Potential for Profit, Potential for Real Change
MANAGED CARE July 1999. ©1999 MediMedia USA
Now, online outlets are alternate retail sites. But if they can help physicians and plans solve medication compliance problems, they will be formidable.
Organizations establishing "dot.com" operations on the Internet are Wall Street's darlings, offering the lure of large profits when the organization goes public. This presumes that online operations will supercharge their markets — and investors' pocketbooks. While online organizations are truly changing the commercial landscape, online drugstores have many issues to resolve before they can realize the potential Wall Street expects.
That potential is nothing short of tremendous. Jupiter Communications, which conducts market research for online industries, projects $1.7 billion in online sales of prescription and over-the-counter drugs and other products by 2003. For managed care organizations, physicians, and customers, potential benefits include automated prescription-checking against the formulary, accurate transcription of the physician's prescription, automated checks for contraindications, and a mechanism to address noncompliance.
Today, most online drugstores operate much like other online retail operations. They provide static medical and drug information, simple credit card transactions, and some customer services, such as answers to medication questions. Physician interaction is identical to community pharmacies, with verification and clarification taking place by phone.
As of the spring, online drugstores' business strategy had been one of commodity marketing — providing the lowest price for a product, coupled with a smattering of product information. While this attracts initial attention, continual pressure to produce the best price reduces it to a lowest-price commodity outlet, versus one that builds brand loyalty.
Brand loyalty, as manifested by the repeat customer who values the drugstore beyond price comparisons, is achieved through services that build relationships: offering personalized information, making the most of existing relationships with customers' physicians and managed care organizations, and knowing customers' preferences for prescription delivery, to name a few.
The advantages of online drugstores include 24-hour ordering convenience, a potentially larger selection of products, and, sometimes, lower prices — although the total price including shipping charges may be comparable to or higher than traditional community pharmacies. One downside is that patients cannot quickly obtain medications — antibiotics to treat the crying child's ear infection, an emergency supply of insulin for the diabetic. Other disadvantages, such as the inability to work with a customer's insurance plan, automatically verify a prescription or review potential contraindications, and provide real-time consultation are hurdles that are likely to be addressed during the next few months as online drugstores mature.
These short-term challenges exist because most online drugstores aren't yet plugged into the information flow of HMOs and other health care delivery systems. Most online drugstores reconcile customer payment with the credit card clearance system used by online retail outlets. However, for customers with health coverage, payment for prescription drugs should take into account the MCO's payment schedule, based on the customer's health plan and agreements between the drugstore and the MCO. Most online drugstores are not yet electronically connected to formularies — presenting two problems. First, many customers are not able to use their prescription benefits fully. Second, it gives pharmacy benefit managers a competitive weapon — a valuable entry point to become online drugstores. Merck-Medco, the PBM, for instance, is launching an online drugstore that offers individual consumers a selection that matches their plans' formularies and manages their pharmacy histories.
I believe integration of formularies will occur from several different directions — PBMs launching online drugstores, established online drugstores striking deals with MCOs for access to formularies, and existing community pharmacies bringing their formulary access to online partners. Just last month, drugstore.com negotiated access to drug-benefit information for health plan members served by PCS Health Systems, the PBM. In the same deal, drugstore.com established Rite-Aid, the retail giant, as a place for same-day pickup of prescriptions ordered online.
This overcomes an important problem facing online and mail order pharmacies: timely delivery of acute drugs — medications to be given within hours of the physician visit. About half of all prescriptions are for acute drugs. A similar problem is safe delivery of medications that cannot withstand the rigors of temperature changes; savings from online or mail order are lost when drugs are damaged in transit. Further, it is often difficult for a customer to wait at a receiving address for a delivery. Establishing a pickup point provides a solution, and in turn presents an opportunity for face-to-face customer education and compliance monitoring.
As online drugstores become able to display insurers' payment schedules to individual customers, a more efficient flow of information may follow. If the prescription can be transmitted electronically to the online drugstore, there are several immediate wins: (1) It can be automatically checked against the formulary, eliminating the pharmacy-physician negotiation for a covered drug; (2) its electronic nature reduces the risk of mistranscribing the physician's prescription; (3) it can be scrutinized for accuracy; (4) the physician writing the prescription can automatically be authenticated — effectively eliminating illegal sale of prescription medications; and (5) the pharmacy has the ability to monitor prescription compliance, both for initial pickup of the drug and for refills.
