Why Are Pharma Companies Still Spending $7bn A Year On DTC Advertising In US?

In the next evolution of health care, the pharmaceutical industry needs to preserve its customers, not the direct to customer advertising campaigns.

The scariest part of the chemistry of collapse involves feedback loops – an idea from biology that says the output from a system amplifies the actions of the elements within the system in order to keep itself alive, perpetually seeking its own salvation. In effect, revenue models designed to flow into a restaurant or onto a cruise ship seek revenue from flow onto a cruise ship or into a restaurant. We become kinetically trapped in action and analysis looking for solutions to rebuild the past.

Feedback loops are the biggest reason why so many businesses (and economies) get stuck trying to keep old market theories alive, “doomed to be, always, in defense of whatever allowed them to be successful in the first place,” said the late Swedish management consultant Richard Normann in Reframing Business: When the Map Changes the Landscape, considered the first book on conceptual transformation in business. And feedback loops are why there are so many innovation failures when leadership teams try to fit their understanding of events and market theories to a radically new operating environment; and why they cannot step out of the current state to enact a new reality.

The strategic shock caused by coronavirus is a daily kick in the head for every nook and cranny of a $90tn global economy. Countries are flailing for coherent direction. Companies spanning the arc of industry are pulling forecasts and planning layoffs. Unemployment is reaching levels not seen since the Great Depression, and the structural fragility of a global system is being exposed. We are seeing the effect from design points that have been too narrow, visions too small or self-serving, assumptions too thin, and creative responses inadequate and under-conceptualized when everything is intertwined.

Physician practices (and hospitals) in the US are not immune. They, too, have been caught in the gravitational pull of total system collapse, their revenue based on the same sort of linear, fee-for-service transaction model that is now coming apart at the seams in the restaurant, hospitality and airline industries: fewer appointments equal less revenue and less cash.

Most primary care practices are seeing a 30% to70% reduction in visit volume (flow) due to the pandemic, say Robert Phillips, Andrew Bazemore and Aaron Baum in a new perspective published 17 April in Health Affairs. At the same time that revenue vanishes, operating costs are increasing. “Many [physicians] are being asked to self-finance a total transformation to telemedicine to provide needed care while reducing patient exposure to COVID-19. Most practices still live on fee-for-service contracts and will struggle to bear that loss of revenue,” noted the authors, who practice medicine in a community-based residency program in Fairfax, Virginia.

Nearly one in three family medicine practices remain independent, which is to say they are not owned by large integrated delivery networks (like Kaiser Permanente, for example), and as such are “not only financially hemorrhaging, but cannot afford the jump to telemedicine, meaning that they either choose to stop seeing patients or put themselves and their patients at risk by continuing face-to-face visits,” the authors wrote. 

Many physician practices are facing difficult decisions about laying off staff or closing. One-fifth of primary care practices in the US – 20% of a customer segment for pharmaceutical companies – say they could close within the next month because they do not have the operating cash flow to keep their businesses open.

“We estimate that a 50% reduction in visits will mean a $700m loss for independent practices across the country over the next three months, more if they are unable to implement telemedicine. The rest of the primary care workforce will lose much more, and we estimate that the total loss in primary care to range from $10bn to $15bn,” wrote the Health Affairs researchers.

That amount is roughly what pharmaceutical companies are now spending on advertising to drive consumers into the offices of said physicians. When you add in the “HCP” element of drug promotion and include sales, that $7bn enlarges to a $30bn a year investment in activities that keep the system alive, even though the physicians the pharmaceutical industry is trying to influence may not even be around in six months to speak about “disease awareness” with patients. The rationale at a system level no longer makes sense. But at least things are holding up well in the drug promotion business. Quoting Janis Joplin from White Rabbit, we are at a moment “when logic and proportion have fallen sloppy dead.”

Strategic Innovation Is About Enacting A New Reality

Excluding the network-centric players like Amazon, or the surveillance capitalist companies like Google, most western businesses still work under the Fordist model of mass production and consumption conceptualized at the beginning of the second industrial revolution. This is an economic theory where the idea of promote-and-push product is positioned at the center of commerce. The purpose put into the machine is managing “brand.” Revenue is based on getting fees-for-services. It is an entrenched mode of being.

This is a view of identity and approach that, up until recently, achieved a sort of benign balance in the friction between contending interests of business and consumer. There is an entire industry subsystem -- of marketing and media advisors, analysts, media companies, digital platforms and advertising and public relations agencies that comprise a nearly $1.7 trillion economy by itself – whose revenue models, and the professional fates of executives, are still dedicated to preserving.  The calcification runs thick, depositing layers of decomposing market theory across mindsets.

And as one of the largest advertisers in the overall marketplace, pharmaceutical companies are also affected by the same sort of arterial hardening – most are operating with a belief system that product promotion (brand management) is the primary form of defense against competing drug brands, many of which have the same technical attributes.

The future of strategy and competition in the pharmaceutical industry is a model that goes broader than pharmaceuticals; it also lies in servicing health. More specifically, it lies in transitioning away from an industrial-era view of market and business bounded within the context of discovering, pricing and promoting the technical merits of a physical product (i.e., drug), to a model based on embedding a drug within entirely new systems of health production.

Said differently, drug companies have a unique opportunity to invent a different market for themselves. It begins by telling a new story about the value they create at a system level and in collaboration with customers.

In the next evolution of health care, the things the pharmaceutical industry needs to preserve are its customers, not the DTC ad campaigns.  It is the difference between value extraction for shareholder benefit, and value creation for stakeholder benefit.

About the author: John G. Singer advises business and government on health system vision and value innovation. He leads Blue Spoon Consulting, the pioneer of ‘big design’ as a methodology to drive large-scale system change.