What does a split congress mean for healthcare reform?

What can we conclude from the election of Democrats to the House while Republican’s increased their majority in the Senate? The simple answer is that nothing will get done in the next two year. I’ve long held that a congressional fix for healthcare is an unlikely outcome; however, I now believe that there are some interesting things that can happen. The focus should be on the (progessive/trifecta blue) states.

#1) Create durable protections under law for pre-existing conditions

IF the Democrats are clever…The Democrats should take Republican claims of support for pre-existing conditions seriously. Even Ted Cruz supported pre-existing conditions down the stretch. Democrats should put pressure on Reps by passing legislation in the House carving out and creating a long-term, legal protection for pre-existing conditions. Even though this is technically unnecessary, given the prominence of pre-existing conditions in ACA, it’s possible that the Republicans may suddenly ‘forget’ their support for this policy. It is unlikely to pass in the Senate – but that’s not the point. Election stump talk is cheap, legislation is more expensive.

Allowing Republicans to u-turn on pre-existing conditions and not holding their feet to the fire would be a mistake. (but count on Democrats to miss a good opportunity whenever they can)

 

#2) Stop focusing on prescription drugs – start focusing on the medical benefit

Last night Nancy Pelosi gave a truly cringeworthy speech that touched on the need to reduce the cost of prescription drugs as a primary way to make healthcare affordable. As I’ve written many times, we could eliminate our spending on drugs, crippling both the branded and generic drug manufacturers at the expense of thousands of jobs, and ONLY reduce healthcare spending by >10%.

In politics cutting healthcare spending means ‘cutting drug spending’ because drug out-of-pocket costs are highly visible to consumers. But until politicians see the forest (medical benefits) for the trees (drug spending) we aren’t going to see healthcare costs come down. Having a single payer system isn’t going to solve this problem, despite what progressives wish to be true.

 

#3) The cauldron of innovation is now the States

One lightly reported change is the democratic pickup of 5 ‘trifectas’. With the slow/no rate of healthcare change at the National level, these states are the most likely to try something creative. Rumors abound that California will resurface it’s $400B single payer legislation that went nowhere in 2017. Without the balance of a meaningful opposition party, Democrats in these 13 states will want to demonstrate to their constituents that they can deliver on healthcare. IF they take a serious look at BOTH pharmacy and medical benefits (see #2!) it will be interesting to follow the outcome. Reducing spend by eliminating overbilling, unnecessary care, prioritizing less expensive treatments, etc. sounds much easier than it is. However, I will applaud their efforts and we should all watch with open-minded interest. After all, almost every other advanced economy has managed to provide (good/better) healthcare at lower costs.

Pharma: Please stop blaming R&D for high prices!

Pharma: Please stop blaming R&D for high prices!

 

I cringe every time I hear a CEO or pharma policy representative suggest that high prices are necessary to encourage innovation. It implies that pharmaceutical prices ARE high because of the investments made to get products approved. Thinking in this way is a mistake. It’s falling victim of the Sunk Cost Fallacy – as the value of a product in the market is completely disconnected with the amount of investment to get that product to the market. Let’s look at this in more detail.

 

For years, Pharma, PhRMA, and Bio have made the argument that we need to have high prices (particularly in the United States) to enable investment in future biopharmaceutical research. However, the monies flowing into biopharma flow from the high profitability of the industry, NOT directly from high prices. In fact, high prices COULD divert broad scale research AWAY FROM diseases that affect large portions of the population, i.e. diabetes, heart disease, common forms of cancer, by making orphan diseases ‘artificially’ profitable. This is (potentially) fuel for another piece in the future.

 

Here I want to talk about what we really use to price pharmaceuticals in the United States. The process is simple. We take all possible clinical outcomes, model the financial offsets (also known as HEOR) if they are available, and talk about potential patient populations – both at launch and over the drug’s lifecycle. These are presented in a brief designed to mirror a condensed form of the pharmacy and therapeutics dossiers produced by U.S. payers during the review process. Yes, these dossiers do benefit from and include various outcomes of the R&D process. But there’s not a single payer in the U.S. – state, Federal, or commercial – who cares how much money was invested to produce those clinical outcomes.

