Pharmaceutical/Biotech Pricing Strategies

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Information about Pharmaceutical/Biotech Pricing Strategies
Business & Mgmt

Published on February 25, 2014

Author: aharrell2000



This slide presentation is for illustration purposes only and to show how AH2 & Beyond can help you build a pricing strategy that will be competitive in the Pharmaceutical/Biotech Marketplace.

Pharmaceutical/Biotech Pricing Strategies Planning for today and tomorrow Presented By: Andre’ Harrell

This slide presentation is for illustration purposes only and to show how AH2 & Beyond can help you build a pricing strategy that will be competitive in the Pharmaceutical/Biotech Marketplace.

Purpose • The purpose of this presentation is to introduce you to the varied issues and structures that influence the way pharmaceutical products are priced in today’s complex health care market. • Awareness of the different mechanisms behind the costs of prescription drugs and medical services will help you determine the pricing strategy of your product/services to be competitive in today’s challenging health care environment.

Today’s Situation • The price of prescription drugs receives much attention from both the press and policy makers as prescription drug spending continues to grow. In the face of increasing drug expenditures, large purchasers attempt to control their drug costs, in part, by negotiating lower prices with manufacturers. Some purchasers deal directly with manufacturers while others have representatives that act on their behalf. For example, Pharmacy Benefit Managers (PBMs) negotiate drug prices for many HMOs and insurers. Group Purchasing Organizations (GPOs) represent thousands of the nation’s hospitals.

Agenda • Understand the varied terms associated with pharmaceutical drug pricing • Differentiate between pricing systems used by federal and nonfederal purchasers • What factors should influence discounts and rebates in purchasing decisions • Outline the different pricing systems used for varied market segments • What are the factors impacting the way pharmaceutical products are priced in today’s marketplace • Provide pricing strategies

Price Variation • Manufacturers offer discounts on brand-name drugs based on both the drug’s market performance and the purchaser’s ability to influence market share by systematically favoring one brand-name drug over another. • Hospitals, clinics, and HMOs that purchase drugs directly from manufacturers and influence the prescribing practices of doctors frequently pay less for the same product than retail pharmacies.

Discount versus Rebate • • Manufacturers’ discounts on brand-name drugs take a variety of forms: Discount generally refers to a lower purchase price negotiated with the manufacturer. Rebate refers to a specified amount the manufacturer pays the purchaser based on the volume of drugs purchased over a given period; rebate size grows and shrinks depending on sales/market share performance. Important to Know: • In the past a number of health plans entered into risk contracts with pharmaceutical companies to limit their exposure to higher pharmaceutical cost. Under these contracts a pharmaceutical company receives a negotiated per member per month (PMPM) payment for its product. Pharmaceutical companies refused to enter into theses types of contracts for a number of reasons that include: Seasonality - many pharmaceutical products have a usage seasonality making it very difficult to predict an appropriate PMPM calculation. Impact on best price - The impact on best price is unpredictable. Shift in incentives As a drug company markets its drug and attempts to increase its markets share, it drive its unit cost down. Not pharma’s business - Pharmaceutical companies do not want to be in the insurance business .

Market-Share Based Pricing Many purchasers, including PBMs, receive rebates and discounts from manufacturers in exchange for being listed on a formulary. Consider offering performance discounts to plans that can significantly drive market share. The more influence the purchaser yields in its ability to favor one brand-name drug over a competing drug, or to move market share, the higher the discounts and rebates can be. Important to Know: • • Benefit designs and other processes can drive market share by influencing physicians’ prescribing and consumers’ purchasing practices. The leverage purchasers bring to pricing negotiations is based largely on their ability to drive the market share of a particular drug.

Pricing Terms Varied pricing structures are used in the pharmaceutical marketplace, creating an alphabet soup of pricing terminology. Average Wholesale Price (AWP): is the price assigned to a drug and is listed in the Red Book, First DataBank or Medispan. AWP operates as a suggested list price, and is typically not what is paid as buyers may negotiate lower prices through the inclusion of discounts, rebates or free goods. The AWP is referred to as the “sticker price” because it is a starting point for negotiations – not the actual price that large purchasers normally pay. Naturally, the buyers are looking for discounts below the AWP in exchange for higher market share. Medicare officials have been highly critical of using the AWP, arguing that it grossly overpays physicians for services because it is based on inflated price reports generated by the pharmaceutical industry. Government estimates have put the AWP overpayments as high as $1.2 billion per year, prompting calls to lawmakers to change Medicare's payment rules.

