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The value prescription: Relative value theorem as a call to action
Research in Social and Administrative Pharmacy 8 (2012) 338–348
Commentary
The value prescription: Relative value theorem as a call to action Greg L. Alston, Pharm.D.a,*, Joseph C. Blizzard, R.Ph., Ph.D.b a
Wingate University School of Pharmacy, 515 North Main Street, Wingate, NC 28174, USA b Beam Pharmacies, Inc., 2004 Groves Edge Lane, Waxhaw, NC 28173, USA
Summary The Joint Commission of Pharmacy Practitioners Future Vision of Pharmacy Practice 2015 (2005) and Project Destiny (2008) clearly defined a vision for transforming community practice pharmacy from a culture of dispensing drugs to the provision of services. Several viable service offerings were identified. Pharmacy has not yet fully capitalized on these opportunities. Pharmacy must demonstrate value in providing these services to remain viable in the marketplace. Many pharmacists do not understand how value is created and lack sufficient marketing skills to position their practice for long-term success. The relative value theorem (RVT) describes in simple terms the key elements that drive purchase decisions and thus marketing decisions: (P þ S) PV ¼ RV (P, price; S, service; PV, perceived value; RV, relative value). A consumer compares the P, extra S, and PV of the purchase against all potential uses of their scarce resources before deciding what to buy. Evidence suggests that understanding and applying the principles of RVT is a critical skill for pharmacy professionals in all practice settings to master if they plan to remain viable players in the health care marketplace of the future. Ó 2012 Elsevier Inc. All rights reserved. Keywords: Relative value; Perceived value; Service; Price; Stakeholder; Economics; Cost; Opportunity cost; Value; Accountable care organization; Health care reform
What is the future of pharmacy in America? In 2005, the Joint Commission of Pharmacy Practitioners issued the Future Vision of Pharmacy Practice Vision Statement.1 This document declared that “Pharmacists will be the health care professionals responsible for providing patient care that ensures optimal medication therapy outcomes.” Additionally, the statement predicted that “Working cooperatively with practitioners of other disciplines to care for patients, pharmacists will be . valued patient care providers whom health care
systems and payers recognize as having responsibility for assuring the desired outcomes of medication use.” A key element of this vision was left undefined: how do pharmacists become valued? The Project Destiny summary report released in August 20082 further describes a vision for pharmacists to move beyond the commoditized dispensing of drug products to the provision of pharmaceutical care services. This project of the American Pharmacists Association (APhA), the National Association of Chain Drug Stores (NACDS), and the National
* Corresponding author. Tel.: þ1 704 2338329; fax: þ1 888 8702519. E-mail address: [email protected] (G.L. Alston), [email protected] (J.C. Blizzard) 1551-7411/$ - see front matter Ó 2012 Elsevier Inc. All rights reserved. doi:10.1016/j.sapharm.2011.06.004
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Community Pharmacists Association (NCPA) considered research, analyses, and feedback from stakeholders in the profession of pharmacy, such as pharmacy owners, pharmacy technicians, employers, public and private payers, medical professionals, academics, pharmaceutical manufacturers, legislators, technology providers, and patients. This landmark report stated several key findings. First, a significant unmet consumer need exists. The lack of medication management, the increase of chronic and comorbid conditions, avoidable health care costs, and shortage of outcomes evidence provide a target-rich environment for pharmacists to develop professional services. These unmet needs have the potential to generate $7.5 billion in annual revenues. This level of revenue represents a viable market opportunity for pharmacist-provided services.2 Moreover, community pharmacists are an underused resource. They have the capability to provide access to differentiated services to target consumer groups but have not capitalized on their strategic advantage. Health care stakeholders strongly desire to engage in the process of developing service offerings and collaborate on bringing these services to market. However, the medication management market is rapidly filling with competition from other providers, and the community pharmacy will lose the opportunity to compete if it does not rapidly engage in marketing its services.2 The full Project Destiny documentation provides the business plan, implementation strategy, reimbursement analysis, and timeline for the profession to deliver 4 types of pharmacy service offering (PSO) to the marketplace. Dispensing and administration service offerings are related to the preparation, filling, and delivery of medications and vaccines. Patient care management service offerings are related to leveraging the pharmacist’s skills to address customer’s health care concerns. Related health product recommendations service offerings are designed to augment a customer’s total medication experience through a pharmacist’s selected recommendations. And consumer, service, and outcomes data service offerings focus on analyzing, using, and reporting detailed and aggregated data to prescribers, payers, funders, and consumers of health care.3 Two key concepts are fundamental to this future vision of community pharmacy: the development of the primary care pharmacist and the introduction of patient care management services. “The primary care pharmacist will demonstrate
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their value by assisting patients and their providers in the overall management of medications and conditions across providers.”2 However, significant hurdles exist including negative perceptions of community pharmacists’ ability to offer expanded services, regulatory restrictions on pharmacy practice, lack of the payment system infrastructure to support expanded service offerings, and lack of marketing traction with consumers despite consistent attempts to establish it.2 Again, a key element of this vision was left undefined: how do pharmacists demonstrate value? The original timeline created by Project Destiny called for the implementation strategy to be credible and prepared by 2009, proven and mobilized by 2011, and recognized and integrated by 2013 and for community pharmacy to be transformed in to a health care delivery partner by 2017.2 NACDS, NCPA, APhA, and the state pharmacy associations have battled in the legislative and regulatory arenas to secure the opportunity for the profession. Schools of pharmacy have produced record numbers of students with the advanced clinical skills to deliver on the promise. Yet the market demand for pharmacy services has not achieved critical mass. And new challenges have emerged. The passage of the Patient Protection and Affordable Care Act in March 20104 and the Department of Health and Human Services rules regarding Accountable Care Organizations (ACOs) in 2011 have clouded the structure of payment systems. The Medicare Shared Savings Program will reward ACOs that lower growth in health care costs while meeting performance standards on quality of care and putting patients first.5 Under the proposed rule, Medicare will continue to pay individual health care providers under the original Medicare payment system but will allow ACOs to share in the savings generated if patient care quality is above standard. Nevertheless, the details of what ACOs do and how they do it have yet to be defined. Currently, both 1-sided risk (share in savings but not losses) and 2-sided risk (share in both savings and losses) are under consideration. Current payment systems pay providers for the volume of care rather than for the value of that care. ACOs seek to be organizations with an alternative payment system that rewards value.6 Thus, understanding how value is created, nurtured, and managed is essential to making ACOs work. Pharmacists need to engage in the
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development, operation, and management of ACOs so that the value of pharmaceutical care will be fairly represented in these future payment systems. Project Destiny articulated a detailed plan for transforming community practice from dispensing drugs to providing services. Pharmacists possess the clinical skill to deliver primary care. So why is the market not clamoring for pharmacists to provide these valuable services? The profession has failed to establish the value of these services in the marketplace. Unfortunately, pharmacists routinely receive insufficient formal training in how to market their service offerings effectively. The essence of a good marketing plan is creating value for a targeted customer. Therefore, the relative value theorem (RVT) is proposed as a model to teach pharmacists how value is created and how they can position their service offering to be successful in the marketplace. The importance of creating value Pharmacists cannot increase their value to the health care system unless they understand conceptually how value, in general, is created in a marketplace. To understand how value is created, pharmacists need an easy-to-use practical model to inform their decision making. Although the RVT
has not been scientifically validated, it is proposed as a conceptual model of the key factors a “buyer” uses to decide which offering to select for “purchase” from a list of possible alternatives.
The RVT proposed model The RVT equation is RV ¼ ðP þ SÞ PV where RV represents the relative value of the competitive offering, P represents the price or cost to acquire the offering, S represents the extra service included with the offering, and PV represents the perceived value of the offering (Fig. 1). Relative value A consumer decides to buy or not buy an offering by intuitively calculating the RV of the different offerings on which to spend money. Marketing literature examines the link between customer service, quality, and purchase intentions.7-12 Evidence supports the notion that high-quality service offerings can positively influence customer loyalty and the long-term profitability of a business enterprise.13-15 The intuitive RV calculation made by the consumer in the decision-making process includes 3 components.
Price (P) What does it cost in dollars, time and emotional energy?
Relative Value (RV) How does this option compare with other uses of my dollars, time and energy? Do I have the resources to take action today?
