Managed care organizations (MCOs) and pharmacy benefit managers (PBMs)-representing 110 million US patients-have adopted new
guidelines for formulary submissions. As a result, they now reject 40 percent of new drugs. Those standards, the most visible
component in an approach called outcomes-based access, indicate a revolutionary change in the formulary decision making process
that affects 46 percent of the insured population. Many pharmaceutical companies are being caught by surprise.
This article explains the genesis of outcomes-based access, discusses its objectives and administration, and explains how
it is likely to affect pharma companies, their development decisions, and marketing efforts. It also recommends how companies
should respond to the challenge and create a long-term competitive advantage.
How It All StartedIn the past, MCOs and PBMs based their formulary decisions primarily on safety, efficacy, and drug acquisition cost, which,
historically, has not represented a significant hurdle for pharma companies. Outcomes-based access, however, "requires manufacturers
to prove the value of their products," according to Pete Fullerton, former vice-president and director of pharmacy at Regence
BlueShield. Pharma companies must provide that proof through a mandatory presentation of pharmacoeconomic data, which quantify
the impact of new drug therapies on overall treatment costs while producing specific patient outcomes and improvements in
quality of life. (See "Pharmacoeconomics Basics.")
Under the guidelines of outcomes-based access, pharmacoeconomic studies must demonstrate that new therapies produce similar
or better patient outcomes compared with existing products, while lowering overall treatment costs. With the exception of
certain classes of medicines for life-threatening diseases such as cancer and HIV, treatments must meet those requirements
to qualify for preferential formulary inclusion-making the product available for a nominal co-pay. Products that fail to receive
such status are available only as a rung on a strict hierarchical ladder or at largely prohibitive full retail cost. The bottom
line: MCOs are significantly tightening pharma companies' access to their markets through formulary exclusion.
How are those policies playing out? Regence BlueShield, the first MCO in the United States to implement outcomes-based access
(in 1998), reports its per member per month (PMPM) drug costs at 30 percent below the national average-with minimal additional
staffing. Regence's PMPM expenditures for cholesterol-lowering products, among the highest revenue-generating products of
2001 ($11 billion in sales), were 36 percent lower than the industry average. Clearly, the incentive to adopt the new standards
is quite high.
MCOs and PBMs present outcomes-based access as an initiative to improve information flow and increase transparency in formulary
decisions, but its implications are far more significant, even foreboding. The current phase of outcomes-based access represents
the first step in a systematic and aggressive attempt to control drug costs by restricting access. For an increasing number
of MCOs, pharmaceutical costs are now the single highest expenditure. In 2001, MCOs' retail drug costs in the United States
increased, on average, 17.1 percent to $154.5 billion. That jump is partly a result of increased pharmaceutical use, which
prevents significant medical and hospital expenditures. Greater therapy use combined with the politicization of rising costs
have emboldened MCOs to target pharma expenditures as never before.
Managed Care's ThinkingEven though its proponents overlook and misinterpret some critical facts, outcomes-based access is founded on legitimate concerns.
Supporters argue that many new products fail to produce better outcomes-they are simply marginally improved treatments that
are more expensive. Proponents also maintain that the purpose of such therapies is less to improve patient care than to help
pharma companies recoup lost revenues as patents expire or to gain entry into lucrative markets with me-too alternatives.
Further, they claim that, of the treatments that do produce better patient outcomes than their competitors, many do not show
improvements commensurate to their cost. Proponents argue that, because the clinical benefits of those me-too treatments are
insufficient by itself for market success, pharma companies use sophisticated and expensive marketing to create strong results.
Few disagree that pharma companies attempt to maximize the revenue of their innovations by making improvements as their products
mature. Driven by pressures from Wall Street to achieve revenue growth projections and justify market valuations, manufacturers
alter delivery systems, dosing schedules, molecular structures, and drug combinations to retain brand share and exclusivity.
Outcomes-based access proponents argue that the end result is the continued introduction of expensive pharmaceuticals with
no apparent new benefit. They consistently cite Schering-Plough's Clarinex (desloratadine) and Astra-Zeneca's Nexium (esomeprazole)
as two visible examples.
The managed care industry's perspective is illustrated in a controversial May 2002 report from the National Institute for
Health Care Management (NIHCM) called "Changing Patterns of Pharmaceutical Innovation." The report contains serious flaws.
Its shortcomings and their effect on its conclusions are extensively discussed in PhRMA's response, "NIHCM's Report on Pharmaceutical
Innovation: Fact or Fiction?"
The NIHCM report categorizes 1,035 FDA-approved new drug applications from 1989 to 2000. According to the analysis, only 35
percent (361) contain new active ingredients not available in marketed products. Of the remaining 674 drugs, 83 percent differ
from marketed products only in dosage, route of administration, or combination with another active ingredient. The remaining
116 are considered "identical" to products already available, providing no apparent improvements.
By NIHCM's definition, only 15 percent of the total are considered highly innovative: those containing new active ingredients
and providing significant clinical improvement. But its "innovative drug" list represents only 36 percent of managed care's
total spending increases associated with new products. The balance of the spending increase,a whopping 64 percent, is on products
NIHCM categorizes as either representing marginal improvements or identical to existing treatments.
On the Other HandPhRMA's rebuttal points out that the NIHCM report excludes all vaccines and biotech drugs from its study-130 products altogether.
Excluding those relevant new therapies, PhRMA argues, drastically skews the study's conclusions and calls into question its
objectivity. Furthermore, the NIHCM report classifies the majority of approved drugs (54 percent ) as only marginal improvements,
an undeservedly harsh categorization. Although NIHCM categorization mainly considers the active ingredient and whether the
drug was granted a priority FDA review, it ignores the clinical and quality-of-life improvements wrought by incremental yet
Consider, for example, the benefits of transitioning a child with attention deficit hyperactivity disorder from dosing three
times a day to J&J/Alza's Concerta (methylphenidate) once-daily treatment. The benefits include limiting pharmacological peaks
and troughs, eliminating stigmatizing visits to the school nurse's office, and increasing a child's ability to focus during
activities later in the day. Using NIHCM's standards, those patient care improvements would not necessarily be considered
significant except for possibly improving compliance. Instead, Concerta would be dismissed as a reformulation of an existing
Similar arguments can be made for an array of products that represent
- new methods of action: Merck's Cozaar (losartan)
- a new formulation: GlaxoSmithKline's Augmentin (amoxicillin clavulanate)
- a new delivery system: inhaled insulin.
Yet when the payer community makes a value assessment, such improvements are unlikely to draw praise, at least not at a competitive
price. Valuing a patient's quality of life and assessing the indirect benefits of a therapy requires a great deal of subjectivity
and a delicate balance of self-interest with ethical considerations.