Thursday, September 25, 2014

How best to sell drugs

It used to be easy to sell drugs:  employ the most attractive sales people you could find--drug companies favored former cheerleaders with no experience in medicine--and take doctors to sports events or cater lunches for their offices.  

But things are changing.
Today, 42% of doctors practice as salaried employees of hospital systems, up from 24% in 2004, according to Cegedim Relationship Management, a marketing consultant.  As a result, the pharmaceutical industry is shifting its sales efforts from doctors to the institutions they work for.
Hospitals get better prices than drug stores because they have the ability to steer patients to drugs on a formulary:
The superior bargaining clout of hospitals and HMOs relative to drugstores is attributable to their use of formularies, which enable them to solicit bids from competing manufacturers for an all-or-nothing contract.  Drugstores, in contrast, typically stock their shelves with all competing brands of a drug, and cannot credibly threaten to withdraw their business from a manufacturer that fails to offer a discount.

Bottom line:  the alternatives to agreement determine the terms of agreement.  In this case, the ability of hospitals and HMO's to "steer" patients to particular drugs means that the alternative to agreement is much worse for the drug manufacturer.  This makes the drug manufacturer more eager to reach agreement, which results in better prices. 


  1. Doctor's affiliating themselves with hospitals are a common occurrence. With the implementation of the new health care law the influx of new patients for physician practices has risen and one of the best ways to attract new customers is to affiliate yourselves with an institution. Hospitals and emergency rooms see hundreds of patients per day and preventing readmission to hospitals ensures payment for each patient seen. Physicians see this as an opportunity to increase their profits margins.

    The sheer size of hospital based institutions gives them bargaining power because they purchase in bulk quantities. Purchasing in bulk gives drug manufacturers the benefit of knowing they will have a steady flow of income. They can bargain hard on their times forcing drug manufacturers to accommodate them. It also gives hospitals bargaining power because they know they can go to any of the drug manufacturers competitors to receive a better offer. Drug manufacturers are in essence taking the lesser of two evils as they would rather make some profit rather than none at all.

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  4. There was a story on NPR regarding the concern of pharmaceutical companies advertising direct to consumers. There is a push to restrict direct to consumer advertising by drug companies. Doctors have pointed out that patients are now coming in suggesting drugs they be prescribed, which is not always in the best interest of the patient. After all, they did not go to med school. Would drug companies then stop spending massive amounts of money on advertising and allow the drugs to cost less? The story concludes no, drug companies would then shift their advertising budget to a harder push towards hospitals and doctors rather than consumers. I tend to think they are right. But it certainly would be nice for drugs to cost less.

  5. The fact that sick elderly people without prescription drug coverage pay more for drugs than people with health insurance has created a call for our governments to take action. An accurate understanding of price differences is essential to the creation of sound prescription drug policies in the US.

    The pricing of prescription drugs has become a popular issue of late. Many have questioned the motives of drug manufacturers and about the workings of the market. Growth in spending and the fact that people without drug coverage pay higher prices than those with such coverage have ignited this issue.

    Participants in this debate sometimes draw conclusions about drug prices as if the “law of one price” prevails. For example, comparisons between US and other country's drug prices typically rely on choosing a retail price in the United States and comparing it with one in another region (we are often compared to Canada). Thus, the comparison and the resulting conclusions are typically that prices are higher in the United States on the assumption that there is a single price charged to all buyers. Many are upset by the fact that the law of one price does not seem to hold in this industry. That is, people who buy retail and pay cash for prescriptions face the highest prices. These people are often among the least privileged in the nation. People who lack coverage, many poor, sick citizens pay the highest prices of all!

    A wide range of prices for prescription drugs can exist for the exact same product. These vary according to one’s insurance coverage, place of purchase (drugstore vs. mail order), and the organizational arrangements under which a pharmacy benefit is administered. I have worked (and studied) healthcare for a long time now, and there is much to be said about he pharmaceutical industry in this country, and not much of it is good!

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  7. I was actually talking to representative for Pfizer on the plan today about this very topic. He says the drug industry has definitely drastically changed over the past 15 years. With many doctors on salaries now at hospitals they go about doing much differently than in the past. Hospitals now have a bargaining power where they can push the drug companies eager to reach an agreement. In a since they are able to model the game of chicken where they are able to commit to their position of price quickly as there are many options. (Froeb, 2014) Drug companies are now aware of hospitals power to bargain hard and doing better in the trade as they were in the past as can be seen in lower prices in hospitals than drug stores.

    Froeb, e. (2014). Managerial Economics; A problem solving approach (3rd edition). Mason, OH: South-Western Cengage.

  8. Todd Barton-MBA Student SUNY Empire State CollegeDecember 22, 2017 at 10:33 AM

    One of my best friends was a pharmaceutical sales rep for Pfizer from 2000 to 2005 and would tell me stories of how the doctors had such power on what drugs their patience would use. I found it troubling, how much wining, dining, golfing etc. that these doctors were shown and accustomed to from the sales reps. Fast forward to today, and the playing field has changed where the doctors leverage has been replaced by the hospital they work for. As Devers argues, “Our findings suggest that many hospitals' negotiating leverage significantly increased after years of decline. Today, many hospitals are viewed as having the greatest leverage in local markets. Changes in three areas—the policy and purchasing context, managed care plan market, and hospital market—appear to explain why hospitals' leverage increased.” (Devers, et al., 2003).

    In economics, hospitals now leverage and bargaining power when playing a game of chicken with the pharmaceutical companies. As Froeb (2016) states, “At this point, you should know what to expect in a game of chicken-both parties will try to steer the game to their preferred equilibrium by committing to a position. If you can convince your rival that you’re going to bargain hard, regardless of what your rival does, he will be better accommodating, and you will get a bigger share of the gains from trade.” (P.206). In this case, the hospital plays hard due to their leveraging power and the pharmaceutical companies better accommodate.

    Devers, K., Casalino, L., Rudell, L., Stoddard, J., Brewster, L., & Lake, T. (2003, Feb). Health Service Research. Retrieved from Hospitals Negotiating Leverage with Health Plans: How and Why Has It Changed?:

    Froeb, L., McCann, B., Shor, M., & Ward, M. (2016). Managerial Economics. Boston, MA: Cengage Learning.

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