No Margin for Error - Pharmaceutical Executive

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No Margin for Error
Companies that will be forced to cut back on sales and marketing spending must focus on value, not volume. Here's how to reduce your spend where it matters the least.


Pharmaceutical Executive



California: MCO Shakedown
But what has really pushed these expenses past the tipping point is pharma's spending on managed care rebates and contracts. Over the last 10 years, the dollars pharma has rebated back to MCOs, PBMs, and national insurers has grown at two to three times the rate of companies' revenues, depending on the product portfolios involved. When those rebates are combined with Medicaid's "best price," consumer price index (CPI) adjustments, and state supplemental discounts, rebates for many manufacturers today represent a cash outflow that is now greater than all their direct-selling expenses combined, and may represent about 20 percent of gross sales.

Of course, many companies, particularly in crowded therapeutic markets, feel it's worth it. They often justify payer bids based on a belief in a commensurate "spillover"—in other words, that providers apply their script-writing behavior under deeply discounted contracts to prescriptions not covered by that given contract. Executives tend to overuse the spillover argument, so when rebate strategies are coupled with sales force and DTC, it results in what's euphemistically called "margin-negative" business—sales that bring in less than the marginal cost of selling, promoting, and manufacturing the drug.


Written vs. Dispensed
For many years, negative-margin deals were limited to federal programs, such as the VA, and a few aggressive state Medicaid programs, such as MediCal and MassHealth. However, the growth of supplemental rebates for state programs, the increasing power of MCOs, as shown by WellPoint, and the expectation by Medicare Part D providers that the exemption from best price will translate into deeper discounts may mean that as much as 50 percent of all prescriptions in some concentrated markets will be margin negative.

The Payer Mix Index

The key to managing promotion in the new environment is to look closely at margins and access at the territory level and evaluate how much you're likely to make from selling the drugs, and identifying areas where you are unlikely to succeed.

Let's look first at margins. The easiest method to better align companies promotional resources against profit opportunities is creating a payer mix index (PMI) at the territory level.


Same Share of Detailing, Different Results
To create a PMI, you break down your sales in a given territory by payer: the patient, third-party MCO, or Medicaid (and perhaps, down the road, Medicare). Then, determine the margins you make on each revenue source. MCO discounts and supplemental payments can be differentiated on a state-by-state basis, while the average commercial rebate in a state can be used as a close proxy to the actual rebates paid to each account. Some exceptions, where commercial rebates are outside the norm, should also be incorporated into the PMI. Finally, calculate an average margin for each territory, weighted by payer type. "Calculating PMI,", gives an example of how the process works: The two territories have similar sales volumes but very different mixes of payers and margins.


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