Pricing Terms con’t Wholesale Acquisition Cost (WAC): The cost at which wholesalers and wholesale chains purchase drug products from the manufacturer. The price is defined as the “list price established by manufacturers for sales to wholesalers. The drug manufacturers provide this information. Like AWP, WAC is a suggested price, but the actual selling price may be lower due to a discounts. Average Manufacturer’s Price (AMP): The average price paid to a manufacturer by wholesalers for drugs distributed to retail pharmacies or wholesale chains. Does not include prices associated with direct sales to HMOs, hospitals, or federal purchasers. Average Sales Price (ASP): A system created by federal and state government prosecutors in settlements with pharmaceutical manufacturers TAP and Bayer to ensure more accurate price reporting. ASP is the weighted average of all non-federal sales to wholesalers and is net of chargebacks, discounts, rebates, and other benefits tied to the purchase of the drug product, whether it is paid to the wholesaler or the retailer. In the new Medicare law, Congress adopted the ASP system to replace AWP for reimbursing outpatient drugs under Medicare Part B beginning in 2005.

Pricing Terms con’t Non-Federal Average Manufacturer Price (NFAMP): The average price wholesalers pay to manufacturers for drugs distributed to nonfederal purchasers. NFAMP is not publicly available. Estimated Acquisition Cost (EAC): The State Medicaid Agency’s best estimate of the price generally paid by pharmacies for a drug. This figure is meant to represent a calculation across all pharmacies of Actual Acquisition Cost. Maximum Allowed Cost (MAC): For generic drugs, about three-fourths are reimbursed using limits known as maximum allowable cost (MAC). These limits are established by PBMs, based on the lowest estimated acquisition cost for any of the generic equivalents of a given drug. The MAC tends to be 50 to 60 percent below AWP. The remaining one-fourth of generics are reportedly reimbursed, like brand-name drugs, at AWP minus 13 to 15 percent. MACs can also be established by the Federal and State governments once the generic is on the market. Retail or Usual and Customary (U & C) Price: The pharmacy’s selling price to individual consumers. The price includes the cost of the drug and the pharmacy’s mark-up. The mark-up includes allowances for business operating costs, e.g. rent, utilities, employee wages/benefits, etc., and dispensing services.

Pricing Terms con’t Dispensing Fee: A fixed dollar amount, above the cost of the drug itself, in the range of $2.50, that PBMs offer retail pharmacies for dispensing drugs. The dispensing fee for generics can be the same as for brand drugs, but sometimes it is 25 or 50 cents higher, to encourage generic substitution by pharmacies. Best price (BP): is defined as the lowest price available from the manufacturer to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity within the United States. The following are not included in determining the best price: • Prices charged to the Indian Health Service, the Department of Veteran Affairs, the Department of Defense, the Public Health Service (PHS), and PHS covered entities; • Prices charged under the Federal Supply Schedule; • Prices used under state pharmaceutical assistance program prices • Any depot and single award contract prices. Federal Upper Limit (FUL): The Maximum Allowable Cost used in price calculations in the Medicaid program. It is also referred to as the “HCFA MAC.” Important to Know Health Care Financing Administration (HCFA): The former name of the federal agency within the Department of Health and Human Services (DHHS) established to administer the Medicare, Medicaid, and State Children's Health Insurance Programs. Agency is now known as the Centers for Medicare & Medicaid Services.

Pricing Process Manufacturers Manufacturers di stri bute their products pri maril y through drug whol esal ers, but al so sel l di rectl y to pharmacies, hospi tals, and other bul k purchasers. Manufacturers establ i sh Whol esal e Acquisi tion Cost. List Price: Whol esal e Acquisi ti on Cost (WAC) A ctual Selling Price: Av erage Manuf acturers Price (AMP) Wholesalers Whol esal ers act as the mi ddl emen that di stri bute pharmaceuticals from manufacturers to pharmaci es List Price: Average Whol esal e Pri ce (AWP) A ctual Selling Price: Actual Acquisition Cost (AAC) Retail Pharmacies Pharmaci es di spense prescri pti ons to consumers and provi de professi onal pharmaci st servi ces Reimbursement: Esti mate Acqui si ti on Cost (EAC=WAC pl us a percentage of AWP m nus a percentage) – plus a dispensing i fee Manufacturer Rebates (Branded Products): 15.1% of AMP or AMP Best Pri ce Medicaid Agencies Cover the pharmaceutical costs for el i gi ble l owi ncome women, chil dren and di sabl ed