Service (S) What do I get in addition to the product or service?
The Relative Value Theorem (P+S) x PV = RV
Fig. 1. The subjective prism of PV interprets the objective price and service data to generate an RV decision.
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Price The pricing element of the equation is the component in which the consumer compares the cost to acquire an offering versus the cost of acquiring competing offerings. In this context, cost can include monetary and nonmonetary items. Nonmonetary items include opportunity cost, time expended, physical effort, mental effort, and other sacrifices necessary to execute the purchase. If the price or cost of an offering was the only factor a consumer considered before executing a purchase, then no offering could remain in the market unless it was the lowest price option. Because we know by observation that a broad variety of offerings persist in the marketplace and that these offerings are not all priced identically, there must be something besides price alone that buyers consider.
Service Service introduces an additional variable to the consumer thought process that modifies the simple price/cost comparison. Service in this context will encompass all the factors associated with the offering that are ancillary to the offering itself. These factors are the elements over which the provider has control when designing the product or service offering and could be thought of as those things the provider could use in a marketing campaign to distinguish his offering from the competition. The service component will include such business practice decisions as the satisfaction guarantee, the level of service provided after the initial sale, and the quality of the support staff. In addition, the quality of the pharmacists’ professional certifications, the integrity with which the business will operate, and the compassion shown to clients are service elements. And finally, the ease of use of the business system, the convenience of the location, the hours of operation, and the availability of emergency access to care are important components. Many of these factors have shown to be significant motivators for pharmacy patronage.16-18 However, price and service alone do not explain 100% of the observable value decisions made by buyers as they shop in the marketplace. Significant variations in sales activity over time for identical products would demonstrate that there must be at least one other factor influencing the purchase decision. Gladwell19 in 1994 described such a case in The Tipping Point.
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Sales for Hush Puppy shoes were approximately 30,000 pairs per year in the United States during the early 1990s. By 1995, sales had reached more than 430,000 pairs primarily because of the shoes becoming a “chic” designer item. The Wolverine Shoe Company did not plan or execute this marketing campaign. It occurred because the “in” people at the “in” clubs in New York City had worn the shoes. The fad spread virally and propelled the company to have stores in virtually every mall in America in less than 2 years. The same shoe at the same price became extremely popular because people who previously did not want to buy the shoes suddenly did. A shoe store example may seem trivial in the context of a health care discussion. However, this component of the RVT helps explain many medication adherence failures. A patient may be able to afford his/her medication (P) and understand that the drug will improve his/her life expectancy (S). However, the patients often decide that they would rather keep their bad habits than take their medicine. If patients can afford the price and can rationally understand the impact on their health, why don’t they take their medicine as directed? So there must be something else driving their decision other than price and service. Perhaps, in the patient’s opinion, the side effects may lead to a lower quality of life. This third element of the RVT equation is the PV component. Perceived value Zeithaml defined the concept of value.20,21 She suggested that value is (1) low price, (2) whatever I want in a product, (3) the quality I get for the price I pay, and (4) what I get for what I give. PV has been defined as the cognitive trade-off between perceptions of the quality (what I get) versus the sacrifice (what I have to give up). Marketing plans attempt to improve the PV of a product in the minds of the targeted customers by manipulating the price and service elements of the offering. However, the individual consumer controls the outcome of the RV choice. All decisions regarding the RV of a product or service offering filter through the individual prism of PV. In the Hush Puppy example, the Wolverine Shoe Company did not start the trend, but they did an excellent job of capitalizing on their good fortune. The PV of their shoes changed because it became “cool” to wear them, not because they tried to convince people they were “cool.”
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The reason the P þ S component of the formula is multiplied by the PV component in the proposed model is to reflect the belief that a “buyer’s” PV can overrule the additive nature of the P þ S and translate to an RV of 0, if PV is 0. This concept is alternately described in the marketing business and consumer research literature as perceived risk,22 customer value propositions,23 customer PV,24 consumer PV scale,25 and PV.26 The buyer’s individual value analysis is a personal decision colored by the prism of his or her own unique perspective. This personal prism incorporates a complex mixture of emotion and reason to arrive at a decision. Research suggests that emotion plays a larger role than rationale analysis.27 And perceived service value seems to be comprehensive measure of a customers’ overall evaluation of a service.28 Work in both neuroscience and behavioral economics suggest that “extremely satisfied” customers fall into 2 distinct groups: those who have a strong emotional connection to the business and those who do not. Emotionally satisfied customers contribute far more to the bottom line success of a business than rationally satisfied customers, although both are satisfied.27 Understanding how to enhance the PV of a PSO should encourage pharmacists to create less price-sensitive, more valuable products and services. It also should develop loyal customers.
Why is value marketing important? Businesses with loyal customers tend to be more profitable.29 Researchers estimate that a 5% improvement in customer retention can lead to an increase of up to 85% in profits.30 The Human Sigma project suggests that engaged customers generate 1.7 times the sales revenue when compared with nonengaged customers.27 Ignoring the drivers of PV will jeopardize marketing campaigns. Elements of decision making are not just theoretical marketing constructs but are being actively documented by cognitive neuroscientists. With neural imaging, neuroscientists are showing support for the cognitive components associated with the PV to consumers of products and services.27,30-35 These decisions have also been studied with the addition of a time component comparing immediate versus delayed expectations. This has important future applications in health care where we often ask patients to engage in services or
behavior changes that often have no immediate impact but only long-term delayed benefits. In the business of pharmacy and PSOs, a patient’s perceptions can dramatically affect the sustainability of a practice model.36 For example, if a pharmacist makes a dispensing error on a patient’s prescription, the patient may decide to never patronize this pharmacist again. If the patient believed that the pharmacy dispensing service was dangerously inaccurate, the RVT model predicts that the PV of this pharmacy would become 0. If the PV is 0, it is unlikely that any price reduction or service enhancement will entice a customer to return. On the other hand, if the price for the prescription has a fixed co-payment, which is the same at any pharmacy, then the patient will choose where to purchase prescriptions based on the service level or PV of the service offering at a particular location. Something as simple as convenient location or something as complex as their level of trust for the pharmacist could drive this PV.16-18 A consumer’s PV of a product or service offering is colored by his/her personal experiences, the recommendations of his/her friends, and his/her shifting assumptions. Health care marketplace examples include 1. Patients who want brand name drugs only and perceive generics as lower value 2. Patients who want to see the doctor only and do not perceive care by the nurse practitioner or physician’s assistant as equally valuable 3. Drug store customers who patronize their favorite store because they perceive their relationship with the pharmacist as valuable 4. Customers who refuse to make any discretionary purchases because the stock market is down and because they perceive that holding onto their cash is more valuable than buying medicine 5. Patients who refuse treatment for an embarrassing medical condition because they perceive that their privacy or dignity is more important than treatment 6. Payers opting to include a mail order-only option in their plan design and exclude community pharmacies because they do not perceive value in local pharmacist care. In short, the PV of an offering exists totally within the mind of the person calculating the RVT. The RVT describes the interplay of P, S, and PV that generates the bid price a buyer is willing to offer to the marketplace to buy that product or service. Failing to understand the RVT
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could put pharmacists at significant disadvantage in the health care marketplace.
