by Stephanie A. Nelson

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					FOR GLOBAL BUSINESS AND MARKETING LEADERS

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Managed Care

by Stephanie A. Nelson

Maneuvers
©Reprinted from PHARMACEUTICAL EXECUTIVE, September 2001
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Stephanie A. Nelson Director, Managed Care Practice Campbell Alliance 8540 Colonnade Center Drive, Suite 401 Raleigh, NC 27615 (919) 844-7100, ext. 120 Email: snelson@campbellalliance.com

Marketing Strategies

Managed Care
Stephanie A. Nelson

Maneuvers
WITH THE RIGHT TOOLS, PHARMA COMPANIES CAN SWAY THIRD-PARTY PAYERS.

I
Stephanie A. Nelson
is a director with Campbell Alliance, a management consulting firm specializing in pharmaceuticals and healthcare.

t happens all the time. Patients walk into their pharmacies, prescriptions for brand-name drugs in hand, only to discover that the desired product is either not covered by their insurance or carries an alarmingly high co-pay. Often, the visit ends with the patient refusing to fill the prescription or switching to a lowerpriced competitor. At that point, even the most effective physician detailing campaigns have been wasted. The scenario has become more and more common as managed care organizations (MCOs)––which survive by keeping pharmaceutical and other healthcare expenses down––increasingly turn to restricted or closed drug formularies and tiered co-payment structures. Rising pharmaceutical costs have compelled many MCOs to adopt defensive reimbursement and market access tactics that can have a profound impact on the commercial success of a brand. If pharma companies are to succeed in such an envi-

ronment, they must develop pragmatic brandspecific access and reimbursement strategies that optimize the market potential and profitability of each product. To be effective, a company’s managed care account representative must approach MCOs with the right balance of financial incentives, clinical efficacy evidence, and value-added programs to win access and preferred formulary status for their brands. This article presents a disciplined outline for achieving preferred formulary status while simultaneously executing profitable contracts with MCOs.

Give Them a Choice
Despite its perceived restrictiveness, the formulary system has failed to curb the growth of US pharmaceutical expenditures. For health management organizations, drug costs as a percentage of operating expenses increased from 9 percent in 1990 to more than 13 percent in 1999. During the next

ARTWORKS

Marketing Strategies

decade, those costs are expected to increase at nearly double the rate of overall healthcare expenditures. If unchecked, they are projected to reach $366 billion––14 percent of total US medical spending––by 2010. To balance customer demand for access to a broad array of medicines with the need to control expenditures, most MCOs offer multi-tiered copayment systems that increase the number of drugs granted partial coverage while shifting the lion’s share of the cost burden for nonpreferred brands to consumers. (See “The Multi-Tier Pyramid,” page 102.) Although two-tiered designs have been around for more than 20 years, the multi-tier co-payment system is an ingenious benefit design that appears to preserve member choice—and establish a cost-management mechanism for MCOs. The use of multi-tier co-payment structures increased markedly during the last few years, from less than 40 percent of plans in 1998 to more than 80 percent in mid-2000. Recent research indicates that more than 90 percent of MCOs use such a system today. (See “The Tiers Have It.”) The multi-tier system, however, creates challenges for pharmaceutical companies. When confronted by sticker shock (see “On the Rise”), many consumers agree to switch to generic or preferred brands, particularly in crowded therapeutic classes in which clinicians judge several brands to be therapeutically equivalent. Take the allergy sufferer who arrives at a pharmacy with a prescription for Schering-Plough’s Claritin (loratadine). The pharmacist fills the prescription for the product, which, in this case, is a Tier III brand, and requests a $35 co-pay. Alarmed by the price, the patient asks the pharmacist why the prescription is so expensive. Upon learning that Claritin’s competitor, Pfizer’s Zyrtec (certirazine), is a Tier II product requiring only a $15 co-pay, the patient has the pharmacist phone the doctor to request a switch to Zyrtec. Schering-Plough has now lost a potential customer—possibly for a lifetime. Yet, when selling a tiered plan to consumers and employers, the MCO can make the case that its system guarantees access to most branded products. A frequent exception to that general-access rule has been lifestyle drugs, such as Viagra (sildenafil) and Propecia (finasteride), which have little bearing on patients’ health. In the past, the managed care representative’s goal was reasonably straightforward: to ensure formulary access for branded products. They accomplished that aim by demonstrating a brand’s clinical superiority and offering MCOs attractive

discounts or rebates. But today, inclusion on an MCO formulary isn’t enough. Crowded therapeutic areas are intensifying the competition for preferred formulary status, and the large number of product launches has made MCO decision makers reconsider many new medications’ clinical superiority to older products.

