The Trump administration recently announced through an executive order that the cost of drugs under the Medicare Part B and D programs would be no higher than the price in selected wealthy countries, or Most Favored Nations (MFNs), with a similar per capita GDP to the US . The implementation of this executive order is simply an importation of direct government-imposed price controls in social democratic economies that are used to achieve lower prices there, which is different from the US approach, where market forces are given greater influence on the level of drug prices. The phrase “importation of direct government-imposed price controls” is not to be confused with “drug importation.” The more commonly used latter phrase refers to people or state governments obtaining drugs directly from other countries, such as buying drugs from Canada. The former phrase means using the structure of other country lower drug prices, often determined by direct government price controls, as the basis for setting US drug prices.
This policy development by the Trump administration did not come as a surprise since the Centers for Medicare & Medicaid Services (CMS) already put in place an International Pricing Index (IPI) on the reimbursement of Medicare Part B drugs in 2018 . The new order does not lessen the significance and impact of the rule change if enacted on the pharma industry. However, the fear among industry representatives was that the IPI approach would be expanded to cover Medicare Part D drugs. This expansion has now happened. This expansion of the IPI reimbursement approach greatly increases the impact of the rule and certainly will have spillover effects on the commercial (private) payer health insurance market if implemented. The order requires federal rulemaking to review the change to test the new reimbursement model, which could take months to complete. So, while there is no immediate impact, a 2nd term Trump administration, if it occurs, could see the new model enacted. Challenges are very likely to the new rule, which could also lengthen the delay of the rule’s implementation.
The Trump administration had already been making aggressive moves to control the “high cost of prescription drugs,” following the blueprint, as noted in the American Patients First proposal . More recently, both political parties have picked up this topic as a bipartisan issue that seems to resonate with voters. Many in the pharma industry currently have feared that the broad use of price controls, once thought of as being theoretical and a remote possibility, but now is an inevitability. This author has previously noted in numerous articles published on both the Axtria Research Hub and Axtria Blogs that the imposition of price controls represents an existential threat to the industry. Unfortunately, the political forces that once shielded the industry from the imposition of direct price controls for federal reimbursement on programs like Medicare have been severely weakened. Even more significant, the imposition of such federal program controls will effectively spill over into private health insurance markets, creating larger effects.
There is ample empirical evidence on the adverse effects of drug price controls on pharma R&D investment and the diffusion of new drug technology . These negative effects will eventually lead to lower health outcomes and higher healthcare economic costs to society, requiring no further explanation here, as noted in the cited reference. These documented adverse effects are, however, ironic, given the clear need to have a dynamic and robust pharma industry to find effective vaccines and treatments for COVID-19, a point clearly made by the CEO of PhRMA Stephen Ubl when criticizing the executive order .
Why Pharma Commercial Executives Should Take Notice
However, another significant area of price control effects on the pharma industry that receives no attention (as far as this author is aware) is the impact on the commercial side of the business. Direct control on drug prices will effectively lower the net price of drugs, thereby requiring pharma companies to rethink its entire set of commercial practices and the value of each sales and marketing channel. A lower price structure will reduce the marginal value of promotion-response by channel, all things being equal. This public policy change will give greater importance to ensure promotion channels can be efficiently delivered and produce effective results on prescription volume response.
A lower structure of drug prices will accelerate existing industry trends towards adopting a value or outcomes-based commercial model design and move the intent of sales and marketing from “persuasive” to “informative” promotion. An informative promotion approach means greater emphasis by pharma commercial executives on taking actions based on the following principles:
- Apply models designed and focused to disseminate scientific, medical, and medical information.
- Create promotion structures designed to enhance company contact engagements with healthcare stakeholders.
- Develop empirical models and methods to measure the quality of engagement and dissemination of information effects.
- Expand the use of technology to deliver more efficiently through sales and marketing channels.
- Build data structures needed to analyze the preceding effects.
These commercial operations effects are the focus in the next section on how pharma companies should prepare for a lower structure of drug prices. Not covered here, and left for another blog, is the impact of this policy change to “statutory pricing,” how those prices will be calculated, and its overall impact on prices and reimbursement.
How Will a Lower Structure of Drug Prices Affect Commercial Operations? – Impact on Pharma Clients
What should pharma companies do now to prepare themselves for future legislation on drug pricing that lowers the structure of overall net prices, thereby affecting the pharma commercial model? Key suggested actions include the following items:
- Develop more efficient means to deliver sales and marketing messages. COVID-19 induced effects of physician offices being closed to sales reps have meant pharma companies seeking digital ways to disseminate messages and engage doctors. The shift towards greater use of digital channels was already in existence pre-COVID-19, but the combination between pandemic-induced and price effects will accelerate this shift to find more efficient ways to engage physicians and disseminate necessary drug information.
- Ensure traditional marketing-mix analyses incorporate the lower structure of net prices into their output calculations. Lower net prices will mean a decrease in the marginal value and additional sales and marketing spending, all things being equal. Some channels may not receive sufficient frequency of messaging at a lower level of activity to induce a meaningful marginal value promotion-response. This means pharma companies having to challenge the wide range of sales and marketing channels they use to generate changes in prescription volume.
- Look to create synergistic effects to increase the incremental value of promotion-response of sales and marketing. A lower structure of prices will increase the need for pharma companies to ensure coordination of sales and marketing to increase their overall promotion-response effectiveness.
