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The marketing challenge for every business is to sell products against a backdrop of competitive forces, technological developments, and established industry rules. While change is a constant, the natural tendency within each of these zones is to operate in some kind of normalcy, and for the relationships among them to interact in equilibrium. There are times, of course, when profound change occurs. These might be called "tipping points," where the weight of something new overwhelms the established logic.
The marketing challenge for every business is to sell products against a backdrop of competitive forces, technological developments, and established industry rules. While change is a constant, the natural tendency within each of these zones is to operate in some kind of normalcy, and for the relationships among them to interact in equilibrium. There are times, of course, when profound change occurs. These might be called "tipping points," where the weightof something new overwhelms the established logic. The emergence of Microsoft vis-Ã is IBM illustrates a tipping point in the zone of competitive forces. The same could be said for the internet in the zone of technological developments and for managed care in the zone of established healthcare industry rules. These developments were transformative. While there are always notable exceptions, IBM and Xerox for example, transformative developments are generally recognized by top management—sometimes a little earlier, sometimes a little later—and their marketing implications eventually absorbed. This article does not address transformative developments.
Using a baseball analogy, if transformations are scored as "home run developments," lesser change can be equated with "singles," "doubles," and "triples." The proposition set forth in this article is that there are at least three changes under way in the pharmaceutical marketplace—call them doubles and triples—that are significant enough to represent new marketing horizons for manufacturers. These new horizons include increasing out-of-pocket costs, evidenced-based commodification, and Medicare prescription coverage.
Should pharma executives neglect any one of these developments, they run the risk of causing a decline in their company's sales. Neglecting more than one compounds that risk.
The old news is that cost-shifting to patients with multitier prescription benefits is well established. Generic-to-second tier copay differences as well as second-to-third tier differences of at least $10 have become the norm. Based on interviews I regularly conduct with pharmacy decision makers, over the next two years it would not be unreasonable to see generic-to-second tier and second-to-third tier copay differences at a minimum double to $20—all part of a general belief that patients need to have "skin in the game." These, it bears emphasizing, are conservative projections.
Prodded by employers, it is also likely there will be an emerging market share shift to tiered co-insurance, with consumers paying, for example, 10 percent of a generic/first tier, 20 percent of a brand/second tier, and 40 percent of a brand/third tier. Aside from reinforcing cost-sharing, the rationale for co-insurance is that it gives employers budget predictability, knowing that employees are absorbing a fixed percentage of total drug cost.
Coinciding with increased cost differences between tiers will be a dramatic increase in the number of quality generic agents on the market. Over the next two years, some of the most successful brands will be available as generics, making consumers think twice about spending extra money for marginally better brands at the second or third tier.
With this next wave of generics, five developments are likely to shape how health plan pharmacy management will try to steer member drug utilization:
The cumulative impact of increasing cost differences between tiers and the increasing availability of respected generics represents an altogether new marketing challenge for pharma managed-care executives. This challenge centers on the emergence of consumer marketing within health plans, something that pharma managed-care executives have usually not had to address. In the years ahead, consumer marketing in health plans may prove to be just as critical to a product's success in managed care as formulary position. These two thrusts in health plans—consumers and formulary considerations—represent a dual marketing focus managed-care executives will need to address in the future.
The pharma marketing model has traditionally been based on brand marketing, which has three focal points. The first point involves development of a product's information platform: product identity, positioning, messaging, and advertising. The second involves healthcare professionals: detailing, education, and other forms of communication. The third involves consumers, particularly direct-to-consumer (DTC) advertising.
Managed-care marketing flows out of brand marketing and has five focal points. First is contracting. Second is account management. Third is program and resource support, such as disease management, education, and analytics. Fourth is pull-through support. And fifth is coordination with field sales.
Managed-care marketing is largely structured marketing—that is, managed- care marketing creates frameworks in health plans to produce member demand. Core examples include securing second- tier or formulary status; promoting disease management; providing physicians with treatment guidelines; measuring patient outcomes; and demonstrating pharmacoeconomic advantages. Each of these frameworks represents a structural attempt to increase member demand.
