Risk-sharing arrangements in which full payment is contingent on clinical outcomes are gaining traction in an environment that is increasingly sensitive to value delivered.
Recent legislation and growing anxiety about debt have put healthcare in the spotlight, where it’s likely to stay for an indefinite period. Payers and providers are under enormous pressure to reduce costs and improve quality, manifested in the increasing experimentation with Accountable Care Organizations (ACOs), bundled pricing, and other alternative delivery models. As reimbursement rates for hospitals decrease, the way decisions about care are made is changing as well, with a growing focus on institutional policies. This creates multiple challenges for product marketers, including increased pricing pressure, reduced resources, and new stakeholder groups with more demanding purchasing criteria.
In the face of these challenges, marketers will have to rethink their strategies. Sales tactics to physicians will need to change to become more tailored and efficient, relying on segmentation by more subtle factors than script-writing decile. More significantly, marketers will need to shift their attention to institutional decision- makers, reframing their approach in terms that are meaningful to this new target audience. And what is the key criterion for this group? Increasingly, it is economic and clinical value. Institutional decision-makers are insisting that reimbursement or inclusion on the formulary be linked to clear-cut benefits for the patient and cost effectiveness for the decision-maker. Risk-sharing arrangements in which full payment is contingent on clinical outcomes are gaining traction in an environment that is increasingly sensitive to value delivered. Marketers must be aware of these trends and adapt their behaviors to succeed in this challenging marketplace.
Since the late 1970s, healthcare costs have grown faster than the CPI. By 2008, the growth of these costs was nearly triple the CPI growth rate. Going forward, a recent Health Affairs article estimates, healthcare spending will grow at a rate of 5.8 percent per year from 2010-20201. Yet this growth in costs has not generated parallel improvements in quality. The Commonwealth Fund compared the U.S. to five other countries (Australia, Canada, Germany, New Zealand and the United Kingdom) and found that while the U.S. spends more on healthcare, it ranks last or next-to-last on five key dimensions of quality2. There is general agreement that action is needed to control this unsustainable cost inflation, but as payers attempt to slow that growth, they cannot repeat the mistakes that accompanied HMO development in the early 1980s.
In an effort to expand access and reduce costs, the federal government passed the Patient Protection and Affordable Care Act (PPACA) in 2010. This legislation funded pilot projects on ACOs and bundled pricing, providing momentum for experimentation in new models of care delivery and additional legitimacy to these and similar approaches. These models are designed to align physicians with hospitals through incentives to provide service less expensively—without cutting corners on quality. As ACOs and bundled pricing gain momentum, physicians and hospital/system management are expected to work more closely to give financial impact a larger role in treatment decisions. One example is to challenge requests for a branded product when generic substitutes are available and there is no data to support superior clinical value.
In addition, payers, particularly the Centers for Medicare and Medicaid Services (CMS), are limiting reimbursement rates, especially within some of the most expensive medical conditions. Specifically, under PPACA, CMS will no longer pay the costs of 30-day readmissions for the same diagnosis, or for hospital-acquired infections. These changes are designed to move the system towards a pay-for-performance approach, creating incentives for providers to improve quality of care.
LESS PHYSICIAN CONTACT
Reduced reimbursement rates are clearly on the horizon and can be expected to create further market consolidation across hospitals and systems. Although the number of hospital mergers and acquisitions has declined since its highest point in the early 1990s3, the consolidation trend is expected to continue as hospitals seek ways to build greater system efficiencies.
Individual providers are also feeling the effect of these changes and considering how to approach these new demands on their business models. The pace of practice consolidation has increased and is expected to continue. Many physicians are seeking opportunities to become employees rather than business owners. From 2008 to 2018, the Bureau of Labor Statistics estimates that the number of hospital-employed physicians and surgeons will grow by 26 percent, the third-fastest growing group of hospital employees4. As these providers become employees, hospitals and other care delivery systems are acting to limit manufacturers’ influence over prescribing patterns and are restricting—and in some cases eliminating—physician contact with product representatives. Support for these restrictions came from the 2010 federal Physician Payments Sunshine Act that requires manufacturers to record and report any physician payments over $10. Along these same lines, Harvard Medical School recently adopted a more restrictive code and also prohibits its physicians from giving promotional talks or accepting meals from representatives. The seriousness of these rules was driven home when the school and Massachusetts General Hospital recently announced that it disciplined three of its noted psychiatry faculty for conflict-of-interest violations5.
IMPLICATIONS FOR MARKETERS
As reimbursement shrinks (as it’s almost certain to) and automatic reimbursement escalator clauses are replaced by mechanisms that force providers to earn increases through cost reduction and to take on additional risk, administrators will play a larger role in the success of premiumpriced and new products. Administrators’ influence will grow at the expense of physicians, and physicians themselves will exert price pressure on manufacturers as they become more aligned with new reimbursement incentives. In particular, payers will likely look to reduce reimbursements for medical devices. Many device manufacturers have operated under the assumption that providing additional value warranted reimbursement regardless of whether a patient needed that extra value. It’s anticipated that CMS will no longer pay for premiums associated with functionality patients don’t need. Patients who want these benefits can expect to pay for them—or specialty hospitals that want to appear cutting-edge may absorb the additional costs to provide these services. Regardless, payers recognize this as an area where they can reduce costs.
Historically, hospital representatives have focused on surgeon-as-customer, but now they must also engage with hospital leadership which requires developing relationships with C-suite executives. To work with C-suite customers, representatives must have more than product knowledge; they must also be able to engage in discussions about value propositions that help the hospital achieve its goals. Once a hospital’s needs are identified, representatives must be able to work within their own organizations to develop a plan to address the institution’s needs. This is a significant change from the features and benefits detailing approach by product representatives and requires marketers to develop training programs to ensure their representatives are able to manage these discussions.
