Even the most ardent advocate for a single-payer system in the US would not have seen this convoluted path to get there: the rapid consolidation of the health insurance industry. Just in the last few weeks, there has been news about three major potential acquisitions: Aetna-Humana, Wellpoint-Cigna, and Centene-HealthNet. Of course, the FTC will have to approve these acquisitions and that is no guarantee. And consumer advocates will no doubt point out the irony of potentially approving these mega-acquisitions and essentially undercutting the increased consumer choice fostered through the affordable care act.

With the pending OptumRx acquisition of Catamaran, this ongoing consolidation portends an increasingly difficult payer landscape for the pharma industry. Assuming that these deals withstand the scrutiny of the FTC, here are 4 things pharma should worry about:

1. Increased Pricing Pressure

This one is obvious. With payers becoming larger, it will become difficult for pharma to maintain their net revenue margins because:

  • Losing a contract will mean walking away from a much larger piece of the business than ever before
  • Payers will negotiate harder and posture with greater confidence

2. Net Price Spillover to Government Segments

As commercial payers push for larger rebates, companies will increasingly be looking at rebates in excess of the 23.1% best price threshold. Depending upon a drug’s payer mix, any rebate in excess of the best price will lead to increased Medicaid base rebates, reduced FSS pricing, and a lower 340B price. Cumulatively, net prices will drop across the board and lead to lower Gross-To-Net margins

3. Reduced Pricing Flexibility

In the past, teams could pick and choose which payer to negotiate with, and which ones to de-prioritize. Account managers used to decipher the “Level of Control” associated with their customers, and P&L owners determined the level of rebates commensurate with the potential for utilization management. In the future, this ability to discriminate between accounts will be reduced dramatically because:

  • An average contract will span over a larger population of Rx lives thereby reducing the total number of distinct possible contracts. Smaller number of contracts will translate into an equally smaller number of potential price points limiting the ability to vary prices strategically in a fine-grained fashion
  • Selectively offering high rebates to plans increase the risk of the contract exposure given the continuing pace of acquisitions. A high rebate offered to a small strategic plan could become available to a larger acquirer in the future thereby increasing the risk of price exposure

4. Tougher Prior Authorization Management Process

At the physician level, the commercial payer segment will consolidate and physicians will have to negotiate agreements with payers who may have a dominant share of their local market.

More germane to pharma:

  • Payers will likely become more aggressive in enforcing prior authorization and step-edit guidelines in order to steer physicians towards specific drugs.
  • Sales representatives may need to spend additional time helping physicians, nurse, and office managers to navigate the PA environment
  • Rejection rates could potentially increase leading to demand erosion to compound the impact of the reduced net margins

Single payer or not, pharma clearly has its work cut out. Here are 3 things payer teams should be looking to have in place to best prepare for the potential challenges ahead:

  • A strong contracting analytics infrastructure to monitor cross-segment pricing impacts
  • A rigorous data-centric RFP review process to minimize revenue leakage
  • Finally, a centralized account management process which involves cross-functional input from sales, patient support, brand management, national accounts, contract operations, and commercial analytics

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