State-based planning models. WIC's influence on the infant formula business was felt more quickly and deeply in some states than others. By 1993, more than 70 percent of the infants in Tennessee and Mississippi received WIC subsidies; the equivalent figure in Virginia, New Jersey, Michigan, and Illinois was 40 percent. Because of spillover, the value of marketing to the non-WIC, non-rebated segment of the market differed dramatically depending on whether the company or its competitor had the WIC contract in a given state. By the early 1990s, it became clear that a one-size-fits-all resource plan (sales reps, sampling, and couponing) no longer made sense.

Initially, all three competitors reduced their discretionary spending on a state-by-state basis and attempted to maintain their sales forces at historical levels. However, as they looked at the prospect of being "off contract" in a state like California for a three-year period, they downsized sales forces selectively and moved representatives from one state to another. Ultimately, the annual planning and resource allocation process for Abbott and Mead Johnson had to move from a single national plan based on total volume to state-based marketing, sales, and compensation plans that incorporated an understanding of the various segments and contract status.

Industry cost structure rationalized. By the mid-1990s, Wyeth had exited the US market, and Ross and Mead Johnson had seen their profits from the US market decline. A new competitor, Nestle/Carnation, which used a lower-cost direct-to-consumer business model, had successfully entered the market. Although gross sales of infant formula increased each year through price and volume growth, net sales flattened and actually declined in some years.

New Patient Segments Will Emerge

Lessons for Pharma The pharmaceutical industry should look at the evolution of the infant formula business to anticipate the customer, government, and competitor dynamics that are likely to emerge as a result of the new Medicare drug benefit, as well as the actions that managed care companies and state governments could take to leverage their market power. Moreover, managers should look to the changes in business models and processes that evolved in infant formula as a precursor of what is likely to occur in their own industry. The evolution and decline is likely to repeat itself in the same sequence of steps.

First, participation in subsidies will increase as consumers, public health organizations, and state agencies learn to optimize the system. Although the specific regulations have yet to be written, the Medicare Modernization Act (MMA) has aims similar to those of WIC and includes a deeper federal subsidy for the lowest income segment of the market. Currently, the Part D benefit includes no deductible, threshold, or gap in coverage for Medicare beneficiaries with an annual household income under $12,490. Beneficiaries with incomes up to 150 percent of that figure will receive subsidies in the form of sliding-scale premiums and lower deductibles and co-pays. They will also not be subject to the coverage gap between $2,250 and $5,100, in which the patient pays all costs.

Current estimates by the Kaiser Family Foundation are that approximately 6.3 million of the 40 million Medicare beneficiaries will qualify for the greatest subsidy and an additional 7.5 million will have income and assets low enough to qualify for reduced premiums, co-pays, and deductibles. Will this subsidized segment expand as participants learn the rules of the game? How long will it be before state agencies, private "drug purchasing counselors," and the infor- mal network of retirees figure out how to game the system to get their drugs at little or no cost? The odds makers would favor highly motivated seniors with a lot of free time, over government bureaucrats and gatekeepers.