- Create new methods to develop segmentation schemes that will enhance promotion-response effectiveness. A lower pricing structure will reduce the overall level of promotion. This means pharma companies will have to create the same effects as before, though with less promotion activity (doing more with less). The first step in sales and marketing analysis is creating a segmentation scheme, the basis of a brand commercial strategy.
- Generate more effective sales rep-physician engagement models to increase prescription-response effectiveness. The use of the sales force is still the least efficient promotion channel (highest cost per target contact), however, is made up for in being the most effective (highest sales generation per target contact). Traditional sales response modeling is still predominantly based on frequency of sales activity. Sales response modeling has to focus more on the quality of sales rep-physician engagement and the effect of improved messaging. This change in modeling is especially relevant when dealing with the dissemination of scientific information, as in the case of specialty medicines, in particular anti-cancer drugs, rather than simply measuring effects from resource allocation on prescription response [5-8].
- Invest in analytical modeling capabilities to understand the direct and societal value of new medicines when engaged in pricing decisions. Health technology assessments (HTAs) such as the Institute for Clinical and Economic Review (ICER) are having a growing influence over future pricing decisions, such as their recent analysis of the price of remdesivir as a treatment for COVID-19 .
- Leverage economic models to develop the societal value of medicines. This requires developing methodologies unique to the training of PhD economists. The shift toward greater government-payer provided medicines will mean a larger emphasis on the societal value of medicines as tradeoff decisions are made on where to put scarcer public resources (especially with growing federal budget deficits and national debt).
- Develop and apply a value/outcome-based and patient/healthcare system-oriented commercial model design (CMD). This means the integration of traditional commercial analytics with methodologies used in health economics and outcomes research (HEOR) and real-world evidence (RWE). This modified CMD must permeate across sales, marketing, and payer strategy and operations. The industry’s shift to more expensive specialty medicines, especially in the area of orphan drugs for rare diseases, means promotion will be more geared toward informative education rather than traditional persuasive activities. This change in the application of HEOR and RWE with traditional commercial analytics will require internal pharma company organizational changes to facilitate this integration of methodologies.
- Apply artificial intelligence (AI) and machine learning (ML) to generate real-time changes in model output information. AI and ML can provide pharma decision-makers real-time updates on the estimates of effects of key variables in inferential models and predictions on the dependent variable under investigation within forecasting models (e.g., new brand prescriptions, patient adherence, or patient health outcomes within inferential and forecasting models).
- Create an efficient data architecture to handle the size and diversity of the growing myriad of different data sources. More important than handling the size of big data for analysis is developing the capability to link different databases to build a complete and accurate model picture for analysis. In addition, the data architecture must serve to populate the expanded use of empirical models for decision-making. Lastly, while emphasis has been on big data analysis, the shift to personalized medicines that serve smaller and smaller patient populations means that “small data” analysis will become even more critical over time.
- Generate capabilities in using technology to facilitate the implementation of the preceding analytical and data innovations. These innovations include new data collection (e.g., measuring the information attributes of sales rep-HCP discussions) to the applications of AI /ML for real-time updates and Next Best Action (NBA) decision-making.
Next Step for Pharma Clients
Axtria’s think tanks in Decision Science, Commercial Excellence, and Business Information Management have developed innovative solutions and useful insights to help pharma clients transition in setting up and implementing the preceding capabilities. Furthermore, the existence of the COVID-19 pandemic has accelerated existing forces that were already in place, causing changes in pharma commercial models and analytics. Axtria has leveraged its expertise to assist clients in navigating through COVID-19 induced business challenges. If you are worried about how future price controls will affect the pharma commercial model, please contact us (directly below). Axtria would be delighted to help and ensure that your commercial model is prepared for the challenges brought about through future-imposed onerous price controls. This will allow us to ensure that potentially life-saving medications continue to get to the appropriate patients and mitigate the negative societal health outcomes that public policy measures on imposing drug price controls will trigger.
- Restuccia A and Burton T. Executive order aims at drug prices. The Wall Street Journal 2020; 14 September: A4.
- Centers for Medicare & Medicaid Services. ANPRM international pricing index model for Medicare part B drugs. gov, published online 25 October 2018, available at https://www.cms.gov/newsroom/fact-sheets/anprm-international-pricing-index-model-medicare-part-b-drugs.
- S. Department of Health & Human Services. American Patients First, published online May 2018, available at https://www.hhs.gov/sites/default/files/AmericanPatientsFirst.pdf. Washington, D.C.: The U.S. Department of Health & Human Services.
- Chressanthis G. The relationship between drug price controls and patient health outcomes. Axtria Research Hub, published online October 2016, available at https://insights.axtria.com/relationship-between-drug-price-controls-and-patient-health-outcomes.
- Kappe E and Stremersch S. Drug detailing and doctors’ prescription decisions: the role of information content in the face of competitive entry. Marketing Science 2016; 35: 915-933.
- Sood A, Kappe E and Stremersch S. The commercial contribution of clinical studies for pharmaceutical drugs. International Journal of Research in Marketing 2014; 13: 65-77.
- Rod M and Saunders S. The informative and persuasive components of pharmaceutical promotion. International Journal of Advertising 2009; 28: 313-349.
- Azoulay P. Do pharmaceutical sales respond to scientific evidence? Journal of Economics & Management Strategy 2002; 11: 551-594.
- Institute for Clinical and Economic Review (ICER). ICER presents alternative pricing models for remdesivir as a treatment for COVID-19. Published online 1 May 2020, available at https://icer-review.org/announcements/alternative_pricing_models_for_remdesivir/.