As a consequence of recent healthcare reforms, providers are facing increasing financial pressure. This pressure has resulted in new market structures and dynamics that are affecting pharmaceutical and medical device manufacturers’ commercial business models. In this article we will explain how reform has altered the landscape, why manufacturers need to develop a new commercial model, and explore the skills and capabilities needed now by manufacturers to position their products for commercial success.
Healthcare Delivery’s Rapidly Changing Landscape
The goal of healthcare reform is to improve health outcomes while lowering costs. In an effort to accomplish this goal, the country’s largest payer, CMS (the Center for Medicare and Medicaid Services), has begun reducing provider reimbursement and penalizing delivery organizations that fail to achieve certain performance metrics. In October 2012, CMS began withholding up to one percent of reimbursement to hospitals with excessive readmissions for acute myocardial infarction, pneumonia and heart failure. These penalties will be expanded in 2015 to include chronic obstructive pulmonary disease, total hip arthroplasty and total knee arthroplasty. Also, on November 27, 2013, CMS announced new physician payment rates for 2014. Although some specialties—like psychiatrists, clinical psychologists and clinical social workers—will see an increase in their rates, the overall change is a 20.1% rate reduction due to the Medicare Sustainable Growth Rate (SGR).
In response to these pressures, there has been significant consolidation among hospitals, and a spike in the percentage of physicians who have opted to become healthcare system employees. Some estimates predict that in the next five to seven years, 20% of the nation’s 5,000 hospitals will merge. In 2012, 105 deals were reported—double the rate prior to the Patient Protection and Affordable Care Act (PPACA).1
Additionally, hospitals have accelerated the hiring of physicians. A significant and growing percentage—between 25% and 50%2 depending on the source—of physicians are now employed directly by hospitals or integrated delivery systems. These factors compound the existing and well-documented trends that have reduced sales representatives’ ability to reach doctors, such as insufficient time for physicians to see reps; employer’s restrictions on rep visits; and recent laws limiting physician and medical staff compensation (e.g., Stark Law and Anti-Kickback Statute).
A significant component of PPACA was the creation of accountable care organizations (ACOs). ACOs consist of groups of physicians and other providers that work together to manage and coordinate care for Medicare fee-for-service beneficiaries, and to meet certain quality-performance standards. Through “shared savings” programs, ACOs will receive a portion of the shared savings if they sufficiently reduce costs and simultaneously improve quality. Commercial payers are also working with healthcare delivery organizations to develop similar models for non-Medicare populations.
Another approach gaining significant attention is population health management. Population health management implies design and implementation of systematic programs to improve the quality and lower the cost of care for a defined population. This really is a paradigm shift requiring a new approach to quality improvement and how it’s measured, greater focus on the continuum of care and a payment system that is aligned with these goals.
How Health Systems are Responding to the Changes
Faced with the prospect of shrinking margins, health systems are becoming more focused than ever before on treatment costs and quality outcomes, and are giving more attention to the concept of value.
The influence of institutional management over decisions about what products to use or prescribe is growing at the expense of the clinical perspective. As a result, the responsibility for decision-making regarding what drugs to include on the formulary has shifted dramatically from individual physicians to committees comprised of clinicians and various administrative functions—pharmacy managers, financial analysts, formulary managers and others. Using established research and historical insight, many organizations are developing predictive care paths for physicians to follow to ensure consistent care and measurable outcomes.
With these care paths, health systems can establish a total cost for treatment without creating an additional administrative cost burden by boring down into step-by-step detail and paying separately for those component parts. This new approach means that manufacturers must understand how care paths are developed and how they can influence them to ensure their products are represented.
As hospitals become more focused on their own bottom lines, and are under increased scrutiny for the health outcomes they achieve, they are increasingly demanding that manufacturers demonstrate how their products can help them meet their goals. For example, in 2012, Memorial Sloan-Kettering Cancer Center removed Zaltrap from its treatment protocols claiming the incremental survival did not justify the incremental cost relative to the existing gold standard, Avastin. To gain access to Sloan-Kettering’s patients, Sanofi announced rebates of up to 50%.
