Tapping The Value Of Value-Adds: Why The Drug Industry Needs To Monetize Services And Support

In recent years, it has become standard practice for marketers of pharmaceutical and biotechnology products to offer a whole host of wraparound services to bolster the value proposition of their brands. Why not sell them?

• As incremental safety and efficacy gains for next-generation drugs become smaller, support services can be major differentiators for both new and existing drugs.
• Pharmaceutical companies haven’t attempted to sell these services, and doing so will require significant business model and structural creativity.
• But becoming more than manufacturers will require shifts in pharma’s traditional pricing and access models – and means competing for service revenue with increasingly well placed distributors, payors, and providers.

Drug companies should stop selling pills and start selling services. To encourage prescriptions and to ensure reimbursement and access once drugs are prescribed, such value-adding services are necessary as physicians and payors become ever more cost conscious and focused on outcomes.

But because these services have been viewed as add-ons unrelated to the price of the product, drug companies have been giving away for free something that could become a major source of revenue. To capitalize on the opportunity to monetize support services, however, will require drug companies to fundamentally change the way they position themselves in the market. Though making the necessary changes to the industry’s traditional selling model may be difficult, the increasingly arduous reimbursement environment and ever-growing portfolio of generic drugs support a new approach to doing business and a renewed emphasis on value.

That value equation is reorienting away from volume and toward outcomes. Consolidation among providers and the advent of the Accountable Care Organization (ACO) and the Patient-Centered Medical Home models are driving this movement away from a simple money and goods exchange toward the exchange of money for outcomes at either a patient level or a population level. As positive health outcomes are driven by much more than the medication itself, providers are seeing real value in the wraparound services that can be offered.

Traditionally, a product’s value has been defined by its ability to deliver a good clinical outcome with minimal safety/side-effect burden. Although safety and effectiveness will continue to be important, the industry is reaching a point where the incremental gain in efficacy of next-generation drugs is becoming smaller. As a result, it becomes necessary to further differentiate and compete on the support services that can be wrapped around the drug.

Although safety and effectiveness will continue to be important, the industry is reaching a point where the incremental gain in efficacy of next-generation drugs is becoming smaller. As a result, it becomes necessary to further differentiate and compete on the support services that can be wrapped around the drug.

Non-Drug Value

Patient support can be offered in the form of education, disease management support, and network support. Social media networks, for example, are being formed to provide patients with a way to connect and manage their treatment together.

Physician support can come in the form of education, diagnostic tools, and network support. Physicians also look for economic support around reimbursement and access and evaluations of how use of the drug may impact their practice economics. In addition, physicians look for direct financial support in the form of inventory management, accounts-receivable risk mitigation, product samples, and co-pay/co-insurance support.

On the payor side, value-add is clearly defined. Payors are looking for a reduction in their medical loss ratio by preventing downstream disease occurrence, reducing the number of office visits, or reducing the number of surgical interventions.

While health care providers are obviously in the best position to provide non-drug value today, other stakeholders are increasingly taking up that mantle. Payors, for example, are providing patient support in the form of nurse call centers and disease management services. Specialty distributors are increasingly providing patient support, particularly in the realm of high-value oncolytics. Entire support systems are being put in place at the specialty distributor network to help patients get through their treatment regimens.

Pharmacies, especially those with integrated clinical capabilities, are very well positioned right now to provide value in the form of patient information on drug-drug interactions or advice on how to take a particular medication. Increasingly, retailers such as Target, CVS, and Walgreens are operating mini-clinics providing true professional support.

Drug companies, meanwhile, are already providing a considerable amount of non-drug value as a critical component of almost any product launch. These wraparound support services, however, are viewed as a means of adding value to the pill itself. The services themselves are given away for free, and the cost of providing them becomes an expensive line item in the launch budget. By this point, wraparound services have become an expectation among payors and providers, and by not monetizing the services offered, drug marketers are effectively undervaluing the medical benefit they are providing.

Jockeying For Position

In the future, all the providers of non-drug value described above are in a position to begin monetizing the services provided. But they are not alone. Integrated delivery networks, for example, can bring all the different pieces of an outcome solution to bear, and both ACOs and Patient-Centered Medical Homes are fundamentally oriented toward delivering value at a fixed price.

Specialty distributors will be in a much better position to monetize services than they are even today. Drug companies are increasingly using specialty distribution to provide wraparound services, in the process surrendering the relationship with the patient. This is particularly the case in the chronic disease management setting. Any organization that can talk to patients and build relationships will be in a much better position to monetize value and start charging patients directly.

