Value-Based Pricing of Pharmaceuticals in Canada: Opportunities to Expand the Role of Health Technology Asessment?

Husereau, Don; Cameron, Chris G. 16/12/2011 (CHSRF Series of Reports on Cost Drivers and Health System Eficiency: Paper 5)

KEY MESSAGES

• The rate of spending on health in Canada is rising faster than the rate of economic growth, creating concerns about the sustainability of Canada’s publicly funded healthcare systems. Expenditures on drugs is one of the fastest-growing areas.
• Canada’s public drug plans currently use a formulary system informed by health technology assessment (HTA) to manage drug expenditures. There are concerns that the current formulary system limits consumer choice, provider autonomy, producer innovation and patient access. For example, if a drug is perceived as having low or uncertain value for money by a payer, it might not be listed on a public plan formulary, challenging prescriber autonomy and leading to out-of-pocket expenses for patients.
• In addition, current pricing and reimbursement policies and practices in some provinces undermine the efforts of others to negotiate lower prices, resulting in higher prices for everyone (e.g. best price policies and confidential rebates). Further, this type of price discrimination based on provinces’ buyer market power is inequitable and can reduce access to drugs for certain individuals.
• To maintain private sector innovation, patient access, health system fiscal responsibility and sustainability, some jurisdictions internationally have turned to value-based price negotiation mechanisms. Value-based pricing consists of negotiating prices for new pharmaceuticals based on the value the new drug offers society, as assessed through HTA.
• Domestic and International evidence suggest that an effective and accepted mechanism of determining reimbursement price can result in reductions in net pharmaceutical expenditures.
• Canadians would benefit from a pricing system with two distinct features: 1) pan-Canadian coordination, to reduce the potential for whipsawing; and 2) real-time evaluation of the drug value and feedback, to create more opportunities for negotiation. The single price negotiation would (i) determine which drugs would require price negotiation, (ii) clearly communicate to stakeholders what constitutes good “value” and how this will be translated into a price, and (iii) have the legislative authority to negotiate price on behalf of other provincial (and federal) jurisdictions and to keep negotiated prices confidential.
• A single, coordinated price negotiation body would help reduce inequity across jurisdictions by leveraging the buying power and macroeconomic factors of provinces with larger drug budgets to those provinces with much smaller budgets and smaller industrial incentives. It would promote a standard regarding which interventions are legitimately valuable to society and which are not.
• A price negotiation mechanism tied to real-world assessment would allow for even more options for price negotiation. Real-world assessment of drugs would increase the capacity to conduct disciplinespecific research, monitor health products throughout their lifecycle and strengthen Canada’s knowledge economy.

How mature is your company in (Pricing)? Take the Pricing IQ Quiz and find out!

Pricing IQ Quiz - SPMG Pricing Hierarchy of Needs.

INTERPRETING YOUR SCORECARD

Click here to begin your Pricing Quiz

This pricing IQ Test is designed to evaluate and quantify your companies perceived performance across a wide set of organizational pricing "Best-Practices" in an effort to achieve pricing process excellence.Your scorecard provides you with both a TOTAL PERFORMANCE SCORE and an INDIVIDUAL SCORE across each of the Pricing Performance Stages.  It's important to view all scores across each of the stages as they contribute in aggregate to your overall score.  We've taken the liberty to access each of the five stages respectively, to provide you with insight around possible areas of deficiencies. 

            If you score less than 75% in any of the five stages, we can provide further insight or one-on-one professional advice. 

      Over 95% = Outstanding

      95%-86% = Excellent  
      85% – 76% = Good        
      75% - 65% = Inadequate  
      Under 65% =  Failure to meet Minimum Standards

STAGE 5 - Strategic Process Alignment 

*less than 80% suggests a shortcoming in meeting pricing process maturity and excellence through seamless and consistent execution across all business units. Moreover, it is impossible to make the transition without linking the changes to processes, tools, technology, and company culture. 

            In order to obtain a score above 80%, the following areas of efficiency must be analysed and, where necessary, changes implemented: 

1.   Value-Based Pricing & Training

2.   Cost differentiation of Products & Customers

3.   Cost benefit analysis of potential outcomes and likely competitor responses

4.   Alignment of corporate goals and objectives with pricing strategy

5.   Data mining and harvesting of Internal and external data to measure and optimize revenue

6.   Efficient Communication and dissemination of information to the tactical team who supports the company goals and objectives.

STAGE 4 - Analytical Tools/Revenue Optimization 

* less than 80% suggests that your organization has fallen short integrating data-driven software tools that provides relevant, dynamic information to facilitate both pricing tactics and strategies in real-time.   A comprehensive pricing strategy requires both the alignment of organizations goals and objectives, as well as the tools to help facilitate the pricing process.

      To score above 80% your company must address the following pricing process options. 

1.     Developing capabilities in Customer Relationship Management

2.     Developing capabilities in Price & Revenue Management

3.     Utilizing forecasting algorithm models

4.     Quantifying value of product advantages using internal and external tools

5.     Clarifying who’s buying what and obtaining ‘Buy-in’ from various functions whether       ‘we’ really need this customer.

 

STAGE 3 - Primary Research/Competitive Intelligence 

*less than 80% suggests your company has failed to utilize or adequately determine the role of pricing in your product positioning. External research is critical in helping to expose a customer's current and/or future willingness to trade price for value. Furthermore, the importance of conducting Stage 2 research cannot be overstated, as this is the only representative stage of value-based pricing that quantifies an 'outside-in' rather than an 'inside-out' approach towards obtaining information about market share, price-elasticity of demand, revenue and profitability expectations.

