Price Elasticity and Inelasticity of Restriction

Ira Studin, PhD, President, Stellar Managed Care Consulting

Price elasticity plays an important role in business. If a product price is raised or lowered and demand changes little, it is price inelastic. If demand changes considerably, it is price elastic.

This same logic applies to pharmaceutical products. Assuming clinically comparable, preferred tier drugs can anticipate greater demand than non-preferred. For that reason, manufacturers turn to coupon strategies to lower non-preferred out of pocket costs.

For consumers, “demand” is the predicate of price. For payers, “restriction” is the predicate of price. (Price for payers refers to net cost.) Given the attention to this issue in the broad business landscape, there is ample basis for generalizing on price and elasticity or inelasticity of demand.

The question here is, are there generalizable rules regarding price and elasticity or inelasticity of restrictions in the payer market?

The short answer is yes. The payer market has ample experience with pharma pricing and restrictions. This discussion will draw a distinction between products for large and small patient populations.

LARGE POPULATIONS: RULES ON PRICE ELASTICITY AND INELASTICITY OF RESTRICTION

For a price. Payers will contract away a step requirement or prior authorization (PA) for sufficient rebate. Rule: if payers are not worried about demand, restrictions are price elastic. 

Genie in the bottle. Payers will not contract away a step or PA if they worry the patient population will be so extremely large it changes the financials of the organization. They may contract for formulary tier, but not restrictions. A current example would be GLP-1s for type 2 diabetes and weight loss. Rule: if limiting demand is a top priority, restrictions are price inelastic. 

Rebate impact. Payers are less likely to contract away a step or PA if an incumbent with a contract and significant market share can reduce or drop its rebate and a clinically comparable lower-priced competitor does not neutralize the loss. Rule: if adding a product to preferred tier from the same class as the incumbent does not make up for lost incumbent rebate, payer restrictions are likely to be price inelastic.

Cost-driven value prop. Where there is unmet need, when new product prices create an extreme budget impact prompting onerous restrictions, if price is significantly lowered (i.e., CGRPs/migraine; PCSK9s/high cholesterol), payers will scale back their restrictions. Rule: new, cost-driven value propositions can make restrictions go from price inelastic to price elastic.

SMALL POPULATION: PRICE INELASTICITY OF RESTRICTION

Arguably, the most significant facet of product mix in the payer market is the disproportion between specialty spend and total prescription volume. Current data shows about 51% of spend for less than 2% of the population—a trend that will only continue. Rule: for products treating small, orphan, and rare disease populations, restrictions are price inelastic.

Three reasons stand out: 1) extreme cost of treatment; 2) restrictions are cost-effective; and 3) value is best delivered through restrictions. The obvious implication is that PA will always be the vehicle for implementing restrictions. More pertinent is that inelasticity can cover a range of restrictions. Experience points to this range being impacted by clinical data—call it, “data elasticity of restriction.”

SMALL POPULATION: DATA ELASTICITY OF RESTRICTION

The suggestion here is that there are two broad paths likely to shape how PA restricts high cost treatments for small populations.

Data inelastic PA path. Less deference to prescriber judgement; fixed data and documentation requirements behind PA. Potential drivers:

• Indication too broad for the trial population.
• Clear that only specific subgroup(s) realize a benefit.
• Trial inclusion/exclusion criteria justify limiting coverage.

Data elastic PA path. More deference to prescriber judgement; medical policy allows PA to accommodate a range of data and documentation to justify coverage. Potential drivers:

• Clinically meaningful benefit shapes value proposition.
• Demonstrated durability of benefit.
• Science and experience stretch what was narrowly designed in pivotal trial.

Suffice it to say, brand teams will be well-served with strategy that can shift products from the data inelastic to the data elastic PA path.

Ira Studin, PhD, is President, Stellar Managed Care Consulting. He can be reached at istudin@stellarmc.com.