The Right Levers
Pharma companies have three levers for negotiating with MCOs: financial incentives such as price reductions through discounts or rebates, superiority claims in their brands’ clinical profiles, and complementary “value-added” programs. The most effective negotiating efforts employ all three levers, varying the mix based on each MCO’s perspective and the brand’s characteristics. The first step in crafting the right mix is gaining a realistic understanding of the product’s clinical merits—as perceived by MCO decision mak-

THE MCO ANALYSIS
When reviewing prescription drugs for formulary status, MCOs consider the following top five factors:

ON THE RISE
Three factors contribute to increasing pharmaceutical costs.

Increase in number of prescriptions 42%

Shift to higher-cost drugs 36%

Price increase 22%

1 Safety 2 Clinical efficacy compared with other products 3 Price 4 Range of indications and spectrum of action 5 Outcomes or pharmacoeconomics data.

Source: Prescription Drug Expenditure in 2000: The Upward Trend Continues, National Institute for Health Care Management Research and Educational Foundation, May 2001.

Graphic

THE TIERS HAVE IT
The number of MCOs with three-tier structures has jumped dramatically in the last five years.

100 80 Percent 60 40 20 0 1996 2000 2001 36% 90% 80%

Source: 2000: Top Developments on the Pharmaceutical Landscape, ExpressScripts, 2001. 2001 data based on Campbell Alliance research with managed care decision makers.

Graphic

Marketing Strategies

A therapy’s merits cannot be assessed in isolation from its class–– or apart from the priority MCOs accord that class.

ers—compared with other therapies. Based on that evaluation, companies can decide whether they should emphasize clinical superiority and how necessary incentives and value-added programs may be. They must then assess their financial impact. Finally, account managers should take traditional targeting a step further by prioritizing MCOs to determine where to best allocate their sales and marketing funds and resources. That requires assessing the organizations’ structures, reviewing their formulary decision-making processes, and understanding their needs. Once they’ve done that, the company’s managed care team can craft and execute the appropriate strategies for each account or category.

Profiling the Profile
Pharma companies must fully understand a product’s clinical profile as well as its position in its class and the importance of that class to MCOs. (See “The MCO Analysis,” page 100.) They must consider two primary factors when completing a brand’s clinical profile: its clinical superiority and the therapeutic area’s competitive intensity. To ascertain whether a product represents a significant clinical advance for MCOs, pharma companies must analyze the following components of a product’s profile: q The product’s clinical efficacy and safety compared with existing therapies and its differential

THE MULTI-TIER PYRAMID
The difference between co-pays for preferred and nonpreferred tiers can be as high as $35.

Tier I Generics only

$5–$10 co-payment

Tier II Preferred (1–3 drugs)

$15–$25 co-payment

Tiers III and IV Nonpreferred (all others that do not require prior authorization)

$35–$50 co-payment

Source: Campbell Alliance

Graphic

value to patients and to the MCO. The product’s value in reducing the MCO’s pharmaceutical and/or medical expenses as well as its ability to replace multiple drugs and to curb costs by reducing or eliminating highintensity care episodes, such as hospitalizations. If its price point is higher than in-line therapies, its clinical benefits must clearly justify the price. q The review priority FDA has given the product. Many MCOs take their cues from FDA’s eagerness to evaluate a product and its assessments of potential clinical efficacy. Such an analysis generates objective data for assessing a medication’s merits but fails to answer the question: Will MCO decision makers perceive the product as worthy of their expenditures? A therapy’s merits cannot be assessed in isolation from its class—or apart from the priority MCOs accord that class. Most MCO prescription costs are concentrated in several categories on which they focus when reviewing products and initiating disease-management programs. Even the strongest clinical profile can fall victim to a therapeutic class that is crowded or that MCOs perceive as relatively unimportant. Marketers must ask themselves: q Does the product treat a disease that MCO decision makers perceive as a high priority? q How crowded is the therapeutic class in which the product competes? q In the case of a product launch, how many in-line products already compete in the same therapeutic area? q If a product is already on the market, what position does it have today? From the MCO viewpoint, the ideal medicine has a revolutionary clinical profile for a high-cost and high-prevalence disease, satisfies an unmet medical or pharmaceutical need, and has no competitors. Few products enjoy such a profile. Marketers need to understand exactly how far their brands fall short of that ideal and, as a result, how much clinical leverage they will have when negotiating with MCO decision makers. They can then determine the extent to which they must rely on financial incentives and value-added programs to sell their brands. Overestimating the strength of a brand’s clinical profile can prove costly. A company that believes MCOs will perceive its drug as a revolutionary clinical advance may offer them few, if any, discounts or rebates. But if an MCO considers the product the therapeutic equivalent of several other treatments and therefore unworthy of a price premium, it may provide preferred status to another, less expensive drug in the class. Viewing a product’s
q

