What is an outcomes-based contract?
An outcomes-based contract is a contract, often for services, that bases payment on the accomplishment of a specified objective, rather than upon time spent working or activities performed. In other words, the outcomes-based contracting approach focuses on obtaining a desired result, rather than on how the outcome is achieved.
Outcomes-based contracts originated in the United States many years ago, but have become much more popular in recent years. These contracts traditionally have been more popular in the non-profit or government sectors, but are gaining popularity in the business community. We’ll provide a real-life example below.
A health insurer entered into an outcomes-based contract with a pharmaceutical company to govern the amount the insurer will pay to the pharmaceutical company for a particular drug when it is provided to insured patients. The drug costs hundreds of thousands of dollars and therefore requires a massive up-front cash outlay. Pursuant to the terms of the contract, reimbursement rates for the drug are tied to the patient’s clinical experience from using the drug. Health improvements to the patient are measured at agreed-upon intervals of time after taking the drug and measured against specific medical benchmarks. If treatment is unsuccessful, the insurer is entitled to a rebate.