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.
California: MCO Shakedown
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.
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
Written vs. Dispensed
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.
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
Same Share of Detailing, Different Results