to the therapy within four years of administration.

While the agents’ costs alone might make them good candidates for warranties, that is coupled with uncertainty about their potential durability. The Institute for Clinical and Economic Review (ICER) projects that one dose of Hemgenix should last 20 to 25 years and a single dose of Roctavian for 10 or 11 years. And because these are adeno-associated virus vector-based gene therapies, redosing is not an option because AAVs can cause a severe immune response, so payers will have to cover some other kind of medication for these patients after the gene therapy’s efficacy wanes.

Survey: Several Payers Have Warranties

For the Managed Care Biologics and Injectables Index: Q3 2024, from Aug. 19, 2024, to Sept. 8, 2024, Zitter Insights polled 35 commercial payers covering 120.8 million lives about warranty-based contracts. Payers had an average of eight warranty-based contracts. One of the plan respondents reported 30 such contracts, while one of the PBM respondents said it had 50.

AIS Health and Zitter Insights are both divisions of MMIT.

Payers representing almost all lives cited high cost as the No. 1 reason for engaging in these arrangements, while those with 94% of covered lives pointed to uncertain product efficacy. Respondents said that a treatment priced around $500,000 is where they would consider entering into a warranty-based contract, although PBMs and independent plans had a lower threshold than large national payers and regional plans/Blues affiliates.

But it’s not as simple as a high cost or uncertain efficacy immediately making a product a good fit for a warranty. Rather, says Avalere principal Kolton Gustafson, it is “when the effect of the product can be measured through a clear and objective outcome. Also, products that can point to reduced health care resource utilization as a result of their product may be better suited to warranty models because manufacturers can make a clear actuarial argument to payers.”

But getting payers and manufacturers to agree on those outcomes may be easier said than done.

According to Gustafson, one big challenge with warranty-based contracts “is determining the outcome that should be linked to a warranty and measuring patient response to treatment. The second challenge is convincing payers that those are the appropriate outcomes and timeframes to assess product performance.”

Indeed, the Zitter Insights survey found that of the respondents engaging in warranty-based contracts, those with 78% of covered lives said they had experienced challenges with selecting a clinical endpoint.

In order to align with payers on that endpoint, drugmakers should “define what success looks like to them. What are common issues that patients are facing with these products — adherence? Relapse?” says Samantha Ngan, associate manager of market research at MMIT. Manufacturers also should be sure that payers know the trial criteria for the treatment and that they themselves understand “the goals payers are trying to achieve with their members.”

Manufacturers should directly engage payers “to discuss whether proposed clinical endpoints can be clearly connected to product performance,” maintains Gustafson. “Then they need to think about how the data for that endpoint will be accessed or collected.”

However, he tells AIS Health, “they should also consider whether a clinical endpoint is appropriate and sufficient — there are other types of measures they could leverage, including care resource utilization or patient-reported outcomes that may give a clearer picture of treatment success or failure.”

Another potential issue arises in the situation where a patient changes jobs and has a new health plan. Survey respondents with 41% of covered lives said their company would seek reimbursement from the new payer, and those representing 6% of lives said they would transfer the agreement to the new payer. Payers covering 8% said they would write off the payment, and one PBM remarked that in that situation, “the patient is considered lost to follow-up, and no reimbursements are made for the cost of the drug from the manufacturer.” Payers may decide that that kind of risk is unpalatable.

One possible solution has been suggested by Tufts Medical Center’s NEWDIGS consortium FoCUS (Financing and Reimbursement of Cures in the US) Project in an October 2020 white paper: “Warranties might employ transferability riders by payer segment to minimize regulatory and reimbursement rate disparities.” However, it concluded, “in the absence of a patient mobility solution, the perceived warranty value by payers will simply be reduced according to their expectations of member retention in their plans.”

Warranties Provide Array of Benefits

Still, pharma companies should keep in mind that warranties can benefit them and payers in a variety of ways.

“In theory, the primary benefit is more favorable coverage policies for the product,” Gustafson declares. “Warranty-based contracts lower the financial risk that a payer takes by providing clear opportunities for money back in the case of a patient that doesn’t respond to treatment. They also offer manufacturers an opportunity to stand behind the effectiveness of their products.”

Ngan agrees. The contracts, she says, “are meant to ensure that these manufacturers’ products are working as intended. Payers should be able to share patient data with manufacturers regarding these products. Whether through physician documentation or uploads into a portal, this information gives manufacturers real-world insights into how patients are utilizing their products and the problems they may be facing.”

Another upside of warranties is that unlike some other types of arrangements, they are not factored into Medicaid Best Price, nor are they considered kickbacks. The HHS Office of Inspector General in 2020 published a final rule that, among other things, modified the safe harbor for warranties to “protect low-risk, beneficial arrangements without opening the door to fraudulent or abusive conduct that increases Federal health care program costs or compromises quality of care for patients or patient choice.” It took effect on July 1, 2022.

Manufacturers considering offering warranty-based contracts “should have a very clear idea of how much they’ll need to pay out in warranties based on what they have observed in terms of product effectiveness,” maintains Gustafson. “They should also think very clearly about how the warranties will be adjudicated, meaning they should know what data is necessary, who is collecting the data, who will adjudicate the model and what happens when there is a dispute with a payer.”

Ultimately, advises Ngan, both manufacturers and payers are trying to mitigate risk, and warranties are one way they can do that. “There are multiple ways for payers and manufacturers to come to an agreement on what success looks like for these products.” In addition, pharma companies “should understand that these types of contracts are not uncommon. Warranty-based contracts are variations of outcomes-based contracts, and both manufacturers and payers have the common goal of ensuring that a product works efficaciously for their patients/members.”