New Commercial Models for the New Hospital Customer

As the purchase of medical devices increasingly shifts from physicians to hospital administrators, manufacturers must reassess their business models.

November 19, 2014

9 Min Read
New Commercial Models for the New Hospital Customer

Michael N. Abrams and Rita E. Numerof

Facing lower reimbursements and growing demands for price transparency, hospitals are demanding more evidence of differentiated value as they select medical device products. Moreover, hospitals are seeking performance guarantees and other risk-sharing arrangements in the hopes that they can offset the financial risks they are assuming by adopting population health management and new payment models.

At the same time, physicians are no longer driving hospital system decisions on product use. While they are still consulted, decision-making processes have become more complex. Consistent with their organizations’ strategic goals, C-suite executives and administrators are playing a greater role in selecting products.

As a result of these changing market dynamics, medical device companies need to reassess their commercial models. By doing so, they help to ensure that their models reflect the new realities and equip themselves to meet rapidly evolving customer goals.

New Approaches to Managing Care Delivery

Cost Pressures. Hospital reimbursement rates have been under pressure for some time as private and public payers seek to reduce their costs. This situation has been compounded by readmission and other penalties for not meeting performance targets. In addition, employers and consumers are increasingly demanding greater transparency from hospitals on the cost and quality of the care they deliver. As this information becomes available, consumers will be able to make more-informed decisions about where to spend their healthcare dollars—especially as they assume a greater cost burden through high-deductible health plans and health savings accounts. Consequently, healthcare providers will face stiffer competition, forcing hospitals to focus more closely on managing costs.

Meanwhile, consolidation is giving hospital systems greater purchasing power in negotiations with suppliers. They see consolidation as a way to own the continuum of care, decrease the costs of acquiring patients, and gain economies of scale. With a projected 1000 hospitals expected to be absorbed through mergers by the end of the decade, consolidations will continue apace. Thus, manufacturers whose products lack differentiation are being forced to compete even more on price.

Risk Sharing. Many hospital systems are seeking to recover some of the margin they have lost as a result of reduced reimbursements. For example, under new payment models negotiated with payers, healthcare providers are increasingly assuming an element of financial risk for managing a defined population and achieving health outcome targets. Whether they form an accountable care organization or treat patients for a bundled or capitated price, the common element of these arrangements is the assumption of risk. To succeed under these new payment models, at-risk providers must reduce the cost of delivering care and, more importantly, reduce variability in cost and quality. Without greater certainty, they will be poorly positioned to set competitive prices, and they will suffer losses if outliers are not managed well.

Narrowing Physicians’ Choices. When physicians were the primary input in product purchase and use decisions, they were the focus of the sales process. Many had long established relationships with medical device manufacturers. As increasing numbers of physicians have left private practice and become hospital employees—recent estimates suggest that nearly 50% of doctors in the United States are now employees—their decision-making influence has changed. While doctors are consulted to ensure clinical relevance and soundness, hospital administrators have taken a leading role in determining how to select products for hospital use. Meanwhile, doctors are increasingly incentivized to save money.

Providers cannot reduce cost and quality variability if all physicians have their own treatment protocols and require hospitals to stock a wide range of products. The need to reduce variability has motivated administrators to begin implementing standardized, evidence-based care paths that guide treatments for specified diagnoses. Even selected products are subject to tougher price negotiations.

From the number of antibiotics stocked in the pharmacy to surgical implants and tools, administrators are asking doctors to reduce the range of products they use. To narrow the range and variability in cost and outcomes, clinicians and administrators are making evidence-based decisions about which products offer the most value. In other words, they are trying to optimize the relationship between outcomes and costs. This increased level of standardization and the dominant market position achieved by some hospital organizations as a result of consolidations are enabling providers to negotiate even more price concessions.

Some manufacturers are actively seeking to preempt competitive bidding by offering significant discounts in exchange for guaranteed purchase volumes. For example, Smith & Nephew is offering the Genesis II knee implant and the Synergy hip stem and reflection cap at a substantial discount through multiyear direct-sale contracts. The company anticipates that the products covered by the program, called Syncera, will be suitable for roughly 80% of all hip and knee procedures in the United States. It also hopes to maintain current margins by reducing the expense of onsite technical and logistical support personnel.

Challenges for Medical Device Manufacturers

Demonstrating Value. Manufacturers will need to differentiate the economic and clinical value of their products to justify inclusion on hospitals’ product short lists. Otherwise, they may be excluded entirely or only be able to compete on price, subjecting them to aggressive competitive bidding processes.

Taking on Risk. Attempts by hospital systems to pass on risk can be just as challenging as pricing pressures for manufacturers. Increasingly, manufacturers are being asked to provide performance guarantees. While such arrangements are common in Europe, they are more prevalent for pharmaceuticals than for medical devices. In the United States, this trend will probably accelerate as well, eventually expanding to medical technology products.