Pricing Pressures Pricing pressures from private and government purchasers have resulted in a downward trend in drug prices in recent years. This trend will likely continue as a result of Medicare’s Drug Discount Cards, followed by the Medicare Prescription Drug Benefit which began begin in 2006. Percent Change in Prescription Drug Prices: 2009-2013* 6 5.7 5.4 5 5.2 4.4 4 % change 3.3 3 2 1 0 2009 2010 2011 2012 2013

The Federal Government & Drug Pricing The Federal Supply Schedule The federal government is among the largest purchasers of prescription drugs. Government exerts its influence on drug prices by: • Using the Federal Supply Schedule (FSS) of prices for other federal drug purchasers. • Requiring manufacturers to provide rebates to states for Medicaid drug purchases. In order for a manufacturer to participate in state Medicaid programs, they must participate in the FSS. • Other federal purchasers of prescription drugs include the Department of Veterans Affairs, the Department of Defense, the Public Health Service and the Coast Guard. Brand name drugs must be priced on the FSS at least 24% lower than the NFAMP. Important to Know: Manufacturers have incentives to give even larger concessions than the mandated 24% to federal purchasers. For example, many physicians receive part of their training at VA hospitals, and manufacturers may want to make sure that these new physicians learn about their prescription drugs.

The Federal Government & Drug Pricing The Department of Defense (DoD) The Department of Defense (DoD) purchases some pharmaceuticals through the FSS, but negotiates independent contracts for the majority of its drug purchases: • The Defense Supply Center in Philadelphia (DSCP) is the single entity which negotiates DoD’s distribution and pricing agreements with over 200 drug manufacturers • Negotiated prices for drugs are approximately 24% to 70% below the AWP Fast Fact In 1997, military pharmacies dispensed approximately 55 million prescriptions at a cost of approximately $1 billion.

The Federal Government & Drug Pricing Medicaid Rebate Program The Medicaid Rebate program is another way the government controls drug costs. Manufacturers are required to pay state Medicaid programs a basic rebate for brand name drugs. Basic rebates are calculated as a rebate equal to at least 15.1% of the average price they earn on sales to retail pharmacies for brand-name drugs. The basic rebate is often higher than the 15.1% minimum since manufacturers must use best price when calculating Medicaid drug rebates. In order to participate in Medicaid manufacturers must participate in the FSS pricing. Best Price for Branded Products and Medicaid Best price is used in the calculation of Medicaid rebates due in the Medicaid Outpatient Drug Rebate Program. The rebate for brand name drugs is the greater of 15.1 percent of the Average Manufacturer Price per unit or the difference between the AMP and the manufacturer’s “Best Price.” Rebate = 15.1% of (AMP) or (AMP – BP).

What are your “Price Pressures”? Keep in mind that when doing the research on where you should price your product as always your customer may demand a “Best Price” contract. Remember this decision will create a ripple effect, Medicaid will also demand that “Best Price and Medicaid could constitute about 15% of your overall business: Cash 11% Medicaid 15% 3rd Party 74% Important to Know Remember, in addition to cost, the clinical value of your products weighs very heavily in your customer’s decision-making process. In other words, highly valued products can help you drive more favorable contractual arrangements.

Pricing For Medical Services Planning for today and tomorrow

Introduction As a manufacture HOW you price your product is extremely critical, as drug pricing is clearly a primary concern of your customers. Still, it is also important to understand what the other pricing mechanisms relevant to your customers and the medical services they provide. The “Bible” for pricing is the International Classification of Diseases, 9th Revision Clinical-Modification (ICD-9-CM) • The ICD-9-CM identifies the diagnosis for a patient's condition. In addition to identifying a patient's condition, hospital inpatient departments use certain ICD-9 codes to identify some of the services they have provided to a patient. • The ICD-9-CM includes more than 10,000 numeric codes, with as many as five digits apiece. • All five-digit codes are subsets of four-digit codes, which are subsets of three-digit codes the three digit codes were organized in to 17 chapters representing broad disease categories, which range from “neoplasms” to “symptoms, signs, and ill-defined conditions” The information represented by these codes is the basis for hospital payment by Medicare, many national health statistics, and other uses.

