In the PME article, ‘If the Shoe Fits’, four emerging pharmaceutical market strategies were identified, based on uniqueness of positioning and type of competition (www. pmlive.com/ shoefits). This next article in the series concentrates on the bottom right quadrant of the grid depicted in that opening feature: situations where a product without unique positioning has a competitive advantage on outcomes through value-added services.
New healthcare combination solutions, such as diagnostic-drug, diagnostic-device or novel delivery mechanisms, are at the forefront of a newly emerging pharmaceutical (and medical device) strategy that wraps complementary products and services around drugs (and devices) to deliver superior outcomes. However, both pharmaceutical companies and payers struggle with the key question of who pays for these combinations. In most countries, healthcare budgets are fragmented and reimbursement of products, such as drugs or devices, is separate from healthcare services, such as ambulatory doctor treatment or homecare.
Traditionally, healthcare products and services are disaggregated and evaluated individually: every pill and activity has a price. For each component, the price is agreed with the relevant
(reimbursement) authority and the total for the overall healthcare bundle is just the sum of all individual parts. Unfortunately, the approach has limitations, particularly for chronic diseases evolving over a long period, such as diabetes mellitus type 2. According to the KoDim study based on German payer information, only 10 per cent of the total direct costs from diabetes (both type 1 and 2) are related to treatment with oral anti-diabetics (OAD) and insulin. Over 78 per cent of the total diabetes-induced costs relate to complication costs due to cardiovascular disease, dialysis and others. Hence, the study authors advocate more prevention and earliest identification of high-risk patients so that they can receive intensive care.
The diabetes numbers show the limitations of pricing each healthcare service individually. The optimisation of each component fails to manage the overall picture (across all components and/or time). Hence, in some countries payers have started to accept the pricing for an overall healthcare solution through capitation (fee per patient). Providers typically have to deliver specifically negotiated outcomes with the payers, which are then imposed as a condition for payment. However, payers are resistant to bundled offerings as they are always suspicious of price inflation compared to the individual items, making the overall solution more costly.
In fact, few companies have been able to build successful businesses with healthcare bundles or solutions, particularly in the ambulatory sector. Those that succeed have rarely started from a pharmaceutical product offering. However, product companies can be successful in offering product and service healthcare solutions for fixed fee reimbursement, with the following prerequisites:
• Product companies should only embark on transforming their business model if they truly believe in synergies with the existing business. They must create more value from the integration of products and services into a healthcare solution than from the components alone.
• Product companies need to develop superior treatment/ management standards and demonstrate improved outcomes. Their deep disease understanding, strong access to (medical) opinion leaders and ability to develop standards/protocols for continuous outcome measurement are powerful assets that must be mobilised here.
Since healthcare systems are different in each country, companies need to experiment with and pilot their business models locally. This requires a strong entrepreneurial culture in the company. Conversely, despite having a proven and established business model in other countries, entering a new country poses a significant challenge in adapting to the local environment. The examples and future trends suggest that combined healthcare solutions will come to dominate treatment within certain diseases. Countries open to the new reimbursement approach will be fertile ground for entrepreneurial pilots, leading to radical transformations.
Historically, pharmaceutical companies have not involved themselves with services/solutions because the margins are lower than those for drugs. When drug margins were high, they could offer services for free to drive market share and still make money. As a consequence, payers, providers and practitioners now expect such services to be free. Pharmaceutical companies that want to be successful in these emerging markets need to transform their operations from drugs to solutions.
In conclusion, laggards without a strategic response to the fundamental market changes driven by the demand for outcomes will see their revenues and profits evaporate. Increasing price pressure and patent expirations will rapidly commoditise many disease areas, unless companies can extract a premium from loyal customers. However, combined solution providers will be able to protect and even grow their revenues and profits using a robust business model that is separate from the fate of individual drugs.