 

Once these value propositions are completed we debate their merits and try to understand where the product fits within the current set of options available. We attempt to include developmental products that will likely come to market during the products’ protected period. We include competitive product characteristics and trade-off various products’ value propositions. Generics & biosimilars will typically offer more value-for-money versus branded alternatives. Many payers have generics first preferences. Understanding this, we work with payers to understand their preferred treatment pathway, and where the new agent fits within that treatment pathway. These treatment pathways create the drug Tiering and controls that define coverage. Depending on the therapeutic area’s unmet need Step Edits (through Generics or Brands) may be appropriate. Depending on the clinical outcomes from misuse or off-label use, prior authorization may be appropriate.

 

Again, at NO TIME do we talk about the investment required to bring products to market. Because these investments aren’t relevant to the value of the products we produce. Payers don’t care.

 

Imagine a couple of examples –

First, my wife and I purchase a property in the mountains, far off the road and away from others. We invest to bring expensive building materials to the site and construct our dream home. After we’ve built the home and enjoyed it for years, we decide we want to sell the mountain home to purchase something else. Buyers will come to the property and evaluate the value we’ve created relative to the replacement cost, building from scratch, and their perception of the value of being able to live/vacation at the property. They won’t and shouldn’t care how much money it cost us to build it – instead their perception of value will stem from what we’ve created.

 

Another example…imagine if the film industry constantly reminded us that we need to pay more for movies in which they’ve cast expensive stars. They’d say, ‘public, you’d better go see this movie because we spent $200m to film it!’ and ‘if you don’t go see these fancy movies, we won’t make them anymore.’ They don’t say that because it’s laughable. Everyone knows that stupid movies with expensive stars that don’t make money flop. And Hollywood, Bollywood, and now China will continue to make movies because SOME make a lot of money.

 

We need to get more sophisticated about the way we talk about value creation in the biopharma world. It would be great to have a consistent view of value creation and reward – and I believe that will happen in my lifetime. In the meantime, it’s important to discipline yourself, your organization, and your leadership to avoid falling for the sunk cost fallacy when pricing pharmaceuticals & talking about your pricing. Because those of us in the know see through it, and it sounds silly to pharmaceutical outsiders.

Pricing 202: The Importance of Customer Choice (The Sufferfest)

Rarely do I get to bring my passions together, but today’s one of those days.

On September 28, 2018 The Sufferfest, an on-line training tool for cyclists increased their prices from $9.99/month to $12.99/month while keeping the annual pre-paid subscription at $99/year. This was brilliant. https://thesufferfest.com/blogs/the-sufferfest-blog/why-were-changing-our-prices

Background about on-line cycling training platforms for folks who don’t know what a ‘smart trainer’ is

First, there are some important points that are critical to understanding The Sufferfest’s market. The Sufferfest is a tool for cyclists to use indoors on their ‘smart’ trainers. This is important for folks who are time crunched and/or live in climates where unseasonable weather limits their ability to ride outside for months on the year. The Sufferfest, like many global companies, derives much of its revenue from the USA, Canada, and Europe (I’m guessing, though they are based out of Singapore/Australia). Thus, the late Fall and Winter in the Northern Hemisphere is the time for them to make the bulk of their money.

Additionally, with a month-to-month model athletes are likely to only sign up for the Fall/Winter months and then will cancel their membership. SaaS (Software as a Service) pricing often provides (large) discounts for upfront payment. Companies love to lock in revenues and the cash flow favorability of such pricing strategies is obvious.

The price increase

Today I want to focus on both the SIZE of the price increase (30%) and the maintenance of the $99 annual price. As objective marketers and pricing professionals know, companies are more likely to benefit from price increases that are sensible and well communicated to customers. Put another way, it’s unlikely that revenues will go DOWN due to this price increase.

The Sufferfest faces steep competition from other, ‘more’ interactive competitors – Zwift is the best example. Most riders are unlikely to pay for both for the entire year…and even doubling up during the winter seems like a luxury (though I might do that as ANYTHING that keeps me on my bike in the winter is godsend…).  Zwift took a price increase about the same time last year. Thus, the price increase could be seen both as reactive to Zwift’s pricing strategy as well to take advantage of the pricing differential that Zwift created.

Let’s analyze The Sufferfest’s pricing decision –

BEFORE

At $10/month and $99/year – the breakeven for an annual membership is 10 months.