Historically, pharma companies that succeed in their structured marketing also succeed in capturing more market share than their competitors. However, once prescription benefits leave the nominal out-of-pocket cost realm and patients have "skin in the game," the gains from successful structured marketing begin to lessen. Because of this, plan members will increasingly be forced to make choices as pocketbook priorities shift the center of gravity in the doctor-patient relationship from patients deferring to what physicians prescribe to patients questioning their physician for financial reasons. By intent, this represents a radical departure from the long-established logic of health insurance that nothing was to come between doctors and patients.
With out-of-pocket drug costs rising and copay differences between tiers widening, pharma executives can expect more health plan members to raise financial questions about branded products their doctors select. "Do I ask for a generic?" "Do I tell my doctor, 'Only products on the second tier'?" "Do I explain, 'There is no way I can afford all that medication for my family'?"
Assume, for example, that a manufacturer's managed-care team gets its product on the second tier, helps to implement an effective disease management program, and successfully promotes physician education. If, depending on their purchasing decisions, individuals face a monthly $100-plus swing for multiple medications, and families face a monthly $200-plus swing, it is far from certain patients will automatically comply with what their doctor prescribed.
This tendency had been documented in studies of insured populations before the 2003-2004 wave of significant cost-shifting took effect. In a study published in the Journal of the American Medical Association and summarized in the Wall Street Journal, researchers found that "when copayments doubled, the use of prescription drugs fell between 17 percent and 23 percent among patients with diabetes, asthma, and gastric acid disease." A few months earlier, in a Harvard Medical School study published in the New England Journal of Medicine, also summarized by the Wall Street Journal, researchers found that due to higher copays, "employees quit filling prescriptions for chronic conditions, with as many as 21 percent at one employer giving up taking cholesterol-lowering statins."
With health plan members forced to make separate purchasing decisions after their physician hands them a prescriptionpharma managed-care executives will need to address consumer-member marketing if they are to realize market share success at the plan level. This dual focus in health plans—structures to facilitate demand before a script is written, and share of mind to lock in demand after the script is written—represents a new marketing horizon. The following principles may serve internal planning discussions as pharma managed-care divisions prepare for this emerging industry development: Material for member marketing should flow from brand marketing, but the approach and methods will need to be health plan-specific
Evidenced-based medicine is a little like mom and apple pie. Who could take issue with it? The problem for pharma is that evidenced-based medicine is a double-edged sword. On one hand, it promises to improve quality in everyday medical practice. On the other hand, it promotes tendencies to commodify products by locking in a specific product category in
clinical decision making and minimizing product differences within categories. Evidenced-based medicine comes down squarely on the side of class effect, product interchangeability, and "me-too" reasoning—until proven otherwise
It's axiomatic now that there's a quality chasm in American medicine and that practice variation is a root cause. There is also an emerging consensus among employers, federal policy makers, and managed-care executives that a more aggressive adoption of evidenced-based medicine can be a powerful corrective. As a practical matter, this translates into the use of guidelines, pathways, and protocols, all of which are intended to standardize medical treatment around scientifically validated data and best practices
Recently, a "pay-for-quality" movement has emerged to extend the reach of evidenced-based standards across mainstream medicine. Hospital and physician scorecards, long a staple of managed care, are at the center of renewed efforts to reward evidenced-based practices. Significantly linking provider scorecards to increased payment appears to be gaining employer support. In addition, Medicare has weighed in on the guideline/protocol front with the prospect of increasing payment to physicians who take better care of patients with chronic illnesses
Three factors suggest widespread incorporation of evidenced-based medicine in routine physician decision making. First, the need to systematically improve quality has gained rapid acceptance. Second, adoption of standard guidelines and protocols is seen as a way to also control costs. And finally, the technology for industrywide implementation through physician-friendly point of care and wireless systems is now readily available
Although physicians are not inclined to absorb the cost of these systems, if recent headlines are a sign, health plans, provider networks, and pharmacy benefit managers (PBMs) are, to different degrees, stepping up efforts to promote adoption of e-prescribing tools and web-based functionality—all of which have the capacity to lock physicians into evidenced-based practices
The new horizon for pharma managed-care marketing will be defined by increased product commodification justified not by cost but by quality. Traditionally, products are reduced to commodities because cost trumps differentiation. While cost-driven commodity environments pose considerable marketing challenges—the pharmacy director may be more "finance oriented" than average or a pharmacy and therapeutics (P&T) committee more "skeptical" than average—pharma can attack commodification by addressing the customer's value proposition. Usually, this occurs in one of three ways: being low cost; bundled contracting; or partnering to produce greater value with program support
In an emerging evidenced-based commodity environment, pharma will need to address quality-driven imperatives that standardize treatment rules by requiring adoption of consensus guidelines and protocols. Superficially, this will look like current utilization management that uses step therapy, therapeutic substitution, system edits, and prior authorization. Unlike current utilization management, though, these methods will be linked, not to situational cost concerns but to an "objective need" for establishing consistent quality of care across all network providers.
