Pay-for-performance arrangements

IFRS Revenue Recognition Guidance

Pay-for-performance is a pricing concept under which the price paid for a given medicine is intended to reflect the economic benefits of a drug at an individual patient level. The idea that those that fund healthcare, whether it be insurances companies (as in the USA) or Governments and the public purse (as in much of Europe), should only pay for drugs that have a demonstrable benefit over other treatments is not new and in recent years both Governments and regulators have showed increasing reluctance to pay for “me-too” or “copy-cat” drugs.

As drugs budgets come under increasing pressure we are seeing an increasing number of schemes introduced, particularly within Europe, where drugs are only paid for on the basis if they show a certain level of efficacy. For example, very recently, the UK Government revised its Pharmaceutical Price Regulation Scheme (PPRS) which captures the spirit of this principle and suggests that where drugs show additional benefit then an increase in the price of a drug may be justified.

Not only do these type of arrangements present cashflow and other commercial issues, they also pose a significant challenge to revenue recognition. This paper discusses the issues and provides guidance as to when revenue may be recognised under these arrangements.