Medtronic, St. Jude Medical and Johnson & Johnson are reading the tea leaves correctly as they take on more financial risk for products they sell to hospitals.
No risk no reward may be a tired old adage, but it also happens to be true.
And larger medtech firms are finally embracing it.
Earlier this week Reuters reported that under increasing pressure to prove the value of their devices, Medtronic, St. Jude Medical and Johson & Johson are among the first medtech firms to provide product guarantees when some of their products do not perform as expected.
In some cases, the product guarantees include cost sharing with the hospitals for follow-up treatment. Orthopedics manufacturers are also exploring such agreements, according to the report.
The article also explains how the new product guarantees is not simply about replacing a faulty device - for instance, in the past if a pacemaker's battery depleted faster than expected, a product warranty from the manufacturer would cover its replacement. But these new guarantees go beyond those and are tied to specific health outcomes.
For instance, Medtronic is touting the efficacy of its Tyrx resorbable mesh sleeve with antibacterial agents that wraps around ICDs with the goal of reducing infections tied to device implants. The device maker is guaranteeing that Tyrx will lower the infection rate in such patients compared to competing cardiac devices without the resorbable sleeve. If it doesn't lower the risk of infection as promised, Medtronic is on the hook to cover the costs of treating the patient's infection.
This is a watershed moment.
Progressive medtech firms are actually putting their money where their mouth is.
They are realizing that the ground is shifting beneath their feet as the move from the fee-for-volume to a fee-for-value based system is demanding greater accountability from all players. The shift in paradigm also means that payers and providers are scrutinizing new technology such as Tyrx more closely. The hope is that risk sharing will help in adoption of such technologies.
Medtronic's Omar Ishrak told Reuters that risk-sharing in commercial transactions "is going to be an increasing component going forward."
While insurance companies and patients typically bear the cost of care and therefore the burden of added expenses when things go wrong, hospitals are increasingly on the hook for failures as well. For instance, Medicare penalizes a hospital if a heart failure patient is readmitted to a hospital within 30 days of being discharged.
So now hospitals are demanding others pull their weight as well. Last October, Susan DeVore, president and CEO of Premier, a company that works with hospitals to improve outcomes and lower costs as well as negotiates prices for products on their behalf, called for providers to step up.
"We want manufacturers to take the next step and go at risk with the price of the product for the difference in clinical outcomes," DeVore said.
Looks like at least Medtronic, St. Jude and Johnson & Johnson are heeding her call.
A medtech expert predicts that the future will bring a new kind of contractual relationship between medtech vendors and hospitals where companies can share in financial upside if products work well.
"The examples in [the Reuters] article are exactly the types of initial risk-sharing arrangements we have been expecting," said Jonas Funk, managing director and partner at L.E.K Consulting, in an email. "Going forward, we expect not only more of these types of risk-sharing arrangements but also expect an evolution from “risk-sharing” to “gain-sharing” arrangements in which medtechs not only protect against down-side risk (i.e., a device doesn’t perform as promised or an adverse event occurs), but also share in the gains / benefits (e.g., improved outcomes, reduced overall costs) of their technologies”
[Photo Credit: iStockphoto.com user Marek Mnich]