Gregg Wurster09.01.02
In recent years the nutraceutical industry has matured. This fact has been demonstrated by slowing growth and price competition. A lack of new blockbuster ingredients has also contributed to the industry's slowdown. While these microeconomic trends in the nutraceuticals industry lead to a bearish outlook, a trend in the larger health sector may hold the key to a second wind for the industry. Rising health insurance premiums and the resultant consumer response are causing a fundamental change in health insurance, which will result in the growth of nutraceutical consumption in the near future.
In order to understand the effect of these changes on the nutraceuticals industry, one must first understand how health insurance operates. Fundamentally, health insurance spreads the expense of healthcare, and thus the risks of incurring an extraordinary expense, over a group of people. A person receiving health insurance through their employer, which is the most common situation in the U.S., pays an average cost for insurance as a member of the group, plus a "load fee" to the insurer, through the premium. Through deductibles and co-payments, this person contributes for his or her individual medical consumption.The larger the co-payments or deductibles in a health insurance plan, the more each individual pays for his or her own medical consumption. Correspondingly, individual premiums decrease as deductibles and co-payments increase. In plans with a higher premium because of low co-payments and deductibles, healthy individuals subsidize the medical consumption of heavy medical consumers.
Health insurance premiums will likely continue to increase at a double digit pace . While this increase is due to many factors, it is the resultant consumer response that is significant. As premiums rise, consumers and businesses alike are less willing and able to foot the bill. Specifically, healthy individuals will no longer be willing to foot the bill for their counterparts who consume large amounts of medical care.
Groups and individuals are opting for lower premiums and higher deductibles and co-payments in response to rising insurance premiums. Essentially, consumers are choosing to bear more responsibility for their own medical costs.
Novel methods of managing risk in medical consumption have also surfaced in recent years. Medical savings accounts (MSAs) allow individuals and families to set aside money for medical expenses, which are not covered by insurance. They were created in response to high insurance premiums facing small groups and self-employed individuals. When an MSA is coupled with a high-deductible health insurance plan, an individual or family can pay for their own basic medical costs with pre-tax dollars, while controlling the risk of an extraordinarily large medical expense. Often targeted specifically at healthy individuals, ,these plans will free consumer dollars for greater consumption of nutraceuticals and other wellness-related products.
These changes amount to a shift in the economics of healthcare. Healthcare is known as an imperfect market because consumers do not pay the actual full price of medical care. This leads to overuse of any medicine subsidized by insurance, a fact established by the RAND Health Insurance Study, which is inefficient. (RAND stands for Research And Development and is a non-profit think tank originally started by the U.S. government). Changing market conditions in which consumers choose to pay for medical care largely based on their own consumption, however, will result in consumer choice to take greater responsibility to use medical care efficiently. This shift in the market dynamics of healthcare will affect both wellness and treatment spending on nutraceuticals.
As healthcare consumers became more cognizant of their medical expenses, they will become more conscious of ways to prevent those expenses. Nutraceuticals consumed for the purpose of prevention of illness, such as multivitamins and soy-containing foods, will definitely benefit from this change in consumer perception. This effect of changes in health economics is especially important because it brings new customers to the wellness and nutraceuticals markets.
For example, a self-employed, 35-year-old woman has seen her health insurance premiums increase considerably over the past five years. She is overweight and has chronic knee problems because of the extra weight. She consumes a great deal of medical care, and her experience rating, used by insurance companies to determine how much medical care she will consume, indicates that her premium will rise by 25% this year. She must not only reduce her premium in the short term by selecting insurance with a higher deductible, but also improve her experience rating in order to curtail future expenses. This person realizes that her lifestyle is not only costing years of her life, but a substantial amount of money for health insurance in the meantime. She adopts a light exercise regimen to lose weight and begins to read some health and fitness publications. Through her reading she learns that glucosamine may be beneficial for her knees and that multivitamins and diet aids may also aid her quest for better health. Having met with positive results, this person may become a lifelong customer of the nutraceuticals industry.
Nutraceuticals consumption will also increase due to the "balancing effect" that will occur in the pricing of medical care. Economists call healthcare an imperfect market because the consumers of medical care do not pay the full cost of medical care. The cost of medical care is largely subsidized by insurance, causing people to consume more medical care than preventative care, which includes wellness consumption of nutraceuticals. As consumers realize more of the cost of their medical care, nutraceuticals will present a better economic value to those consumers than they did in the past.