Pharmacies are likely to continue their evolution into becoming retail medical providers. They are well positioned to function as an extension of the physician role. Physicians will continue to do the diagnosis and write the prescription, but all the patient support work that wraps around the medicine could easily be done in a clinic.

The future could also see the rise of secondary insurance markets that function as niche players in exchanges. The proliferation of high-deductible, relatively inexpensive insurance plans is going to create a secondary market of buy-ups for preexisting conditions. These niche insurers will sell bolt-on packages to a customer’s existing insurance plan to cover expenses specific to a particular preexisting condition such as cancer, diabetes, or hepatitis. As part of that package, the customer would then receive premium service for that therapeutic area.

Despite the competition, drug companies will remain well positioned to monetize non-drug value to patients, capitalizing on their vast disease knowledge, therapeutic area expertise, and experience providing wraparound services. The questions remain, will they do it and can they do it in a way that is sustainable?

Despite the competition, drug companies will remain well positioned to monetize non-drug value to patients, capitalizing on their vast disease knowledge, therapeutic area expertise, and experience providing wraparound services. The questions remain, will they do it and can they do it in a way that is sustainable?

To make the transition from simply selling pills to selling the full range of services and support that are required to achieve the level of health outcomes expected from payors and providers, drug companies are going to have to answer some fundamental questions. Monetizing value they currently provide for free will require drug companies to rethink their approaches to pricing, their business models, and their cultures.

Uncouple Unit And Price

The first challenge drug companies must overcome is finding a way to uncouple unit and price. Per-pill pricing immediately opens up a product to slow and inevitable price erosion. If the price is set for the service attached to the pill, however, the payor is now putting money toward a total solution for the patient – something far less vulnerable to generic competition.

Traditional contracting with an insurer involves charging Wholesale Acquisition Cost (WAC) price per unit, with a volume discount for bulk purchases. To monetize non-drug value, innovative contracting would be needed to set prices according to outcomes. The insurance company could pay a fixed fee per new patient start, for example, and the insurer could use as much drug as needed until the patient is cured. An example of this is seen in Novartis AG’s agreement with the UK’s National Health Service (NHS) related to its drug Lucentis (ranibizumab), for the treatment of wet age-related macular degeneration (AMD). In this case, Novartis agreed to pay for any additional injections of Lucentis (beyond the 14 recommended), thereby capping the cost of treatment for the patient and the payor. (See (Also see "U.K. Seeks Flexible Drug Pricing; NICE Becomes Flexible On Value" - Pink Sheet, 17 Nov, 2008.).)

Another example of innovative contracting strategy is outcome-based contracting. Here the manufacturer is reimbursed for the product based on the patient outcome. A well-known example of this is from 2007, when Janssen-Cilag, a division of Johnson & Johnson, agreed to a risk-sharing agreement with the NHS for its drug Velcade (bortezomib), indicated for the treatment of multiple myeloma. Under the agreement, for patients who do not show a “complete or partial response” (tumor reduction of less than 50%) after four cycles of treatment, J&J reimbursed the NHS with the full cost of treatment.

Other interesting examples include Merck & Co. Inc.’s arrangement with Cigna for its blockbuster diabetes drugs Januvia (sitagliptin) and Janumet (sitagliptin/metformin HCl), whereby Merck gave bigger discounts for good results. Merck also provided discounts if more people were adherent to their drug regimen. As a result of this agreement, Cigna would benefit with fewer people having complications from the disease, while Merck benefited by selling more pills. In October 2010, Merck and Cigna reported that the outcome-based contract resulted in an increase in the number of people with type 2 diabetes who were able to control their blood sugar levels by taking their medications appropriately. According to Cigna, results demonstrated improved blood sugar levels of more than 5% for those continuously enrolled in the program regardless of which diabetes drug they were taking. Customers who actively participated in Cigna's diabetes support program were 3% more likely to have their blood sugar under control than those who were not in the program. There was also a 4.5% increase in blood sugar lab testing during the period. (See (Also see "Risk-Sharing Drug Rebate Contracts: Do They Live Up To The Hype?" - Pink Sheet, 19 Mar, 2012.).)

Although these types of value-based contracting solutions have been used in the past, they are hindered by difficulties in monitoring performance. For these solutions to be widely implemented, the administrative challenges should be reduced through implementation of success metrics that are simple, reliable, and transparent. With the advent of electronic medical systems, however, it will become easier to overcome these challenges.

Rebuild The Business Model

Next, drug companies need to rebuild their business models to incentivize value instead of volume. Today, sales representatives are typically incentivized on volume only, and drug companies generally are incentivized on how much product can be shipped out the door. To a certain extent, hospitals and physicians are incentivized in the same way, with more drugs equaling more dollars in their pocket.

