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Payer environment

Europeans should understand the difference between fact and fiction before entering the US marketplace

From the outside looking in, the complexities of the US payer environment can appear daunting. Used to operating in a different market environment, European pharmaceutical brand teams preparing to launch their first product in the US have probably formed their own preconceptions about what to expect once they enter it. However, there are several common fallacies related to the managed markets environment that should be exposed.

Myth 1: The US is a private-payer market
The US payer environment is commonly perceived as a private-payer market. In fact, the truth is far more complicated. The US reimbursement arena is fragmented, with decisions made by a range of payers, including managed care organisations, pharmacy benefit managers, employers and various government programmes such as Medicare, the federally-funded healthcare programme for the elderly, Medicaid, the federally and state-funded healthcare programme for low-income citizens, the Department of Veterans Affairs (VA), and the Department of Defense (DOD). Reimbursement decisions can vary widely depending on therapeutic categories and across national and local jurisdictions.

Understand the payer mix
The payer situation is not homogeneous. A product faces a specific payer mix depending on the dosage form and the patient demographics tied into the particular disease state. For example, drugs approved for specific oncology indications, such as prostate cancer, are largely paid for by Medicare. Drugs for multiple sclerosis, on the other hand, are paid for by commercial payers, typically. An antipsychotic product, meanwhile, usually takes a large portion of its business from Medicaid, based solely on the patient demographics distinctive to that condition.

Product managers must understand which types of payers are most likely to be reimbursing their products and then use that knowledge to guide their development of payer value propositions and pricing and contracting strategies.

Even in the commercial managed care market, the environment is not homogeneous. The various insurance companies and pharmacy benefit managers all possess their own usage control infrastructures, management philosophies and membership characteristics. Their behaviour can vary significantly as a result, so it is wise to follow a structured approach, segmenting the managed care customers and prioritising them based on the level of market opportunity they represent, their control level, their influence and their potential access risk. Account managers can then put the various players into meaningfully differentiated categories and develop tailored objectives and strategies for each.

Myth 2: The US is a free price market
While it is generally true that the US is a free price market, private and public payers also have the liberty to respond to price with various management techniques. In addition, public payers, such as Medicaid, the VA and the DOD, place mandatory price reductions on products.

Medicaid sets a 23.1 per cent mandatory rebate of the wholesale acquisition cost (WAC) as the statutory rebate. The VA and DOD, meanwhile, place a minimum 24 per cent reduction from the WAC for products on the federal supply schedule. Those are merely the ceiling prices, however, and many pharmaceutical marketers will go lower to be competitive.

It is important to map out the patient demographics and understand who is paying for the drug. It should be taken into consideration that, when launching at a particular price, the true gross and net revenue may not be as predicted.

Myth 3: The US is an isolated market
The concept of external reference pricing, in which markets link the prices of certain products to other markets, has become the norm in Europe. The perception is that reference pricing is less common in the US, but this is not necessarily the case: prices are referenced within therapeutic classes, US payers are increasingly interested in their EU counterparts' decisions and specific US prices are referenced by other markets. Brazil, for example, uses the 24 per cent discount off the WAC mandated by the VA and DOD in the US as its reference price.

Certain strategies employed in Europe's highly referenced environment do not work stateside either. In Europe, manufacturers use sophisticated risk-sharing schemes designed to maintain artificially inflated list prices. Manufacturers offer free drugs and performance-based rebates to drive down the effective costs while the reference price is based on the relatively high benchmark. In the US, creative techniques to lower effective costs in the commercial market have an immediate impact on government pricing due to the transparency of the system. This is because the public payers do not look at the list price. Rather, they factor their discounts into the equation only after all the incentives have reduced the price.

Myth 4: Product price can be based on product value
In the US, the reality is that very few classes exist in which marketers can tell an attractive story to link the cost of the product directly to its clinical value. The European definition of cost-effectiveness rarely applies in the US market in its entirety.

European companies are eager to show improved outcomes and hopefully medical cost offset. The truth is that the vast majority of the drugs launched today are not going to save payers money; they will cost them more. One realistic approach is to focus on how the product can provide therapeutic improvement or therapeutic innovation at a reasonable and predictable cost. For most drug classes in the US, the price is not directly linked to the value of the product. Manufacturers look at comparable situations and established references within a therapeutic category.

Myth 5: Market access is the most important goal of a US launch
The goal of any product launch is uptake and revenue. Market access is an important means to those ends and, by bringing the product price down far enough, market access is a commodity that can be bought. The questions are, though, how much does market access cost and how much will be given in return?

Manufacturers need to define access goals at the time of launch clearly. For example, is chasing tier 2 formulary access the right choice? This can be a very expensive proposition for a launch product. When pricing is set to please the payer customer, the manufacturer is probably leaving money on the table. Pricing should be set based on revenue and gaining maximum margin. The consequences of any access restrictions should vary greatly depending on the drug class, prescriber specialty, and the patient population.

The temptation is to develop strategies designed purely to gain market share or increase the gross revenue at whatever cost. That tendency may hurt the long-term margin potential for the compound for the rest of the life cycle. Marketers must constantly debate how much they pay for access compared with how much they get in return.

As product managers look to tackle the US payer environment for the first time, they must be mindful of how patient demographics can affect which payers and payer types typically reimburse which drug types. They also need to understand the key payer segments and how their motivations and objectives differ from one to the next. This will help them determine the unique payer mix for their individual products and develop appropriate payer segmentation and prioritisation strategies. Finally, the importance of clearly defining access goals at the time of launch cannot be underestimated.

By keeping these thoughts in mind, product managers and payer account managers will stand a better chance of developing pricing and reimbursement strategies that strike the optimum balance between access and profitability, thereby maximising the value of their brands.

Lujing WangThe Author
Lujing Wang is a physician and health economist and leads Campbell Alliance's pricing and market access practice.

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16th August 2011


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