To Contract or Not to Contract?
Determining the value of a managed care formulary position requires product managers to estimate the share increase that can
be expected from an improved formulary position. Comparing expected share increases with the cost of improving the formulary
position-through rebates or other value-added services-provides a cost-benefit assessment of formulary contracting efforts.
(See "Share Loss from Formulary Restrictions,") As formulary control increases-because of higher patient co-pays or prior
authorization requirements-product share decreases.
Share Loss From Formulary Restrictions
Another way of looking at the value of formulary access is to determine the price reduction that would be necessary to offset
the share loss resulting from a restrictive formulary position. In one example, with a co-pay increase from $10 to $20, price
might need to fall by 35 percent to offset the share loss. In the same scenario, with a $40 co-pay, price would need to fall
by 55 percent to offset the share loss relative to a "no restrictions" situation. (See "Price Impact of Formulary Controls,"
page 96. )
Contracting strategy boils down to providing rebates, discounts, or other value-added programs in return for improved formulary
position-when it makes economic sense. Knowing the "up side" to improvements in formulary position-the expected share increase-defines
the break-even point for negotiating formulary position with an MCO. In the previous example, the share impact of moving from
third tier with a $40 co-pay to second tier with a $20 co-pay is roughly 10 share points. In that case, a pharma company would
be better off walking away from contracting discussions if the MCO required a rebate in excess of the total profit increase
associated with a 10 point increase in share. In some cases, leveraging a portfolio of products can increase the bargaining
position for formulary placement and reduce the overall rebates required to get on formulary.
Price Impact Of Formulary Control
Identifying the value of formulary status imposes economic discipline on contracting with MCOs; the company should only pay
up to the potential value of the improved position. Understanding the trade-off between value and cost is crucial to negotiating
a contract. Without it, product managers will miss the mark in targeting accounts for formulary access, overpaying in some
or failing to realize the potential of others by not bringing enough to the table. To be successful, product managers must
segment customer accounts by plan type (low-control, high-control) and potential (size and growth of the market) and compare
the value of formulary access against its costs.
Putting the Pieces Together
Optimal pricing strategy requires understanding the factors-both clinical and economic-that are most critical to prescribing
decisions. Product managers must understand
- patients, physicians, and MCO segments
- the medical conditions for which the product will be used
- how the product stacks up against competitors with regard to key attributes such as efficacy, safety, tolerability, and convenience.
Decision makers must also consider the relative importance of price-sensitive segments. Through research, they can determine
whether the product will be used primarily by patients who are more sensitive to price, or in situations where physicians
view price as important in prescribing decisions-chronic, mild-moderate severity, first-line, and so forth.
In each segment, the demand for the drug identifies the share to expect at each potential price. Product managers derive the
optimal price for maximizing profits directly by aggregating the results from each of those segments.
For patients covered by third-party payers such as MCOs, product managers need to quantify the share potential of improved
formulary positions with the payer. For managed care plans in which the formulary has proven effective in moving market share,
it may be worth substantial rebates to secure a lower co-pay than competitors have, or to avoid being blocked or disadvantaged
in some way by the plan formulary. With reliable data on the value of an improved formulary position, product managers can
make informed, economically sound decisions about how much to rebate or discount to optimize profits.
Pricing and contracting strategy go hand-in-hand. By applying a systematic approach to identifying both the optimal price
in price-sensitive segments and the value and cost of contracting with key third-party payers, decision makers can maximize
profits when faced with complex pricing choices in dynamic markets. z