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Over the past 20 years, the medical device industry has experienced cycles of pricing pressure. At times, the pressure was self-inflicted by the behaviors of the market participants. Consider the price wars that have occurred in certain segments of the industry—orthopedics, for instance. At other times, changes to the reimbursement system or reimbursement rates have created pressure on customers, which in turn created pricing pressure for suppliers.
Today, however, fundamental changes are occurring in the market structure, in customers’ buying behaviors, in stakeholder incentives and in provider business models that point toward reacceleration of pricing pressure for the medical device industry. This is particularly true for the U.S. market, which is the primary focus of this article. Device companies that adapt their strategy and approach have the opportunity to address pricing pressure head-on. Those who enter this new period unprepared will likely face significant pricing, margin and growth challenges.
Why This Time is Different
To be prepared for accelerating price pressure, it helps to understand the changes that are occurring in healthcare and to know how this differs from the past. Here are key forces that make the immediate future different and more of a threat than ever before.
- Healthcare reform: Most notably, the Accountable Care Act (ACA) has ushered in changes intended to better align incentives for providers to reduce costs, improve quality and enhance patient satisfaction. Many of the changes are focused on reducing overall costs for managing patients as opposed to paying for volume and fragmented care.
- Physician and provider alignment: Bundled payments and the physician employment trend mean that providers’ and physicians’ economic interests are better aligned than at any other point in the past. A more aligned physician means that they will likely act in ways that are aligned with the fiscal interests of the provider.
- Hospital supply chain evolution: The hospital supply chain and purchasing capability has lagged far behind other industries.¹ This is quickly changing as providers see the supply chain as a potential source of cost reduction and extraction of more value from medical device companies. Moreover, many supply chain leaders see it as their role to help the hospital bring a much greater focus on outcomes, quality and cost in device company selection decisions.
- Value-based purchasing: At a provider level, many hospitals are building value-analysis teams and committees to ensure that purchasing decisions incorporate costs, quality and outcomes. There are two new hospital industry societies, the Association of Healthcare Value Analysis Professionals and the Association for Healthcare Resource & Materials Management CQO, focused on helping providers improve how they incorporate value into medical device company selection decisions.
- Price transparency: Group Purchasing Organizations (GPOs), as well as a number of new purchasing start-ups, are attempting to provide much greater price transparency to what has traditionally been an opaque area.² This is being enabled by technology and the Internet.
- Leveraged buying: Traditionally, GPOs have tried to play a role in aggregating spend. However, their ability to drive savings for providers has been debated.³ Medicare and other large buyers have stepped in to conduct competitive bidding with much success. ⁴ Expect this leveraged buying to accelerate.
- Demographics and fiscal situation: The aging population will put significant pressure on the healthcare system. This is happening at a time when the government is already overburdened with enormous debt. One of the logical solutions is to reduce healthcare costs, which account for a substantial portion of government.
- Customer consolidation: Hospitals and health systems will continue to consolidate to create cost synergies and efficiencies, as well as to create market power with payers and employers. This will create more powerful buyers and expose unexplained variations in market pricing.
Key Actions to Prepare for Accelerating Pricing Pressure
All of these forces will certainly accelerate pricing pressure. While it may sound like a gloomy future, it shouldn’t be for smart medical device companies. They have the opportunity to turn this changing marketplace into a source of advantage—if they are prepared. While there are many actions that a company may want to consider from an R&D perspective, here are five key commercial actions companies should take—and employees at all levels should understand—to be ready:
- Update the Sales Model & Selling Competencies: The traditional model of selling clinical benefits to the physician or user-buyers has changed. Sales teams must connect their solution to the cost, quality and outcome metrics used by all of the people involved in the buying decision. Moreover, they will need to specifically address how their solution connects to the customers’ reimbursement and business model. The ability to navigate the economic buyers and committee-based purchasing processes will also critical. An improving customer procurement function and a more-aligned physician require a different level of negotiation skills. Further, many companies may need to reassess salesforce structure and roles in the face of the market changes.
- Reassess the Offering Strategy: Traditionally, many medical device companies have bundled together value-added services with core product offerings. This creates an issue when selling to hospitals with different buying behaviors. A hospital that is a value buyer may appreciate the value-added services and be willing to pay for them. On the other hand, a price-focused buyer may want—of course—the lowest price, and will have no interest in paying for value-added services. As pricing pressure intensifies, medical device companies need to be in a position to unbundle their value-added services to deal with highly price-sensitive customers. Suppliers should also seek to create tiered offerings with different quality and performance to target buyers with differing needs. The offering strategy should include the core product, enabling technologies, services and the business terms that govern the relationship.