Value strategy To create a value strategy for a professional practice, a pharmacist will need to consider 2 key issues: (1) the other offerings that compete with the specific pharmacy service in the marketplace and (2) the price the market is willing to pay. Pharmacists should understand that all goods and services, which are alternate uses for a buyer’s scarce resources, compete with the pharmacy offering in the marketplace. To create an offering that buyers will freely choose in the marketplace, the RVT value will have to be higher than competing products or services in the mind of the potential buyer. The price needs to be competitive but not necessarily lower than other options. If the buyer perceives the service component to be better or the PV to be greater, he/she may accept a higher price. To ensure that a professional practice succeeds, the RVT equation will have to be balanced to favor the practice in the minds of the potential customers. When designing a niche pharmacy offering for the health care marketplace, pharmacists need to tailor the offering to meet the unmet needs of the targeted niche audience. A major focus should be the development of a unique selling proposition that clearly states what the practice does, what solutions the practice is offering, and why this solution is needed by the targeted market. It is important to note that the RVT predicts that a lower price will not always produce a higher sales rate. Consumers may choose not to buy if the price is too low because they may perceive the product is inferior. Moreover, the RVT suggests that price reductions are not the only form of successful marketing. A pharmacist must understand the interplay of all the forces at work in the buyer’s mind to create the buyer’s willingness to spend their money on the service. Within the context of the health care marketplace, pharmacists must generate a higher RVT value to their targeted stakeholder than competing service providers. Pharmacists are not the only professionals capable of providing immunizations, smoking cessation services, disease state management, drug regimen reviews, or prescription dispensing services. Failure to demonstrate that pharmacists can provide these services at a competitive price, with better outcomes,
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or with a higher customer PV may potentially lead to pharmacists losing the opportunity to do that work. Moreover, a critical point to consider when using the RVT to guide a value creation strategy for the profession is that you cannot assume that a stakeholder’s worldview is the same as yours. A stakeholder may be deciding how to spend his/ her limited resources (discretionary income) by comparing 2 completely dissimilar uses of his/her money. Although a pharmacist may assume that a patient is comparing the RVT value of his/her professional service offering with that of a similar pharmacy provider, this may not be the case. The patient may be deciding between paying for pharmaceutical care or his/her rent. When allocating how to spend their scarce funds, the patients will consider not just expenditures on health care but on all the potential uses of that money. With 47% of seniors reporting annual incomes less than $29,140 annually,37 patients may be selecting between buying groceries and buying medicine. This same dynamic may force health systems to make tough choices in the future about whether pharmaceutical care provides a better value than other cost saving measures. There are 3 discrete methods to increase the value of an offer relative to competing products or services: 1. Price it correctly 2. Improve the service value of the offer 3. Improve the PV of the product Understanding the RVT equation provides pharmacists with the knowledge to design an appropriate long-term marketing strategy. In a professional practice model, creating value for patients ultimately creates satisfied patients and caregivers. Subsequently, satisfied patients and caregivers become loyal customers. Businesses with loyal customers generate consistently higher profits.29,30 RVT additionally explains the difference between new and existing customers. New customers by definition have not purchased from you yet. They do not know you well enough to trust you, so they resist your marketing message. The key to attracting new customers cost effectively is getting referral recommendations from satisfied customers. The reason referral marketing works is revealed in the RVT equation, RV ¼ (P þ S) PV. If a potential new customer receives a recommendation from a person he/she trusts (high PV) for a product that meets his/her needs (high service value), that he/she can afford, and is
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willing to buy (right price), he/she will be likely to buy your professional service. According to Reichheld, in the book The Loyalty Effect, U.S. corporations lose half of their customers in 5 years and half their employees in 4 years. Customer retention is the yardstick that measures how well the company is creating value for its customers. Creating value for customers builds loyalty, and loyalty builds growth, profit, and more value. Profit is not the ultimate goal. Profit is a direct result of value creation. The only way for a business to achieve long-term success is to create a culture of value creation and loyalty. High turnover rates for customers and employees are a symptom of weakness for a business that must be addressed. Human capital, unlike most other assets, does not depreciate over time. It actually improves with age.13
The role of profits in the pharmacy business Management expert Peter Drucker stated that businesses exist to serve society. A business should focus on serving its customers. However, business profits are a required resource in order for the company to continue serving society.38 A successful business grows profitably by providing a quality offering and real value to the marketplace. The profession of pharmacy is a business, and money and profits are required to sustain the activity. They function to keep the pharmacy solvent to continue providing needed services and products to society. Reichheld describes 2 kinds of profit. Virtuous profit results from the creating, sharing, and building of company assets. And destructive profit comes from exploiting the assets of the business. Virtuous profit therefore emanates from activities that are good for the business and the customers it serves, whereas destructive profits ultimately harm the same.13 Clearly a pharmacist should seek to produce virtuous profit by creating value for his/her customers. Although it is acceptable to profit by providing quality professional services or products, it is not acceptable to sell patients products or services they do not need merely to make a profit. Do this once, and risk destroying your reputation (PV) and damaging your ability to succeed for the long term. An essential driver of the value pharmacists have historically created in the marketplace is the trust the public places in the profession. If pharmacists violate that trust, PV in the eyes of
the marketplace would be diminished. In terms of the RVT equation, if our PV becomes 0, our RV becomes 0 and the pharmacy would be reduced to pure- price commodity status. RV ¼ ðP þ SÞ PV if PV ¼ 0 then RV ¼ 0
Value creation as a survival strategy Several generations of community pharmacists have used the retail drug store as their core business model. The pharmacist’s ability to adjust the model to fit the demands of the marketplace has ensured the profession’s survival. Community pharmacists faced numerous challenges beginning in the early 1900s. The original hometown apothecary evolved to compete with expansion of chain stores, narcotics laws, generic drugs, patient profiles, patient counseling laws, computerization, pharmacy payment systems, the Health Insurance Portability and Accountability Act, third party audits, and the federal government as primary payer to name a few. As a result, entrepreneurs developed a variety of retail and nonretail pharmacist practice models. With the pace of change steadily accelerating, this entrepreneurial skill (adaptability) will be even more important in the future. The variety of practice settings, business models, and practice specialties required to fulfill the Project Destiny vision will require that new paradigms be used to exploit new opportunities. Therefore, it is incumbent on the profession to develop pharmacists capable of creatively capitalizing on these opportunities. As health care and drug therapy treatments get more complex, specialists become more essential to meet the needs of the specialty market. Pharmacists should adapt to fill these roles. There is no single right business model that provides value to all potential stakeholders. Individual pharmacists must design, develop, and adapt their skills to fit the needs of the marketplace. The profession must accommodate a wide variety of practice models to meet the needs of society. The process of developing a market-competitive PSO will require teaching pharmacy practitioners how to create value. To actively direct this process, our profession will need to embrace economic, business, and marketing theory to redefine the nature of the work that pharmacists expect to perform in professional practice. Pharmacy students, clinical pharmacy practitioners, and academics have historically distanced themselves from the financial aspects of running a business. Nevertheless, given forces such as
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economic recession, changes proposed by Project Destiny, and the tightening of the job market for graduates,39,40 many pharmacists will need to update their financial skills to remain competitive in the marketplace. In short, to continue receiving acceptable salaries, pharmacists will need to justify their worth to an employer. A foundation in economic theory will be essential to inform the allocation of time and effort toward producing service offerings that generate a return on investment and create value for stakeholders. The value of any product or service in the marketplace is ultimately determined by the interplay of economic forces within that marketplace. The principles of economics describing these interactions are well defined in the business literature. Therefore, a key step in educating pharmacists to improve their business acumen is to explain the core concepts of economics that apply to practice. These principles should frame the discussion of how to create value in the marketplace for a professional practice opportunity using the RVT as a guide.
