Are pharmaceutical companies getting full value for the billions of dollars they pay managed care companies for market access?
Unfortunately, the answer is often "no."
Healthcare payers exercise significant control over market access for pharmaceutical products by using tools such as tiered
formulary plans and copays, adjudication, spillover, pharmacy reversals, and promotions. In response, pharmaceutical companies
spend significant amounts on rebates designed to gain market access for their products. In 2008, these rebates totaled $40
billion—that's 20 percent of industry gross sales.
When used effectively, these rebates can improve sales and profitability. But much of the spending is wasted. According to
ZS Associates' research, at least 15 percent, and possibly as much as 50 percent of all payer rebates exceed their expected
rate of return. (The variance is due to differing product life cycle stages, market differentiation, and company focus on
revenue as opposed to profit.)
Several factors account for this disconnect, but the primary reason is that while industry spends almost twice as much on
rebates than on its sales force, many companies do not apply the same kind of objective, analytical decision-making to managed
care rebates that they do to sales strategy. Furthermore, the contracting department often operates in a silo, and does not
account for other variables that can influence outcomes.
How We Got Here
In recent years, as managed care companies have consolidated and gained market power, their influence has become both stronger
and more variable. As a result, pharmaceutical companies receive less for more with their expensive rebates. And yet managed
care rebates have increased 5 percent in the last five years. This trend will continue as payer consolidations persist and
generics proliferate. In addition, healthcare reform and pressure to increase Medicaid rebates will only increase costs for
In response, pharma executives must revamp their rebating strategies by capitalizing on the wealth of data available today.
They must use rigorous analytics to determine which products should be rebated, which payers to contract with, and be clear
about the conditions needed for pull-through. While developing a process-oriented managed care rebating process is challenging,
the effort can be well worth it. Executives must account for three critical elements when developing a well-integrated, results-driven
managed care rebating program.
Rigorous, Objective Decision Making
Pharmaceutical market data available today offers companies a unique opportunity to quantify the impact of various rebating
decisions on market access and profitability.
Data can help companies understand the "spillover" effect for different formularies, and determine the impact of formulary
tier positions and copay variation within these tiers on market share. For instance, anonymous patient-level data can help
companies calculate copay elasticity, helping them set more accurate and effective rebates. Copay elasticity varies by geography
as well as patient demographic. Typically, a copay differential in excess of $20 will bias patient preferences, and, as a
result, a $20 difference in copay can sometimes affect up to 20 percent of the baseline share for a particular product.
In the women's healthcare market, products such as oral contraceptives and prenatal vitamins come in many branded and generic
versions. Patient decisions for these products are based heavily on copays; pharma companies pay rebates to get a favorable
formulary "tier" (as opposed to taking copay amounts into account when modeling deals and contracts with payers). But many
payers insufficiently reduce the differences in copay amounts between branded product and generic alternatives, and the rebate
goes to waste.
In addition to helping determine proper rebates, leveraging data can help companies refine the relationship between managed
care and sales effort. It can give companies a better understanding of the sales force activity and marketing investment required
to pull through formulary access.
The complexity of negotiating contracts and the variety of data needed to evaluate them means pharmaceutical companies need
to supplement available data with technological tools to evaluate managed care contracts in the context of an integrated marketing
The best tools share a common platform across the company. They must not only help predict likely outcomes for different contracting
scenarios, but also inform the allocation of sales force and marketing resources (coupons, samples, direct-to-consumer marketing),
given changes in managed care access.
A technology tool alone will not solve a pharmaceutical company's managed care rebating shortcomings, however. It needs to
be part of a comprehensive promotion framework that can help determine when the company should change its managed care access
and when it should complement or supplement managed care access with sales force or marketing investment.