Pharmaceutical Pricing Practices Must Change to Reestablish Market Trust

Prescription drug prices are a major source of distrust, frustration, and irritation for everybody in the healthcare market except pharmaceutical industry executives.  Payers and insurers find it difficult to justify paying for expensive branded products when they know less expensive generic drugs would probably work just fine for many patients.  Physicians struggle to explain to their patients that despite the high price, the brand they have selected is the best product for their particular situation.  Patients struggle to pay for the biggest out-of-pocket healthcare expense they have, often deciding whether to buy food, split their pills, or go without their medication to make it through the month.  With unemployment hovering around 10%,  more people are without insurance, making prescription drugs even more unaffordable for many.

The pharmaceutical industry has been totally insensitive to these market /patient issues as they continue to raise prices on many of their most popular, highest volume drugs.  The Congress’ Government Accountability Office calling the increases “extraordinary” with prices for many brands doubling from 2000-2008 while some increased substantially higher yet.  A recent study also revealed that branded prescription drugs increased 9.3% when the CPI was running -0.3% during the same period (2008-2009).

The industry response to the market concerns about high drug prices hasn’t changed for as long as I can remember (at least 30 years I’ve been in the industry).  They continue to highlight the dismal research success rate (1 in 10,000 discovery compounds makes it to the market), blame the high cost of R & D, and the need to recover their high costs in a short period of time as the reasons for their high prices.  Nobody in the healthcare market has ever bought that rationale for high prices and I don’t think that is going to change.  More recently the the industry has tried to also deflect high price accusations with stories about lower overall drug prices (which includes over 70% of prescriptions being filled with less expensive generics), drug costs as a diminishing share of healthcare cost (also because of generic drugs use and the out of control other healthcare costs), and claiming their free samples and the industry’s token prescription assistance programs make the high prices more affordable for everybody.

“What the market will bear” pricing strategies have led to unsubstantiated initial high product launch prices (relative to other therapeutic options, adding little or no real clinical benefits) and subsequent price increases which often outpace inflation.

Pricing is a marketing responsibility with huge corporate financial implications.  The internal pressures to set the absolute highest possible price to achieve revenue and profit targets can be intense.  In many cases it becomes a very impersonal, quantitative spreadsheet modeling exercise providing executives with the comfort that forecast numbers (think quarterly revenues and profits) will be delivered.  More often than not, the price leader is the baseline metric against which new product pricing is evaluated, whether or not the new product has real clinical benefits over the price leader.

Price increases are taken as needed to make the financial numbers or to make the numbers look better?  You may even be able to do two small increases in the same year to get a bigger annual increase rather than taking it all at once.  With all the patients currently on a chronic product it is unlikely they will switch just because of the price increase and formularies are not likely to throw the product off just because of an increase,  so the thinking is ….go for it.

So what to do as a marketer?

The industry must start being more market sensitive and value based in its pricing practices.  Eventually, the market will force this issue as cost management becomes an increasing priority for the evolving new healthcare market.  But it shouldn’t take the market imposed price intoilerance to make this change.  Remember the idea is to reestablish market trust.

So, what is the real value and can you substantiate the value of your product against other therapeutic options?  This is not rationalizing small clinically meaningless differences.  It is time to “show me the data” and be more realistic about the value of your products relative to other therapeutic options.  If a generic drug can do the same as your product for most patients, how is it that you can charge 5 or 10 times the generic drug price and say you have “fairly priced” your product?  Can you really expect insurers or patients to pay the equivalent of the price of a new home in exchange for a drug that gives them merely a chance (not a guarantee) of maybe living a few more weeks or months?  Have you really priced your product “fairly” and consistent with its value…as perceived by the market?

For marketers with products that have clinically meaningful benefits that clearly exceed those of other therapeutic options, reestablishing trust comes by setting prices that are considered by the market to be consistent with the product value.  Product value should be proven if the benefits are real and meaningful.  So again, “show me the data” that patients will be able to relate to and appreciate.  Patients and insurers do not mind paying for what they value.  They mind feeling like they are being ripped off and don’t have a choice.

The biggest challenge marketers will face trying to execute this market sensitive, value based pricing strategy is the organizational pressure from executives and senior managers who have expectations for continuing the financial windfalls of “what the market will bear “ pricing strategies.  Unfortunately, I don’t expect many pharmaceutical industry executives to embrace this concept until the market forces them to consider making the change.  It will take strong marketing managers to help organizations realize how important this painful but simple change can make a huge difference in how companies are perceived.    Regardess of whatever else companies do to improve market trust,  without a change in pricing practices, reestablishing market trust is not possible.

2 thoughts on “Pharmaceutical Pricing Practices Must Change to Reestablish Market Trust”

  1. Hi Mike,

    As usual, you did a great job outlining the current state of affairs, highlighting current problems and offering suggestions for improvement. Although I absolutely agree with your prescription for fixing the problems, you and I both know that so long as execs are simultaneously rewarded and pressured to think quarterly and they have control over a life-or-death resource with elastic demand, pricing will continue to be “a very impersonal, quantitative spreadsheet modeling exercise.”

    The best example of the dark-side of this behavior is the way Enron priced energy in CA after their successful bid for deregulation. Besides practicing some creative accounting to hide losses, as one person in the documentary Enron: The Smartest Guys in the Room stated, Enron basically used California as their own personal cash machine.

    By adjusting the price of energy to arbitrarily high rates (e.g. what the market would bear), Enron was able to plug revenue holes quarterly. We all know how that story turned out though.

  2. Thank you. You are correct. Big Pharma suffers from many of the same executive integrity and accountability issues found in other large corporations. Mike

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