A willingness to share risk may also help differentiate a product in the marketplace when there is no evidence of clinical superiority. In certain product classes, it may eventually become table stakes to participate at all. In order to assume risk, manufacturers must be confident that their products will deliver cost savings or health outcomes as promised.

Offering a Portfolio that Matters. To meet customer needs, manufacturers must offer a portfolio of relevant products and services and be able to communicate the value of that portfolio in terms that resonate with each customer. Just as customers’ needs are unique based on their strategic goals, skills, and competencies, the mix of products and services a manufacturer offers—and how they are contracted—must be tailored. No longer can manufacturers detail a uniform portfolio to every customer.

Identifying Shared Goals. Many providers operate in a risk-based environment and struggle to manage costs. Medical device manufacturers have skills, knowledge, and products in several areas that help providers better manage their business and the health of the populations for which they have taken on financial responsibility. Thus, manufacturers can further enhance their relationships with healthcare providers by framing their interaction as collaborative (working together to find solutions of mutual benefit) rather than transactional (negotiating prices annually).

A New Commercial Model to Address Evolving Needs

To meet the new challenges created by the rapid transition in customer expectations, manufacturers need to challenge the assumptions on which they have built their commercial models. Even given the pervasive focus on cost and risk management, each customer is unique and must be treated as such. To succeed, manufacturers must acquire new capabilities that support a go-to market strategy. Elements of this strategy include the ability to diagnose customers in order to understand their risk profile and business drivers, enhanced business acumen in order to view and prioritize customers as a business, and the ability to engage with customers around value and solutions that meet their needs in a mutually beneficial manner.

Diagnose Your Customer. In diagnosing a customer, it is important to first determine where they are along the risk path and how far they intend to go. Have they barely considered at-risk payment models? Have they studied them, and are starting to explore their application? Or, have they jumped in wholeheartedly to implement bundled payments, form an accountable care organization, or fundamentally change their risk profile?

Next, manufacturers need to understand how product decisions are made. While administrators play a more significant role than manufacturers, they do not make business decisions alone. Because major decisions are now discussed, and often made, in the C-suite, it is imperative for manufacturers to understand who the various influencers are and their data requirements. A good understanding of a hospital’s economics is important for determining how a manufacturer’s products and services can impact the customer’s bottom line.

How to Treat Customers as a Business. Medical device manufacturers need to provide account management teams with the skills and incentives needed to manage their accounts strategically. Prioritizing each account based on its potential and then working to optimize the value of the account requires a level of business acumen not commonly found among traditional sales reps trained to focus on a product’s features and benefits. The traditional selling model is predicated on establishing a relationship with physicians and explaining how the product can affect the physician’s experience. Now, it is crucial to discuss the value of the product to the patient and the provider.

Most manufacturers’ annual incentive plans may be an obstacle to establishing a profitable customer relationship over the long term. Instead of focusing on the long-term potential of the customer relationship across multiple years and brands, sales teams are often incentivized for short-term sales targets that involve a small part of the overall portfolio. As risk-based contracting becomes more common, the time frame for evaluating a contract may stretch to multiple years. Similarly, account managers need to represent the whole portfolio in discussions with the more complex institutions that are today’s customers. Manufacturers must understand how their entire portfolio fits across the relationship and how it impacts the hospital’s bottom line.

Value and Solutions

Manufacturers have struggled in the past to provide such value-added services as service-line optimization, operating-room efficiency improvement, practice management tools, and patient-centered education and adherence programs. The economics of such services, in addition to concerns over anti-kickback regulations, have tempered some manufacturers’ previous attempts to become service providers. However, manufacturers have certain skills and knowledge that might enable them to engage with providers in helping to manage the patient population. Examples include helping to stratify patients so that the right device is used for each subpopulation, initiating patient-engagement programs to encourage adherence to rehabilitation or the use of ongoing monitoring tools, and applying technologies to connect stakeholders in order to improve coordination across the continuum of care.

Regardless of whether they provide a product or service, manufacturers must communicate the value proposition, with the necessary supporting evidence, in terms that resonate with their customers. That way, customers can understand how manufacturers can help them better manage their business and provide better outcomes for their patients. Achieving this goal requires the design and implementation of new structures and capabilities to generate the necessary data, articulate and communicate a compelling value proposition, and engage with senior executives at increasingly complex, rapidly evolving institutions.

Michael N. Abrams is managing partner of St. Louis–based Numerof & Associates Inc. He completed his doctoral work in business policy at St. Louis University and received an MA from George Washington University in Washington, D.C. Reach him at [email protected].

Rita E. Numerof is president of Numerof & Associates Inc. Together with Abrams, she coauthored Healthcare at a Turning Point: A Roadmap for Change, which is in its second printing. She received a PhD from Bryn Mawr College in Pennsylvania. [email protected].

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