Effectively, it’s more about whether you want to be charged up front or throughout the year. Sure, a 20% discount is generous. But, it’s easy to think that you’ll take a break during the heat of the Summer months. Surely, few do, but that’s the thinking.

After

A decision needs to be made upfront – the discount for prepayment is now 56% and the breakeven is 8 months. If you KNOW you’re going to ride (hard, really really hard, but that’s another post) only for the worst of the Winter months, then money can be saved with the month-to-month option.

I’d say that the $12.99/month option was a perfect price point. They are still $2 cheaper than Zwift and they’ve managed to increase their price by 30% (as mentioned above). This also enables them to increase the annual fee in 2019 to $120+

B2C pricing always has an element of optics to it. As a long-time The Sufferfest rider (I actually own all the videos before they went on-line, but love the new ones…thus I support their new business model) I can ‘see’ the value in $13/month being a sweet spot between $12 (otherwise why take a price increase at all) and $14/month (potential for folks to say ‘look you’re not offering as much interactivity as Zwift, I’m outta here). But I’ll have to jump on some The Sufferfest chat rooms to see how people are reacting.

 

Business implications

Before the pricing strategy didn’t really SAY anything to potential customers –

  • “come and try it out.”
  • “If you like it, stay.”
  • “If you pay up front, we’ll give you a (minor) discount.”

Now the pricing strategy says a lot –

  • “come and try it out.” (they’ve kept the trial period and the monthly rate is still low)
  • “There’s a 56% discount for paying for a year if you like it”

Customers then self-segment into annual folks and month-to-month folks. Consumers really have to make a tough decision when they sign up or shortly thereafter…

Self-segmentation is hugely valuable. As is getting annual pre-payment for SaaS offerings.

Why not take the annual price up?

While it’s likely that The Sufferfest would have made even more money by taking up the annual price too (as I mentioned a price point of between $110 and $120 inclusive seems optimal for 2019) the threat to the business of doing too much too fast exists. It’s clear from the post that The Sufferfest plans to retain as many current riders as possible using the $99/year strategy. It’s a great objection handler – yes, our MONTHLY prices went up, but we want you to stay for the year and that price strategy didn’t change.

And, as mentioned above, they should be considering an increase during 2019 for the annual price points as well.

Conclusion

I may be leaving out a passel of supportive details from years in the pricing trenches. Also, I realize that some of my arguments ($13/month and $99/year are and look ‘right’) are completely subjective. But I wanted to put together this post today to make the point about pricing against competition and allowing self-segmentation of pricing. Too many organizations are afraid of price as a true strategic option despite it being one of the most critical elements of ANY organization’s success. Also, I like getting out of the healthcare area every once-in-a-while to talk about other things that I’m passionate about.

 

Disclaimer: I pay for The Sufferfest and Zwift (though I’m currently, at the time of post NOT a subscriber of either; as I cancelled my subs during a period of zero riding as I got ChiralLogic off the ground). I do not and will not take money to post anything on ChiralLogic.com – and I don’t have a professional relationship with any company mentioned in this post.

Three steps that would ACTUALLY bring down LIST and NET Pharma pricing

Now that we’ve seen the White House Plan to bring down healthcare costs – I’d like to offer a counter suggestion. Here are three steps that would ‘immediately’ bring down list/net pricing and reduce the cost of insurance.

 

#1) Eliminate structured, tiered patient out of pocket and move to a graduated out-of-pocket system based on family income level (opt-in ONLY)

One-size-fits all copay levels are regressive and discriminate against the working poor – while making drugs artificially INEXPENSIVE to high income earners. Currently, there’s a question whether tying patient benefit to ability to pay is legal and most agree that it’s not fair. Why not move to a system where the goal is to charge a nominal fee for each BRANDED prescription tied to income level. A secure, opt-in databased could be pinged for patients seeking to pay below the maximum out-of-pocket level.

I would suggest maintenance of Gx/Brand differentiated out-of-pocket for low priced (MAC’ed) Gx.