A SHIFT IN MARKETING AND DEFINING VALUE
Even as revenues from current branded drugs and premium-priced products shrink, manufacturers will be forced to reallocate resources from physician marketing to institutional marketing. Both segments will increasingly require a strong economic and clinical value case to sway their decisions. Through systematic, segmentation-based market research, marketers can identify what components of the economic and clinical value (ECV) case resonate with each of their target stakeholders. This group of stakeholders has expanded and now includes employers, payers, administrators, physicians and patients.
Marketers must work closely with researchers to ensure that requirements for the ECV case are a consideration during clinical trials so that supporting data is available at the time of market introduction and throughout a product’s lifecycle— including addressing competitive responses after a product is launched. Payer value cannot be overlooked— nor can defining it wait until commercialization. Payer value must be embedded in all elements of strategic marketing, from clinical and publication strategy all the way back to fundamental decisions about market focus and product development funding. Some companies are already beginning to engage payer advisory boards early in the product development process to help them make decisions around potential molecule acquisitions and priorities around product development.
Furthermore, as the results of comparative effectiveness research (CER) funded by recent legislation become available, marketers will need sufficient evidence of their products’ superiority against other acceptable treatments—beyond the product class. Alternative treatments could include older (but less expensive) technology, naturopathies, nontraditional medicine (e.g., acupuncture) or non-invasive therapies. Historically, many studies concluded shortly after commercialization and only demonstrated that a product was safe and effective. Going forward, marketers will need on-going data to defend their product positioning. Rather than looking at a blockbuster model for product development, many pharmaceutical companies are beginning to explore therapeutic areas to identify a particular genomic segment where their product works and works well. Once identified, they can develop a strong ECV case for that sub-segment of the population and build the necessary data-based support for reimbursement. Marketers can then use that position as a starting point to identify other genomic segments where the product is effective, to create their own ‘rolling blockbuster’ by adding indications for additional population sub-segments. Without a compelling ECV case, new and even current in-market products will face increasing price resistance, and relationship building alone with physicians will not win the day.
PAYMENT LINKED TO PERFORMANCE
In addition to demanding a strong ECV case, payers are becoming more interested in outcomes-based contracts as a way to share some of the risks with manufacturers. For example, in 2009, Merck and CIGNA entered a performance-based contract that linked product discounts with improved medication adherence and reduction of A1C blood sugar levels for individuals with type II diabetes. Eighteen months after the contract’s inception, CIGNA announced an increase in the number of people with type II diabetes who were able to decrease their blood sugar levels by taking their medications appropriately. It is apparent through its recent announcement with EMD Serono that CIGNA felt it was worthwhile to pursue other such agreements. This new contract measures the effectiveness of EMD Serono’s product in reducing and controlling multiple sclerosis-related ER visits and hospitalizations.
Engaging in these types of agreements is not without risk and should be considered carefully. Earlier U.S. attempts have met with mixed results as not all parties have been satisfied, but current experiments are better defined and align incentives toward realized value. Although these agreements are in the early stages of adoption, they are expected to continue. Further consolidation of healthcare delivery systems will lead to the creation of an oligopoly within the U.S. hospital system. Once systems have consolidated and command significant market share, they will then be in a position to leverage their purchasing power similar to the way NICE does in the U.K. As payers are under so much pressure to reduce costs, this is a very likely scenario as they are seeking ways to redirect that pressure elsewhere.
Challenges to the healthcare system are growing, and they are changing the way healthcare is delivered in the U.S. To stay ahead of these changes, marketers should:
- Build sales teams with major accounts influence skills that can develop partnerships with hospital administrative leadership;
- Develop a data-based economic and clinical value case that resonates with each stakeholder;
- Work closely with company researchers to ensure the ECV data needs are included in research programs—throughout the product’s lifecycle; and
- Consider outcomes-based contracts as a method to improve product positioning with payers.
Change is the only constant in healthcare right now. The companies that monitor these developing trends and adapt their business models and practices to address them will be best positioned for continued market success.
1. Keehan, Sean P., Sisko, Andrea M., Truffer, Christopher J., Poisal, John A., Cuckler, Gigi A., Madison, Andrew J., Lizonitz, Joseph M. and Smith, Sheila D. National Health Spending Projections Through 2020: Economic Recovery And Reform Drive Faster Spending Growth (2011, July). From: http://content.healthaffairs.org/content/early/2011/07/ 27/hlthaff.2011.0662.full
2. Davis, K., Schoen, C., and Stremikis, K. Mirror, Mirror on the Wall: How the Performance of the U.S. Health Care System Compares Internationally 2010 Update. The Commonwealth Fund, June 2010. From: http://www.commonwealthfund.org/Content/Publicat ions/Fund-Reports/2010/Jun/Mirror-Mirror- Update.aspx
3. Williams, Claudia, Vogt, William, and Town, Robert. Robert Wood Johnson Foundation, Policy Brief No. 9, 2006: How has hospital consolidation affected the price and quality of hospital care? From: http://www.rwjf.org/files/research/15231.hospitalconsolidation. report.pdf
4. Bureau of Labor Statistics. Career Guide to Industries, 2010-2011 Edition. From: http://www.bls.gov/oco/cg/cgs035.htm
5. Silverman, Ed. July 2, 2011. Pharmalot: Harvard Docs Disciplined for Conflicts of Interest. From: http://www.ahrp.org/cms/content/view/828/71/