Basic economic concepts Economics is the study of how individuals and groups choose to allocate resources. The process by which resources are allocated can vary widely, but the core principle definitions remain the same. The RVT model was developed through the authors combined 50 years of community practice experience and adapting several of the points from Thomas Sowell’s discussion of economics in the book Basic Economics, Third Edition.41 Economics is the study of the use of scarce resources which have alternative uses. Lionel Robbins, English Economist
In economic terms, “scarce” means that there is insufficient quantity to satisfy desire. It is not simply the health care budget that constrains our ability to provide every conceivable type of care to every patient. It is the physical reality that time, labor, skilled practitioners, and dollars are never available in unlimited supply. Someone always has to decide on what is practical, helpful, and cost effective when provisioning provider time, diagnostic equipment schedules, and the use of any clinical resources. Economics describes the process by which societies, individuals, and markets interact to produce and consume goods and services. Economic decisions use the principles of economic
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theory to describe the allocation of scarce resources required to produce goods and services. Pharmacists make economic decisions daily about how to use their time, effort, and money to achieve their goals. Cost The cost of an offering is the sum of the costs of the components required to produce the offering. This includes the materials, time, labor, effort, opportunity cost, and any other resources that must be consumed to produce that product or service. Opportunity cost Opportunity cost describes the process by which making a choice precludes the simultaneous selection of other choices. For example, approximately half (54%) of all Medicare Part D enrollees in 2009 earned less than the federal poverty limit of $19,600 per year.37 The opportunity cost of paying rent may be not adhering to their prescribed medication regimen. Opportunity cost includes the monetary and nonmonetary costs of a decision such as time and effort. Opportunity cost describes how spending time developing niche practice expertise in the field of oncology precludes one from simultaneously spending that same time developing expertise in pediatrics. Given the complexity of any practice specialty, therefore, it is unlikely that a pharmacist has the time to become a credible expert in multiple areas simultaneously. Price The price is the amount the buyer is willing to pay to acquire the offering. In a free market, supply and demand interact to set prices. In a regulated market, frequently price controls are imposed by government regulation. Most health care services are highly regulated. For example, the U.S. Department of Health and Human Services has created a fixed pricing structure for most product and service billing codes using the resource based relative value scale.42,43 This type of fixed pricing system can create negative unintended consequences.44-47 If a service offering sells in the marketplace for more than it costs to perform, the offering will be profitable for the provider. If a service sells for less than it costs to perform, then the provider will lose money performing the service. If the provider loses money on a service, the loss must be made up with higher
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profit somewhere else in the service provider’s business model for the provider to remain solvent. Supply and demand The supply is a measure of the quantity of competitive offerings available to the marketplace. The demand is a measure of how intensely the market wants to acquire the offering. Supply and demand forces are not static. They interact continually in a ritual dance to affect what the market is willing to pay. Oversupply usually results in falling prices, whereas supply shortages drive prices up. This is how the free market sets prices. Sowell41 states that “Prices rise because the amount demanded exceeds the amount supplied at existing prices. Prices fall because the amount supplied exceeds the amount demanded at existing prices. The first case is called a ‘shortage’ and the second is called a ‘surplus’dbut both depend on existing prices. Simple as this might seem, it is often misunderstood, sometimes with disastrous consequences.” According to Sowell, price controls and excessive regulation implemented in an attempt to circumvent the free market typically have the unintended consequence of stimulating black markets, lowering quality, and creating shortages in some areas and surpluses in others. Attempts to circumvent market forces therefore are unlikely to create lasting value for the marketplace. However, the interaction of supply, demand, and price is not how the marketplace determines value. The RVT predicts that other factors in addition to price determine what the individual consumer is willing to pay for goods and services. It is important to understand that prices are typically set by the marketplace, not by what a provider wants to charge. The fair market value of a pharmacy service is that amount that the market is willing to pay. The market does not care what it costs to perform the service; it only cares that the price has value to the buyer compared with other choices.
Why should pharmacists care about economics and value creation? Economic reality demands that our leadership transcend politics to find workable solutions to our pressing health care policy problems. Misguided policy can be created by people with good intentions who possess a poor understanding of
the unintended consequences of their actions. A thorough understanding of the RVT can provide pharmacists with the insight to predict the consequences of impending policy decisions. If policy makers understood RVT, they could have predicted that health benefit design would have a significant effect on patient outcomes.4-6,48,49 They could have known that payment systems could incentivize the wrong provider behavior and potentially reduce the number of providers willing to do the right work.44-47 And they could have known that price controls and highly regulated markets can negatively affect the consumers they are attempting to serve.41,44-49 Many pharmacists may not want to learn about economics, marketing, and value creation. They may not think that health professionals should worry about the business aspects of managing a practice. They may tell themselves that they do not understand and don’t like business. However, one does not have to like or understand physics and the law of gravity to understand that stepping off of a 10th story balcony will cause you to fall to your death 100 feet below. A pharmacist who understands the RVT can become a powerful agent of change to help the health care industry make the right decisions to provide sustainable high-quality patient care in the future. References 1. JCPP Future vision of pharmacy practice statement 2005. Available at: http://www.aacp.org/resources/ historicaldocuments/Documents/JCPPFutureVision ofPharmacyPracticeFINAL.pdf. Accessed 25.06.11. 2. Project Destiny summary 2008. The American Pharmacists Association (APhA) Web site. Available at: http://www.pharmacist.com/AM/Template.cfm?Sect ion¼Resource_Library2&Template¼/MembersOnly. cfm&NavMenuID¼1830&ContentID¼18122&Direct ListComboInd¼D. Accessed 15.06.11. 3. Project Destiny detailed report 2008. The American Pharmacists Association (APhA) Web site. Available at: http://www.pharmacist.com/AM/Template.cfm? Section¼Home2&CONTENTID¼19002&TEMPLA TE¼/CM/ContentDisplay.cfm. Accessed 15.06.11. 4. Summary of New Health Reform Law. The Henry J Kaiser Family Foundation Web site. Available at: http://www.kff.org/healthreform/upload/8061.pdf. Accessed 12.04.11. 5. Accountable care organizations: improving care coordination for people with Medicare 2011. Available at: http://www.healthcare.gov/news/factsheets/acco untablecare03312011a.html. Accessed 14.06.11. 6. Can accountable care organizations improve the value of health care by solving the cost and quality
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quandaries? 2009. Available at: http://www.rwjf.org/ qualityequality/product.jsp?id¼50609. Accessed 14. 06.11. Bloemer J, de Ruyter K, Wetzels M. Linking perceived service quality and service loyalty: a multidimensional perspective. Eur J Mark 2009;43:1082–1106. Bolton R, Drew J. A Multistage Model of Customers’ Assessments of Service Quality and Value. Journal of Consumer Research [serial online] March 1991;17(4):375–384. Available from: Business Source Premier, Ipswich, MA. Accessed 04.08.11. Caruana A, Money AH, Berthon PR. Service quality and satisfactiondthe moderating role of value. Eur J Mark 2000;34:1338–1352. Churchill GA, Surprenant C. An investigation into the determinants of customer satisfaction. J Mark Res 1984;19:491–504. Cronin JJ, Brady MK, Hult GTM. Assessing the effects of quality, value, and customer satisfaction on consumer behavioral intentions in service environments. J Retailing 2000;76:193–218. Oliver RL. A conceptual model of service quality and service satisfaction: compatible goals, different concepts. Adv Serv Mark Manag 2001;2:65–85. Reichheld FF. The Loyalty Effect, The Hidden Force Behind Growth, Profits, and Lasting Value. Boston, MA: Harvard Business School Press; 1996. Venetis AK, Ghauri NP. Service quality and customer retention: building long-term relationships. Eur J Mark 2004;38:1577–1598. Woodruff R. Customer value: the next source for competitive advantage. J Acad Mark Sci 1997;25: 139–153. Sriwong BT. Evaluation of changes in prescription medication patronage motives: the comparison study. Silpakorn Univ Sci Technol J 2007;1: 13–25. Smith HA, Coons SJ. Marketing Pharmaceutical Services: Patron Loyalty, Satisfaction, and Preferences. Binghampton, NY: Haworth Press; 1992. Wiederholt JB. Development of an instrument to measure evaluative criteria that patients use in selecting a pharmacy for obtaining prescription drugs. J Pharm Mark Manag 1987;1:35–60. Gladwell M. The Tipping Point. New York, NY: Back Bay Books; 2002. Zeithaml V. Consumer perception of price, quality, and value: a means end model and synthesis of evidence. J Marketing 1988;52:2–22. Zeithaml VA, Berry LL, Parasuraman A. The behavioral consequences of service quality. J Marketing 1996;60:31–46. Sweeney JC, Soutar GN, Johnson LW. The role of perceived risk in the quality value relationship: a study in a retail environment. J Retailing 1999;75: 77–105. Anderson JC, Narus JA, van Rossum W. Customer value propositions in business markets. Harv Bus Rev 2006;52:91–99.
