Healthcare payers exercise significant control over market access for pharmaceutical products by using tools such as tiered formulary plans and copays, adjudication, spillover, pharmacy reversals, and promotions. In response, pharmaceutical companies spend significant amounts on rebates designed to gain market access for their products. In 2008, these rebates totaled $40 billion—that's 20 percent of industry gross sales.
When used effectively, these rebates can improve sales and profitability. But much of the spending is wasted. According to ZS Associates' research, at least 15 percent, and possibly as much as 50 percent of all payer rebates exceed their expected rate of return. (The variance is due to differing product life cycle stages, market differentiation, and company focus on revenue as opposed to profit.)
How We Got Here
In recent years, as managed care companies have consolidated and gained market power, their influence has become both stronger and more variable. As a result, pharmaceutical companies receive less for more with their expensive rebates. And yet managed care rebates have increased 5 percent in the last five years. This trend will continue as payer consolidations persist and generics proliferate. In addition, healthcare reform and pressure to increase Medicaid rebates will only increase costs for pharmaceutical companies.
In response, pharma executives must revamp their rebating strategies by capitalizing on the wealth of data available today. They must use rigorous analytics to determine which products should be rebated, which payers to contract with, and be clear about the conditions needed for pull-through. While developing a process-oriented managed care rebating process is challenging, the effort can be well worth it. Executives must account for three critical elements when developing a well-integrated, results-driven managed care rebating program.
Rigorous, Objective Decision Making
Pharmaceutical market data available today offers companies a unique opportunity to quantify the impact of various rebating decisions on market access and profitability.
Data can help companies understand the "spillover" effect for different formularies, and determine the impact of formulary tier positions and copay variation within these tiers on market share. For instance, anonymous patient-level data can help companies calculate copay elasticity, helping them set more accurate and effective rebates. Copay elasticity varies by geography as well as patient demographic. Typically, a copay differential in excess of $20 will bias patient preferences, and, as a result, a $20 difference in copay can sometimes affect up to 20 percent of the baseline share for a particular product.
In the women's healthcare market, products such as oral contraceptives and prenatal vitamins come in many branded and generic versions. Patient decisions for these products are based heavily on copays; pharma companies pay rebates to get a favorable formulary "tier" (as opposed to taking copay amounts into account when modeling deals and contracts with payers). But many payers insufficiently reduce the differences in copay amounts between branded product and generic alternatives, and the rebate goes to waste.
In addition to helping determine proper rebates, leveraging data can help companies refine the relationship between managed care and sales effort. It can give companies a better understanding of the sales force activity and marketing investment required to pull through formulary access.
The complexity of negotiating contracts and the variety of data needed to evaluate them means pharmaceutical companies need to supplement available data with technological tools to evaluate managed care contracts in the context of an integrated marketing strategy.
The best tools share a common platform across the company. They must not only help predict likely outcomes for different contracting scenarios, but also inform the allocation of sales force and marketing resources (coupons, samples, direct-to-consumer marketing), given changes in managed care access.
A technology tool alone will not solve a pharmaceutical company's managed care rebating shortcomings, however. It needs to be part of a comprehensive promotion framework that can help determine when the company should change its managed care access and when it should complement or supplement managed care access with sales force or marketing investment.