Introduction
The competition within the health care industry and pharmaceutical market is a complex process, and it is important to analyze pricing strategies used by employers and managers for distributing prescription drugs. According to Jones, the basic pricing strategies for prescription drugs are based on Wholesale Acquisition Cost (WAC), Maximum Allowable Cost (MAC), Average Wholesale Price (AWP), and Rebates principles; moreover, traditional strategies such as utilization management, targeted disease intervention, generic sampling program, and managed formulary are also used in the industry (Jones, 2003).
As a result, it is difficult for pharmacy benefit managers to make the right choice and to focus on the effective pricing strategy because of the intense competition between the generic drugs and brand-name drugs. Thus, finding the right price to change in health care is more difficult than in other industries because of the complex decision-making process based on the significant competition within the industry, necessity to state the strong competitive position, possible opportunities for price lining, the necessity to state goals clearly for pricing decisions, focus on the high patient outcomes, focus on reducing costs, and focus on the sponsors’ advantages.
Pricing Strategies Used Regarding the Prescription Drugs
Referring to the pharmacy, Jones determines several specific pricing strategies based on WAC, MAC, AWP, and Rebates principles (Jones, 2003). All these strategies can be used to charge employers for prescription drugs, and these strategic approaches are more effective within the highly competitive environment in comparison with the traditional ones. The WAC approach is one of the most popular and debatable strategies when the effectiveness of the AWP strategy depends on many years of its use in the industry. These strategies are effective inaccessibility and administrative simplicity (Jones, 2003, p. 16).
It is possible to select the MAC strategy, but it is necessary to find the balance related to the broadness of the MAC list and its criteria (Jones, 2003; Searles et al., 2007, p. 236). However, the MAC strategy can be selected as the most appropriate variant in many cases because its strong features are transparency, accessibility, administrative simplicity, and low costs, opportunity to support the competitive position, and comprehensiveness.
How Health Care Pricing Strategies are Different than in Other Industries
The development and selection of pricing strategies in many industries depend on the assessment of potential profitability, concentration on the industry’s competition, and the analysis of the associated costs. To develop an effective pricing strategy, it is important to estimate the company’s success in controlling and managing costs because it is necessary to correlate between costs and prices effectively (Williams, Hammes, & Karhalis, 2007).
Health care pricing strategies differ from the strategies used in the other industries about the significant focus on reducing the expenses because of provided services and products’ specifics (Hong et al., 2005, p. 747). Referring to the pharmacy and other segments of the health care industry, it is possible to note that pricing strategies should orient to reducing the expenses, to managing benefit costs, to improving patient outcomes and quality of care, to managing utilization, to improving the competition with the branded alternatives or counterparts, and to increase the sponsors’ satisfaction.
The Relationship between Cost and Prices
The relationship between cost and prices in the health care industry depends on many factors because managers select the pricing strategy referring to the ability of consumers to charge for the services and products, to the analysis of the industry’s competition, to the analysis of such lists as MAC ones, to the opportunities for price lining, to the possibility to provide high patient outcomes and to reduce the costs as the resources used to produce the drugs or other products (Titus, 2007, p. 29).
Thus, the costs of producing definite drugs influence their prices because it is necessary to find a balance between preserving the competitive position within the market and attracting consumers. In the health care industry, the demand for drugs and services is high as well as the volume of drugs and services proposed (Feldman, 2002, p. 14). Price remains to be one of the most important factors to influence consumers’ decisions. Producers intend to reduce costs and choose the most effective pricing strategies to propose prices which can contribute to the revenue’s increase, the sponsors’ advantages, and consumers’ interest in products.
Conclusion
Different pricing strategies can be used in the health care industry to state the competitive advantage and correlate between costs and prices. Nevertheless, the task of the benefit managers is to select the most effective pricing strategies because the process of finding the right price in the health care industry can be discussed as more difficult than in other industries because of particular features of the complex decision-making process. In this case, the MAC strategy is effective for prescription drugs. Thus, the choice of pricing strategies depends on analyzing the aspects of competition within the industry, on predicting the high patient outcomes, on reducing the costs, and on increasing the sponsors’ advantages.
References
Feldman, D. (2002). The pricing puzzle. Marketing Research, 14(4), 14-19.
Hong, S., Shepherd, M., Scoones, D., & Wan, T. (2005). Product-line extensions and pricing strategies of brand-name drugs facing patent expiration. Journal of Managed Care Pharmacy, 11(9): 746-754.
Jones, J. (2003). Developing an effective generic prescription drug program. Benefits Quarterly, 19(1): 14-18.
Searles, A., Jeffreys, S., Doran, E., & Henry, D. (2007). Reference pricing, generic drugs and proposed changes to the Pharmaceutical Benefits Scheme. Medical Journal ofAustralia, 187(4), 236-239.
Titus, F. (2007). Price transparency’s role in healthcare purchasing reform. Frontiers of Health Services Management, 23(3), 29-31.
Williams, D., Hammes, P., & Karhalis, G. (2007). Real options reasoning in healthcare: an integrative approach and synopsis. Journal of Healthcare Management, 52(3), 170-187.