Pharmacos and Payers: Achieving Common Ground in a Changing Market

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Pharmaceutical CommercePharmaceutical Commerce - July/August 2010

Most would certainly agree that the main focus of discussion between manufacturers and payers is and has been, “What is the price of this drug, and what discount can I get from that price?” But this discussion has been going on since the first health plan set the first contract with a manufacturer, and now it has become much more nuanced. The complexities go both ways and may involve hard-to-measure elements such as patient demand, health plan quality metrics and outcomes, and the still-unfolding impact of government pricing. New drugs and technologies impact both the medical and pharmaceutical side of the payer universe, and the fact that manufacturers are more involved in proving ongoing safety and efficacy has created more of a sense of “shared responsibility.”

However, the pervasive tendency of drug manufacturers and payers to view one another as adversaries stems naturally from the opposing financial interests that exist between any buyer and seller. Manufacturers wish to sell their products at the highest possible price while payers wish to either avoid the purchase entirely or reduce the price in order to preserve resources. If the product offers no perceived incremental benefit for the price offered, the payer will not buy.

Yet in the healthcare environment, both parties have some shared goals and so some opportunities to bridge the divide. Manufacturers need payers to bring patients whose health plans will cover their products; payers must cover those products deemed necessary or “in demand” by the health plans and need competitive pricing from manufacturers. The two parties need each other in order to meet their respective business objectives and are both motivated to improve human health.

So while it often seems like pricing is the only relevant concern, we believe there is more at stake for all parties than “just price.” Here, we suggest methods that both parties can use to find common ground and work collaboratively to create win/win situations.

Mutual understanding

Pharmaceutical companies long ago learned that not all payers are alike; understanding their unique differences and challenges is key. Companies usually segment payers based upon their market potential and their basic sector (government agency, vs. health insurer [or “Health Plan”] vs. Pharmacy Benefit Manager [PBM]). However, a deeper level of segmentation is required.

Payers have different policies and tendencies that color their interactions with manufacturers. These policies depend on factors such their location(s), member or patient demographics, and business model (e.g. government agency or fiscal intermediary, for-profit, mutual, non-profit, associated with a teaching hospital, a business line within a multi-line insurance company, an offshoot of a PBM, or others). Payers could be qualified for contracting on factors such as short- or long-term financial viability under healthcare reform and how the cost of pharmaceuticals impacts their own margins and competitive positioning.

For a manufacturer, understanding a payer’s organizational personality and engaging in supportive interactions can be important long before a critical business discussion takes place. A company that has already developed a positive relationship with a payer has a greater ability to schedule a timely meeting when it is seeking approval for a new products by the Pharmacy & Therapeutics (P&T) Committee than does the company that is just getting to know the customer.

By the same token, payers should be “doing their homework” to prepare for conversations with manufacturers. Prior to contract discussions, payers should have a sense of each product’s therapeutic value, market share potential, member impact, net costs involved, competitive products and market trends. After a contract is in force, both payers and manufacturers should be equally vigilant in monitoring the performance of a product in a plan.

New level of candor

Ideally, manufacturers and payers should have a fair, balanced discussion about the advantages, value, and risk that a new product or new product indication will pose for the payer and its members. With this clearly established, payers could do manufacturers a service by being open about their intentions for formulary positioning. Manufacturers could do payers a service by being forthright about the benefits and shortcomings of the products they are proposing to the payer. The lack of a contract does not mean the lack of a relationship, particularly if both parties are transparent in their discussions.

Note that proactive payers may use their own data (both prescription and medical claims information) to run their own cost/benefit models. And, when conditions warrant, some large payers run their own head-to-head clinical trials. Their motivation to do so is tied to the potential impact of the drug(s) in question on both budget and medical loss ratio (MLR) (the ratio of direct health costs compared to the total dollars received), the need to determine whether proposed products are materially or marginally differentiated in value (outcomes, cost, etc.), and the knowledge that there are large cost differentials in therapy choices.

More meaningful interactions

Manufacturers that have products with strong value propositions in a competitive environment can benefit from thinking creatively about ways to collaborate with payers that further the payer’s business objectives. Manufacturers already employ a variety of means to get to know payers and their needs, however, the forums listed below may represent opportunities for more frequent or more meaningful exchanges:

• Payer advisory boards. These are typically convened to understand what payers are looking for from a new product in development, and some payers view their participation as a favor to manufacturers. It could be beneficial to retain advisory boards for a more general exploration of payer issues and expectations, thereby offering payers more value from participating.

• Account managers. Seen from the payer’s perspective, manufacturers don’t always make best use of the time their account managers spend with them. Certainly payers prefer continuity in their contact, spending time with well-informed managers who have new information to impart, and having their message carried back to headquarters accurately.

• Senior management tête-à-têtes. This is perhaps the least used and the most beneficial type of interaction that manufacturers can arrange with payers. The goal would be to share strategic directions and find common ground at the CEO or president level to lay the ground-work for collaborative programs.

