Medicare: D Day

Although The Medicare Prescription Drug Benefit will not go into effect until January 1 of next year, pharma companies face pressing deadlines right now that could significantly affect their share of the business from the 40 million Americans currently eligible for Medicare. During the first three months of 2005, companies must decide how they will contract for their products under the new Part D drug benefit of the Medicare Modernization Act (MMA). As this article goes to press, strategic analyses and discussions should be well under way. The decisions companies make over the coming weeks will directly affect their brands' access, reimbursement, utilization, and profitability under the new benefit.

Part D Timeline

This article discusses the key factors pharma marketers must consider when making such critical decisions. It also serves as high-level strategic checklist for strategic planning and will help readers look ahead by providing an overview of some of the sales and marketing changes pharma companies face. For executives who have not yet considered these issues, it is most definitely crunch time.

Tight Timelines

Pharma companies that wish to compete in Medicare Part D must develop contracting strategies for their products during the next month or so. Because the focus has been on January 1, 2006—the benefit's official start—it may come as a surprise to many that the timeline for making these strategic decisions is so tight.

There are several reasons for this time crunch. The Centers for Medicare and Medicaid Services (CMS) requires that managed care organizations (MCOs) and pharmacy benefits managers (PBMs) that wish to become plan sponsors under Part D submit bids to CMS by June 6, 2005. These bids can be developed only with an understanding of the specific contracting terms for the products involved. Therefore, between now and June, MCOs and PBMs must discuss formulary positioning and product-specific contracting terms with pharmaceutical manufacturers. A CMS guidance issued on December 3, 2004 tightened the timeline even further by requiring MCOs and PBMs to submit their proposed formularies and approved drug lists by April 18, 2005. (See "Part D Timeline.")

All of this leaves a very narrow window during which pharma companies must make some crucial decisions. For companies that are prepared, the potentially expanded market created by Part D represents a great opportunity. For others, failing to react quickly enough or making a wrong decision could be very costly mistakes. The challenge for manufacturers is to conduct the requisite research and analysis to support informed decisions—all within the constraints of a very tight timeline set by CMS. For companies that have not yet developed product-specific contracting strategies for Medicare Part D, now is the time to act.

Five Factors

To develop an effective product-specific Medicare strategy, pharmaceutical marketers must gain a solid understanding of how Part D affects their products. This process may require significant primary and secondary research as well as financial modeling and scenario planning. Five key factors must be carefully evaluated:

• age distribution of the patient population receiving the drug

• current management of the indicated disease in the Medicare population and how it could change

• geographic distribution of the patient population

• Medicare formulary management for the therapeutic categories

• effect on products' managed care and Medicaid business

Age Distribution. By looking at the age distribution of a product's patient population, marketers can answer some critical questions: How important is Part D to our overall business? What portion of our business is currently represented in the age 65 and older population? How well are we currently doing in the market segments most likely to be affected by Part D? What is our market share and how does it compare with our competitors in this population?

Part D may have a far greater impact for products taken mostly by younger patients than for a product whose users are mostly over age 65 (and therefore eligible for Medicare). A caveat to this, however, is that age alone can be a misleading indicator of Part D's overall effect on a product; roughly one-third of all dual-eligibles—those enrolled in both Medicaid and Medicare—are under 65.

Take anti-psychotic drugs for example. If the brand team for this type of medication looked simply at age distribution, it would notice that most patients are much younger than 65. Based on that finding alone, the team might conclude that Part D would not significantly affect the product's market performance. But they would likely be wrong. Many people taking anti-psychotic drugs are dual-eligible for both Medicare and Medicaid even though they are under 65. Currently, these patients receive drug coverage under state Medicaid programs. However, these dual-eligible patients will begin receiving their drug benefit under Medicare Part D in January 2006. Thus, Part D will be much more important for some categories than first glance would suggest. (See "Medicare Patients at a Glance," )

Medicare patients at a glance

Management of the Disease State. Marketers must determine whether the conditions for which their products are indicated are managed differently in the senior population than in the broader population and, if so, why. Are these differences a result of safety, efficacy, or economic concerns? In addition, they need to understand how the management of those conditions might change under Part D. The availability of the benefit may motivate physicians to alter their prescribing habits in various ways, posing new opportunities (and threats) to Rx products. Different drugs will be affected in different ways, and each brand team must assess its own specific situation.