Manufacturers can expect that in therapeutic areas with multiple products not meaningfully differentiated by indication, outcome or application, hospitals will limit their formularies and use their increased purchasing power to negotiate lower prices. As a result, some products will likely be shut out of these larger accounts. PBMs are also scrutinizing product value and making significant formulary changes. Express Scripts recently announced removal of more than 40 products from its 2014 formulary because there are lower cost alternatives available that are considered to work just as well as the products it removed.
Implications for Pharmaceutical Manufacturers
As the environment continues to evolve and healthcare delivery organizations adjust to the changes brought about by healthcare reform measures, it’s more critical than ever that manufacturers are able to demonstrate both the economic and clinical value of their products. Moving forward, a strategic marketing approach is required to develop and communicate a relevant message for each stakeholder. This will result in a commercial organization of a much different size and structure requiring new capabilities, skills and responsibilities.
Unless manufacturers can demonstrate the differentiated value their products provide and how they fit within the care continuum, payers—hospitals, insurance companies and PBMs alike—are likely to treat competing products like commodities and use aggressive purchasing tactics to drive down costs. This new focus for hospitals calls for a radically new approach that turns the commercial model upside down. No longer can manufacturers focus on the detail and messaging about features and benefits targeted at physicians. Market access must become a dominant focus, and organizations need to think about how they reach all stakeholders—physicians, patients, payers and even employers.
Increased collaboration between physicians and hospital management means that pharmaceutical companies will need to have economic and clinical data tailored to a broader set of stakeholders. Through systematic, segmentation-based market research, pharmaceutical companies can identify what components of the economic and clinical value case resonate with each of their target stakeholders.
Pharmaceutical companies also need to ensure that requirements for the value case are included in the due diligence for merger, acquisition and licensing activities, considered during early development and designed into clinical trials so that compelling data is available at the time of market introduction and throughout a product’s lifecycle.
Marketing can play a critical role in ensuring that data needs are defined as part of market strategy, and should work with clinical and HEOR teams to ensure that the information needed is developed. Representatives will need to understand the clinical and scientific basis for the development of care paths and demonstrate, with the appropriate evidence, how their products and solutions can be incorporated into the continuum of care to help achieve the provider’s objectives.
Presuming the product value proposition addresses both economic and clinical value, pharmaceutical companies also need to be able to forge partnerships with providers (hospitals and physicians) that are based on achieving measurable health outcome improvements. This is a stark contrast to typical industry-physician interactions. Providers are interested in how to better diagnose unique patient conditions, how to determine the overall course of treatment to achieve improved health outcomes, and how to guide patients to manage their health. Working with them to accomplish these goals will require a more complex approach to sales than the traditional decile targeting approach currently used. Sales representatives will need to develop new competencies to engage in a complex sales process—one focused on engaging in value-added conversations with executive decision-makers to surface needs, craft responsive non-product solutions, and convey compelling value propositions that leverage the full capabilities of their company.
In addition, messages, supported by evidence, will need to reflect the overall value the product provides—and demonstrate relevance for the stakeholder. These messages must address more than the additional clinical benefits the product provides; they must provide insight on how the product improves patient outcomes, enhances the physician/patient experience and improves treatment costs. These messages will be delivered by a much smaller sales force that is able to discuss the science and economics behind the value proposition of a unique and targeted solution that may or may not be centered on a pill.
The Future of Healthcare
Healthcare reform is here to stay. There is no doubt that the current system is broken and recent reform efforts aim to ensure better health outcomes at lower cost. The changes being demanded of healthcare delivery organizations will have effects on other segments of the industry. Responding to these changes will require manufacturers to think differently about how they go to market. Those organizations that adapt their commercial model and look at and use data in new ways will be best positioned for success in this new environment.
1. “A Wave of Hospital Mergers.” New York Times. August 12, 2013 (http://nyti.ms/1bnnd2l).
2. Robert Kocher, MD, and Nikhil R. Sahni, BS. “Hospitals’ Race to Employ Physicians—The Logic behind a Money-Losing Proposition.” N Engl J Med 2011; 364:1790-1793 May 12, 2011 published on March 30, 2011, at NEJM.org.