The business model needs to be turned on its head, which is no easy task. Most organizations are heavily invested in the current way things are done. As an alternative, instead of rebuilding the company’s business model, a drug manufacturer could simply acquire the business model as a separate unit or spin off that function as a separate company.

The business model needs to be turned on its head, which is no easy task. Most organizations are heavily invested in the current way things are done. As an alternative, instead of rebuilding the company’s business model, a drug manufacturer could simply acquire the business model as a separate unit or spin off that function as a separate company.

Examples exist of where the pharmaceutical industry has stepped out of its role as a strict manufacturer and into quasi-provider spaces. In 1997, the city of Asheville, NC, which is a self-insured employer, partnered with GlaxoSmithKline PLC and the American Pharmacists Association to develop the Ashville Project. In this program, educational materials were provided to city employees with chronic health problems such as diabetes, asthma, hypertension, and high cholesterol. Through this agreement, employees with these conditions were provided with intensive education and were teamed with community pharmacists who made sure they were using their medications correctly. As a result, employees experienced improved lower total health care costs (–35%), fewer sick days (–50%), improvements in physical health indicators (e.g., A1C levels, –20%), and increased satisfaction with their pharmacist’s services. (See (Also see "When Interests Align: Medication Adherence" - Pink Sheet, 1 Jul, 2011.).)

Another similar program called the Florida: A Healthy State campaign was announced in 2001. This program was developed between the Florida Agency for Healthcare Administration and Pfizer Inc. Florida agreed to keep all Pfizer medications on its Medicaid formulary, and in return Pfizer guaranteed Florida savings of $33 million over two years. To accomplish this, Pfizer administered disease management programs for asthma, congestive heart failure, hypertension, and diabetes at no cost to the state, while paying for all administrative costs of the program, salaries, and training for the care managers and the 24-hour nurse hotline, educational materials, and select durable medical equipment for participants. Pfizer published a report that stated the company enrolled more than 150,000 patients and saved the state more than $41 million over 27 months.

Providers and payors have made considerable headway in transforming their business models. The pharmaceutical industry, by contrast, has been dragging its heels because margins have been so good for so long. As those margins collapse and the customer base shifts radically toward a new model, the industry is going to have to follow suit.

Become More Than Manufacturers

To compete as service providers, drug companies will need to undergo a dramatic cultural shift. The advent of social media and the ability to touch patient populations en masse opens up an opportunity for companies to market wraparound services directly to patients. A simple credit card transaction could be arranged directly with the patient on a monthly or annual basis or through the course of the disease.

For now, the best place to look for examples of companies making major cultural shifts is outside the industry. The high-tech sector in particular has undergone huge cultural shifts in recent years. IBM, for example, has transitioned fully from a computer manufacturer into a consulting firm. Meanwhile, HP has turned its eye away from printers and hardware to cloud-based solutions.

When these major tectonic shifts have occurred in other sectors, they happened fast. The environment in which the pharmaceutical industry operates is looking as though it is ready for such a shift. With generics representing 90% of the volume in the US and payors and providers shifting pharmaceuticals from the profit to the cost side of the equation, change is coming, and for some companies, it will be surprising how fast it will happen.

Should fear lead to inaction, drug companies run the risk of failing to make the switch before other stakeholders in the health care continuum do. Specialty distributors in particular are poised to capitalize on their patient and physician relationships to monetize the non-drug value they already offer. Currently, many specialty distributors are paid by drug companies as outsource partners. However, if those outsource partners can turn to the ultimate payor – the insurer – to get reimbursed, they may no longer see the need to be beholden to a drug company.

While a certain level of urgency exists, adopting a new business model is not something that needs to be rushed. Drug companies can make an incremental evolution, actualizing the transition in the context of the reform that is taking place throughout the health care space. Contracting solutions with ACOs can be structured to provide services, not just supply. Contracting can be done on a per outcome basis as opposed to per pill sold. Drug companies can work with specialty distribution to put together the best mix of drugs, service, and support.

The infrastructure to monetize wraparound services already exists. It’s the sales model that needs to change. Free is a terrible pricing model.

Will Suvari ([email protected]) is VP, Pricing and Market Access, Kelly White ([email protected]) is Senior Consultant, Commercial Effectiveness, and Bharat Mehrotra ([email protected]) is Senior Consultant, Brand Management, Campbell Alliance. Campbell Alliance (campbellalliance.com) is the consulting business segment of inVentiv Health.