Consider the following example. In years past, each family member visited the family doctor three times per year for illness, receiving an average of one prescription per visit. Assuming a co-payment of $20 per doctor visit and $10 per prescription, that costs a family of four $360 per year. Because of rising premium costs, the head of household decides to shift the direct contribution family medical plan to higher co-pays in order to lower the growing premium payment. If each co-payment increases by $10 ($30 for doctor visits and $20 per prescription), then the same amount of medical visits would cost that family $600 per year. A simple regimen of nutraceuticals, a multivitamin and 1000 mg of vitamin C per day, might cost about $200 for the family per year. If this regimen of nutraceuticals were to cut those doctor visits and prescriptions in half, the net savings to the family is $100 per year. This savings does not even take into consideration the days of school and work that would have been lost prior to the incorporation of the nutraceutical regimen.
Perhaps the most interesting effect of the shift in the economics of healthcare is to make nutraceuticals more viable competitors to conventional medical treatments. As the imperfect market becomes more balanced, nutraceuticals will better compete with the once heavily subsidized treatments from mainstream medicine. In the 1970s, the World Health Organization (WHO) recognized that "natural" treatments for illnesses presented a better economic value than pharmaceuticals, in many cases, in third world nations where health insurance was all but non-existent. According to a press release dated May 16, 2002, the WHO continues to recognize natural medicines' value, in this regard. As the U.S. health system approaches a state where pharmaceuticals are less subsidized by insurance, nutraceuticals will likely benefit from this same phenomenon.
A great example is the consumer/medical professional choice in the treatment of benign prostatic hyperplasia (BPH). The majority of sufferers of BPH choose to use non-invasive measures to improve symptoms. These measures often include pharmaceuticals, such as Merck's Proscar (finasteride), or nutraceuticals, such as the extract of saw palmetto berry (Serenoa repens). Each treatment works to reduce levels of dihydrotestosterone (DHT), which are often at the root of the symptoms. The cost for a 30-day supply of Proscar, taken from a discount Internet pharmacy, is approximately $90. (It's estimated that sales of Proscar will bring Merck $608 million in 2002.) The cost for a month's supply of saw palmetto, also taken from a discount internet supplier, ranges from $10 to $15. Under normal circumstances, most consumers would choose to try the saw palmetto.
When covered by typical health insurance, the price for Proscar realized by the consumer may only be $10 per month in co-payment. As is often the case, because the consumer does not realize the full cost of the prescription drug, they would choose the prescription drug over the nutraceutical.
Enter the future. Because of rising health insurance premiums, the consumer's employer reduced the degree of coverage in the employee health plan, thus increasing drug co-payments. Under the new plan, the consumer's co-payment for Proscar increases to $20 per month. In an instant, the potential economic value of saw palmetto versus Proscar becomes apparent. If only 10% of Proscar's customer's switch to saw palmetto, the effect on sales of the nutraceutical is profound. This is not to mention saw palmetto's potential for substitution for other drugs used to treat BPH or saw palmetto's potential as a substitute for Merck's Propecia (finasteride), which is the same drug as Proscar but at a lower dosage and is approved to treat male pattern hair loss.
Decisions to switch from pharmaceuticals to nutraceuticals will not be confined to the end consumers. Keenly aware of the economics of healthcare, physicians will likely begin to recommend and prescribe nutraceuticals at a growing rate. Physicians are already aware of the "prescription potential" of many nutraceuticals, aided by the introduction of the Physician's Desk Reference (PDR) for Herbal Medicines, now in its 2nd edition.Prescriptions for nutraceuticals carry the additional benefit that the purchase becomes a tax-deductible expense for the consumer, further increasing the attractiveness of the nutraceutical option. Better yet, if Senators Hatch and Harkin's Dietary Supplement Tax Fairness Act is passed, expenses for nutraceuticals will be tax deductible without the formality of a prescription.
Years ago, the decision to utilize nutraceuticals was often a lifestyle decision. Rapidly this paradigm is changing. In the future, the decision of a consumer to use nutraceuticals, either for wellness or treatment, will be an economic decision.NW
About the author:
Gregg Wurster is a veteran of product development and marketing in the nutraceutical industry. He is currently attending graduate school at Duke University's Fuqua School of Business, specializing in Health Sector Management. He can be reached at 919-427-3238; E-mail: gregg.wurster@duke.edu.
