Dynamic Pricing: What Pharma Needs?

Blake Powers

We’ve all witnessed the retail, transportation, and travel industries undergo a transformation based on new digital models. Outcomes include lower cost, improved safety, more consumer choice, and ecosystems that serve as a haven for a variety of market players to coexist and compete on price, quality, demand, and reputation. These dynamic pricing models leverage data analytics to make pricing decisions that benefit both businesses and customers through timely, market-aligned adjustments. Yet, with all the innovation applied to pharmaceuticals, e-commerce has yet to gain traction in the space. Pharmaceuticals stand to benefit with the same outcomes as other industries embracing digital approaches to their pricing models.

The recent US Department of Health and Human Services (HHS) white paper, “Policy Considerations to Prevent Drug Shortages and Mitigate Supply Chain Vulnerabilities in the United States,” published in April, suggests it’s time to reevaluate, noting that “Incentives throughout the supply chain must be reimagined to ensure the resilience and supplier redundancy required to prevent drug shortages from occurring.”

We habitually use dynamic pricing models in our daily lives, whether it’s travel reservations, ride hailing apps, or online marketplaces to stock our pantries or to find the perfect gift. Still, the pharmaceutical industry, by and large, has yet to adapt. It still depends on older models that rely on long-term price negotiations that lock in prices.

Online marketplaces and aggregators have a historic track record for debuting new business models, amplifying transparency, fixating on source suppliers’ unmet needs, and obsessing about the perfect user experience for the buyers engaged with their applications. Something that would have required either the services of a travel agent or hours of comparative research now only takes 10 minutes.

Up-and-coming creators and artists don’t need to invest in the overhead of a gallery or peddle their wares on the street anymore; they simply list their pieces online for greater customer reach. So many aspects of our lives have changed in the last 20 years, yet what’s fascinating is how within the ecosystem of healthcare providers (HCPs) sourcing drugs, it hasn’t really changed at all.

Take, for example, the 90% volume that generic drugs represent in the US pharmaceutical market. For HCPs, 80% to 90% of their medication purchases are negotiated on their behalf by their group purchasing organization (GPO) as “contracted products.” The philosophy is that when you combine a GPO membership’s total purchasing power (representing one-third of the hospital beds in the country), each hospital member will have the most competitive price. It’s one less detail for HCPs to worry about, and with multiyear awards from drug manufacturers committing to a price for five to seven years, the argument is that it helps pharmaceutical companies better plan for market demands while ultimately, creating more stable supply.

However, this model has its flaws.

• From the reliability perspective, outcomes of the status quo static-pricing model are concerning, with drug shortages reaching a reported two-decade high.
• It assumes that the sole (or dual) manufacturer(s) awarded will have uninterrupted supply of the product for five to seven years. Are the lowest bidders always the most reliable?
• The model doesn’t encourage other players to be ready to serve the market in situations where a hurricane shuts down the island of Puerto Rico, or FDA suspends the operations of a production plant due to a failed inspection.
• With the trend of M&A, it leaves the number of major national hospital GPOs to three. This means, as a drug company, if you don’t win the award of a particular GPO, you are boxed out of the market until the time rolls around where the other two major GPOs have a bid cycle.
• It discriminates against emerging/midsized pharmaceutical companies because the sheer volume of the bid requires enormous production capacity.
• Long-term prescription demand is tough to forecast and often the expected volume of the awarded product does not match up with the actual pull-through (creating excess supply, risk of waste for manufacturers, or shortages).

Artificially setting fixed price points insulates the pharmaceutical supply chain from the basic economic law of supply and demand. If the price is set too low, only the largest players (or those with the thinnest margin tolerance) can compete with the economies of scale necessary to make the math work, and such concentration only leaves the supply chain more vulnerable to shortages.It doesn’t entice other manufacturers to stay or enter into the space.

If the contracted price is set too high, you’ll have too many manufacturers producing the same product in the market, creating overstocks, and ironically, pharmacy acquisition cost (at a fixed contracted price) would be greater than what it would be in a free-market environment. With static pricing set by long-term GPO bid cycles, it removes the ability for price points to float into its real-time equilibrium price guided by current supply and demand conditions.

How dynamic pricing is starting to unfold for pharma

New digital solutions and dynamic pricing advantages extend beyond the generic drug world. With more branded and specialty-lite products trending direct, drugmakers often offer unique price points to certain sites of care. For instance, pharmacy-specific prices can be adjusted by the supplier based on the pre-committed or historic pull-through volumes of the pharmacy customer.

Modern technology now provides procurement professionals with real-time optics into what’s available at the manufacturer level and allows for more convenient, open trade.

Would a free-market system create price erosion?

By its very nature, dynamic pricing does not discriminate. In moments of abundance, prices tend to decrease, and in situations of scarcity, prices most always bounce up. The price equilibrium in a dynamic pricing model is discovered immediately. With prenegotiated long-term pricing models, it delays where the market price should really be at.

Considering the number of backorders and the influx of volatility in medication supply, drug manufacturers who can deliver reliable supply at fair market prices should be the ones positioned for success. The aforementioned HHS white paper states, “hospitals can spend at least $600 million per year managing shortages and diverting essential personnel who are needed for direct patient care to find alternative treatments for patients.” Contrary to the common assumption that pharmacy buyers always go for the cheapest available product, procurement teams do indeed make restrictions/soft blocks on certain national drug codes/manufacturers because of physician preference; ease of patient administration; reimbursement implications; shipment turnaround; lack of historic reliability; and even the coloring of the label/vial cap. Price is certainly a major dimension of the purchasing decision, but it’s not the only factor. A platform that provides the freedom of direct dynamic pricing offers a new approach to a supply chain that is experiencing no shortages of new challenges.

The gross-to-net economics of what the product sells for versus what is retained by the manufacturer at the end of the day is beginning to have a negative impact. It starts with the drug company trying to sustain a product line where 40% to 65% of gross sales are being consumed by pharmacy benefit manager rebates, higher distribution fees, chargebacks, 340B penny pricing, and GPO administration fees. After all the upfront expense of R&D and manufacturing capabilities, the costs of the active pharmaceutical ingredient and labor, and obtaining FDA approval, it’s becoming a greater challenge to forecast the viability of a product once pharma companies analyze the bottom line of what it takes to also launch and distribute the product.

Arguably, the costs should be lower for manufacturers to digitally price and distribute their drugs to HCPs and their patients. Having the ability to manage price based on real-time market data puts companies in control, preventing unstainable erosion, and allowing for a more rapid response to any unmet needs.

Is it time to contemplate medications as we do other commodities, embrace digital formats, and allow for more dynamic pricing to occur? Perhaps this shift in thinking is just the remedy the drug supply chain needs.

About the Author

Blake Powers is the CEO of Medigi, and a member of Pharmaceutical Commerce’s Editorial Advisory Board.