Marketing Strategies
clinical edge through rose-colored glasses may translate into inappropriate market positioning, a consequent poor reimbursement profile, and disappointing sales. mated—their expenditures in the therapeutic category. Because each product in the class combined a drug and a medical device, it was sometimes reimbursed as a medical benefit and sometimes as a pharmacy benefit––often at the same MCO––depending on whether the product was acquired from a durable medical equipment company or directly from the pharma company’s sales force. The MCO decision makers approached by the company often took into account only the pharmacy benefits costs of the product category. But for some MCOs, the medical benefits costs were as much as four times greater. The company approached several large MCOs and offered to conduct analyses of both their pharmacy and medical claims data in the therapeutic category. By investing a relatively small amount of

Managing the Manager
Helping MCOs understand a disease state’s full range of medical and pharmaceutical costs can contribute to a compelling case for brand adoption. (See “The Real Decision Makers.”) In response to rising expenses, MCOs have become more efficient at tracking and managing their pharmaceutical budgets in high-cost therapeutic areas. They can disaggregate drug costs into their brand- and dosage-level components and analyze use trends. More important, many MCOs can rapidly forecast the budget impact of use increases or decreases and changes in contract terms and pricing. That analytic sophistication makes MCOs eager for pharmacoeconomics data. But increasingly, they are more interested in obtaining data based on specific enrollment populations than they are in constructing generic “what if” scenarios. MCOs are becoming more receptive to pharma companies’ offers to sponsor claims data analyses or studies of their unique populations for estimating disease-state-related costs and savings. In fact, several large MCOs have done such studies internally and solicited pharma company funding for their execution. MCOs are also eager to apply claims data analytics to medical costs, because the root cause of those expenditures is often buried in medical claims data and codes. One pharmaceutical company learned the value of such studies the hard way. Because it was firmly convinced of the superior outcomes produced by its new product—a combination pharmaceutical and medical device—the company’s initial marketing strategy was to emphasize that clinical superiority in detailed presentations to MCO decision makers. Unfortunately, the sales resulting from that approach fell far short of expectations. Striving to understand the reasons for the product’s disappointing sales, the company commissioned research that revealed two problems. First, MCO decision makers did not share the company’s belief in the product’s superiority; they saw it as the therapeutic equivalent of several competitors. Clinical presentations failed to alter that perception or address the MCOs’ main area of interest: getting the lowest possible price for a product in a crowded therapeutic category. A second problem was that MCO decision makers misunderstood—and greatly underesti-

The Real Decision Makers
A company preparing for a new-product launch knew gaining MCO acceptance would be an uphill battle.
Although the product would be one of only two competitors in its therapeutic class, it competed in a disease category that was below many MCOs’ radar because they drastically underestimated its cost. Few MCOs had an accurate picture of the number of their enrollees affected by the disease because of the frequency with which it was misdiagnosed or undiagnosed. MCO decision makers believed that the disease was not prevalent among their enrollees and that its impact on them was negligible because it was not lifethreatening. In truth, the disease’s personal, business, and healthcare costs were far from negligible. Treating the condition cost billions of dollars each year. Discomfort and other symptoms also severely compromised patients’ work productivity, costing the US industry more than $10 billion annually. Based on initial managed care research, the manufacturer anticipated that MCOs would be unreceptive to its arguments for formulary acceptance. So the company took its case to the MCOs’ customers instead—large employer groups. The goal was to convince large employers of the prevalence of, and productivity losses associated with, the disease, inspiring them to pressure their MCOs to include the innovative product in their formularies. To reach employers, the company created educational tools targeted at corporate human resources and employee benefits professionals. Their presentation and accompanying CD-ROM included information about the causes and symptoms of the chronic condition, estimates of lost productivity, and testimonials about the disease’s impact from people afflicted with it. The materials also presented the new medication’s ability to restore patients’ productivity and quality of life and concluded by calling on employers to urge their MCOs to list the product in their formularies. Employers responded enthusiastically to the program and brought their influence to bear on MCOs. Partly as a result of that influence, the drug obtained preferred formulary status from numerous influential MCOs. The company also laid the foundation for long-term relationships with large employer groups, several of which asked for assistance in disseminating patient education material to their work forces.

