What's Steering the Ship?
The slate of patent expirations in the last few years is the last driver that empowered commercial plans to extract higher
rebates through the threat of a "generic first" step edit. The arrival of multi-source simivistatin (Zocor), omeprazole (Prilosec),
and alendronate (Fosamax), among others, each gave PBMs and payers a newfound ability to move market share away from non-contracted
brands. Initially, the copay differential between non-preferred brands and generics moved many patients voluntarily to the
lower cost alternative. However, in many benefit designs, copay differentials were insufficient motivation for patients to
abandon their branded prescriptions. So, plans began to introduce both prior authorization and step edits through a generic
before a non-contracted, non-preferred brand could be filled. Manufacturers were quick to see the potential volume loss from
this tactic and capitulated to those plans that had the ability and willingness to impose these utilization control measures.
In some classes, particularly those with fungible brands, even the threat of a step edit was sufficient to up the rebate ante.
In the commercial channel, manufacturers have had an alternative to contracting. Direct-to-patient subsidies, such as coupons
and copay offsets, are often less expensive but also less efficient than contracting for a brand, as they will only be adopted
by a fraction of those exposed to higher copays. Brands that either were unwilling or unable to contract for preferred access
have developed extensive copay offset programs using e-vouchers, copay cards, and coupons to pay patients down to the Tier
2 out-of-pocket expense. Payers are taking note of these programs and are voicing their concerns about offsets that reach
down to the Tier 2 out-of-pocket, or in the case of Lipitor's "pay no more than $4" program, to Tier 1.
But even this option has the potential to go away. United Healthcare recently created yet another mechanism for reducing the
utilization of non-contracted brands. In January, it introduced a "Special Designated Pharmacy," which is the only means for
some of United's members to obtain a refill of 20 non-contracted brands. These can only be filled via United's mail-order
pharmacy, which, conveniently, does not accept coupons or copay offsets. United's primary motivation, however, is to reinforce
its ability to drive market share to preferred, rebated drugs and provide a return to those who invest in formulary position.
Manufacturers Speak Volumes
While the plans have demonstrated increased control, manufacturers have become increasingly willing to pay for preferred access.
It is their own behavior that has driven up rebates as a result of irrational exuberance over the universally accepted value
of preferred or Tier 2 access. Most executives who are currently leading pharmaceutical companies grew up in the age of the
big blockbuster products, when getting on formulary at any cost was a priority. When big launches produced multibillion-dollar
products, and when the price of access was 5 percent to 10 percent of gross sales, the relative cost of contracting was insignificant
to the overall success of a franchise. Volume drove everything, and more volume papered over many inefficient investments
in sales and marketing.
Many of today's general managers still believe that they need at least 80 percent Tier 2 coverage within 12 months of launch
in order to succeed long-term. They are willing to pay nearly any price for that access. Today, however, the launch of a non-differentiated
product has lower dollar potential. Generics are a reasonable alternative to many marginally innovative products. And the
cost of access in many therapeutic areas can be 25 percent to 40 percent of gross sales, or even higher. The heuristic premise
of gaining preferred access at any cost may no longer ensure a profitable business, and the 80 percent target is unrealistic.
It can lead to disappointing net sales, gross margins, and profits.
To slow the growth of rebate spending and continued deterioration of margins, pharmaceutical manufacturers will have to be
a lot smarter and more selective about where they invest their sales dollar. The current process for segmenting based on "plan
control" is inherently flawed and is often based on the wrong information. Most manufacturers will segment accounts based
on whether they are "high control" or "low control," with those designations being made by the historical perception of their
own field organizations. They may also turn to third parties to gather data on the current formulary status of competitors
in a class in their published formularies, which will quantify the difference between Tier 2 and Tier 3 out-of-pocket. However,
these estimates, based on the payer's dominant formulary rarely reflect the experience for the majority of patients. Every
insurer and PBM manages hundreds of benefit designs for their large and small group customers, and many of those designs don't
provide the copay differential between preferred and non-preferred tiers seen in the published formulary. Many public-sector
employers, unions, and public retiree organizations still maintain open formularies with $5 and $10 out-of-pockets even for
non-preferred brands (although this may soon change in Wisconsin). Our own experience is that most manufacturers' current
contracting approach frequently results in gross overpayment for Tier 2 coverage.
A better approach for segmenting these accounts and their control is to look at an actual distribution of adjudicated claims
in the class of interest. A comparison of these adjudicated claims for Tier 2 and Tier 3 products can provide a much better
picture of where it may be valuable to invest in preferred access in any given payer. In Table 1 we have presented a picture
of preferred and non-preferred patient cost exposures for two distinct plans in 2010. Plan A has a clear differential, which
will lead to higher abandonment and more switching off the Tier 3 drug. For those who do fill the prescription at the higher
copay, the brand can expect lower overall patient adherence. What a manufacturer should be willing to pay for on each of these
two accounts can be calculated using those measures and is often well below the plan's asking price.
For launch planning, many manufacturers will use primary research to identify likely control characteristics of plans. Although
market research firms can provide anonymity for the product in question, they also will not have any empirical evidence on
which to ground responses. When they do ask, every plan says every new product is "non-differentiated" will require at least
a 30 percent rebate to get on formulary, or will be stepped or prior authorized into oblivion. Do you believe them?
Despite the threat of imposing a step edit or prior authorization, not all plans are willing or even able to implement such
utilization management processes. In many therapeutic classes, more than 50 percent of commercial volume will be found in
plans that don't employ utilization control in primary care products. Even those that do frequently use prior authorizations
and step edits should not be taken at their menacing word. Some plans really have no teeth in their utilization management