Money-Back Guarantee - Pharmaceutical Executive


Money-Back Guarantee

Pharmaceutical Executive

The incentives are equally strong for payers and patients. They benefit from capitation because it eliminates the need to limit access to clinically preferred drugs. The plan has an incentive to encourage scrips to be written for the capitated drug which, after payment of the capitation fee, becomes essentially free. In the example above, the plan breaks even if only the patients currently taking generics are shifted to the capitated brand. If patients on higher-cost drugs are induced to shift as well, the plan can substantially reduce its total expenditure in the category while patients get access to a more effective, branded drug. A capitation pricing scheme also minimizes the upside budget uncertainty that leads payers to delay or restrict reimbursement for higher-priced new drugs since unexpected volume would not create unexpected cost within the current contract period.

Details of implementation need to be negotiated to consider the contribution of co-pays, the medical appropriateness of using other brands for some patients, management of risk, and the potential for new indications. Capitation fees would need to adjust up or down based upon competitive conditions, like when a drug in a class goes generic. (But those issues are as much a challenge when pricing per unit as when pricing per subscriber.) Still, an offer of capitation pricing creates potential for the payer, the patient, and the pharma company to gain.

Segmented Pricing

Intel and Microsoft have successfully overcome in their industries one of the biggest challenges that face pharmaceutical companies: charging different amounts for essentially the same product when used across different applications or markets. Take computer chips. Intel prices these chips differently if they are sold to drive the processing speed of video games rather than to drive complex logistics systems. Microsoft charges different prices for essentially the same software across different markets based on ability to pay.

For pharma, this type of segmented pricing is particularly difficult to do when negotiating outside of a centralized payer, because drugs intended for one application are easily diverted for another unintended one. To overcome this, companies must create "fences" that hinder purchase for high-value-per-unit applications from being met at a price intended for lower-value applications. The most effective fence—a different product for each application—is also the most costly, but it does work.

For example, while studying Proscar (finasteride) for benign prostatic hyperplasia (BPH), Merck realized that the drug also had an effect on hair loss. The maximum effective dose for male pattern baldness was only one-fifth the dose for treating BPH, a larger and more lucrative market. At the price per milligram for BPH, potential revenue from the male pattern baldness market would have been too small to make them worth pursuing. To enable charging a higher price per unit for male pattern baldness, Merck manufactured a difficult-to-divide 5-milligram tablet for BPH priced at $3.48. It then created an entirely different brand name (Propecia), product appearance, and packaging to support its pricing of the hair-loss drug at $2.38 for a 1-milligram tablet containing the same active ingredient.

Occasionally, pharma companies use similar tactics to make drugs, or licenses, available to aid agencies serving those least able to pay. For example, Pfizer has created a distinctive appearance for Diflucan (fluconazole), which it donates free of charge in many countries in Africa. There is a growing commercial opportunity to use similar tactics for sales in large, developing markets where many people can pay profitable—albeit not the highest—prices. Indeed, different product variations can be used to penetrate developing markets while minimizing the chance that these drugs will be reimported back into markets where higher prices are charged.

By codeveloping local formulations and combinations to ensure no adverse effects, a Western pharma company could supply an active ingredient and a license to a local supplier to manufacture drugs at prices that patients in developing countries could afford. Software companies very often grant licenses to local partners that limit the geographic area within which they can sell. They do so by licensing only a few distributors and using state-of-the-art product tracking codes and counterfeit protections on their products and packaging. Any product that shows up where it does not belong can easily be tracked back to the local authorized distributor, who has a lucrative franchise to lose. Pharma companies could adopt similar tactics in partnering with local manufacturers and distributors and, in so doing, maximize their product's sales around the world.


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