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24. Payne A, Holt S. Diagnosing customer value: integrating the value process and relationship marketing. Br J Manag 2001;12:159–182. 25. Walsh G, Kilian T, Buxel H. Assessing the consumer perceived value scale. Adv Consum Res 2008;35: 688–689. 26. Tam JLM. Customer satisfaction, service quality and perceived value: an integrative model. J Mark Manag 2004;20:897–917. 27. Fleming JH, Asplund J. Human Sigma: Managing the Employee-Customer Encounter. New York, NY: Gallup Press; 2007. 28. Drew JH, Bolton RN. Service value and its measurement: local telephone service. In: Suprenant C, ed. Add Value to Your Service: 6th Annual Services Marketing Proceedings. Chicago, IL: American Marketing Association; 1987. p. 375–385. 29. Lee HS. Factors influencing customer loyalty of mobile phone service: empirical evidence from Koreans. J Internet Bank Commerce 2010;15:1–14. 30. Kerin RA, Hartley SW, Rudelius W. Marketing. 9th ed. Boston, MA: McGraw-Hill; 2009. 31. Sugrue LP, Corrado GS, Newsome WT. Matching behavior and the representation of value in the parietal cortex. Science 2004;304:1782–1787. 32. Sallet J, Quilodran R, Rothe M, Vezoli J, Joseph JP, Procyk E. Expectations, gains, and losses in the anterior cingulated cortex. Cogn Affect Behav Neurosci 2007;7:327–336. 33. Cohen MX, Ranganath C. Behavioral and neural predictors of upcoming decisions. Cogn Affect Behav Neurosci 2005;5:117–126. 34. Dayan P, Daw ND. Decision theory, reinforcement learning, and the brain. Cogn Affect Behav Neurosci 2008;8:429–453. 35. McClure SM, Laibson DI, Loewenstein G, Cohen JD. Separate neural systems value immediate and delayed monetary rewards. Science 2004;306:503–507. 36. Nau DP, Ried LD, Lipowski EE, Kimberlin C, Pendergast J, Spivey-Miller S. Patients’ perceptions of the benefits of pharmaceutical care. J Am Pharm Assoc (Wash) 2000;40:36–40. 37. Medicare at a glancedfact sheet: 2010. The Henry J Kaiser Family Foundation Web site. Available at: http://www.kff.org/medicare/1066.cfm. Accessed 12.04.11. 38. Drucker PF. Management: Tasks, Responsibilities, Practices. New York, NY: Harper & Row; 1986. 39. Knapp KK, Shah BM, Barnett MJ. The pharmacist aggregate demand index to explain changing demand over a ten year period. Am J Pharm Educ 2010; 74:189. 40. Recession presents challenges for pharmacists Drug Topics 2009. Available at: http://www.modernmedi cine.com/modernmedicine/Associations/Recessionpresents-challenges-for-pharmacists/ArticleStandard/ Article/detail/603267. Accessed 21.04.11. 41. Sowell T. Basic Economics. 3rd ed. New York, NY: Basic Books; 2007.
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42. Hsiao WC, Braun P, Yntema D, Becker ER. Estimating physicians’ work for a resource-based relative-value scale. N Engl J Med 1988;319:835–841. 43. Hsiao WC, Braun P, Dunn D, Becker ER, DeNicola M, Ketcham TR. Results and policy implications of the resource-based relative-value study. N Engl J Med 1988;319:881–888. 44. Maloney JA. Critical analysis of the resourcebased relative value scale. JAMA 1991;266: 3453–3458. 45. Goodson JD. Unintended consequences of resourcebased relative value scale reimbursement. JAMA 2007;298:2308–2310. 46. Ginsburg PB, Crossman JM. When the price isn’t right: how inadvertent payment incentives drive
medical care. Health Aff (Millwood). Available at: content.healthaffairs.org/content/early/2005/08/09/ hlthaff.w5.376.full.pdf+html?sid=975f35ae-11d5448e-b01f-f621bbf90d84. Accessed 27.04.11. 47. Medicare Payment Advisory Commission (MEDPAC) Report to the Congress: assessing alternatives to the sustainable growth rate system 2007. Available at: http://www.medpac.gov/documents/Mar07_SGR_ mandated_report.pdf. Accessed May 31, 2011. 48. Soumerai SB. Benefits and risks of increasing restrictions on access to costly drugs in Medicaid. Health Aff (Millwood) 2004;23:135–146. 49. Majumdar SR, Soumerai SB. The unhealthy state of health policy research. Health Aff (Millwood) 2009; 28:w900–w908.
Commentary
The value prescription: Relative value theorem as a call to action Greg L. Alston, Pharm.D.a,*, Joseph C. Blizzard, R.Ph., Ph.D.b a
Wingate University School of Pharmacy, 515 North Main Street, Wingate, NC 28174, USA b Beam Pharmacies, Inc., 2004 Groves Edge Lane, Waxhaw, NC 28173, USA
Summary The Joint Commission of Pharmacy Practitioners Future Vision of Pharmacy Practice 2015 (2005) and Project Destiny (2008) clearly defined a vision for transforming community practice pharmacy from a culture of dispensing drugs to the provision of services. Several viable service offerings were identified. Pharmacy has not yet fully capitalized on these opportunities. Pharmacy must demonstrate value in providing these services to remain viable in the marketplace. Many pharmacists do not understand how value is created and lack sufficient marketing skills to position their practice for long-term success. The relative value theorem (RVT) describes in simple terms the key elements that drive purchase decisions and thus marketing decisions: (P þ S) PV ¼ RV (P, price; S, service; PV, perceived value; RV, relative value). A consumer compares the P, extra S, and PV of the purchase against all potential uses of their scarce resources before deciding what to buy. Evidence suggests that understanding and applying the principles of RVT is a critical skill for pharmacy professionals in all practice settings to master if they plan to remain viable players in the health care marketplace of the future. Ó 2012 Elsevier Inc. All rights reserved. Keywords: Relative value; Perceived value; Service; Price; Stakeholder; Economics; Cost; Opportunity cost; Value; Accountable care organization; Health care reform
What is the future of pharmacy in America? In 2005, the Joint Commission of Pharmacy Practitioners issued the Future Vision of Pharmacy Practice Vision Statement.1 This document declared that “Pharmacists will be the health care professionals responsible for providing patient care that ensures optimal medication therapy outcomes.” Additionally, the statement predicted that “Working cooperatively with practitioners of other disciplines to care for patients, pharmacists will be . valued patient care providers whom health care
systems and payers recognize as having responsibility for assuring the desired outcomes of medication use.” A key element of this vision was left undefined: how do pharmacists become valued? The Project Destiny summary report released in August 20082 further describes a vision for pharmacists to move beyond the commoditized dispensing of drug products to the provision of pharmaceutical care services. This project of the American Pharmacists Association (APhA), the National Association of Chain Drug Stores (NACDS), and the National
* Corresponding author. Tel.: þ1 704 2338329; fax: þ1 888 8702519. E-mail address: [email protected] (G.L. Alston), [email protected] (J.C. Blizzard) 1551-7411/$ - see front matter Ó 2012 Elsevier Inc. All rights reserved. doi:10.1016/j.sapharm.2011.06.004
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Community Pharmacists Association (NCPA) considered research, analyses, and feedback from stakeholders in the profession of pharmacy, such as pharmacy owners, pharmacy technicians, employers, public and private payers, medical professionals, academics, pharmaceutical manufacturers, legislators, technology providers, and patients. This landmark report stated several key findings. First, a significant unmet consumer need exists. The lack of medication management, the increase of chronic and comorbid conditions, avoidable health care costs, and shortage of outcomes evidence provide a target-rich environment for pharmacists to develop professional services. These unmet needs have the potential to generate $7.5 billion in annual revenues. This level of revenue represents a viable market opportunity for pharmacist-provided services.2 Moreover, community pharmacists are an underused resource. They have the capability to provide access to differentiated services to target consumer groups but have not capitalized on their strategic advantage. Health care stakeholders strongly desire to engage in the process of developing service offerings and collaborate on bringing these services to market. However, the medication management market is rapidly filling with competition from other providers, and the community pharmacy will lose the opportunity to compete if it does not rapidly engage in marketing its services.2 The full Project Destiny documentation provides the business plan, implementation strategy, reimbursement analysis, and timeline for the profession to deliver 4 types of pharmacy service offering (PSO) to the marketplace. Dispensing and administration service offerings are related to the preparation, filling, and delivery of medications and vaccines. Patient care management service offerings are related to leveraging the pharmacist’s skills to address customer’s health care concerns. Related health product recommendations service offerings are designed to augment a customer’s total medication experience through a pharmacist’s selected recommendations. And consumer, service, and outcomes data service offerings focus on analyzing, using, and reporting detailed and aggregated data to prescribers, payers, funders, and consumers of health care.3 Two key concepts are fundamental to this future vision of community pharmacy: the development of the primary care pharmacist and the introduction of patient care management services. “The primary care pharmacist will demonstrate
