Price Sensitivity in Federal Markets

Drugs launching into crowded market baskets require pricing strategies that are customized for premium tolerability within a certain therapeutic area. Hospital-based products, in particular, bring an additional layer of nuanced price sensitivity and manufacturers often elect to conduct segment-specific "price sensitivity analysis." However, the Federal segment is often not represented in this process for a variety of reasons, including access to stakeholders, misconceptions about the true business opportunity and spillover, and especially confusion around the interplay of statutory pricing.

It is overly simplistic to assume that matching most favored nations or most favored customer pricing for a pharmaceutical drug is the only way to achieve favorable formulary status or product utilization in the Federal market. While these agencies will happily accept this lowest possible price status and a manufacturer could benefit in other ways from an exceptionally positive relationship with one or more of the BIG 4 agencies, it is actually a thorough understanding of the nuances around price sensitivities in this market that make (or break) product utilization. The reality is that this market focuses on value differently than the commercial market and a manufacturer’s ability to communicate product value specific to Federal market populations served is the best method to test price sensitivity in the Federal market.

BIG4 agencies, specifically the Veterans Health Administration (VHA) within the Department of Veterans Affairs (VA) and the Defense Health Administration (DHA) within the Department of Defense (DOD), must make conscious cost considerations with each purchasing decision. Not only are budget limits imposed by a third party (specifically, Congress), but the operationally-focused civil servants and military service members are stewards of the taxpayers’ dollars and, as such, strive to maximize the value derived from every dollar spent. Selecting the most cost-effective pharmaceutical product by ensuring all treatment options that offer comparable outcomes at lower costs are explored is a very visible way of achieving that goal. Pharmaceutical manufacturers, however, should avoid complex methods of calculating cost savings or present assumed savings that are not directly supported by data as these approaches are frequently found to be unpersuasive.

Demonstrating cost-effectiveness begins with a pharmaceutical manufacturer properly defining a discrete market basket, particularly for those disease states that are pervasive throughout the population and have wide-ranging treatment options. Without a specific, manageable market basket based on objective criteria indications (i.e., similar mechanisms of action, therapeutic effects, etc.), it is difficult to define how a product could (or should) fit within the pre-existing treatment protocols. While these health systems will always perform their own clinical review and make their decisions based on their independent analysis of product data, each are open to conversations with industry and it is within those interactions that pharmaceutical manufactures can ask the right questions that better determine how elastic (or inelastic) the demand curve based on price may be for that specific product in this market.

These health systems value real world evidence and data specific to their patient populations, particularly the VHA. Pharmaceutical manufacturers that can provide clinical data specific to the population served by these health systems are generally able to better pressure test product price in both pre- and post-launch scenarios. Both independent and collaborative research opportunities are available through the Federal government grant-making process. These grants can support the exploration of a product’s direct impact and/or benefit to a specific population within the Federal health system. Alternatively, manufacturers could consider grants measuring the comparative effectiveness studies focused on cost, which speaks to the heart of the VHA’s pharmacoeconomic program in its Health Economics Resource Center (HERC).

Effectively communicating the value proposition of a drug to decision-makers while simultaneously pressure testing price sensitivity within the Federal markets requires a delicate approach. This balance is best achieved by framing drug pricing in a clear and transparent manner relative to how this product serves a patient population while acknowledging the various limitations and preferences that are unique to the Federal health system.