How to make a classic pricing error in Copay Card Vendor Selection
At the recent CBINET Formulary, Copay, and Access Summit, I heard tales of finance and procurement strongly suggesting and even forcing brand teams and Centers of Excellence (COEs) to select vendors based on lowering transaction costs. While establishing and maintaining cost effective programs IS important, focusing on transaction costs when selecting vendors is a classic pricing mistake, here’s why:
#1) Transaction costs represent a fraction of the investment in the program
Let’s simply assume that fees represent a total of 5% of total program cost, with patient benefit taking up 95%. That’s a ratio of 1/19. If the goal of the program is to truly cut costs, it would be 19 times more efficient to focus on reducing the patient out-of-pocket expenses, or better yet as we’ll see, enable those investment dollars to go farther.
#2) Reducing patient out-of-pocket expenses, though VASTLY more efficient than reducing program management/transaction costs, isn’t REALLY the goal either
As your sales force produces more scripts, your total expenses for these programs will increase. The goal of the program should be to increase NET revenues. Since BOTH the patient benefit AND the transaction fees are tied to filled scripts, the goal should be to increase the number of filled scripts. As Luke Greenwalt puts it, increase your script volume AND your efficiency ratio and you’ll increase net revenues. In this case you’ll have both higher transaction costs and higher patient benefit. But you’ll also have a lot more net revenue with which you can pay your expenses.
Unless your market is extremely mature with completely flat script generation and an immovable efficiency ratio – in which case, perhaps focus on optimizing BOTH expenses and patient benefit. This is because it’s not possible to increase net sales in this kind of market using patient assistance.
#3) Therefore, focusing on the 5% (expenses) at the expense of the 95% (dynamic program design) misses the point
From my experience, borne out at the conference as well, the focus on decreasing transaction costs may be due lack of differentiation in program design. Clearly, Finance and Procurement teams solely focused on expenses don’t believe in program differentiation. I tend to believe that card providers overstate the potential sales lift from their program designs; card providers should do a better job helping stakeholders to understand the dynamics of these leveraged programs.
I mentioned Luke Greenwalt’s efficiency ratio above – and spoke with the leaders of each of the major coupon providers at the conference. Each had his or her own suggestion for differentiating their services – via increased compliance offerings, better program design, improved data and reporting platforms.
As we’ve noted above – improvements in program benefit design are 19x more likely to improve your program’s bottom line. Let’s look at an example
ACME Pharma – procurement/finance tell brand team to switch from Good Co to Cheap Co
Savings on transactions = -20%
Loss on Program design = -10%
$100m program (to make math easy)
BEFORE: transactions and maintenance = $5m
Program investment = $95m
ROI of the program = 2 to 1 (this number was presented at the conference)
Yield = $180m – $100m = $80m net sales lift
AFTER: transactions and maintenance = $5m * 0.8 = $4m (reflecting the 20% transaction savings)
Program investment = $95m (held constant for analysis purposes)
ROI of the program = 1.8 to 1 (previous efficiency -10%)
Yield = $171m – $99m = $72m net sales lift (reflecting a loss of 10% versus the previous net sales level but an ROI of -800% versus sticking with your previous vendor + $1m saved versus -$8M lost)
But what if the company were to switch to a vendor that was 15% more expensive but 20% better at program design – after all the best doesn’t come cheaply
Excellence Pharma – COE and brand team switch from Good Co to Great Co
Increased Expenses on transactions = +15%
Gain from better Program design = +20%
Same $100m program
New: transactions and maintenance = $5m * 1.15% = $5.75m
Program investment = $95m (held constant)
ROI of the program = 2.4 to 1 (2 from before times 1.2)
Yield = $228m – $100.75m = $127.5m net sales lift
Versus the original program, that netted $80m, you’d be ahead 59%!
Coupon and copay dollars are leveraged – because they often take advantage of managed care money that you wouldn’t otherwise get. Please don’t focus on the pennies and miss picking up the dollars. And you shouldn’t WANT to work with vendors who want to play the low-priced transaction game. How can you trust that they have your best interests in mind when they can’t demonstrate their value in this way – and avoid an industry destructive price war. Maybe it’s better to go with a vendor who can explain the math behind WHY they’re maintaining their transaction fees at a profitable level.
Finally, at some point, copay and hub vendors are going to wise up and ask for percentage of WAC – as do wholesalers and specialty pharmacies. It might be a better overall deal for pharma to cease this race to the bottom before the industry’s best adopt this approach.