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their value by assisting patients and their providers in the overall management of medications and conditions across providers.”2 However, significant hurdles exist including negative perceptions of community pharmacists’ ability to offer expanded services, regulatory restrictions on pharmacy practice, lack of the payment system infrastructure to support expanded service offerings, and lack of marketing traction with consumers despite consistent attempts to establish it.2 Again, a key element of this vision was left undefined: how do pharmacists demonstrate value? The original timeline created by Project Destiny called for the implementation strategy to be credible and prepared by 2009, proven and mobilized by 2011, and recognized and integrated by 2013 and for community pharmacy to be transformed in to a health care delivery partner by 2017.2 NACDS, NCPA, APhA, and the state pharmacy associations have battled in the legislative and regulatory arenas to secure the opportunity for the profession. Schools of pharmacy have produced record numbers of students with the advanced clinical skills to deliver on the promise. Yet the market demand for pharmacy services has not achieved critical mass. And new challenges have emerged. The passage of the Patient Protection and Affordable Care Act in March 20104 and the Department of Health and Human Services rules regarding Accountable Care Organizations (ACOs) in 2011 have clouded the structure of payment systems. The Medicare Shared Savings Program will reward ACOs that lower growth in health care costs while meeting performance standards on quality of care and putting patients first.5 Under the proposed rule, Medicare will continue to pay individual health care providers under the original Medicare payment system but will allow ACOs to share in the savings generated if patient care quality is above standard. Nevertheless, the details of what ACOs do and how they do it have yet to be defined. Currently, both 1-sided risk (share in savings but not losses) and 2-sided risk (share in both savings and losses) are under consideration. Current payment systems pay providers for the volume of care rather than for the value of that care. ACOs seek to be organizations with an alternative payment system that rewards value.6 Thus, understanding how value is created, nurtured, and managed is essential to making ACOs work. Pharmacists need to engage in the
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development, operation, and management of ACOs so that the value of pharmaceutical care will be fairly represented in these future payment systems. Project Destiny articulated a detailed plan for transforming community practice from dispensing drugs to providing services. Pharmacists possess the clinical skill to deliver primary care. So why is the market not clamoring for pharmacists to provide these valuable services? The profession has failed to establish the value of these services in the marketplace. Unfortunately, pharmacists routinely receive insufficient formal training in how to market their service offerings effectively. The essence of a good marketing plan is creating value for a targeted customer. Therefore, the relative value theorem (RVT) is proposed as a model to teach pharmacists how value is created and how they can position their service offering to be successful in the marketplace. The importance of creating value Pharmacists cannot increase their value to the health care system unless they understand conceptually how value, in general, is created in a marketplace. To understand how value is created, pharmacists need an easy-to-use practical model to inform their decision making. Although the RVT
has not been scientifically validated, it is proposed as a conceptual model of the key factors a “buyer” uses to decide which offering to select for “purchase” from a list of possible alternatives.
The RVT proposed model The RVT equation is RV ¼ ðP þ SÞ PV where RV represents the relative value of the competitive offering, P represents the price or cost to acquire the offering, S represents the extra service included with the offering, and PV represents the perceived value of the offering (Fig. 1). Relative value A consumer decides to buy or not buy an offering by intuitively calculating the RV of the different offerings on which to spend money. Marketing literature examines the link between customer service, quality, and purchase intentions.7-12 Evidence supports the notion that high-quality service offerings can positively influence customer loyalty and the long-term profitability of a business enterprise.13-15 The intuitive RV calculation made by the consumer in the decision-making process includes 3 components.
Price (P) What does it cost in dollars, time and emotional energy?
Relative Value (RV) How does this option compare with other uses of my dollars, time and energy? Do I have the resources to take action today?
Service (S) What do I get in addition to the product or service?
The Relative Value Theorem (P+S) x PV = RV
Fig. 1. The subjective prism of PV interprets the objective price and service data to generate an RV decision.
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Price The pricing element of the equation is the component in which the consumer compares the cost to acquire an offering versus the cost of acquiring competing offerings. In this context, cost can include monetary and nonmonetary items. Nonmonetary items include opportunity cost, time expended, physical effort, mental effort, and other sacrifices necessary to execute the purchase. If the price or cost of an offering was the only factor a consumer considered before executing a purchase, then no offering could remain in the market unless it was the lowest price option. Because we know by observation that a broad variety of offerings persist in the marketplace and that these offerings are not all priced identically, there must be something besides price alone that buyers consider.
Service Service introduces an additional variable to the consumer thought process that modifies the simple price/cost comparison. Service in this context will encompass all the factors associated with the offering that are ancillary to the offering itself. These factors are the elements over which the provider has control when designing the product or service offering and could be thought of as those things the provider could use in a marketing campaign to distinguish his offering from the competition. The service component will include such business practice decisions as the satisfaction guarantee, the level of service provided after the initial sale, and the quality of the support staff. In addition, the quality of the pharmacists’ professional certifications, the integrity with which the business will operate, and the compassion shown to clients are service elements. And finally, the ease of use of the business system, the convenience of the location, the hours of operation, and the availability of emergency access to care are important components. Many of these factors have shown to be significant motivators for pharmacy patronage.16-18 However, price and service alone do not explain 100% of the observable value decisions made by buyers as they shop in the marketplace. Significant variations in sales activity over time for identical products would demonstrate that there must be at least one other factor influencing the purchase decision. Gladwell19 in 1994 described such a case in The Tipping Point.
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Sales for Hush Puppy shoes were approximately 30,000 pairs per year in the United States during the early 1990s. By 1995, sales had reached more than 430,000 pairs primarily because of the shoes becoming a “chic” designer item. The Wolverine Shoe Company did not plan or execute this marketing campaign. It occurred because the “in” people at the “in” clubs in New York City had worn the shoes. The fad spread virally and propelled the company to have stores in virtually every mall in America in less than 2 years. The same shoe at the same price became extremely popular because people who previously did not want to buy the shoes suddenly did. A shoe store example may seem trivial in the context of a health care discussion. However, this component of the RVT helps explain many medication adherence failures. A patient may be able to afford his/her medication (P) and understand that the drug will improve his/her life expectancy (S). However, the patients often decide that they would rather keep their bad habits than take their medicine. If patients can afford the price and can rationally understand the impact on their health, why don’t they take their medicine as directed? So there must be something else driving their decision other than price and service. Perhaps, in the patient’s opinion, the side effects may lead to a lower quality of life. This third element of the RVT equation is the PV component. Perceived value Zeithaml defined the concept of value.20,21 She suggested that value is (1) low price, (2) whatever I want in a product, (3) the quality I get for the price I pay, and (4) what I get for what I give. PV has been defined as the cognitive trade-off between perceptions of the quality (what I get) versus the sacrifice (what I have to give up). Marketing plans attempt to improve the PV of a product in the minds of the targeted customers by manipulating the price and service elements of the offering. However, the individual consumer controls the outcome of the RV choice. All decisions regarding the RV of a product or service offering filter through the individual prism of PV. In the Hush Puppy example, the Wolverine Shoe Company did not start the trend, but they did an excellent job of capitalizing on their good fortune. The PV of their shoes changed because it became “cool” to wear them, not because they tried to convince people they were “cool.”
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The reason the P þ S component of the formula is multiplied by the PV component in the proposed model is to reflect the belief that a “buyer’s” PV can overrule the additive nature of the P þ S and translate to an RV of 0, if PV is 0. This concept is alternately described in the marketing business and consumer research literature as perceived risk,22 customer value propositions,23 customer PV,24 consumer PV scale,25 and PV.26 The buyer’s individual value analysis is a personal decision colored by the prism of his or her own unique perspective. This personal prism incorporates a complex mixture of emotion and reason to arrive at a decision. Research suggests that emotion plays a larger role than rationale analysis.27 And perceived service value seems to be comprehensive measure of a customers’ overall evaluation of a service.28 Work in both neuroscience and behavioral economics suggest that “extremely satisfied” customers fall into 2 distinct groups: those who have a strong emotional connection to the business and those who do not. Emotionally satisfied customers contribute far more to the bottom line success of a business than rationally satisfied customers, although both are satisfied.27 Understanding how to enhance the PV of a PSO should encourage pharmacists to create less price-sensitive, more valuable products and services. It also should develop loyal customers.
