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Voice of Industry

Preparing for Price Pressure: A Letter to the Editor

Dear Readers,
 
William McIlhargey is Principal of WPM Enterprise, a management consulting firm that positions technology for the medical device, therapeutic and biotech industries. Mr. McIlhargey sent this letter in response to a recent article on how to face pricing pressure. We’re pleased to share his thoughts.
—Editors
 
I would like to follow with some comments on the ORTHOKNOW article, “Accelerating Pricing Pressure: Five Ways That Device Companies Can Prepare” (April 2013). The article brought back a flood of experiences from my 35 years of price contracting with all levels of healthcare buyers. With intimate experience in “ortho-economics,” I’ve had a front row seat to various price reduction polices and efforts, referred to by the author as “cycles of pricing pressure.” 
 
As the article rightly points out, we have witnessed myriad “solutions” that target, at least in part, the ongoing dilemma of rising prices for physician preference products. These efforts are recognized under a variety of platforms, such as prospective payment legislation, group purchasing organization engagement, an edict for “managed care” and all manner of contracting models, from capitation to gain sharing. If there is one takeaway from this experience, it should be a caveat for any preparation to accelerated change—speed to market will put your margins in harm’s way! 
 
That said, I have no argument with the author’s points, and in fact applaud his review of those issues that influence the selling of our products. However, as mentioned, healthcare cost reduction/containment has occurred for years, along with a focus on high-profile products and technology. Yet historically, we witness the “product stickiness” of the orthopaedic industry, which has been linked to 1) training on the devices and accompanying instrumentation and 2) proven outcomes over a long period of time. The fact of the matter is that these underpinnings continue to be underestimated during product selection processes. 
 
Case in point for those familiar with the contracting function is the continued dialog with frustrated buyers seeking any manner of reasoning to offset yet another yearly price increase. In many cases, this dialog turns into an emotional demonstration rather than sound business discourse. Further, there are the resulting efforts of prominent proprietary groups establishing purchasing barriers to restrict non-contracted manufacturers, only to revert back to an access platform—albeit under capitation of one type or another. 
 
Other bellwether events come to mind, but the issue at hand is what we have learned from experience. If history is in fact the “grand teacher,” then its leanings are clear on the evolving nature of our industry, and require our application of that understanding to the current pressures at hand. 
 
If we look at some of these latest contributors, we may gain some insight on their projected acceleration.  
 
Product breadth, depth and pipeline—As manufacturers seek to expand products and technology to fill their bags and increase average sell orders, they have not had or taken the time to fret out the clinical success platform now commonplace with their core products. This has led to support disagreements within the clinical community and a lack of widespread acceptance of many proposed technologies (e.g. orthobiologics, metal-on-metal, MIS, etc.).
 
Surgeon transition—Older surgeons who cherished the independence of private practice are retiring, or at best limiting their practices. Younger surgeons filling the rank and file seem much more comfortable working within an organized structure vs. on their own. Coupled with a dwindling payment structure, these surgeons no longer feel in control over their financial wellbeing. Additionally and notwithstanding any legal ramification, the lines have become blurred between the clinical and economic buyers, as new methods are created to involve the surgeons in the financial impact of their decisions (such as physician-owned hospitals, accountable care organizations, physician-owned distributorships, gain-sharing, etc.). 
 
Dwindling orthopaedic DNA—Some may contend that the industry consolidation of OEMs has led to a noticeable lack of orthopaedic experience among top management. As our manufacturers become “pieces” of larger corporations, we have seen cross-pollination in the management ranks, given consideration for circular deployment of strategies previously proven to be ineffective. Clearly, there is something to be said for “growing up in the industry.”
 
Summed up, what we have in our market is a continuum of technology that has been highly successful and now chases the law of diminishing returns for quantifiable value. Unprepared for the next generation of proven technology to fill our pipeline, we have thrown a plethora of products at the market to protect our margins—this without the support of an economic profile that justifies the high margins previously gained by older technologies.
 
Finally, and not to be misunderstood, it would be foolhardy to stick our heads in the sand and ignore the constant change occurring around us. However, at this juncture, we should have enough experience to put these business cycles into perspective within the context of market evolution. Consider balancing each product against: its performance, market position/exposure within the buying community and the current needs for overall clinical acceptance. Using this data, we can assess the speed of “erosion” from this new round of price pressures. By segmenting our offerings, we can better identify where the margin risks resonate within our portfolio, and thereby create a more stratified “off-list pricing strategy” that recognizes the position of each product. 
 
From my vantage point, although the concept of “ortho-economics” still seems to escape our strategic thinking, it is necessary for us to continually reassess our evolving market—with a better understanding of the economic buyer—and implement balance to forward-moving strategies under controlled progress dictated by industry trends—thereby sparing our margins for another day!
 
William McIlhargey has held executive positions with both DePuy and Smith & Nephew before creating a consulting platform promoting strategies that bridge clinical and economic influences. He can be reached at wpm@wpmenterprise.com.