To illustrate how prescribing habits can change in the pre-Part D environment, a physician may treat older and younger hypertension patients differently:

• The physician may be more likely to prescribe a branded angiotensin receptor blocker (ARB) to younger patients who are covered by their employer's private health insurance and can afford higher co-pays.

• For older patients on multiple medications, who may be on fixed incomes and paying cash, the physician may be more likely to prescribe a cheaper generic angiotensin-converting enzyme (ACE) inhibitor, such as lisinopril.

After Part D goes into effect, the older patient would qualify for drug coverage under Medicare and would be in a better position to purchase the more expensive branded product. Therefore, in some cases, Part D could increase the demand (commonly referred to as "induced demand") for branded products.

On the other hand, Part D contains many incentives to drive generic prescribing. The widespread use of e-prescribing, which the legislation has mandated to begin in 2008, as well as point-of-sale counseling from pharmacists could also play a major role in driving the use of generics. These factors can pose a threat to certain branded products and must also be considered.

The only way to make educated decisions is to assess MMA provisions that promote the use of generics and to conduct research with MCOs, PBMs, and physicians to determine how categories are likely to be managed and how physicians' prescribing behaviors could change. The outcome of this research will differ by product category and brand and will provide useful insights for developing brand-specific Medicare strategies.

Geographic Distribution. On December 7, 2004, CMS announced new geographic regions for Medicare Part D, essentially redrawing the boundaries of competition for pharma companies, MCOs, and PBMs. Assessing the distribution of a product's current access and reimbursement in managed care and Medicaid, as well as current and potential patient populations across these regions, can help brand teams answer another key question: What geographies are most important with respect to Part D?

For each of the 26 regions for Medicare Advantage and 34 regions for prescription drug plans (PDPs), a brand team must consider:

• What is the total number of Medicare beneficiaries in the region? What are their demographics (income, dual-eligible status)?

• What is the current access and reimbursement in the region for managed care and for Medicaid?

• How well is the brand performing in the non-Medicare population in the region?

Formulary Management. Although CMS worked with the United States Pharmacopeia (USP) to develop model formulary guidelines that MCOs and PBMs can use in developing their Part D formularies, the agency has made it clear that the USP guidelines will not be the definitive requirement under Part D. Instead, USP guidelines will provide one benchmark, while MCOs and PBMs serving as sponsors under Part D (with CMS approval) will determine their own formularies and how they manage individual drug categories. Thus, manufacturers not only must consider USP's Medicare formulary guidelines, they must also look to existing practices in managed care and must talk with individual MCOs and PBMs to determine how they manage specific therapeutic categories.

Managed Care and Medicaid. With the new "rules of engagement" laid out under Part D, marketers should analyze the potential effect of this program on other parts of their products' business, such as commercial managed care and state-sponsored Medicaid. Because Medicare Part D is designed to be a privately managed, publicly funded program, the same MCOs and PBMs that manufacturers have been dealing with for managed care will be plan sponsors under Part D. Thus marketers need to consider the potential for spillover from managed care to Part D and vice versa.

For example, conversations with decision makers from leading MCOs and PBMs suggest that plans will certainly look to their existing formularies when developing their Part D formularies. Thus, if a product currently has preferred formulary status with an MCO, the product may have some slight advantage when it comes to the plan's Part D formulary.

Marketers will also need to determine how Medicare Part D will affect their Medicaid business—both at the national and state level. More than 7 million of Medicaid's roughly 50 million beneficiaries are considered dual-eligibles—low-income seniors or disabled persons who are enrolled in both Medicaid and Medicare. In January 2006 under Part D, coverage of prescription drugs for those dual-eligibles who receive the full Medicaid benefits package will shift from Medicaid to Medicare. Meanwhile, states will still be required to finance a large portion of these costs through "clawback" payments to the federal government. Thus, marketers will need to determine how the transition of the pharmacy benefit for dual-eligibles from Medicaid to Medicare Part D will affect their products. A few key questions for brand teams include:

• How much of the product's business is left in Medicaid (at national and state levels) after the dual-eligibles transition to Part D in 2006?