 

#2) Require pharmaceutical companies and PBMs/Payers to negotiate over true market access

There’s lots of evidence that out-of-pocket requirements lead to patients foregoing or postponing care. A much better solution would be for Pharma Cos to contract for access (see above at truly nominal out-of-pocket levels). In exchange, pharma would contract PBMs/Payers down to a level that enabled the payers to reduce/eliminate copays. Further, since Pharma would be on the hook for price increases, there would be very limited incentive for price increases. This move would single handedly decrease the perverse incentive to have a HIGH list price, larger rebate, and low net price. Additionally, co-insurance insurance would be largely eliminated with #1 above…

Payers, for their part, would commit to a price where they could provide access to the broadest amount of their patient base. Explicit conversations would be had about the appropriate place in therapy for Gx and Branded alternatives. I’d suggest the PBMs adopt a model like Italy’s – there they provide a price that they’re willing to pay, up to an annual maximum for a given indication, product class, or product. Use beyond this maximum would be provided at the pharma co’s expense. Pharma companies then decide whether they want to ‘take it or leave it.’

 

#3) Remove the Medicaid Best price requirement for instances where the caps in #2 are surpassed and/or for outcomes-based contracts (in situations where the product didn’t work)

Acute readers will note that #2 isn’t possible with the current rules regarding Medicaid best pricing. Allowing exceptions to this policy will enable increase creativity in value-based pricing. To qualify, value-based contracts would have to include potential RISKS and BENEFITS for BOTH parties – outcomes would determine whether the product worked and, built into this proposal, payers would commit to paying MORE in cases where clinical endpoints were met/surpassed in real-world use.

 

As Michael Kleinrock has demonstrated pharma is ALREADY picking up ALL of the net effects of price increases ON PATIENTS. The price increase game is largely over, and the ones left holding the bag are payers with the weakest hands. Moving to these strategies would increase certainty and ease actuarial risk. That would, in turn decrease the cost of insurance coverage – and this effect would be magnified if we increased the total number of people covered with comprehensive insurance. I’d also like to see implementation of truly portable healthcare coverage – paid for by employers, employees, and/or the government (for the record, I’m against single payer but these are bigger/longer conversations, beyond today’s scope).

Decrease the incentives for high prices and you decrease the likelihood of having high prices. Suggesting that government programs lack the negotiating power they have (pharma feels the massive power of the Part D providers every year during the contract renewal process) perpetuates a political myth. I can see the argument that Medicaid pays too much for brand new, high priced biologics; but I don’t understand the suggestion that Part D lacks some power that the same providers wield for their Commercial coverage. (?) States, including Massachusetts, are already asking for waivers outside of current Medicaid rules – maybe the adoption of #2 above for States Medicaid would help to meet their needs and challenge Pharma to provide ‘fair’ prices for open access.

In honor of Uwe Reinhardt – the Sahara Model & Why it Matters

Uwe Reinhardt makes a number of brilliant points in this post, published in February of 2017 – thehealthcareblog.com/blog/2017/02/08/the-sahara-model-of-value-pricing/

There’s an incredible amount to unpack in this piece. And it’s one of the closest pieces I’ve seen to how drugs are actually priced in the United States. Understand the power dynamics of a given market and you’re on your way to understanding pharmaceutical pricing.

The comments about the middle class, especially as they pertain to out-of-pocket expenses for drugs are also excellent.

Clearly losing Dr. Reinhardt is a big loss.

But where does all this leave us? It depends – fully implemented the new finance models mentioned toward the end of the article completely dismantle the global pharmaceutical model as we know it today. Is that likely to happen? No. Is it important for more people within the industry to understand and appreciate these proposals? Yes.

Why? Because application of the Sahara model as illustrated by the recent spate of $250,000/year and now even $475,000/treatment drugs is creating a furor that the industry, Bio, and Phrma can’t control. Rather than talk about pharmaceutical pricing, why not implement (voluntary!) caps on sales and market expenses as a percentage of gross revenues? If we don’t get control of the narrative, some of these innovative R&D strategies are likely to be imposed, especially in a political climate that’s becoming more polarized, and could swing wildly in any direction with each coming election.

To be clear, I believe in the current venture-backed small company to big company R&D system. I believe many of the recommended R&D funding strategies would lead to even more horrible outcomes for new drugs. But I have serious concerns that we need our political class to focus on creating a stable healthcare payments system that covers as many Americans as we can, instead of focusing on how to pay for innovation. But if we continue to lose the battle, by making spurious arguments about needing high prices to support R&D, when we’re really supporting Sales & Marketing, then we make our industry vulnerable to wholesale changes that threaten patients and investors even more.