The Holy Grail of Structural Indispensability

Can product companies ever create a brand so powerful that no purchasing force can afford to be without it?

At a recent Boston Consulting Group symposium, BCG con-sultant Marty Silverstein argued that one of the critical success factors for health care providers in today’s managed care environment is what he called “structural indispensability.” A kind of “big seat at the table” phenomenon, it’s a presence in the market, in terms of brand and scope, that makes a hospital simply indispensable to MCOs creating their provider networks.

Structural indispensability is related to, though not the same thing as, being the low cost provider or vertically or horizontally integrated, though those are critical too. Rather, it’s a kind of value perception—a reputation that leaves MCOs feeling that their network will be the worse for not having that hospital.

The notion of structural indispensability is appealing for a number of reasons, perhaps mostly because it jibes with the way we think on a gut level about providers of care. Despite implicit efforts by MCOs to level impressions of quality by pretending that all providers can deliver comparable levels of care—a process that gives the MCO as buyer leverage over the provider as seller—we still tend to seek the best provider we can when we or someone we love gets sick. When we get cancer, we want to go to MD Anderson or Sloane Kettering, whether, in fact, other hospitals could provide care just as well.

Indeed, structural indispensibility implicitly reverses the leverage in MC/provider relationships by suggesting that it is the provider who calls the shot, who by virtue of its reputation in the local market, can’t be left out of the loop.

More, structural indispensability implies that rather than accepting MCO discounted fees, such institutions may actually merit higher fees for their participation. If it’s important to an MCO that Sloane Kettering be included in its network because of its value in attracting consumers, shouldn’t it get higher rates than hospitals in the network that don’t have such a reputation?

The argument has resonance for product companies. We’ve noted in the past that one of the fundamental dynamics of managed care is that of commoditization: the notion that a product has less value because of a customer’s willingness to deem a competitive product interchangeable, every bit as effective in treatment or diagnosis as the first product.

Generic drugs are the ultimate commodity, but all products become commodities if there is a competitive product, because the customer can use the availability of that alternative to gain leverage over the supplier. But products that achieved structural indispensability would effectively undermine efforts to commoditize. Physicians who feel that, regardless of what else is available, they simply have to have a given device defeat any efforts to standardize and gain leverage over suppliers.

In fact, a kind of structural indispensability is the Holy Grail of product company marketing efforts: planting in the mind of the customer that, notwithstanding other choices, particularly low cost ones, theirs is the only product that will really do. It is precisely this kind of product positioning over which companies are battling for today’s new customer because of the implicit notions of leverage and control that lie behind.

In the September issue of IN VIVO, Bill Pursche of McKinsey argued that most MCOs could create a fully effective formulary with 247 drugs, 90% of which could be generically sourced. A friend of ours asked: if you’re a mid-sized drug company wondering how to survive, why fight the R&D-intensive innovation battles in search of sole-source products? Why not simply become the low-cost manufacturer of 220 or so generics and position yourself as a one-stop source to MCOs?

If there’s an answer, it lies in something like structural indispensability: the ability of drug companies to continue to make a compelling case for multi-source branded products against MCO efforts to push generics. One reason drug companies today aren’t becoming generic suppliers—aside from the fact that they can’t economically compete in pure generic markets—is that they’re betting that brand franchise doeshave value, that you simply can’t reduce all products to therapeutically equivalent versions, and that both employers and consumers will continue to pay for branded products even when a generic is available.

Of course, generics pose a challenge to structural indispensibility. At least with health care providers, we assume Sloane Kettering deserves its special status because the quality of care received there isperceived to be superior to that received in most hospitals—an argument hard to make with generics.

But let’s beg the question of whether structural indispensability is in fact a function of the product itself and ask simply whether the perception of indispensability is achievable. If it is, it is because brand loyalty remains a powerful, if imperfectly understood phenomenon among both consumers and physicians, one that MCOs will choose not to cross.

MCO executives acknowledge the powerful tug of consumer loyalty in drugs; that’s why direct-to-consumer marketing is emerging as a critical new battleground for drug companies and MCOs. Ironically, it is MCOs, with their direct appeal to consumer perception, who may open the door to structural indispensability in formularies, even as they try to limit choice among brands. The question for suppliers: will MCOs see structural indispensability in products as a valuable tool in consumer appeal, as they do in provider networks, or a source of unnecessarily higher costs, as they now do in drugs?