Limitations of ICD-9-CM • To limit the number of codes in the system, the ICD-9CM lumps certain disease entities, which can obscure important differences; for example, codes for patients with renal dysfunction distinguish between acute or chronic cases, but not among levels of dysfunction. • Codes do not indicate whether a procedure or a disease relates to the left or right side of the body, which can impede research. • Different codes can be used to describe the same condition; for example a code for a symptom such as angina can also be used to refer to the disease process of myocardial ischemia or to the anatomic abnormality of coronary arteriosclerosis. Fast Fact According to studies of coding accuracy, diagnosis and procedure codes that are recorded are generally inaccurate. One study showed that even at the three-digit level, more than 25% of principal diagnosis codes assigned were different from those assigned by expert reviewers.

Healthcare Common Procedure Coding System HCPCS is the standard coding system for services provided in the outpatient setting. Physician offices and hospital outpatient departments use these codes to bill Medicare and other payers for services rendered. HCPCS codes include: • Current Procedural Terminology (CPT) Codes: describe medical or psychiatric procedures performed by physicians and other health providers. CPT codes form the basis for reimbursement schedules used by Medicare, managed care and other insurance companies. • The J Code: is a type of code that hospitals and physician offices use to identify injectable drugs (e.g. Herceptin, Rituxan, Avastin) they have administered to a patient. • The Q Code: is a type of code that hospital outpatient departments use to identify chemotherapy infusions. [] Fast Fact Since the early 1970s, Centers for Medicare & Medicaid Services (formerly known as HCFA) has asked the American Medical Association (AMA) to work with physicians of every specialty to determine appropriate definitions for the codes and to try to determine accurate reimbursement amounts for each code.

Medicare Payment Systems: Hospitals Several different type of payment systems are used to reimburse hospitals for inpatient and outpatient care to the Medicare population. The Outpatient Prospective Payment System (OPPS): The Balanced Budget Act of 1997 created the outpatient prospective payment system. The OPPS sets the price hospitals and community mental health centers are paid to provide certain outpatient services to people with Medicare. Medicare also uses the OPPS to pay for some services provided by other facilities, including some preventive shots/vaccines, antigens, casts and splits. Diagnosis Related Groups (DRGs): A classification system that groups patients according to diagnosis, type of treatment, age, and other relevant criteria. Under the prospective payment system, hospitals are paid a set fee for treating patients in a single DRG category, regardless of the actual cost of care for the individual. APCs (Ambulatory Payment Classifications): An outpatient payment system developed by Medicare as a universal capped reimbursement program to control outpatient costs. Medicare Disproportionate Share (DSH) Adjustment: An additional Medicare payment to hospitals which treat a high percentage of low-income patients. The factors used to calculate this adjustment are the sum of the ratios of Medicare Part A Supplemental Security Income (SSI) patient days to total Medicare patient days, and Medicaid patient days to total patient days in the hospital.

Buyers As a manufacture you have the ability to charge different prices to different buyers, including: • • • • Managed care institutions Hospitals Wholesalers Pharmacy chains The size of the negotiated discount depends on the market power of the buyer.

Managed Care and Hospital Discounts Managed care institutions (and large hospitals) tend to negotiate larger discounts from drug manufacturers than large pharmacies and wholesalers. This is mainly due to the use of formularies by MCOs and hospitals. Often, these institutions negotiate a lower price from a manufacturer in return for including the manufacturer’s drug on the formulary. The drug is obtained from a wholesaler at the discounted price and the manufacturer reimburses the wholesaler for the cost of the discount. This is known as the charge back system. Important to Know Most pharmaceutical companies discount products sold to GPOs using the charge back system while they discount products sold to MCOs and other managed care entities using rebates.

Wholesaler and Pharmacy Chain Discounts Unlike MCOs and hospitals, wholesalers and pharmacies do not have the ability to substitute one brand drug for another all of the time. Pharmacies (and their wholesale suppliers) must be prepared to fill any prescription presented. This means stocking a wide range of products, including brand name drugs and a generic, and all drugs within a therapeutic class. Drug companies have less economic incentive to grant discounts to pharmacies and wholesalers, unlike the case with hospitals, managed care facilities, and health plans. Generic drug manufacturers are likely to have less market power than manufacturers of brandname drugs. That’s because buyers can substitute one manufacturer’s generic drug with one from another generic drug manufacturer. Large generic drug manufacturers can negotiate better rates since they can bundle generics for a variety of therapeutic areas.