It appears there are at least seven disease states where practice variation in physician prescribing is a problem and efforts by managed-care stakeholders are likely to coalesce: asthma, chronic obstructive pulmonary disease, diabetes, gastrointestinal disease, hypertension, heart failure, and myocardial infarction. With the potential for huge Medicare growth in managed care beginning in 2006, one MCO pharmacy executive in a recent interview suggested that Alzheimer's disease could be another area for evidenced-based, quality-driven commodification. His reasoning is instructive
"Physicians, patients, and government are going to realize some of these categories that used to be off-limits in terms of limiting drug choice can be in play. Once physicians are more sensitized to that with specific guidelines, which I think they will be, they will understand the rationale for trying to limit choice or steering patients toward certain products. I think Alzheimer's will be an area where we will begin to suggest you can start patients on the same drug all the time and have a kind of sequenced approach."
Although selected efforts are underway for plans to standardize physician prescribing in these disease areas, the new marketing horizon will reflect industrywide quality improvement efforts to standardize practices in the future. If evidence justifies a more expensive therapeutic class be pushed further back in a protocol or there is no evidence to establish differentiation among agents in the class, and your higher cost product is the loser—c'est la vie. Under this scenario, pharma might come to the table with a better value proposition, but health plan pharmacy directors will "have their hands tied."
Being on the right side of evidenced-based commodification is ideal, but for products that are not the challenges will be considerable. The following are three suggestions for attacking subordinate product positioning in evidenced-based, quality-driven commodity environments
Gap analysis between thought leaders and pharmacy management. This means identifying distinctions in assumptions, perspective, and priorities between national thought leaders and specialists who participate in health plan P&T meetings on the one hand, and pharmacy management on the other. It also means developing functional and measurable implications that flow from this gap. What is it that thought leaders and specialists are saying that pharmacy management policy is not attuned to—and why is this important?
Differentiation based on physician and patient value chains. Since P&T thinking focuses on safety and efficacy, if products are equivalent on these two dimensions, cost becomes the focal point. To avoid playing the low-cost game when "equivalent" products are locked out by quality-driven guidelines, pharma marketing will need to establish differentiation in new ways. The suggestion here is that, like business organizations, physicians and patients have value chains, and that product features could lend themselves to making a measurable case for differentiation depending on the utility of a product's value chain benefit. Will, for example, a product make physician monitoring, or patient self-management more effective? Are there additional benefits from a product for patients with certain comorbidities? While this area requires more market research, it holds out the possibility of building a differentiation argument before a brand director is forced to tell senior executives "it all comes down to price."
Framing the efficacy equation more narrowly. Making the claim for superior efficacy is most frequently based on comparisons to placebo and less frequently on head-to-head comparisons. But the emphasis either way tends to be on broad populations. Brand planners usually do not want to "niche" their product and unnecessarily restrict demand. However, brand teams increasingly may find it advantageous in the long run to build niche positioning more prominently into Phase III research so that managed-care teams can develop a narrow, empirical case for differentiation. The tradeoff is increasing the risk of limiting demand for a new product in the launch phase versus decreasing the risk of an evidenced-based P&T commodity decision
Aside from providing seniors with the means to have prescription coverage, a key goal of the 2003 Medicare Prescription Drug Improvement and Modernization Act is to migrate the delivery and risk for prescription coverage from government to the private sector and managed care. To say this new development will add complexity to pharma
managed care is an understatement. Indeed, the complexity likely to unfold when coverage takes effect in 2006 is so multifaceted, and so capable of undermining predictability, pharma managed- care divisions might be better served without a Medicare strategy per se, emphasizing instead tactics for selected products. Perhaps the best way to understand how this new horizon will take shape is to examine three different aspects of the emerging environment. These are discussed below
Based on market research conducted over the years, there are at least seven attributes of seniors that are likely to reflect their behavior as prescription drug consumers in the new Medicare market:
This suggests that pharma managed- care marketing, as a general rule, will need to plan for seniors who will be unlikely to sort through the complexity and confusion of the discount card and insurance programs; will rely heavily on the physician's office and pharmacist for coverage advice; will have a strong bias towards generics; and will be less willing to switch for "serious" medication and more willing to switch for "discretionary" medication
News reports have documented countless flaws that are either inherent in the design of the discount card program or a consequence of its implementation. Both sets of flaws can be expected to undermine the effectiveness of the Medicare discount card leading up to the onset of insurance coverage in 2006. (See "Little Impact")
Given the confusion, the modest savings anticipated (10-25 percent), slow growth in membership, and 18-month time frame, the discount card program is unlikely to have a significant impact on the overall seniors market. However, depending on discount match-ups and the popularity of a given card locally, it is conceivable that local market shares could be affected. It is possible to imagine scenarios in which seniors leverage their $600 low-income credit with purchasing strategies that change product preference
Two developments illustrate tactics companies have adopted for the Medicare discount cards. Merck and Novartis will charge only a small fee for drugs needed by people who use up their $600 subsidies. Pfizer and Eli Lilly will offer 30-day supplies at a fixed copay to Medicare beneficiaries below a certain income level if they use the United Healthcare U Share card.