• How will states change their approach to managing the therapeutic class in which the product competes?

• How (if at all) should marketers adjust their approach to competing in Medicaid?

Select a Strategy

Once a brand team has gained an understanding of how Part D is likely to affect its product, marketers can begin to develop an overall Medicare strategy and contracting approach. But first the team must establish its overall objectives and answer a series of key questions:

• How do we want to compete in Part D? Aggressively, moderately, selectively participate or not at all?

• How will we balance access and reimbursement with market share and profitability?

• What are the clinical and economic components of the product's value proposition and position?

• How should we approach contracting? Should it vary by type of customer and formulary position being offered?

Brand teams should establish a range of strategies, then evaluate their options using both quantitative and qualitative criteria to select the most appropriate one. They must define tactical initiatives and develop an implementation plan based on the critical Part D milestones that have been determined.

Broader Benefits

While pharma companies are focused on initial planning for Part D, they should not lose sight of the broader ramifications of the benefit. As companies implement their strategies, the selling environment may change significantly, and as a result, some sales and marketing tactics may need to be adjusted. It is difficult to predict exactly what those changes will look like, but it is possible to identify where they are likely to take place: direct-to-consumer (DTC) marketing, managed care sales and account management, and field sales.

Marketing Mix. Under Part D, marketers will also need to reassess their overall approach to marketing to key customer groups—MCOs, PBMs, providers, and seniors. Thus, for each customer group, companies will need to consider: What is the right value proposition and positioning? What messages are appropriate? What is the right promotional mix and how should we allocate resources?

Seniors, who will become a more important patient segment for many prescription brands, are likely to receive a barrage of DTC marketing through various media, including television, newspapers, and direct mail, as well as through their respective Part D plan sponsors. Pharmaceutical marketers will need to determine the optimum approach for reaching this new patient segment.

Managed Care Sales and Account Management. The relationships between MCOs, PBMs and pharma companies are likely to change as the same parties begin to interact on two different books of business—commercial managed care and Medicare. To illustrate: If a pharma company is dealing with the same pharmacy director on both Medicare and commercial contracts, the director may be motivated to drive parity between the two books of business. Because Medicare rebates will likely be significant, the pharmacy director may try to pressure the manufacturer to offer increased rebates on the commercial side as well. Under this scenario, the pharma company's overall profit margins could be squeezed. To prevent such an outcome, manufacturers will need to be strategic about how they approach account management for MCOs and PBMs involved in both commercial managed care and Medicare Part D.

Field Sales. Given the new regions defined for Medicare Part D, companies will need to re-evaluate certain geographic areas, because their importance could change significantly. Companies will need to consider making appropriate adjustments to their sales force size, structure, and alignment, as well as to how resources (for example, sampling and promotional dollars) should be allocated across the sales force.

Also, as things shift under Part D, sales force incentive compensation plans are likely to become outdated and will need to be realigned. Consider the following hypothetical situations: In a territory with a large number of Medicare beneficiaries and favorable Part D formulary positioning for key products, a rep may have to do very little work to meet his goals and achieve a maximum bonus. In a territory with fewer beneficiaries and/or mixed coverage for key products, a rep may expend Herculean efforts but barely "move the needle" and fail to receive an appropriate bonus.

A product's formulary position under Part D may also have a significant effect on the product's overall sales performance because of increased or decreased physician prescribing. If a physician who has been a historically strong prescriber learns that the product does not have adequate formulary coverage under Part D, she may be less likely to continue prescribing that medication, and her new mindset could spill over to non-Medicare patients. Such changes can ultimately affect product sales and necessitate adjustments to pull-through approaches.

Although pharmaceutical marketers have much to consider before developing product-specific strategies, there is still a window of opportunity to act now—a window that is rapidly closing as the timeline shortens. In addition, pharmaceutical companies must look down the road and anticipate what the long-term ramifications of the Medicare benefit are likely to be. A watch-and-wait approach at this critical juncture would be very short-sighted indeed.

Kevin Barnett is senior vice-president, Managed Markets Practice, Campbell Alliance. He can be reached at kbarnett@campbellalliance.com