The Big Squeeze: Mitigating Demand and Intensifying Margin Pressures
By Luke Greenwalt, senior principal, Amundsen Consulting, a division of QuintilesIMS
Market pressures have continued to threaten pharmaceutical brand revenue while increasing costs. The convergence of these two forces has challenged pharmaceutical manufacturers to improve margin with new and ever-evolving strategies. Only a combination of sophisticated managed markets expertise and real-world analysis can empower brands to maximize profitability in today’s challenging climate.
Faced with continually rising healthcare costs and structural shifts in cost containment from healthcare reform, employers and consumers are demanding more affordable health insurance options. When they consume healthcare, they are increasingly selecting benefit designs that trade lower, fixed monthly premiums for higher, variable costs should they need care in the future.co-p
Meanwhile, payers are also under more pressure than ever to slow the rate of cost increases. They are contending with insurance mandates – the imperative that plans cover more low-and sometimes negative-margin customers – and other regulatory demands. Thus, in order to remain competitive, US healthcare payers must effectively limit medical inflation, despite the availability of new and more expensive treatment advances.
Payers have, therefore, abandoned their role as passive middlemen from a decade ago; they are, instead, consolidating, reorganizing, and exerting more control over burgeoning costs. Specifically, they are implementing exclusionary formularies, adopting utilization management tactics, and employing benefit designs that shift costs onto patients through deductibles, steeper preferred and non-preferred co-pays, and coinsurance tiers.
Tighter formulary control and higher patient cost-sharing have given the pharmaceutical industry greater impetus to rebate aggressively in exchange for favorable coverage. Manufacturers’ rebates have grown increasingly generous as a way to either gain or retain market share while mitigating the impact of cost-sharing on patient behavior.
The Big Squeeze: Declining Demand & Intensifying Margin Pressure
The confluence of market forces and rebating practices has both top- and bottom-line implications for manufacturers and squeezes margins. Top-line revenue is being affected by reduced patient demand/utilization stemming from:
• More restrictive formulary designs and utilization management
• Higher patient cost-sharing through co-pay inflation and the use of deductibles
• Increased patient abandonment due to higher costs
• Reduced treatment adherence with patients staying on therapy for shorter periods
At the same time, some of the forces that are narrowing manufacturers’ margins are:
• Higher baseline rebates
• Increasing usage and cost of co-pay offset programs
• Growth in Medicare Part D Coverage Gap liabilities
• Price protection clauses that reduce the net impact of pricing strategies
Many manufacturers, to offset their growing access costs and to maintain their gross-to-net margin, have been forced to cut their Selling, General, and Administrative (SG&A) spending. This first-line response worked for some time, but today, manufacturers are operating more efficiently with smaller sales forces and lower operating budgets. Thus, making further cuts to SG&A spending will be increasingly difficult without impacting top-line demand.
Changing Market Dynamics
An important component of measuring rebate efficiency is understanding how changing payer benefit designs impact demand. Co-pay inflation is impacting patient behavior through increased abandonment and decreased adherence as patients cross price sensitivity thresholds.
In the commercial payer channel, patient cost-sharing increased among the most prevalent benefit designs for preferred and non-preferred formularies between 2013 and 2015. When adjusting for the impact of higher patient cost-sharing, the average days of therapy consumed by a patient decreased for both preferred and non-preferred formulary positions but at different rates.
Examination of the differential between preferred and non-preferred illustrates how co-pay inflation can impact the value of contracting. The incremental days of therapy consumed by a preferred tier patient over a non-preferred tier patient decreased by close to 50%, dropping from 30 additional days of therapy to only 14 days in a span of 2 years. Payers that delivered more value between preferred and non-preferred formulary positions may no longer do so – thus impacting contract effectiveness.
Co-pay offset programs are an important tool in mitigating cost-sharing inflation. The cost of doing so, however, is growing and should be considered when evaluating access strategies. The total cost of access in the commercial channel must include both baseline rebates and co-pay offset costs when making contract decisions. Co-pay offset program optimization will help ensure program design maximizes the impact on patient behavior and is integrated into the contract decision-making process.
Payer benefit designs are not uniform and can vary widely both across payers and geographies. The shifting landscape means that these market forces manifest themselves differently across the country with some regions facing much higher levels of change than others.
A case study of a large retail brand between 2013 and 2015 illustrates how patient cost exposure fluctuates. Primary patient co-pays, or the co-pay that patients are asked to pay by the insurer, increased in the commercial channel in nearly every state, but the rate of change was far from uniform. Patients in large states like Texas (+45%) and California (+5%) experienced very different shifts in cost-sharing.
For a manufacturer, the variation in patient experience can have significant consequences on both demand and margin forces and, therefore, investment decisions. Sales force performance, resource investment, co-pay offset strategies, contracting decisions, forecast attainment, business development opportunities, and launch expectations can all be influenced by the changing payer and patient dynamics.
Future Outlook
The speed of change in the life sciences industry is accelerating, and the landscape is becoming more complicated. The next 5 years will see many new specialty products introduced into the marketplace at higher price points than existing therapies. This surge in new product development, combined with double-digit manufacturer price increases and greater regulatory requirements, will continue to force health insurers to look for innovative ways to control costs. These market forces are not abating and will certainly manifest themselves in greater pressures on the cost of access and in shifting more cost-sharing onto patients.
All manufacturers are impacted by these forces. Rebate and demand efficiency are declining which increases the need to protect margin while growing more profitable volume at every stage of a product lifecycle. In-line brands must integrate demand and margin strategies across sales, marketing, finance, and market access. Launch products must account for the changes in payer access as historical analogs are increasingly out of date and do not reflect current let alone future market conditions.
Mitigating the forces of the “Big Squeeze” is challenging for big and small manufacturers alike. Understanding how the cost of access and the shifting payer landscape is affecting demand through altering patient behavior can lead to valuable strategic insights. Investment strategies, contract decision-making, resource allocation, and ROI modeling should take into account how the many dimensions of payer access converge to influence market dynamics. Updating business planning with modern key drivers can increase the accuracy and likelihood of attaining financial goals while providing real, market-driven data to support key assumptions.
Manufacturers that are already coping with higher rebate costs, burgeoning co-pay offset budgets, and declining patient demand and value should expect the future to bring even greater margin pressure and access challenges. Making contracting and resourcing decisions on the basis of historical, institutional knowledge of payer and patient value does not address recent changes in benefit design, cost-sharing, and formulary control.
