A New Approach to Risk Balanced Contracting

April 23, 2020
Tony Carita
Applied Clinical Trials

In a complex world of global clinical trials where execution is riddled with uncertainty, how should sponsors and providers approach and achieve a balance of risk and reward?

In a complex world of global clinical trials where execution is rife with uncertainty, and in which sponsors look to place significant reliance on provider promises, and providers place significant reliance on site investigators and other third parties, how do we approach and achieve a balanced system of risk and reward?  

Regardless of being the sponsor or the provider, during the provider selection process we have all at one time or another felt like a victim of circumstances beyond our control. For the sponsor, this may be in the form of promises made by providers during the proposal/bid defense stage where there may be a tendency to oversell. And for the provider, this could be driven by a need to win, compelling you to fit your solution into the sponsor’s demands regardless of probability of success. Rarely does this result in a win-win for anyone and often leads to cost overruns and schedule delays. 

In order to try and address this, we have seen a focus on procurement initiatives and a proliferation of strategic partnerships with the intent to drive down costs with contracting methodologies that include risk sharing plans. When we cut through industry presentations touting the benefits, and past the polished surface, we discover that it’s often simply a mechanism to shift the risk of performance from the sponsor to the provider while achieving the lowest possible price. To credit an unknown source, “Would you want to fly on a plane built by the lowest bidder?” Or, to make it more relatable on a personal level, would you bid-out your upcoming heart surgery and make your decision on which hospital/doctor performs the procedure solely based on the lowest bid?  

If we look at traditional contract types, we see a shift in risk between the sponsor and provider with little to no consideration given to the level of risk assumed by the provider for the cost of performance. Typically, sponsors try to manage risk by utilizing some sort of fixed type agreements, managing the risk of performance via milestone payment terms, or penalties. These contracts can be further broken down into a number of sub-categories that can push the risk of performance and rewards for performance to extremes. 

For example, we have seen variations on the concept of fixed price contracts from situations where valid changes in scope are not allowed, to cases in which the provider is reimbursed only for units completed in essence making the contract a fixed price downward adjustment scenario with no benefit to the provider for improved performance (completing the contract quicker or with fewer units than planned). These are examples of a system that looks to unduly shift the burden of performance without adequate consideration to the balance of risk and reward. 

Achieving a solution

What we really need to do is develop a model based on open and honest communication with a full understanding of the risks, given all of the constraints of both parties. This risk-balanced approach to outsourcing clinical studies takes into consideration demands of the sponsor and promises made by the provider during the bidding phase and the level of risk being assumed by each party.

I would propose that this starts with sponsors recognizing and acknowledging the level of control a provider has over a study to be completed. This can range from the provider having minimal control, such as situations where the sponsor takes sole responsibility for drafting the protocol and selecting countries/sites, to maximizing the provider control over its ability to perform by having them either draft or co-create the protocol and allowing them to choose the investigator sites and third-party vendors. 

In addition to design of the clinical study we need to determine probability of success in meeting our study timelines. Often, they are driven by corporate objectives rather than a bottoms-up estimate of the time it would take to achieve regulatory approval for site start-up, complete subject enrollment, and analyze study results. This level of risk is often pushed down to the provider base, and it’s not infrequent that we make provider selection based on who states they can meet our timelines, no matter how unrealistic, in an effort to manage up by the sponsor team. There is a reason only “Six percent of clinical trials are completed on time, and 72% of trials run over schedule by more than one month” (source: The Center for Information and Study on Clinical Research Participation - CISCRP).

I would propose an innovative shift in how we think about risk, and how we balance that in our relationships with our providers. What follows is a risk-balanced approach to outsource clinical studies that requires both parties to be transparent, objective, and work collaboratively early in the outsourcing process. Further, this approach rewards both parties when performance beats plan and shares the pain when they do not. The object of this approach is to:

  • Move away from punitive contractual elements.

  • Improve the risk/reward dynamics.

  • Balance risk between the parties to achieve study objectives. 

  • Create a direct relationship between the providers actual margin and performance to plan.

  • Cap the sponsor’s liability and improve predictability.

So how do we accomplish these objectives? Key elements to this risk-balanced model are: 

  • For providers to develop Target Cost and timeline (most likely costof completion). 

  • Target Margin (% to be applied to the cost of completion). 

  • Confidence Level to achieve study objectives (to balance risk between the parties). 

  • Ceiling Price (caps sponsor liability and is tied to confidence level). 

  • Share Ratio (provides risk/reward based on performance and is tied to confidence level). 

The key to success for this approach is to build a confidence model that will allow us to determine the level of risk being assumed by the provider. This confidence model is essentially a risk analysis that can be completed by assessing the following areas:

  • Trial Complexity:

  • Available patient population 

  • Competing studies

  • The impact of inclusion/exclusion criteria on enrollment

  • Any unusual regulatory, drug supply/handling/storage requirements

  • Organizational Constraints:

  • The “corporate” timeline versus a bottoms-up timeline by the provider to complete the study

  • Resource demands at both sponsor and providers organizations

  • Control of: 

  • Drafting, or providing input to, the protocol, 

  • Identifying investigator sites, and

  • Selecting third party vendors 

Once we have determined and agreed with our provider on a confidence level, we can apply that to a model which aims to balance risk and reward associated with actual performance against target. As you can see from the table below the lower the confidence level the more risk is being assumed by the provider and built into the model are share ratios and ceiling prices that equalize that risk. 

 

This translates into both the sponsor and provider sharing the risk of exceeding the target cost, and sharing in the reward of any cost savings from final costs being less than the target price. As we move down the table and increase the confidence level it provides ability for the provider to adequately predict costs, timing and maximize control over study performance which results in lower reward for any cost savings and the greater risk for any cost overruns. 

It is important to note that it is strongly recommend that valid material changes in scope under this balanced-risk model adjust the target cost, target margin and ceiling price. However, what is considered a valid material change should vary based on the confidence level.For example, in cases where the protocol is being written by the provider, they are picking the sites and third parties, and there are no extenuating circumstances that would drive down the confidence level, delays due to enrollment would not be a valid material change. Conversely, if the provider is not picking the investigator sites or there are extenuating circumstances that would drive down the confidence level, delays due to enrollment would be a valid material change.

Sample cost share/ceiling price table

A representative example of what this would look like is depicted in the follow scenarios:

In scenario 1, there is a moderate level of certainty at the time of contract and is based on a 70% confidence level to meet enrollment within the required timeline. In this situation, if the provider comes in under the budgeted target cost the provider would share in that savings thereby increasing provider margins.

In scenario 2, we have the same confidence level, but the provider comes in over budget. As a note, this would include the entire provider contracted budget and not simply service fees. In this situation, if the provider comes in over the budgeted target cost the provider would share in the over budget condition thereby reducing their margins.  

Conclusion

In this balanced-risk approach we are no longer simply pushing the risk of performance down the line to the provider base nor are the sponsors shouldering the total cost of budget overruns resulting from over promising by providers simply to win the business. Instead, we are taking an objective approach by completing a risk analysis in conjunction with providers thus gaining a better understanding of our combined probability of success at the onset. Perhaps if we enter into our outsourced projects with this approach, we can have more successful sponsor/provider relationships, improve predictability and accountability for both sponsors and providers, and just perhaps we can improve on the reported metric that only “Six percent of clinical trials are completed on time".

 

Tony Carita is the Managing Director of Clinical Business Operations at Danforth Advisors.