Health Insurance Shakeup
In order to understand the effect of these changes on the nutraceuticals industry, one must first understand how health insurance operates. Fundamentally, health insurance spreads the expense of healthcare, and thus the risks of incurring an extraordinary expense, over a group of people. A person receiving health insurance through their employer, which is the most common situation in the U.S., pays an average cost for insurance as a member of the group, plus a "load fee" to the insurer, through the premium. Through deductibles and co-payments, this person contributes for his or her individual medical consumption.The larger the co-payments or deductibles in a health insurance plan, the more each individual pays for his or her own medical consumption. Correspondingly, individual premiums decrease as deductibles and co-payments increase. In plans with a higher premium because of low co-payments and deductibles, healthy individuals subsidize the medical consumption of heavy medical consumers.
Health insurance premiums will likely continue to increase at a double digit pace . While this increase is due to many factors, it is the resultant consumer response that is significant. As premiums rise, consumers and businesses alike are less willing and able to foot the bill. Specifically, healthy individuals will no longer be willing to foot the bill for their counterparts who consume large amounts of medical care.
Groups and individuals are opting for lower premiums and higher deductibles and co-payments in response to rising insurance premiums. Essentially, consumers are choosing to bear more responsibility for their own medical costs.
Novel methods of managing risk in medical consumption have also surfaced in recent years. Medical savings accounts (MSAs) allow individuals and families to set aside money for medical expenses, which are not covered by insurance. They were created in response to high insurance premiums facing small groups and self-employed individuals. When an MSA is coupled with a high-deductible health insurance plan, an individual or family can pay for their own basic medical costs with pre-tax dollars, while controlling the risk of an extraordinarily large medical expense. Often targeted specifically at healthy individuals, ,these plans will free consumer dollars for greater consumption of nutraceuticals and other wellness-related products.
These changes amount to a shift in the economics of healthcare. Healthcare is known as an imperfect market because consumers do not pay the actual full price of medical care. This leads to overuse of any medicine subsidized by insurance, a fact established by the RAND Health Insurance Study, which is inefficient. (RAND stands for Research And Development and is a non-profit think tank originally started by the U.S. government). Changing market conditions in which consumers choose to pay for medical care largely based on their own consumption, however, will result in consumer choice to take greater responsibility to use medical care efficiently. This shift in the market dynamics of healthcare will affect both wellness and treatment spending on nutraceuticals.
Wellness Consumption of Nutraceuticals
As healthcare consumers became more cognizant of their medical expenses, they will become more conscious of ways to prevent those expenses. Nutraceuticals consumed for the purpose of prevention of illness, such as multivitamins and soy-containing foods, will definitely benefit from this change in consumer perception. This effect of changes in health economics is especially important because it brings new customers to the wellness and nutraceuticals markets.
For example, a self-employed, 35-year-old woman has seen her health insurance premiums increase considerably over the past five years. She is overweight and has chronic knee problems because of the extra weight. She consumes a great deal of medical care, and her experience rating, used by insurance companies to determine how much medical care she will consume, indicates that her premium will rise by 25% this year. She must not only reduce her premium in the short term by selecting insurance with a higher deductible, but also improve her experience rating in order to curtail future expenses. This person realizes that her lifestyle is not only costing years of her life, but a substantial amount of money for health insurance in the meantime. She adopts a light exercise regimen to lose weight and begins to read some health and fitness publications. Through her reading she learns that glucosamine may be beneficial for her knees and that multivitamins and diet aids may also aid her quest for better health. Having met with positive results, this person may become a lifelong customer of the nutraceuticals industry.
Nutraceuticals consumption will also increase due to the "balancing effect" that will occur in the pricing of medical care. Economists call healthcare an imperfect market because the consumers of medical care do not pay the full cost of medical care. The cost of medical care is largely subsidized by insurance, causing people to consume more medical care than preventative care, which includes wellness consumption of nutraceuticals. As consumers realize more of the cost of their medical care, nutraceuticals will present a better economic value to those consumers than they did in the past.
