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.
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.