Crying Wolf?

Today, drug companies are experiencing unprecedented success on precisely the terms that managed care should have denied it: robust pricing and profitability and a new definition of success for individual products, the mega-blockbuster. Aggressive direct-to-consumer ad campaigns and the success of new, so-called lifestyle or cosmetic drugs, such as {Viagra}, only underscore the impotence of managed care organizations in their efforts to rein-in pharmaceutifal costs. But there are rumblings in some corners of the industry that drug companies take managed care's impotence for granted at their peril.

Over the past several years, the impressive success of pharmaceutical companies in the face of managed care pricing pressures and formulary restrictions has been a major factor in their extraordinary stock market performance. As we've noted often, managed care has largely proven to be a paper tiger: fears of rampant price reductions, deep generic substitution, and significant restrictions on expensive new products have all been unfounded.

Today, drug companies are experiencing unprecedented success on precisely the terms that managed care should have denied it: robust pricing and profitability and a new definition of success for individual products, the mega-blockbuster. Aggressive direct-to-consumer advertising campaigns and the success of new, so-called lifestyle or cosmetic drugs, such as Viagra, only underscore the impotence (no pun intended) of managed care organizations in their efforts to rein in pharmaceutical costs. Once managed care-friendly strategies, most notably the acquisition of pharmacy benefit managers, now are widely discredited. As we've noted in the past, product is king in the drug industry today.

But there are rumblings in some corners of the industry that drug companies take managed care's impotence for granted at their peril. Some executives are beginning to worry that managed care organizations (MCOs) and pharmacy benefit managers (PBMs) are gearing up for a new focus on their pharmaceutical spending.

The reason: cost-squeezed MCOs are now finding drugs to be their biggest out-of-control expense. Some industry executives argue that MCOs failed to gain any leverage over drug companies largely because their clients—employers and other large purchasers of health care—simply didn't want to make tough choices regarding brand restrictions. With the US economy booming and unemployment at all-time lows, what corporate benefit manager wanted to walk in on a Monday morning to a host of complaints from employees irate over denied pharmaceutical claims or forced brand or generic switches?

But those who argue that we're about to see a new, get-tough stance from MCOs insist that MCOs weren't shying away from a fight with drug companies, they were simply choosing their battles, choosing instead to focus on larger-expense items such as hospital charges and physician fees. And, the new thinking goes, after years of battling to get physician and hospital costs under control—during which time MCOs essentially left drug costs alone—they're ready to turn their attention to their drug spend.

Moreover, they have to, since drug cost increases far outstrip all other medical expenses for many MCOs today. One Massachusetts HMO reportedly saw its drug spend exceed its hospital costs last year.

Make no mistake. No one's talking about managed care dealing with drug costs by embracing the greater cost savings potential of pharmaceutical therapy. This is about straightforward, out-and-out price pressure on unit drug prices—the same kind of price pressure that MCOs have brought to bear more or less successfully in their dealings with doctors and hospitals over the past decade or so.

MCOs may even get some help from the government in their battle to control drug costs. If politics dictate, the federal government may begin to cover outpatient drugs under Medicare, which could lead to significant price pressure in the industry's most profitable segment (the elderly) and, just as importantly, a barrage of politics-driven publicity about pharmaceutical price gouging.

Admittedly, there's little real evidence of this new, get-tough attitude on the part of managed care payers. Drug-company pricing and profitability remain strong; older and me-too products have surprising resiliency in the market today. Even generics companies have taken heat recently for their aggressive pricing practices.

Moreover, MCOs can fight higher drug costs in ways that don't really affect drug company profits. The growing enthusiasm for higher and tiered co-pays—in which MCOs and their clients charge consumers a low co-pay for a generic prescription, a slightly higher co-pay for a brand on a preferred list, and a significantly higher co-pay for all other brands—suggest that payers are still willing to let consumers have whatever brands they want, provided they're willing to pay for them.

Watch the new COX-II Celebrex, which is being touted as the next blockbuster. MCOs are already predicting they won't cover the drug because a generic pain killer often works as well for a fraction of the cost.

Of course, MCOs made the same noises about Viagraand, coverage or not, didn't keep that drug from being enormously successful. Still, some argue that drug companies shouldn't assume MCOs can't or won't manage drug costs just because they haven't in the past.

For drug company executives, the tough question may be: Even if you accept this new view, what do you do about it? The last time the drug industry sought to deal aggressively with managed care, it got burned—at the minimum, by offering price concessions and rebates it didn't need to; at the maximum, by buying a PBM and ultimately absorbing significant losses and profit dilution. Given the drug industry's history with managed care, is over-reaction worse than no reaction?

In the children's story about the boy who cried wolf, the boy gets in trouble for warning the townsfolk about a danger that isn't there. In the end, the boy pays for his prank—not at the hands of the irate townsfolk, but in the clutches of a wolf whose threat was real.