A performance-based annuity helps payers manage potential performance risk associated with a therapy and spreads the cost of that therapy over time, thus smoothing payment timing. It reflects that therapy performance is established over a period greater than one year by utilizing contract term of greater than one year.

By spreading payments over multiple years, this model also partially mitigates the actuarial risk of both a surge from patient backlog and rare, but high-cost, cases.

As the figure below illustrates, this approach might include an up-front payment of some portion of the product cost, as well as a commitment to further payments every year for a defined number of years, with ‘out-year’ payments triggered as outcomes are achieved.

Figure: Conceptual performance-based annuity contract

The Policymakers section of the toolkit includes a description of potential pricing regulation barriers and obstacles—particularly Medicaid Best Price (MBP) rules as written. The annuity model also raises accounting considerations, which are discussed in FoCUS’s white paper Precision Financing Solutions for Durable / Potentially Curative Therapies. Appropriate accounting treatment will require payers to consult their accountants. Depending on the details, some payers operating under accrual accounting—e.g., private payers in the US—may need to recognize future payments up front or to reserve for them. Medicaid payers operating under cash accounting would recognize only the current year’s payment, though they may be hampered by single-year budgeting rules. FoCUS has identified potential finance solutions for these challenges, but each organization would need to engage with its technical experts to identify the best solution for its circumstances.

We anticipate that some payers may have more challenges with performance-based annuity contracts. Some states prohibit multi-year Medicaid contracts. Self-insured employers’ one-year stop loss contracts may inhibit their use of this solution because the stop loss insurance would cover the cost of the durable therapy beyond the employer’s limit.

Payers who are not able or willing to undertake prospective payments under performance-based annuities might wish to explore multi-year milestone-based contracts.

Patient financial implications also need to be considered. In general, patients incur two types of copays for treatment. First, they may pay a certain amount of their medicine’s cost in a medicine copay. Second, they may pay for a physician’s services, such as administering a medicine, in an office visit/service copay.

Conceivably, breaking medicine payments down into an annuity with multiple payer payments could trigger multiple patient medicine copays based on the medical benefit plan design. The FoCUS performance annuity model discussed in Design Labs recommends that service copays should not be impacted by medicine financing approaches. Patients should not incur future co-pays or deductibles related to these annual payments. FoCUS envisioned patients could be incentivized to participate in ongoing monitoring to support outcomes assessments and their use for performance guarantees. Future payers that do not share FoCUS’ perspective on this point may design their patient benefits to require copays in each annuity period if they take on responsibility for future payments. But FoCUS participants strongly recommended that safeguards for patients be established to prevent ongoing patient payments. Additional detail on patient financial implications may be found here.

One example of a real-life performance-based annuity is bluebird bio’s proposal of a 5-year installment payment model in Europe for ZYNTEGLO® to treat beta-thalassemia, in which payment is required only if the treatment works. This arrangement was reportedly in place with a German health insurer prior to bluebird bio’s decision to withdraw from the European market.