The Centers for Medicare and Medicaid Services(CMS) recently released annual report on health spending showed some good news for prescription drugs. Cost increases in 2007 were only 4.9%, the lowest increase since 1963. Medicine costs remain at 10% of total health spending, the same as in the 1960’s. The reasons for these lower growth rates are increased use of generics, and smaller price increases for branded drugs.

The CMS report is certainly good news for the drug industry in terms of helping to reduce criticism of high drug costs. It is clear that the U.S. health care system will not significantly reduce costs by taking draconian regulatory actions against drug makers marketing practices. This reported reduction in cost increases, however, will not cause drug pricing issues to completely disappear.

While overall drug cost increases were reduced, the core price issues will remain. The costs of drugs for U.S.  consumers are still 30-40% higher than in Europe and Canada. For consumers who need a branded drug the monthly outlays are still high given increased co-pays. For those Americans uninsured, branded drug costs remain at levels making then largely unaffordable for many. It is unlikely then that the juicy political pricing target offered by the drug companies will go away.

The Obama administration will still proceed with plans to negotiate drug prices through Medicare. It is also likely that some re-importation bill will pass. Drug companies will therefore face continued squeezed margins on topline revenue. This means continued cost cutting across the board. Marketing budgets will certainly face increased scrutiny over the next few years.

For DTC marketers we can expect demands for higher ROI through more targeted spending. That does not mean mass media will disappear, just that the overall returns will need to be more efficient. Increasing efficiency will likely lead to a media mix change over time.  That will happen slowly as DTC professionals look for targeted programs with enough scale to move market share. Mass media companies will need to do more to show that they can improve efficiencies. For example, which day parts and which of their shows offer the best returns for specific drug categories?  Mass media outlets will have to do more research to show they can better target for clients.

The next few years will be challenging for all drug marketers as pipelines get slowly refilled. Squeezing more out of less will be the credo for awhile. While that may not be fun, it is the reality all of us face. Drug companies and their media suppliers will need to come together to succeed in squeezing the budget lemon. I expect drug management teams to be ruthless in cost cutting, making budget defense a key skill for marketers. That means DTC marketers need to explore more alternative media plans and understand the many new options for reaching potential users.  That means more time spent reviewing media alternatives and more demands on agency expertise to identify those options. It also means establishing more quantitative and comparable measurements across media types. That is not easy but will need to get done. The demands over the next few years lead me to conclude that DTC is no longer a place for rotational training for inexperienced marketers. While that has happened many times in the past, the budget challenges require both seasoned brand and agency DTC marketers. Based on the number of brands still expected to do DTC, that experience may be in short supply.

This entry was posted on Friday, January 9th, 2009 at 6:37 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.