 A score of less than 80% requires that the following options be improved upon: 

1.     Identifying relationships between price, discounting and any number of dimensions

2.     Price and discount trends by customer characteristics

3.     Impacts of discounts and allowances

4.     Identifying and defining Best & Worst Customers

5.     Impact of price on growth, volume, market share, margins and revenue

 

STAGE 2 – Historical Product & Customer Analysis

*less than 80% is an indication that your organization is not ‘digging deep enough' to use internal and available data to institute tighter control of the pricing process. Though the past is not a predictor of the future, it does help an organization to understand and quantify the value proposition of its offerings. It is also necessary to develop a process that helps to segment the market, understand the value delivered to those segments and to use the information in its upward climb toward the next stage of pricing excellence.

 A score of less than 80% requires that the following options be improved upon:

1.     Clarify who’s buying what and do we really need this customer

2.     Determine emerging trends

3.     Determine how price and other factors can be used to manage competitors

4.     Identify how customers respond to price changes and structures

5.     Managing conflicting objectives like profit and volume when making pricing decisions

STAGE 1 - Tactical Process Alignment

*less than 80% highlights a weakness across your pricing process.  Typically companies with a weak score in Stage 1 are relying on individuals that have been around for many years and are referred to as ‘Price Czars’ to develop prices using ‘gut’ intuition.  Often organizations react to market forces making pricing decisions under a high-level of stress and departmental gaming rather than sound, researched decision making.

      To score above 80% your company must address the following pricing process alignment options. 

1.     Prioritize the significant attributes towards achieving your organizations goals e.g. profitability, growth, market share, market leader, retention of customers, maximized plant capacity, etc

2.     Implementing tools and processes to gain control of pricing

3.     Removing inconsistencies of price across products, customers and markets

4.     Providing facts and analysis into the pricing process

5.     Clarifying roles, responsibilities and expectations around administering and developing prices

Why Mid-Market Companies can reap even greater returns by investing in pricing solutions?

“Mid-Market” Blog

By: Vernon E. Lennon, III

In today’s conversation we look at why Mid-Market companies can benefit even more greatly from investments in pricing solutions / services / software.

For over 20 years now the Pricing industry has primarily focused their efforts on the “Billion plus” target customer while offering little attention to the larger group of smaller cousins.  While the industry has been in growth mode during this time frame due to some customer internal knowledge of the pricing lever, this doesn’t equate to Mid-Market customers not needing the attention.  Rather I contend due to the demand and the ROI considerations; the pricing industry has primarily focused their marketing campaigns on the “big boys”.  I further suggest that a two pronged approach in the future can not only help the Pricing Industry grow, but can also educate and assist a largely untapped segment.

After all in the U.S. alone there are thousands more of the “sub 1 Billion” customers all looking for enhanced valuations (more fodder here in a future post) and yearning for learning on how to do so.  Couple this with the greater potential for “quick win” returns leading the charge on change management and cemented executive commitment and this pool of companies appears to be ripe for collaborative improvement. 

So let’s take a look at my top ten reasons why this segment is poised to benefit more from pricing assistance.

Mid-Market Companies:

1. Typically don’t have dedicated pricing departments.  In fact many of these companies’ functional departments are responsible for multiple areas and thus only focus a small portion of their time dedicate to price management.
2. Historically have grown out of an idea / innovation, not through business efficiencies.  Ideas and innovation have led them to a great position in the marketplace, but as the maturation cycle has evolved this competitive position is eroding.
3. Tend to be Sales Led vs. Sales Centric.  Historical desires for growth have given the sales organization too much leeway on order taking.  Rather than providing them with central led enhanced information, central offices often relinquish majority control on ultimate pricing decisions.
4. Volume oriented.  Strategies for growth and overall compensation metrics (Sales and Executive) often are too heavily weighted on top line growth, hence there is no impetus to “walk away from bad business” and focus majority efforts on profitable customers only.
5. Believe the forward supply chain typically has greater leverage.  In many cases, Mid-Market companies are selling into customers and channels that are much larger than they are, like the “big box” stores.  This offers the appearance of limited leverage, and without proper controls in place margin leakage here can be great.
6. Assume they need large capital budgets for software solutions.  Due to a lack of clear education and communication, many companies in the segment don’t realize there are some “value” priced SaaS Software packages and Solutions that can firmly meet and beat their pricing needs.
7. Deal with data inefficiencies and information inconsistencies.  Much like their larger cousins lack of data control is perceived to be a road block, but this isn’t necessarily the case (see October 2011 PPS Presentation on Virtual Markets).  In fact there are many existing techniques that can assist companies with taxonomy and hierarchy improvements along with firm graphics enhancements.
8. Often fail to project a true image of value to the marketplace.  Lack of investment in clear “voice of the customer” initiatives or value mapping / attribute selection analysis leaves companies not enabling a powerful market based message.
9. Lack of clear executive commitment to price.  Too many short term initiatives and too few resources often lead to operational paralysis and no clear leadership on how to capture value through the price lever.
10. Lack of Pricing Strategies, Policies & Processes to support organizational behavior.  Limited clear concrete messaging often leaves loopholes of operation and limits the rigor in price deployment.

In conclusion, a large number of Mid-Market customers continue to go un-served by the Pricing Industry as training, education and marketing are too often oriented toward larger customers.  That said, given the points made above, the “need” appears to be greater for the Mid-Market segment and the potential returns that much higher.  With the proper focus on information dissemination by the Pricing Industry, the right tools, solutions and services provided for quick wins with commensurate plans for long term change, the future can be bright for all Mid-Market customers wanting to find greater price competency.