Collaborative fronts

The following are areas of mutual interest that may spark ideas for collaboration, or at least stronger cooperation:

• Understanding the big picture. Payers would like additional help that manufacturers can provide in filling in gaps in their understanding of how the treatment of diseases is changing over the long term. Manufacturers might consider ways to use technology, such as webinars, to present such information to payers for continuing education credits. This could be a cost-effective means to offer a high perceived value to payers.

In the same vein, manufacturers can benefit from information from payers. Manufacturers appreciate being given some context for their discussions with payers, to include: the characteristics of the payer’s risk pools in its various products, the mix of employer types that are most dominant in the payer’s client base, the payer’s most egregious cost drivers (pharmaceutical and non-pharmaceutical), the diseases and conditions the payer is most focused on addressing, and new product and service offerings that the payer is planning to roll out. This works to everyone’s benefit, as account managers can tailor their discussions accordingly.

• Improving engagements with patient advocacy groups. Depending on the product portfolio of the manufacturer, there are common messages to the patient that may benefit both the payer and the manufacturer. Whether the concern is around cancer, HIV, or an orphan disease, working with the payer to develop messaging (perhaps including Patient Assistance Programs), deepens the partnership.

• Understanding the impact of diagnostics. Both parties should explore the impact that a diagnostic test linked to the use of a product will have on drug utilization. While diagnostic tests can limit drug utilization to the proper patient population, they nonetheless represent an up-front cost (and a huge overall cost) to payers, and the pros and cons should be understood.

• Assisting patients. This is certainly an area of common ground between payers and manufacturers. Disease management programs, being very expensive to develop and maintain, are one area of potential collaboration. While these have been tried before in various diseases—diabetes for example—they are often costly for payers to implement on their own.

In addition to manufacturers’ current patient support programs, they might also consider offering co-pay subsidies to patients in collaboration with payers—or at least with their knowledge. (When manufacturers offer co-pay subsidies without payers’ knowledge, they alter payers’ expected response and cost to the benefit design. This, in turn, undermines payers’ utilization and revenue forecasts and increases their costs.) If payers are advised of such a plan, they can help communicate its availability to patients and forecast accordingly.

• Understanding plan performance. When both parties are willing to consider the other’s perspective on contract performance and share data that would be useful, both stand to benefit. As a byproduct of the contracting process, manufacturers often have insights into contract performance that payers themselves lack. It can be instructive for a payer to see, for instance, that a contracted product in a Low-Control plan (with few benefit restrictions) has exactly the same market share as in a High-Control plan (with more stringent benefit limits), creating less of a mutual advantage. Similarly, payers may have a viewpoint on how a product is performing as compared to the competition that could be helpful to a manufacturer.

• Sharing risk. For a variety of reasons, risk-sharing agreements have not yet proven themselves in the US, but in all likelihood they will gain in popularity, particularly as some new, very expensive products enter the market and as access to data and

measurement tools improve. A payer may, for instance, negotiate a maximum annual payment for a drug, per patient, with the balance to be assumed by the manufacturer.

• Improving the timeliness of rebate payments. Payers would like to receive their rebate payments more promptly. This suggests that manufacturers need to overhaul their back-office operations. Doing so could be a true win/win by reducing the cost of contracting and ultimately saving money that could be re-allocated to collaborating with payers in ways that support their goals.

• Keeping compliance concerns in mind. One does not have to look very hard to find examples of compliance “snafus” on either side of the trading partner relationship. Healthcare is a heavily regulated industry—and becoming more so—such that both manufacturers and payers should maintain a friendly rapport with their counsel. The trading partner relationship represents an exchange of value that is subject to internal and external scrutiny, and both sides must be careful to avoid veering into areas that are non-sanctioned activities within a contract.

There are mutual needs and often overlooked interdependencies between manufacturers and payers. The extent to which these are recognized and exploited by contracting parties can not only improve the business relationship between manufacturers and payers, but also have a profound effect on all of US healthcare. PC

ABOUT THE AUTHORS

Terri Bernacchi is Senior Principal, Strategy & Support, Managed Markets Services, IMS Health. In this role, she is particularly focused on supporting clients’ needs in contract life cycle and execution. Previously, Bernacchi was founder of Innovative Health Strategies (IHS), Inc., a technology-enabled business solutions provider that provides pharmaceutical manufacturers support with their rebate and pricing agreements, and before that, a manger at Blue Cross & Blue Shield United of Wisconsin.

Mark Wiseman is Principal, Managed Market Services, IMS Health, where he focuses on advising clients on operational efficiencies, managing risk and contract optimization. Previous experience includes roles in sales, contracting and strategic planning with several pharmaceutical companies. Wiseman has an MBA from the University of Phoenix and Northern IL University, and a BA in Science/Psychology and a teaching degree from North Park College and Judson University in Chicago.

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