Make Rebates Work - Pharmaceutical Executive


Make Rebates Work

Pharmaceutical Executive

The Spillover Effect

The "spillover" effect is an important factor to consider when developing a managed care-rebating program. As plans consolidate, spillover becomes more relevant. However, its effect isn't uniform, so it's important for companies to account for spillover's divergent impact in different locations. Despite its importance, companies rarely measure spillover objectively or include it in their contracting strategy.

Spillover is essentially how formulary changes in one payer plan affect market share within that plan but also across other plans, as there is a "spillover" in physicians' prescribing behavior. While not universal, the basic premise of spillover is that since physicians do not know the formulary information or copay for each of their patients, they make educated guesses when writing prescriptions.

Depending on their overall patient mix, physicians tend to write prescriptions that are filled at the pharmacy with minimum callbacks. Callbacks occur when patients make a "reversal," or refuse to pay for a prescription (a growing trend in today's economy. Spillover occurs when a physician's decision to stop prescribing a drug because of a restriction on one formulary influences that product's performance across the rest of his patient's plans.

When formulating contracts with payers, it is vital that pharmaceutical companies understand plan spillover. For instance, a high-controlling formulary plan may justify a high rebate; not contracting can prove debilitating to a product's market share. Conversely, contracting with a local plan in geographies where most managed care plans already favor a company's product may not further influence a physician's prescribing.

For instance, a Big Pharma company actually walked away from a contract with a commercial payer because they believed the rebate amount exceeded the potential sales return on the plan. What the company failed to foresee was the additional 30 percent "spillover loss" with other payers because it did not pay the initial rebate. Having a good handle on the spillover effect thus changes how a pharmaceutical company approaches rebates.

Until now, evidence about the existence of spillover has been largely anecdotal, and efforts to measure it have been crude. Today, there are ways to measure spillover accurately at the physician level, and executives must incorporate this data when making contracting decisions.

Marketing and Rebating Efforts

The cornerstone of any effective managed care-rebating program is alignment between a company's various marketing groups. Most companies put their contracting strategy in a silo isolated from sales force and marketing. A lack of communication between the sales, marketing, finance, and contracting teams causes many rebating programs to fail.

Take the case of Highmark Blue Cross Blue Shield, a regional payer that controls 50 percent of all covered lives in the Pittsburgh area. Since a contract with Highmark BCBS has a profound impact on a drug company's local market share, it fundamentally changes the level of sales force activity and marketing (samples, coupons, spot-TV) investment required to pull through the formulary access. Even contracting decisions with national payers can make smaller locales ripe for pull-through via sales force and marketing activity.

Companies that integrate their managed care contracting with overall sales and marketing strategy, and adopt robust promotional planning processes that encompass different decision-makers, will give themselves a competitive advantage. Furthermore, since managed care rebating decisions tend to be local rather than national in nature, it is best to evaluate them jointly and locally, rather than individually and nationally.

For example, the Boston area tends to have controlling payers such as BCBS (of Massachusetts) and Tufts, as well as large group practices that work with payers to support generics. Brands lacking good formulary access in Boston require less sales force investment than other areas in the country that may also lack good formulary access. The local strategy for Boston is therefore very different from any other part of the country. A local mindset can be especially beneficial when considering pull-through resources that are available in a given area to influence formulary access.

As payers consolidate and gain power and the government threatens to wade into the payer market, the ability to know precisely which payers a pharmaceutical company should work with, where, when, and how much it should rebate and how it should change its contracting and promotion strategy over time is not just useful, but imperative to ensuring long term profitability.

Pratap Khedkar is a principal with ZS Associates.He can be reached at

Nitin Jain is associate principal with ZS Associates.He can be reached at


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