Why is value marketing important? Businesses with loyal customers tend to be more profitable.29 Researchers estimate that a 5% improvement in customer retention can lead to an increase of up to 85% in profits.30 The Human Sigma project suggests that engaged customers generate 1.7 times the sales revenue when compared with nonengaged customers.27 Ignoring the drivers of PV will jeopardize marketing campaigns. Elements of decision making are not just theoretical marketing constructs but are being actively documented by cognitive neuroscientists. With neural imaging, neuroscientists are showing support for the cognitive components associated with the PV to consumers of products and services.27,30-35 These decisions have also been studied with the addition of a time component comparing immediate versus delayed expectations. This has important future applications in health care where we often ask patients to engage in services or
behavior changes that often have no immediate impact but only long-term delayed benefits. In the business of pharmacy and PSOs, a patient’s perceptions can dramatically affect the sustainability of a practice model.36 For example, if a pharmacist makes a dispensing error on a patient’s prescription, the patient may decide to never patronize this pharmacist again. If the patient believed that the pharmacy dispensing service was dangerously inaccurate, the RVT model predicts that the PV of this pharmacy would become 0. If the PV is 0, it is unlikely that any price reduction or service enhancement will entice a customer to return. On the other hand, if the price for the prescription has a fixed co-payment, which is the same at any pharmacy, then the patient will choose where to purchase prescriptions based on the service level or PV of the service offering at a particular location. Something as simple as convenient location or something as complex as their level of trust for the pharmacist could drive this PV.16-18 A consumer’s PV of a product or service offering is colored by his/her personal experiences, the recommendations of his/her friends, and his/her shifting assumptions. Health care marketplace examples include 1. Patients who want brand name drugs only and perceive generics as lower value 2. Patients who want to see the doctor only and do not perceive care by the nurse practitioner or physician’s assistant as equally valuable 3. Drug store customers who patronize their favorite store because they perceive their relationship with the pharmacist as valuable 4. Customers who refuse to make any discretionary purchases because the stock market is down and because they perceive that holding onto their cash is more valuable than buying medicine 5. Patients who refuse treatment for an embarrassing medical condition because they perceive that their privacy or dignity is more important than treatment 6. Payers opting to include a mail order-only option in their plan design and exclude community pharmacies because they do not perceive value in local pharmacist care. In short, the PV of an offering exists totally within the mind of the person calculating the RVT. The RVT describes the interplay of P, S, and PV that generates the bid price a buyer is willing to offer to the marketplace to buy that product or service. Failing to understand the RVT
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could put pharmacists at significant disadvantage in the health care marketplace.
Value strategy To create a value strategy for a professional practice, a pharmacist will need to consider 2 key issues: (1) the other offerings that compete with the specific pharmacy service in the marketplace and (2) the price the market is willing to pay. Pharmacists should understand that all goods and services, which are alternate uses for a buyer’s scarce resources, compete with the pharmacy offering in the marketplace. To create an offering that buyers will freely choose in the marketplace, the RVT value will have to be higher than competing products or services in the mind of the potential buyer. The price needs to be competitive but not necessarily lower than other options. If the buyer perceives the service component to be better or the PV to be greater, he/she may accept a higher price. To ensure that a professional practice succeeds, the RVT equation will have to be balanced to favor the practice in the minds of the potential customers. When designing a niche pharmacy offering for the health care marketplace, pharmacists need to tailor the offering to meet the unmet needs of the targeted niche audience. A major focus should be the development of a unique selling proposition that clearly states what the practice does, what solutions the practice is offering, and why this solution is needed by the targeted market. It is important to note that the RVT predicts that a lower price will not always produce a higher sales rate. Consumers may choose not to buy if the price is too low because they may perceive the product is inferior. Moreover, the RVT suggests that price reductions are not the only form of successful marketing. A pharmacist must understand the interplay of all the forces at work in the buyer’s mind to create the buyer’s willingness to spend their money on the service. Within the context of the health care marketplace, pharmacists must generate a higher RVT value to their targeted stakeholder than competing service providers. Pharmacists are not the only professionals capable of providing immunizations, smoking cessation services, disease state management, drug regimen reviews, or prescription dispensing services. Failure to demonstrate that pharmacists can provide these services at a competitive price, with better outcomes,
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or with a higher customer PV may potentially lead to pharmacists losing the opportunity to do that work. Moreover, a critical point to consider when using the RVT to guide a value creation strategy for the profession is that you cannot assume that a stakeholder’s worldview is the same as yours. A stakeholder may be deciding how to spend his/ her limited resources (discretionary income) by comparing 2 completely dissimilar uses of his/her money. Although a pharmacist may assume that a patient is comparing the RVT value of his/her professional service offering with that of a similar pharmacy provider, this may not be the case. The patient may be deciding between paying for pharmaceutical care or his/her rent. When allocating how to spend their scarce funds, the patients will consider not just expenditures on health care but on all the potential uses of that money. With 47% of seniors reporting annual incomes less than $29,140 annually,37 patients may be selecting between buying groceries and buying medicine. This same dynamic may force health systems to make tough choices in the future about whether pharmaceutical care provides a better value than other cost saving measures. There are 3 discrete methods to increase the value of an offer relative to competing products or services: 1. Price it correctly 2. Improve the service value of the offer 3. Improve the PV of the product Understanding the RVT equation provides pharmacists with the knowledge to design an appropriate long-term marketing strategy. In a professional practice model, creating value for patients ultimately creates satisfied patients and caregivers. Subsequently, satisfied patients and caregivers become loyal customers. Businesses with loyal customers generate consistently higher profits.29,30 RVT additionally explains the difference between new and existing customers. New customers by definition have not purchased from you yet. They do not know you well enough to trust you, so they resist your marketing message. The key to attracting new customers cost effectively is getting referral recommendations from satisfied customers. The reason referral marketing works is revealed in the RVT equation, RV ¼ (P þ S) PV. If a potential new customer receives a recommendation from a person he/she trusts (high PV) for a product that meets his/her needs (high service value), that he/she can afford, and is
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willing to buy (right price), he/she will be likely to buy your professional service. According to Reichheld, in the book The Loyalty Effect, U.S. corporations lose half of their customers in 5 years and half their employees in 4 years. Customer retention is the yardstick that measures how well the company is creating value for its customers. Creating value for customers builds loyalty, and loyalty builds growth, profit, and more value. Profit is not the ultimate goal. Profit is a direct result of value creation. The only way for a business to achieve long-term success is to create a culture of value creation and loyalty. High turnover rates for customers and employees are a symptom of weakness for a business that must be addressed. Human capital, unlike most other assets, does not depreciate over time. It actually improves with age.13
The role of profits in the pharmacy business Management expert Peter Drucker stated that businesses exist to serve society. A business should focus on serving its customers. However, business profits are a required resource in order for the company to continue serving society.38 A successful business grows profitably by providing a quality offering and real value to the marketplace. The profession of pharmacy is a business, and money and profits are required to sustain the activity. They function to keep the pharmacy solvent to continue providing needed services and products to society. Reichheld describes 2 kinds of profit. Virtuous profit results from the creating, sharing, and building of company assets. And destructive profit comes from exploiting the assets of the business. Virtuous profit therefore emanates from activities that are good for the business and the customers it serves, whereas destructive profits ultimately harm the same.13 Clearly a pharmacist should seek to produce virtuous profit by creating value for his/her customers. Although it is acceptable to profit by providing quality professional services or products, it is not acceptable to sell patients products or services they do not need merely to make a profit. Do this once, and risk destroying your reputation (PV) and damaging your ability to succeed for the long term. An essential driver of the value pharmacists have historically created in the marketplace is the trust the public places in the profession. If pharmacists violate that trust, PV in the eyes of
the marketplace would be diminished. In terms of the RVT equation, if our PV becomes 0, our RV becomes 0 and the pharmacy would be reduced to pure- price commodity status. RV ¼ ðP þ SÞ PV if PV ¼ 0 then RV ¼ 0
Value creation as a survival strategy Several generations of community pharmacists have used the retail drug store as their core business model. The pharmacist’s ability to adjust the model to fit the demands of the marketplace has ensured the profession’s survival. Community pharmacists faced numerous challenges beginning in the early 1900s. The original hometown apothecary evolved to compete with expansion of chain stores, narcotics laws, generic drugs, patient profiles, patient counseling laws, computerization, pharmacy payment systems, the Health Insurance Portability and Accountability Act, third party audits, and the federal government as primary payer to name a few. As a result, entrepreneurs developed a variety of retail and nonretail pharmacist practice models. With the pace of change steadily accelerating, this entrepreneurial skill (adaptability) will be even more important in the future. The variety of practice settings, business models, and practice specialties required to fulfill the Project Destiny vision will require that new paradigms be used to exploit new opportunities. Therefore, it is incumbent on the profession to develop pharmacists capable of creatively capitalizing on these opportunities. As health care and drug therapy treatments get more complex, specialists become more essential to meet the needs of the specialty market. Pharmacists should adapt to fill these roles. There is no single right business model that provides value to all potential stakeholders. Individual pharmacists must design, develop, and adapt their skills to fit the needs of the marketplace. The profession must accommodate a wide variety of practice models to meet the needs of society. The process of developing a market-competitive PSO will require teaching pharmacy practitioners how to create value. To actively direct this process, our profession will need to embrace economic, business, and marketing theory to redefine the nature of the work that pharmacists expect to perform in professional practice. Pharmacy students, clinical pharmacy practitioners, and academics have historically distanced themselves from the financial aspects of running a business. Nevertheless, given forces such as
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economic recession, changes proposed by Project Destiny, and the tightening of the job market for graduates,39,40 many pharmacists will need to update their financial skills to remain competitive in the marketplace. In short, to continue receiving acceptable salaries, pharmacists will need to justify their worth to an employer. A foundation in economic theory will be essential to inform the allocation of time and effort toward producing service offerings that generate a return on investment and create value for stakeholders. The value of any product or service in the marketplace is ultimately determined by the interplay of economic forces within that marketplace. The principles of economics describing these interactions are well defined in the business literature. Therefore, a key step in educating pharmacists to improve their business acumen is to explain the core concepts of economics that apply to practice. These principles should frame the discussion of how to create value in the marketplace for a professional practice opportunity using the RVT as a guide.
