At the ACA party, there are 15 pharma companies standing around a room with only 10 chairs. Which means that when the music stops, five of them are SOL.
That’s the future for pharma in a world in which all providers are at-risk and outcomes data are more important than volume discount pricing when it comes to therapy decisions.
Right now, the most common business strategy for healthcare companies managing the changes brought on by the Affordable Care Act has been consolidation. Everywhere in the system, players are merging. PBMs are consolidating and health systems are gobbling up every type of healthcare service, from physician practices to labs, urgent care to long-term care facilities and community hospitals in an effort to become large, integrated health networks (IDNs).
And, why? Why are they doing this?
At its most basic level, it’s a power move. The more lives you cover, the bigger your provider network, the more leverage you have to negotiate pricing and costs.
Interestingly, pharma already knows what this is like, because pharma went through its own consolidation binge in the ‘90s and early 2000s. Theirs was less about power and more about access to pipelines; pharma execs recognized that they were getting much less productivity and efficiency out of their own R&D labs. M&A to consolidate other people’s development pipelines became the strategy du jour to get better access to promising therapies.
Observing today’s trends among payers and health systems, one might assume pharma would be better off merging into larger global powerhouses to compete with the massive negotiating leverage of national PBMs and health systems.
It just won’t work anymore
My answer is no. It just won’t work. I would argue that for pharma, innovation trumps consolidation. And here’s why.
Healthcare is largely local. There is an obvious limit to the number of employers and consumers in a geographical area and therefore natural limits to the number of providers in that area. So the providers, the local health systems, and the insurance companies and PBMs licensed in that state are the gatekeepers. In fact, in many areas there is a de facto insurer monopoly. They wield the market power.
Pharma sells into that environment and doesn’t have channel power regardless of how big it is.
What pharma does have is innovation. Patients, employers and payers will always negotiate to get access to the right idea or breakthrough product. There is tremendous pressure on payers to provide access to truly innovative therapies. But the operative word here is innovation – I’m not talking about copycat products.
Pharma companies with me-too products are the ones who will end up without chairs when the music stops.
The withering power of substituion
When there isn’t innovation, buyer power wins. A product without new insight into customer need or a new breakthrough in efficacy or safety is subject to the withering power of substitution.
That’s when pharma loses bad.
This is one reason the investor community is pushing the largest pharma companies to unlock value by splitting up or doing asset swaps to spin out the less strategic divisions. Big pharma doesn’t have the power it had in the past.
The only way to win
The only way for pharma to win in this world is through innovation.
The most obvious form of innovation is with a new product. But there are other types of innovation, from bundling to financing to customer service to a platform. There are many examples of non-healthcare product companies evolving their product or the customer experience to leverage other types of innovation to increase its value or differentiation.
The key is innovation that delivers on a key customer need, and that requires fresh insight into the entire value chain. Patient end users, caregivers, healthcare providers, payers and employers. Pick a disease state and there will almost always be gaps in performance, the patient experience, and health outcomes.
Identify an inefficiency or frustration, find a partner to design an alternative approach, fund a small pilot, and then evaluate whether it will make a difference in healthcare ecosystem.
Innovation doesn’t guarantee success, but it’s much more likely you’ll have a seat at the party when the music stops.