- Invest in Economic Value Marketing: Being able to quantify and communicate the economic benefits of one solution relative to the next best alternative will be critical for device companies. The changes to reimbursement and the hospital supply chain will mean that buyers will be more interested than ever in how your solution impacts the hospital’s financial performance. Many companies under-invest in this area, and lack a clear understanding of the economic value of their solutions. If you believe this is an exaggeration, just count how many products in your sales bag have a clear, compelling and quantified value proposition for the hospital. Given that many hospitals have joined or will join accountable care organizations (ACOs), the value message will have to cover the total cost to care for the patient—inside and outside of the hospital.
- Develop Risk-Based Pricing/Contracting Models: Progressive device companies with a clear economic advantage may want to consider new population-based or risk-based contracting models. Hospitals that are part of an ACO will be interested in how a solution impacts the total cost to care for that patient over a multi-year period. Since ACOs will be at risk with Medicare for managing the costs of the patient over a three-year period, device companies that are able to provide guarantees or go at risk for costs will be seen as part of the solution.
- Get Control of Discounting: Companies lacking control of discounting and pricing will end up with messy market pricing and significant risk. As price transparency increases and customer consolidation accelerates, companies face the risk that customers will become aware of pricing that is out in the marketplace. Companies without a logical discount strategy and disciplined price execution will face price erosion. Additionally, poor pricing discipline can cause loyal customers to abandon suppliers if they believe that they have been treated unfairly.
This is an exciting time in healthcare. More change is happening than at any other point in recent memory. For well-prepared companies, the future should be bright.
References
- Rahman, B. et al, “Repositioning Supply Chain in Health Care Systems” Health Sector Supply Chain Research Consortium wpcarey.asu.edu/hsrc-asu Accessed January 11, 2013.
- Empson, R., “Procured Health Nabs $1.1M From Bessemer, Athena Health Founder To Help Reduce Health Costs.” Techcrunch.com Aug 8, 2012.
- See details in: MDMA Statement on Senator Grassley and GAO Reports Showing No Evidence of Cost Savings by GPOs. September 27, 2010. www.medicaldevices.org Accessed June 28, 2012.
- Medicare Expands Competitive Bidding Program. Jan 31, 2013. www.kaiserhealthnews.org Accessed February 5, 2013.
Over the past 20 years, the medical device industry has experienced cycles of pricing pressure. At times, the pressure was self-inflicted by the behaviors of the market participants. Consider the price wars that have occurred in certain segments of the industry—orthopedics, for instance. At other times, changes to the reimbursement system or...
Over the past 20 years, the medical device industry has experienced cycles of pricing pressure. At times, the pressure was self-inflicted by the behaviors of the market participants. Consider the price wars that have occurred in certain segments of the industry—orthopedics, for instance. At other times, changes to the reimbursement system or reimbursement rates have created pressure on customers, which in turn created pricing pressure for suppliers.
Today, however, fundamental changes are occurring in the market structure, in customers’ buying behaviors, in stakeholder incentives and in provider business models that point toward reacceleration of pricing pressure for the medical device industry. This is particularly true for the U.S. market, which is the primary focus of this article. Device companies that adapt their strategy and approach have the opportunity to address pricing pressure head-on. Those who enter this new period unprepared will likely face significant pricing, margin and growth challenges.
Why This Time is Different
To be prepared for accelerating price pressure, it helps to understand the changes that are occurring in healthcare and to know how this differs from the past. Here are key forces that make the immediate future different and more of a threat than ever before.
- Healthcare reform: Most notably, the Accountable Care Act (ACA) has ushered in changes intended to better align incentives for providers to reduce costs, improve quality and enhance patient satisfaction. Many of the changes are focused on reducing overall costs for managing patients as opposed to paying for volume and fragmented care.
- Physician and provider alignment: Bundled payments and the physician employment trend mean that providers’ and physicians’ economic interests are better aligned than at any other point in the past. A more aligned physician means that they will likely act in ways that are aligned with the fiscal interests of the provider.
- Hospital supply chain evolution: The hospital supply chain and purchasing capability has lagged far behind other industries.¹ This is quickly changing as providers see the supply chain as a potential source of cost reduction and extraction of more value from medical device companies. Moreover, many supply chain leaders see it as their role to help the hospital bring a much greater focus on outcomes, quality and cost in device company selection decisions.
- Value-based purchasing: At a provider level, many hospitals are building value-analysis teams and committees to ensure that purchasing decisions incorporate costs, quality and outcomes. There are two new hospital industry societies, the Association of Healthcare Value Analysis Professionals and the Association for Healthcare Resource & Materials Management CQO, focused on helping providers improve how they incorporate value into medical device company selection decisions.
- Price transparency: Group Purchasing Organizations (GPOs), as well as a number of new purchasing start-ups, are attempting to provide much greater price transparency to what has traditionally been an opaque area.² This is being enabled by technology and the Internet.
- Leveraged buying: Traditionally, GPOs have tried to play a role in aggregating spend. However, their ability to drive savings for providers has been debated.³ Medicare and other large buyers have stepped in to conduct competitive bidding with much success. ⁴ Expect this leveraged buying to accelerate.