Marketing Strategies
money, the company was able to prove to the powerful payers that their total therapeutic area expenditures were far greater than they believed—and that they needed to get them under control. That information provided a sound basis for contract negotiations. The pharma company presented a compelling explanation of its product’s clinical and cost benefits. It also crafted a proposal that addressed both pharmacy and medical benefits costs and concentrated market share to ensure competitive product pricing. As a result, the product obtained preferred formulary status with many of the participating MCOs. nization’s ability to secure market share for preferred products. Following that, they should evaluate priority accounts to decide which contract pricing approaches and program offerings would be most effective. For each target account, managers should understand q pharmacy and therapeutics (P&T) review timelines and processes q contract review timelines and processes q internal and external pharmacy benefit managers’ (PBMs) roles in influencing P&T and contracting decisions q stated and actual formulary strategies as well as ability to influence product prescribing q current prescription benefit structures. When it comes to product launches, triage efforts might take into account not only the MCO’s market power but also its drug review processes. For example, the marketing team might turn its immediate attention to PBMs with departments dedicated to reviewing products before approval. If an MCO—no matter how powerful—has a mandatory waiting period before reviewing products, companies could postpone approaching it until after launch. Pharma companies should also tailor their support programs to the special characteristics of each target health plan or PBM. An MCO with great influence over its preferred providers might respond positively to offers of disease-management programs or care guidelines it can brand and disseminate as its own. An organization with less influence, on the other hand, might be more interested in hearing about a company’s field sales efforts to drive prescription volume by educating providers. Pharmaceutical companies invest significant resources—financial and human—in developing products and bringing them to market, often with high return-on-investment expectations. But adequate preparation for MCOs’ defensive reimbursement and market access tactics can determine a product’s level of success. Balancing the use of financial incentives, clinical superiority claims, and value-added programs is critical to marketing effectively to MCOs. After completing the clinical profile assessment, financial modeling, and account triage, companies’ managed care professionals should be ready to develop account-specific approaches for securing access and reimbursement for their branded products. They can determine the right mix of programs by account and by brand, envision their products through the eyes of managed care decision makers, and construct offers that meet their needs. ❚

Maneuvering the MCO

Failure to run financial models is a recipe for low or nonexistent sales and profits.

Once they ensure that products’ clinical profiles— or, more accurately, MCO decision makers’ perceptions—are understood, pharma companies can identify the pricing strategies and value-added programs they should offer to achieve preferred formulary status. Rigorous financial modeling of the effects of program and pricing alternatives allows pharmaceutical companies to optimize their mix, clinical positioning, and price. Failure to run such models is a recipe for low or nonexistent sales and profit. Pharma companies are likely to price products too high—even after discounts and rebates—and forego market share or to price them too low, unnecessarily diminishing product profit margins. They must critically evaluate the financial advantages and disadvantages of seeking preferred formulary status. In some cases, the cost of financial concessions to obtain preferred status—such as contract discounts and rebates—may outweigh market share gains. Despite the necessity for such modeling, interviews with numerous managed care groups at major pharma companies reveal that even the most sophisticated companies often underestimate the financial implications of their MCO contract arrangements. Adequate financial analysis of such contracts should take into account the direct costs of a product as well as the costs of valueadded programs, educational grants, and even sales and marketing time, if it exceeds the norm. Unfortunately, MCOs are not all alike. They vary widely not only in their market share—and control over drug use volumes—but in their account structures, decision making processes, and priorities. Pharma companies need to prioritize MCO customers to allocate resources and maximize returns. They should focus their efforts on the largest and most influential MCOs, based on total patients covered, total pharmaceutical spend, geographic influence, the formulary’s strictness, and the orga-


				
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