Several years ago, I learned a concept that is central to the way I look at the world: Structure Creates Behavior. Understanding how a sales representative is evaluated helps clarify why the field often ignores marketing plans. Knowing that hospital pharmacy directors are evaluated on how well they control the pharmacy budget—not on how drugs affect the overall hospital budget—also clarifies why they don’t like your new drug, even though it will reduce the length of patient stay.

The structure of a market, or market section, is often driven by rules that run counter to rational expectations. This underlies the biggest controversy in the pharmaceutical market today: Why are payers trying to stop the use of cost effective Hepatitis C drugs?

The new Hep C drugs such as Sovaldi, Harvoni and Viekira, are amazing medicines. With cure rates above 90%, these products should be warmly welcomed. They offer stunning curative efficacy and at a price less than the expected lifetime treatment costs of Hep C patients—the “poster children” of pharmacoeconomics and value-based pricing in action. Just what the textbooks say the market wants. Why is there so much push back? The simple answer: Market structure.

U.S. businesses operate 90 days at a time, and annual budgets are critical to operations. But these new drugs push all lifetime treatment costs into a single year. Alone, this is enough to make most businesses recoil—but the health insurance market structure is even more complex than this. Federal law makes it much worse.

The Minimum Medical Loss Ratio

One provision of the Affordable Care Act of 2010 limits the minimum Medical Loss Ratio (MLR)—the proportion of premium revenues commercial health insurers spend on clinical services and quality improvement. By law, an insurer must spend at least 85% of revenue on clinical and quality concerns, allowing no more than 15% to cover all administrative and operational costs. Insurers comply with the MLR requirements through rebates or cost-free premium “holidays.” If an insurer incurs a loss in a given year due to higher than expected medical costs, they must bear that cost and are not allowed to recoup it in later years beyond the 15% allowed. These rules were set in 2010—five years before the Hep C breakthrough.

Despite their positive pharmacoeconomic value, the sudden—all at once—cost of the Hep C drugs put commercial insurers into an existential crisis. If they allowed all Hep C patients to be treated at once—which would be medically and economically prudent—they would risk going broke, unable to recoup losses. Because they are obliged to stay in business, they are forced to limit everyone’s access.

This is just a market reality. If insurers could amortize product payments over a few years, they might have been more willing to grant access, but the market structure prevents it. Understanding how—and why—structure can create behavior is critical in making plans, as the developments in the Hep C market show. Are there aspects of the market that could derail your plans?

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