Basic economic concepts Economics is the study of how individuals and groups choose to allocate resources. The process by which resources are allocated can vary widely, but the core principle definitions remain the same. The RVT model was developed through the authors combined 50 years of community practice experience and adapting several of the points from Thomas Sowell’s discussion of economics in the book Basic Economics, Third Edition.41 Economics is the study of the use of scarce resources which have alternative uses. Lionel Robbins, English Economist
In economic terms, “scarce” means that there is insufficient quantity to satisfy desire. It is not simply the health care budget that constrains our ability to provide every conceivable type of care to every patient. It is the physical reality that time, labor, skilled practitioners, and dollars are never available in unlimited supply. Someone always has to decide on what is practical, helpful, and cost effective when provisioning provider time, diagnostic equipment schedules, and the use of any clinical resources. Economics describes the process by which societies, individuals, and markets interact to produce and consume goods and services. Economic decisions use the principles of economic
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theory to describe the allocation of scarce resources required to produce goods and services. Pharmacists make economic decisions daily about how to use their time, effort, and money to achieve their goals. Cost The cost of an offering is the sum of the costs of the components required to produce the offering. This includes the materials, time, labor, effort, opportunity cost, and any other resources that must be consumed to produce that product or service. Opportunity cost Opportunity cost describes the process by which making a choice precludes the simultaneous selection of other choices. For example, approximately half (54%) of all Medicare Part D enrollees in 2009 earned less than the federal poverty limit of $19,600 per year.37 The opportunity cost of paying rent may be not adhering to their prescribed medication regimen. Opportunity cost includes the monetary and nonmonetary costs of a decision such as time and effort. Opportunity cost describes how spending time developing niche practice expertise in the field of oncology precludes one from simultaneously spending that same time developing expertise in pediatrics. Given the complexity of any practice specialty, therefore, it is unlikely that a pharmacist has the time to become a credible expert in multiple areas simultaneously. Price The price is the amount the buyer is willing to pay to acquire the offering. In a free market, supply and demand interact to set prices. In a regulated market, frequently price controls are imposed by government regulation. Most health care services are highly regulated. For example, the U.S. Department of Health and Human Services has created a fixed pricing structure for most product and service billing codes using the resource based relative value scale.42,43 This type of fixed pricing system can create negative unintended consequences.44-47 If a service offering sells in the marketplace for more than it costs to perform, the offering will be profitable for the provider. If a service sells for less than it costs to perform, then the provider will lose money performing the service. If the provider loses money on a service, the loss must be made up with higher
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profit somewhere else in the service provider’s business model for the provider to remain solvent. Supply and demand The supply is a measure of the quantity of competitive offerings available to the marketplace. The demand is a measure of how intensely the market wants to acquire the offering. Supply and demand forces are not static. They interact continually in a ritual dance to affect what the market is willing to pay. Oversupply usually results in falling prices, whereas supply shortages drive prices up. This is how the free market sets prices. Sowell41 states that “Prices rise because the amount demanded exceeds the amount supplied at existing prices. Prices fall because the amount supplied exceeds the amount demanded at existing prices. The first case is called a ‘shortage’ and the second is called a ‘surplus’dbut both depend on existing prices. Simple as this might seem, it is often misunderstood, sometimes with disastrous consequences.” According to Sowell, price controls and excessive regulation implemented in an attempt to circumvent the free market typically have the unintended consequence of stimulating black markets, lowering quality, and creating shortages in some areas and surpluses in others. Attempts to circumvent market forces therefore are unlikely to create lasting value for the marketplace. However, the interaction of supply, demand, and price is not how the marketplace determines value. The RVT predicts that other factors in addition to price determine what the individual consumer is willing to pay for goods and services. It is important to understand that prices are typically set by the marketplace, not by what a provider wants to charge. The fair market value of a pharmacy service is that amount that the market is willing to pay. The market does not care what it costs to perform the service; it only cares that the price has value to the buyer compared with other choices.
Why should pharmacists care about economics and value creation? Economic reality demands that our leadership transcend politics to find workable solutions to our pressing health care policy problems. Misguided policy can be created by people with good intentions who possess a poor understanding of
the unintended consequences of their actions. A thorough understanding of the RVT can provide pharmacists with the insight to predict the consequences of impending policy decisions. If policy makers understood RVT, they could have predicted that health benefit design would have a significant effect on patient outcomes.4-6,48,49 They could have known that payment systems could incentivize the wrong provider behavior and potentially reduce the number of providers willing to do the right work.44-47 And they could have known that price controls and highly regulated markets can negatively affect the consumers they are attempting to serve.41,44-49 Many pharmacists may not want to learn about economics, marketing, and value creation. They may not think that health professionals should worry about the business aspects of managing a practice. They may tell themselves that they do not understand and don’t like business. However, one does not have to like or understand physics and the law of gravity to understand that stepping off of a 10th story balcony will cause you to fall to your death 100 feet below. A pharmacist who understands the RVT can become a powerful agent of change to help the health care industry make the right decisions to provide sustainable high-quality patient care in the future. References 1. JCPP Future vision of pharmacy practice statement 2005. Available at: http://www.aacp.org/resources/ historicaldocuments/Documents/JCPPFutureVision ofPharmacyPracticeFINAL.pdf. Accessed 25.06.11. 2. Project Destiny summary 2008. The American Pharmacists Association (APhA) Web site. Available at: http://www.pharmacist.com/AM/Template.cfm?Sect ion¼Resource_Library2&Template¼/MembersOnly. cfm&NavMenuID¼1830&ContentID¼18122&Direct ListComboInd¼D. Accessed 15.06.11. 3. Project Destiny detailed report 2008. The American Pharmacists Association (APhA) Web site. Available at: http://www.pharmacist.com/AM/Template.cfm? Section¼Home2&CONTENTID¼19002&TEMPLA TE¼/CM/ContentDisplay.cfm. Accessed 15.06.11. 4. Summary of New Health Reform Law. The Henry J Kaiser Family Foundation Web site. Available at: http://www.kff.org/healthreform/upload/8061.pdf. Accessed 12.04.11. 5. Accountable care organizations: improving care coordination for people with Medicare 2011. Available at: http://www.healthcare.gov/news/factsheets/acco untablecare03312011a.html. Accessed 14.06.11. 6. Can accountable care organizations improve the value of health care by solving the cost and quality
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