Consider the following example. In years past, each family member visited the family doctor three times per year for illness, receiving an average of one prescription per visit. Assuming a co-payment of $20 per doctor visit and $10 per prescription, that costs a family of four $360 per year. Because of rising premium costs, the head of household decides to shift the direct contribution family medical plan to higher co-pays in order to lower the growing premium payment. If each co-payment increases by $10 ($30 for doctor visits and $20 per prescription), then the same amount of medical visits would cost that family $600 per year. A simple regimen of nutraceuticals, a multivitamin and 1000 mg of vitamin C per day, might cost about $200 for the family per year. If this regimen of nutraceuticals were to cut those doctor visits and prescriptions in half, the net savings to the family is $100 per year. This savings does not even take into consideration the days of school and work that would have been lost prior to the incorporation of the nutraceutical regimen.
Treatment Consumption of Nutraceuticals
Perhaps the most interesting effect of the shift in the economics of healthcare is to make nutraceuticals more viable competitors to conventional medical treatments. As the imperfect market becomes more balanced, nutraceuticals will better compete with the once heavily subsidized treatments from mainstream medicine. In the 1970s, the World Health Organization (WHO) recognized that "natural" treatments for illnesses presented a better economic value than pharmaceuticals, in many cases, in third world nations where health insurance was all but non-existent. According to a press release dated May 16, 2002, the WHO continues to recognize natural medicines' value, in this regard. As the U.S. health system approaches a state where pharmaceuticals are less subsidized by insurance, nutraceuticals will likely benefit from this same phenomenon.
A great example is the consumer/medical professional choice in the treatment of benign prostatic hyperplasia (BPH). The majority of sufferers of BPH choose to use non-invasive measures to improve symptoms. These measures often include pharmaceuticals, such as Merck's Proscar (finasteride), or nutraceuticals, such as the extract of saw palmetto berry (Serenoa repens). Each treatment works to reduce levels of dihydrotestosterone (DHT), which are often at the root of the symptoms. The cost for a 30-day supply of Proscar, taken from a discount Internet pharmacy, is approximately $90. (It's estimated that sales of Proscar will bring Merck $608 million in 2002.) The cost for a month's supply of saw palmetto, also taken from a discount internet supplier, ranges from $10 to $15. Under normal circumstances, most consumers would choose to try the saw palmetto.
When covered by typical health insurance, the price for Proscar realized by the consumer may only be $10 per month in co-payment. As is often the case, because the consumer does not realize the full cost of the prescription drug, they would choose the prescription drug over the nutraceutical.
Enter the future. Because of rising health insurance premiums, the consumer's employer reduced the degree of coverage in the employee health plan, thus increasing drug co-payments. Under the new plan, the consumer's co-payment for Proscar increases to $20 per month. In an instant, the potential economic value of saw palmetto versus Proscar becomes apparent. If only 10% of Proscar's customer's switch to saw palmetto, the effect on sales of the nutraceutical is profound. This is not to mention saw palmetto's potential for substitution for other drugs used to treat BPH or saw palmetto's potential as a substitute for Merck's Propecia (finasteride), which is the same drug as Proscar but at a lower dosage and is approved to treat male pattern hair loss.
Decisions to switch from pharmaceuticals to nutraceuticals will not be confined to the end consumers. Keenly aware of the economics of healthcare, physicians will likely begin to recommend and prescribe nutraceuticals at a growing rate. Physicians are already aware of the "prescription potential" of many nutraceuticals, aided by the introduction of the Physician's Desk Reference (PDR) for Herbal Medicines, now in its 2nd edition.Prescriptions for nutraceuticals carry the additional benefit that the purchase becomes a tax-deductible expense for the consumer, further increasing the attractiveness of the nutraceutical option. Better yet, if Senators Hatch and Harkin's Dietary Supplement Tax Fairness Act is passed, expenses for nutraceuticals will be tax deductible without the formality of a prescription.
Years ago, the decision to utilize nutraceuticals was often a lifestyle decision. Rapidly this paradigm is changing. In the future, the decision of a consumer to use nutraceuticals, either for wellness or treatment, will be an economic decision.NW
About the author:
Gregg Wurster is a veteran of product development and marketing in the nutraceutical industry. He is currently attending graduate school at Duke University's Fuqua School of Business, specializing in Health Sector Management. He can be reached at 919-427-3238; E-mail: gregg.wurster@duke.edu.