Establishing Favorable Contracts Philosophy A goal of any negotiation is to seek a win-win agreement that benefits both your company and the customer. But, ultimately, your goal is to increase profitability for your company. To achieve this, you need to consider the 3 Cs of contracting! All 3 C’s are important in the contract negotiation process. Remember that there are a number of contract scenarios -- one of which includes walking away from a contract. So, if one of the three C’s is missing…you will need to evaluate whether it makes sense to contract at all! Critical Mass Size and utilization volume Regional/national leadership and spillover effect Market dominance Affiliations Control Benefit design Prescription influence programs/interventions Demonstrated ability to influence market share Cooperation Agreement to terms and conditions Commitment to partnership “Push” and “pull-through” programs

Establishing Favorable Contracts Know When to Walk Away… You may consider walking away when: • The price demanded by the account will impact your best price. • The account has no demonstrated ability to increase your product's market share or increase your competitor's market share. • The contract terms restrict your product's positioning in the market (when and how it should be used) thereby limiting your ability to market the product or creating confusion in the marketplace. Example: 100 Antihypertensive Scripts (hypothetical) Scenario No Contract: Product A $100/script x 20% share = $2,000 Contract Discount: Product A $85/script x 20% share = $1,700 Result: Contract discount yields a loss of $300 Break Even To break even on contract discount, the customer must have the ability to grow share by at least 4 points: Product A $85/script x 24% share = $2,040. If not, you must walk away. Reduced Market share: Without a contract discount, you could conceivably lose share by 3 points to yield the same results with a discount: Product A $100/script x 17% share = $1,700. But does your customer have the ability to drive your share down further? If so, you may consider contracting. If not, you could walk away.

Pull-Through Programs Setting prices and creating contracts favorable to your business will maximize revenues. But keep in mind that the contract is not the only consideration. Pull- through programs will position you as a partner by adding value and will help drive your business by increasing end-user demand for your products. Example pull through activities include: • • • • • • • Call planning on high volume users of non-formulary products by clinical HCP’s Newsletters to members/physicians/pharmacies Letters, report cards, or incentives to physicians Protocols, algorithms, conversion programming Web Ex’s, Teleconferences, CE’s, CME’s Electronic messaging pharmacy KOL programs Ask and you shall receive Remember, pull-through programs are much more effective (and appreciated) when they address specific customer needs. The better you understand your customers, the better you will be able to deliver more targeted programs. Often times, they’ll tell you what their “pains” are – all you have to do is ask!

Recommendations • Always base your final pricing on the customers/purchasers ability to increase the volume use of your particular product/service, which can be done through benefit designs and other processes that influence the end users use of your product. Using the explained mechanisms, can offer you in exchange for price benefits a higher use of your product. • Examine your price variability (e.g. discounts, rebates) based on both volume and the purchaser’s ability to influence market share by systematically favoring your brand-name product over another. • If your final pricing structure has incentives tied to it such as “Rebates” the size of the rebate should be tied to a percentage increase in volume, In other words, you should price your products at a fair level in exchange for an increase in sales volume/market share. • Many purchasers, including pharmacy benefit managers (PBMs), receive rebates from manufacturers because they apply a formulary to a broad patient base, something a retail pharmacy itself generally cannot do. You should provide price incentives such as rebates or discounts based on the formulary status of your products, the more influence the purchaser wields in its ability to favor one brand-name drug over a competing drug, the higher the discounts and rebates can be.

Last Say Before establishing pricing for your new or existing product/service ensure that you understand the important features of the government programs you reside. By learning about the important features of these government programs, you will be better able to develop, position and implement innovative/effective pricing in the competitive landscape of pharmaceutical/biotech sales. You’ll also be able to present yourself as a “VALUE” and knowledgeable resource to your customers, which will separate you from the competition.

Checkout my presentation on “Global Sales & Marketing Excellence Plan-Example”! You can also checkout my background/work by clicking on the following links:

Andre’ Harrell AH2 & Beyond Consulting 267-221-8529

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