Friday, March 6, 2015

Pharma not prepared for changing health care landscape

Public attention for the last few weeks has rightly focused on the inexcusable mistakes that accompanied the Affordable Care Act's rollout. While the pharmaceutical industry spent several years preparing for the ACA, managements at most of the companies remain flatfooted amidst a few other trends that will likely create more serious problems for them than Obamacare.

Pharma not prepared for changing health care landscape

Public attention for the last few weeks has rightly focused on the inexcusable mistakes that accompanied the Affordable Care Act's rollout.  While the pharmaceutical industry spent several years preparing for the ACA, managements at most of the companies remain flatfooted amidst a few other trends that will likely create more serious problems for them than Obamacare.

For example, the astute pharma journalist, Ed Silverman, recently listed (see here) some of the reasons why the Affordable Care Act might either boost revenues for branded pharma companies or create some hazards.  The potential benefits come from insuring more people, thereby putting them in a better position to buy pharma's products.  At the same time, Silverman notes that Obamacare's likely use of data analysis to better determine drug cost-effectiveness represents a distinct threat.  The use of Big Data analysis to determine which medications work best for which patients under what particular circumstances can powerfully obstruct pharma's efforts to differentiate its brands and justify their exorbitant costs.

Data analytics are likely to create a scenario of dueling databases.  Pharmas will have their data scientists make the case that patients will benefit from branded medications, after which payers will analyze the data and, most likely, reply that, “your brand is better than the generic in 4% of the candidate patient population, as long as conditions x, y and z apply.”  If it comes to that, such a scenario will doom the possibilities for future blockbusters to make billions of dollars by treating large populations.

Silverman mentions but doesn't discuss another threatening trend for pharma.  That one involves more insurers moving away from defined benefit plans and toward coinsurance.   Coinsurance plans create a problem for pharma because if a person has to pay somewhere between 30% and 50% for a hugely expensive brand, the companies will hear a much louder public uproar against drug prices.

A third trend that finds pharma back on its heels concerns its shrinking customer base.  Currently pharmaceutical marketing and its support functions are geared toward assessing the needs and attitudes of a million or so physicians worldwide, and then directing promotions to them.   The fact remains, however, that individual physicians represent a shrinking percentage of pharma's customer base.  Instead of physicians, Large Integrated Healthcare Systems (LISHs) constitute an increasing proportion of the industry's customers.  

In the US, for example, pharma's customer base will consist of less than 200 LISHs instead of half a million health care practitioners.  LISHs are impervious to the way pharmas currently promote and sell their products: brand teams, reps with goodies, medical society conventions, CME sessions and other "spokes of the marketing wheel."  In its place, the drug business will become a business-to-business affair demanding technical, individualized contract negotiations.

Pharma remains years away from addressing this reality.  Marketing researchers still conduct their staples of segmentation, attitude, usage, awareness and ad studies, all designed to assess what it takes to induce prescriptions from health care practitioners.  Along the same line, brand teams remain overbloated groups intent on micromarketing their brands to the various market niches identified by the research studies. 

All of this means the customer base will be drastically different and much smaller, yet the industry either hasn't caught on or hasn't reflected the reality in its organizational structure.

Another trend to which pharma buries its head involves payers and providers progressively demanding a different type of information to guide their therapeutic decision making.  Pharmas remain mired in communicating information to customers that shows how their respective brands are better than alternative therapies.  But the at-risk payment structure in which payers and providers work means that most of the time, such information has only marginal value for them.  Instead their profitability demands assessing how pharma's offerings can improve outcomes and reduce total costs.

To address those needs, pharmas must develop and sell service packages that include elements such as adherence coaching, adherence incentives for patient, and pricing arrangements modeled after the accountable care delivery model. 

The dawning reality demands that pharmas share in the risk because the revenues they will receive from their brands must depend upon achieving specified metrics.  While pharmas are acutely aware that improved outcomes connected with their drugs involve efforts at adherence, prevention, coaching and similar efforts, the managements cast a cold eye at the prospect of trying to generate a large revenue share from at-risk services. 

So while CMS, the federal agency that administers Medicaid and Medicare, has proposed a plan to reimburse providers for distance visits that could be applied to health coaching and other, non-physician, third party interventions, the pharmas have yet to show an interest in pursuing it.

Since few of pharma's full-time employees currently possess the skills to develop and manage such service programs, even if drug companies saw the light, they would have to outsource the entire operation.  But pharmas have historically refused to base a substantial share of their revenues on the performance of outside agencies.  

Then finance and accounting, the primary source of pharma's intransigence, throw another wet blanket on the prospect of the companies developing a substantial stake in service businesses.  They have inevitably squelched all such efforts by claiming that services would cause dire reductions to company operating margins.

Even as attention right now focuses on Obamacare and whether it will improve or worsen profits, the pharmaceutical industry has remained in the caboose as far as trends that are more important for its long-term sustainability.  Last year, when a source at Merck was apprised about some of these issues, she said the company was at least four years away from even entertaining them as concepts.

Pharma's narrow-mindedness means that threats to its independent existence can come in two ways — first gradually then all of a sudden.  Instead of taking the time to plan and implement a useful place for itself in the emerging health care environment, the drug industry still clings to the hope it can continue 1995 into perpetuity and live in a utopian version of Groundhog Day.  Unfortunately for the thousands of pharma employees that may receive their terminations one morning without prior notice, life will become a different movie.


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Daniel R. Hoffman, Ph.D. President, Pharmaceutical Business Research Associates
About this blog

Check Up covers regional health news and a wide array of healthcare topics from pharmaceutical happenings to patient safety. Read about some of our bloggers here.

Portions of this blog may also be found in the Inquirer's Sunday Health Section.

Michael R. Cohen, R.Ph. President, Institute for Safe Medication Practices
Daniel R. Hoffman, Ph.D. President, Pharmaceutical Business Research Associates
Hooman Noorchashm, M.D., Ph.D. Cardiothoracic surgeon in the Philadelphia area
Amy J. Reed, M.D., Ph.D. Anesthesiologist and Surgical Intensivist in the Philadelphia Area
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