Payers are People too: Harnessing Behavioral Economics to Improve P&MA Strategy

Applying behavioral economics to any business or industry can lead to sizable growth. Yet the life sciences industry has failed to utilize this potential, especially when it comes to pharmaceutical P&MA. Experts Michael Chan, Mattia Belloni, and Elizabeth Shrout reveal how these concepts can be used in the payer journey to optimize pricing and market access outcomes. 

Behavioral economics in life sciences

Would you rather take a drug that is guaranteed to extend your lifespan by five years, or take another drug that will extend it by twice as long but with half the chance? If you were a perfectly rational individual you would see these two options as equivalent. However, chances are, you preferred one of these two options.  Behavioral economics can explain why humans are not perfectly rational through predictable biases and mental shortcuts (heuristics) we use while processing information.

In the life sciences industry, behavioral economics has been used most often to inform how to develop strategies to help healthcare professionals (HCPs) improve health-related decision-making and patient compliance. However, this systematic application simply doesn’t exist for pharmaceutical pricing and market access (P&MA). Most assume payers in life sciences are “more rational” than the average person, which is likely incorrect: payers are people too, so these behavioral concepts still apply. 

Given the consistency of heuristics and biases, behavioral economics can unveil the drivers of payer decision-making, strengthen manufacturer-payer communication, change payers’ mindsets, and encourage certain payer behaviors.

While the life sciences industry has yet to apply behavioral economics into P&MA strategies, we at Simon-Kucher have been integrating these concepts for some time, helping our clients grow. In this article, we demonstrate how behavioral economics applications can be used in the payer journey to optimize value messaging, price negotiation, and P&MA outcomes.

Behavioral economics at work in the payer journey

We define the “payer journey” as the continuous and evolving interaction of payers with new product information and/or its target indication, spanning from the early stages of research and development (R&D) to post-marketing. Regardless of the market, product, or indication, the payer journey generally consists of four phases: 

1. Early exposure phase (i.e., prior to P&MA dossier submission) – this begins when payers first learn about the pipeline asset and start collecting / are exposed to relevant information
2. Dossier review phase – payers receive, digest, and validate integrated information as part of a P&MA dossier
3. P&MA negotiation phase – the drug’s pricing and access conditions are discussed and agreed upon with the manufacturer
4. Post-marketing phase – payers monitor the real-world impact of the agreed-upon P&MA conditions, and potentially refine them through renegotiations 

While the manufacturers’ involvement in the payer journey is highly variable across markets and phases, it is critical for them to recognize and utilize relevant biases and heuristics for value communication (especially in phases 1 and 2 of the payer journey), as well as negotiations (phase 3).

Phases 1 & 2: Biases and heuristics in value communication

Payer-focused value communication is a continuous, interactive process aimed at supporting the drug’s payer-perceived value, highlighting its potential to address the unmet needs in the target indication. This is especially relevant when launching in low-awareness therapeutic areas, as payers may first become aware of the target indication through manufacturer sources, and clear pricing benchmarks supporting the manufacturer’s price ambitions may be lacking.

There are several behavioral economics concepts that can be applied to the payer journey, regardless of the specific market, therapeutic area, and product. Numerous biases and heuristics play a role in a payer’s overall value perception of the product, which can critically impact their decision-making, as detailed below:

• The confirmation bias occurs when people seek out or evaluate information in a way that fits with their existing thinking and preconceptions. If previously exposed to positive information, payers will tend to prioritize and focus on that same information (especially when first learning about a new drug or indication), during the dossier review
• Due to the endowment effect people place a greater value on things once they have established ownership. Payers involved early-on in clinical value and price setting discussions may develop a sense of “ownership” of the product. This then increases their baseline willingness to pay and inclination to compromise on a P&MA agreement during subsequent negotiations

The additional behavioral concepts below can be leveraged to influence the reception of disease background information, as well as help payers focus on a product’s key value drivers:

• The identifiable victim effect is the tendency to feel greater empathy and an urge to help in situations where tragedies are about a specific individual, rather than a larger, more general group. Given this, exposing payers to real-life patient stories by interacting with patient advocacy groups may improve their perception of a disease’s clinical burden and the treatment efficacy
• The picture superiority effect explains that stimuli presented as pictures are markedly better remembered on tests of recall or recognition than stimuli presented as words. Depending on the market-specific P&MA landscape, manufacturers may be able to exploit this bias by using impactful graphics and pictures of symptoms to convey disease burden and patient benefits to payers

Phase 3: Biases and heuristics in price negotiations

Supported by initial value communication and perception, several behavioral biases and heuristics can be used during price negotiations to drive desired outcomes, and ultimately reveal the tangible impact behavioral economics can have on pricing:

• The priming effect occurs when an individual’s exposure to a certain stimulus subconsciously influences their response to a subsequent one. Similarly, the term anchoring describes the phenomenon where the initial exposure to a number serves as a reference point and influences subsequent judgments. Combining these heuristics, payers will be prepared to discuss high prices if those ambitions are socialized pre-launch by the manufacturer

  Further, the price comparator, or initial price offer made by the manufacturer, will influence negotiators’ willingness to pay. By integrating these heuristics into a strategy that clearly communicates high pricing ambitions and supports decoupling from cheaper drugs, manufacturers may ultimately be able to influence payer-perceived value and pricing decisions

• Finally, payers’ uncertainty aversion – defined as the propensity to favor the known over the unknown – may lead them to prefer a straight discount over a more complex access agreement. The latter implies higher financial uncertainty/liability, while being theoretically actuarially equivalent (or even favorable)

Applying behavioral economics to support manufacturers

Behavioral economics has the unrecognized potential to maximize value-based access for life sciences manufacturers by leveraging the predictable heuristics and biases to drive payers’ P&MA decisions. The pivotal role of behavioral concepts in P&MA strategies will continue to grow as innovative products are brought to increasingly competitive and expensive markets, especially in low-awareness therapeutic areas. As a trusted partner to our clients, we successfully employ 200+ such principles to deliver actionable recommendations and develop effective P&MA tools.

Payer-focused value stories can leverage powerful heuristics and biases to support the payers’ perception of the drug’s clinical value, and strategically anchor it to favorable clinical and price comparators. Market research can also be designed to test and/or measure the impact of select biases and heuristics on product perception and payers’ willingness to pay.

Finally, competing P&MA strategies and analogs can be analyzed to identify where, when, and with whom behavioral principles were successfully leveraged. Support can also be provided to help operationalize these decision-shaping strategies through behavioral economics-focused negotiation excellence training.

Take a look at the heuristics and biases described above and think about your recent payer value communication or negotiation. Was there an opportunity to employ any of these tools to ease negotiations, or execute strategy more efficiently? Is there an upcoming opportunity where you might want to leverage these principles to shape payer decision-making?

If you need help answering any of these questions, feel free to reach out to our experts!