The futures of online, mail order, and conventional pharmacies are linked by physicians' and MCOs' electronic-business strategies. Here, one of many possibilities may play out. The pharmacist can play a pivotal role in the evolution of the drugstore, ranging from a role as pessimistic as a "licensed packager" to as optimistic as "practitioner of therapeutic medicines." It is very likely that online drugstores will take over the prescription intake, though its fulfillment may take several routes. This would parallel the evolution of American Airlines' SABRE system for online passenger reservations. While this system initially was constructed to manage reservations for American Airlines, today many of its competitors use it to manage reservations electronically.
One model could revolve around price. If online drugstores focus on winning and retaining market share by maintaining the lowest price, E-business technology can facilitate an electronic information-and-supply chain to reduce internal costs and increase flexibility to meet changing market demands. Packaging and labeling may be handled in a central distribution center, with the final product delivered to the customer's door by a commercial shipper. In this scenario, the number of retail pharmacists declines dramatically, as community pharmacies go the way of the drugstore soda fountain.
An alternate plan would be try to build brand value in the customer's eyes. In this case, a pharmacist in a community pharmacy may take on a value-added role. While the store's online service may offer cost efficiencies and the ability to track customers in proactive and reactive fashions, the pharmacist can offer pharmaceutical care, providing therapeutic delivery of medicines and operating in conjunction with the customer's physician to ensure pharmaceutical compliance.
The role of the community pharmacist in the online era can include:
- Timely dispensing of acute medications;
- Providing a pickup location for a medication;
- Giving personalized education; and
- Being in a unique position to address medication compliance issues.
When physicians can enter prescriptions online, they can reduce the likelihood of physicians prescribing an incorrect dosage, the wrong drug, or one with contraindications. Further, it removes a compliance obstacle — customers having to take the prescription from the physician's office to the pharmacy to be filled. The online pharmacy has incentives to ensure that the customer not only picks up the prescription, but also maintains compliance by picking up refills. If the pharmacist's role evolves to the point of participating in drug selection, based on a physician's diagnosis, community pharmacists will be able to build personal value and brand loyalty with customers. By following loyal customers over time, online drugstores can track outcomes — and ultimately, project cost-effectiveness of specific treatment protocols.
While smaller community pharmacies could benefit from a nonexclusive online prescription clearinghouse (e.g., a SABRE-like system), large chains that leverage long-term relations with customers, physicians, and MCOs will benefit most. If online clearinghouses are exclusive, it becomes difficult to track customers as they move around the country and change physicians and insurance plans, thus making it harder to build brand value.
One of the hallmarks of electronic business is rapid entry of nimble participants eager to enter a high-margin portion of the business. As when Amazon.com invested in drugstore.com, they may bring a loyal customer base with them. Establishing an online drugstore is generally easier when the foothold is based on something other than pharmaceuticals — nutritional supplements, or beauty, diet, exercise, and alternative-medicine products.
New marketing tack
Many new entrants will position themselves as "personalized partners" in helping customers attain and sustain "health and well-being," a markedly different tack from providing treatments to cure or palliate disease and discomfort. The former tactic targets the customer's desire to be healthy and happy — a niche of entertainment, grocery, and fashion industries. These new participants will build brand value by building relationships aimed at maintaining customers' health and lifestyles. The boundaries defining the role of a drugstore are likely to become more and more blurred as electronic businesses expand during the next few years.
The international nature of the Internet brings new challenges to online drugstores. Drug prices are regulated by many non-U.S. countries. The Internet provides pricing transparency — a drug that is moderately priced in the U.S. may cost more if purchased in Germany or much less in Spain. Consumers will look for the lowest-priced location, particularly if their medications are not covered. It also brings access transparency — some pharmaceuticals may be available in one country but not another. Degrees of physician involvement and direct-to-consumer information vary from country to country, as do taxes and privacy and security concerns. These issues are not likely to be reconciled soon — thus online drugstores are likely to target discretely identified, regulated customer segments.
Electronic business will change the landscape of both the health-delivery system and community pharmacies. Online drugstores compete by lowering the cost of prescription medications, but competing on price alone ultimately will be self-destructive, with continuously eroding margins. While online drugstores may be able to streamline the information flow to sustain a profit, other E-businesses will build brand loyalty, combining cost-efficiencies with the benefits of a community pharmacy — addressing both business and therapeutic problems.