- Demographics and fiscal situation: The aging population will put significant pressure on the healthcare system. This is happening at a time when the government is already overburdened with enormous debt. One of the logical solutions is to reduce healthcare costs, which account for a substantial portion of government.
- Customer consolidation: Hospitals and health systems will continue to consolidate to create cost synergies and efficiencies, as well as to create market power with payers and employers. This will create more powerful buyers and expose unexplained variations in market pricing.
Key Actions to Prepare for Accelerating Pricing Pressure
All of these forces will certainly accelerate pricing pressure. While it may sound like a gloomy future, it shouldn’t be for smart medical device companies. They have the opportunity to turn this changing marketplace into a source of advantage—if they are prepared. While there are many actions that a company may want to consider from an R&D perspective, here are five key commercial actions companies should take—and employees at all levels should understand—to be ready:
- Update the Sales Model & Selling Competencies: The traditional model of selling clinical benefits to the physician or user-buyers has changed. Sales teams must connect their solution to the cost, quality and outcome metrics used by all of the people involved in the buying decision. Moreover, they will need to specifically address how their solution connects to the customers’ reimbursement and business model. The ability to navigate the economic buyers and committee-based purchasing processes will also critical. An improving customer procurement function and a more-aligned physician require a different level of negotiation skills. Further, many companies may need to reassess salesforce structure and roles in the face of the market changes.
- Reassess the Offering Strategy: Traditionally, many medical device companies have bundled together value-added services with core product offerings. This creates an issue when selling to hospitals with different buying behaviors. A hospital that is a value buyer may appreciate the value-added services and be willing to pay for them. On the other hand, a price-focused buyer may want—of course—the lowest price, and will have no interest in paying for value-added services. As pricing pressure intensifies, medical device companies need to be in a position to unbundle their value-added services to deal with highly price-sensitive customers. Suppliers should also seek to create tiered offerings with different quality and performance to target buyers with differing needs. The offering strategy should include the core product, enabling technologies, services and the business terms that govern the relationship.
- Invest in Economic Value Marketing: Being able to quantify and communicate the economic benefits of one solution relative to the next best alternative will be critical for device companies. The changes to reimbursement and the hospital supply chain will mean that buyers will be more interested than ever in how your solution impacts the hospital’s financial performance. Many companies under-invest in this area, and lack a clear understanding of the economic value of their solutions. If you believe this is an exaggeration, just count how many products in your sales bag have a clear, compelling and quantified value proposition for the hospital. Given that many hospitals have joined or will join accountable care organizations (ACOs), the value message will have to cover the total cost to care for the patient—inside and outside of the hospital.
- Develop Risk-Based Pricing/Contracting Models: Progressive device companies with a clear economic advantage may want to consider new population-based or risk-based contracting models. Hospitals that are part of an ACO will be interested in how a solution impacts the total cost to care for that patient over a multi-year period. Since ACOs will be at risk with Medicare for managing the costs of the patient over a three-year period, device companies that are able to provide guarantees or go at risk for costs will be seen as part of the solution.
- Get Control of Discounting: Companies lacking control of discounting and pricing will end up with messy market pricing and significant risk. As price transparency increases and customer consolidation accelerates, companies face the risk that customers will become aware of pricing that is out in the marketplace. Companies without a logical discount strategy and disciplined price execution will face price erosion. Additionally, poor pricing discipline can cause loyal customers to abandon suppliers if they believe that they have been treated unfairly.
This is an exciting time in healthcare. More change is happening than at any other point in recent memory. For well-prepared companies, the future should be bright.
References
- Rahman, B. et al, “Repositioning Supply Chain in Health Care Systems” Health Sector Supply Chain Research Consortium wpcarey.asu.edu/hsrc-asu Accessed January 11, 2013.
- Empson, R., “Procured Health Nabs $1.1M From Bessemer, Athena Health Founder To Help Reduce Health Costs.” Techcrunch.com Aug 8, 2012.
- See details in: MDMA Statement on Senator Grassley and GAO Reports Showing No Evidence of Cost Savings by GPOs. September 27, 2010. www.medicaldevices.org Accessed June 28, 2012.
- Medicare Expands Competitive Bidding Program. Jan 31, 2013. www.kaiserhealthnews.org Accessed February 5, 2013.
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Christopher Provines Christopher Provines is a healthcare and medical technology industry veteran with 23 years of experience in various functions, including executive roles at Johnson & Johnson and Siemens Healthcare. He is an expert in medical technology pricing and market access, serving as CEO of Value Vantage Partners, a global consulting and training company focused on strategic pricing, value selling and sales negotiations. He is the author of Strategic Pricing for Medical Technologies, and is an Adjunct Professor at Rutgers University Business School where he teaches in the MBA program.