Strategically, it would appear that there are at least three implications pharma managed-care teams might consider in addressing the discount card aspect of the Medicare market
Medicare prescription coverage (Part D) will be provided through one of two vehicles: Prescription Drug Plans (PDPs) for those staying in Medicare fee-for-service, and Medicare Advantage plans (currently Medicare+Choice) for those opting to be in managed care. The centerpiece of the new prescription benefit is the statutory design. (See "Statutory Benefit Design.")
Although both Advantage plans and PDPs will have the technical ability to offer alternatives, their Medicare premium will be tied to this benefit design. Any change from the cumbersome deductible and donut features will need to be actuarially equivalent. Most significant is the $3,600 out-of-pocket cost that seniors are intended to absorb prior to the 5 percent co-insurance. Also, it bears emphasizing that unlike the current Medicare+Choice plans where senior prescription benefits are capped, there can be no cap in the 2006 environment. As severe as the statutory design is, therefore, Advantage plans and PDPs will be financially pressured to offer alternatives with their own severe features—many, quite possibly, with a deductible and certainly with huge tier differences.
Based on interviews conducted with several managed care decision makers and others in the Medicare community, three strategic observations emerge from a snapshot of how the 2006 seniors prescription market appears to be developing. Any number of subsequent events could alter the points outlined below.
Managed-care contracting considerations, with its traditional formulary structure, product channeling, and rebates, appear unlikely to come to fruition as broadly or as cleanly as proponents contemplated.
In addition, CMS can be expected to take on much more full risk in the traditional Medicare market than originally intended because PBMs have signaled they have little interest in assuming PDP risk. For PDPs where CMS takes full risk because PBMs (or health plans) want an administrative services only (ASO) role, rebates are unlikely since the federal government to date has avoided rebate relationships.
Statutory Benefit Design
The seniors prescription market in 2006 is likely to be more oriented to lower average wholesale prices (AWPs) than a lower net cost through contracting.
To date, there does not appear to be any managed-care consensus around a host of basic formulary issues, further complicating how a pharma managed-care team should approach a given account. Some of those issues include:
One exercise in strategic planning is for the enterprise to identify how it expects to be successful three, four, and five years out. This might include how it wants to be positioned competitively, what sales numbers it hopes to achieve, and what market identity it seeks to establish. The three new pharma managed-care marketing horizons described in this article are by no means transformational. They are, though, important enough to have a considerable impact on how pharmaceutical manufacturers succeed going forward. Companies that understand how these horizons define what steps are needed to get to their desired future are more likely to succeed than companies that do not.
There is also the question of whether "superior products" make the new horizons described here more or less moot. Will strong products, products with a unique mechanism of action, and products that are effectively differentiated be immune to the challenges posed by these new horizons? That, it would appear, is an open question, but the odds are, even superior products will likely face greater vulnerability should their managed care divisions fail to think through the marketing challenges and competitive threats the three new horizons pose in the years ahead.
I am grateful to Norm Smith from Viewpoint Consulting and Nancy Featherstone from AstraZeneca for their reviews of a prior draft.