Pricing has never been more of a key issue for the industry than it is right now. Yet, even with the increased importance of pricing strategies, a lack of focus on critical market factors leads many manufacturers to forego profits or increase their vulnerability to aggressive payers. Aligning pricing and contracting can achieve a sustainable competitive advantage-if product managers objectively assess a product's clinical benefits and address two key questions:
Contracting for preferred formulary status in key customer accounts-the "net price" decision-is a critical element of pricing strategy. Often, it is the contracting tactics that differentiate the product in the market. Pharma companies can use managed care contracting to target strategic customer niches, adapt pricing to reward share performance, align customer objectives through creative win-win contracts, and avoid the deleterious effects of potential price spirals.
Physicians and Price There is considerable debate about whether physicians know or care about the price of the drugs they prescribe. The authors' research shows that doctors know about prices-especially the relative prices of key products-and that price sometimes influences prescribing decisions. For instance, doctors are more price-sensitive when prescribing for mild to moderate conditions, and they are sensitive to the price of prescriptions for chronic conditions.
Physicians are also more price conscious when prescribing for patients who must pay the full "out-of-pocket" cost. In some situations, doctors purchase and administer therapies to patients, as with oncology products in the United States or with many traditional prescription medications in Japan. They are usually reimbursed at a fixed amount for the product and its administrative costs; therefore, doctors are often concerned with the spread between the price and the reimbursement rate.
In contrast, physicians are less concerned about price if the patient has an acute condition requiring treatment for a short course of therapy. Even for chronic conditions, if the physician has tried several medications and encountered problems with tolerability or lack of efficacy, he is far more likely to disregard price when faced with a decision for the next course of therapy. Determining how much of the potential market for a product is price-sensitive requires product managers to understand patients in the therapeutic area and the responsiveness of prescribers to price at each decision point: first-line choice, second-line product switch because of lack of efficacy or side-effects, add-on therapy, and so on.
For price-sensitive patient segments, market research about product demand provides product managers with the basis for optimal pricing strategy. First, they can use market research to determine the demand for therapy at different prices for each physician type and patient segment. That allows them to estimate the market share response to incremental changes in price and competitors' possible price responses. From demand simulations, product managers can determine the price that provides the highest revenues and profits. That type of analysis, when completed for each physician type and patient segment, provides an aggregate demand profile that combines all segment information to identify the exact price that will maximize profits in price-sensitive segments. (See "Demand Curves" and "Reaction Curves.")
Consequently, when prescribing for patients with "high control" formularies, physicians generally pay much more attention to formulary guidelines than to the price of a therapy. When physicians share the responsibility for controlling pharmaceutical costs on a per-patient basis, the influence of formularies is offset and price becomes more important.
Formulary status and the elements of an MCO benefit plan-patient co-payments, prior authorization requirements, and so forth-have more impact on physician prescribing for MCO patients than price does. Therefore, it is imperative for product managers to identify the MCOs that are most able to affect prescribing through their formularies-those who can "move share"-to understand what drives formulary decisions and to compare the costs and benefits of getting on formulary or improving formulary position. Segmenting accounts by their potential to affect share through benefits structure and formulary control can help apportion contracting resources. (See "Getting the Most From Managed Care.")