Survey: Medtech Firms Challenged by Contract Complexity and Pricing

Gopkiran V. Rao

December 1, 2007

10 Min Read
Survey: Medtech Firms Challenged by Contract Complexity and Pricing

Model N's Rao: Driving the revenue cycle.

The challenges of driving net revenue and profit targets while complying with evolving government legislation place medical technology manufacturers in a highly complex demand-chain landscape. Results from a recent best practices survey of 20 major medical technology companies show that organizations have begun to pay greater attention to the processes that drive the revenue life cycle—pricing, contract development, contract performance monitoring, settlement management, and regulatory compliance management—in order to better control issues of revenue leakage and regulatory compliance risk.

This article presents findings revealed in the 2007 Revenue Management Excellence Survey, an industry survey designed to help medtech companies benchmark their performance and identify best practices for pricing and contracting. The survey identifies and examines medtech manufacturer trends and initiatives related to revenue management.

An analysis of three important areas from this year's medical technology survey identifies significant opportunities for improving the impact and effectiveness of revenue management. Key findings of the survey include the following.

  • More than a quarter of survey participants (27%) have poor or very poor confidence in their current system's ability to manage the linkage between commercial and government pricing.

  • The vast majority of respondents (85%) reported that their companies currently use a manual system (spreadsheet) or an enterprise resource planning (ERP) system to manage pricing and contracts.

  • Nearly two-thirds of survey participants (64%) reported that their sales teams do not have the tools to analyze margin and profitability for a proposal.

Within medical technology companies, sales and marketing, finance, and support functions face revenue-related challenges in their daily interactions with distribution partners, group purchasing organizations (GPOs), integrated delivery networks (IDNs), and emerging affiliations of providers and physicians. To retain margins in their competitive environment, medical technology manufacturers must incentivize each contracting partner with creative pricing structures and contract terms, leading to ‘mass customization' in contracting. This dynamic poses significant challenges for medical technology companies' sales, finance, and contracts organizations, often creating a significant spread in the growth-to-net-revenue equation.

In addition, regulatory compliance issues related to government contracts, as well as the accountability requirements imposed by the Sarbanes-Oxley Act of 2002, increase both the complexity and administrative burden on pl anning and operations.1

Prior surveys from 2003 through 2006 revealed that a combination of revenue leakage sources could cost medical technology companies as much as $40 million in lost revenue on every $1 billion in sales.2–4 In this year's survey, respondents estimated the further effects of revenue leakage on certain aspects of the revenue life cycle, including the following:

  • Estimated revenue loss from contract noncompliance or nonperformance averaged 8% of contract value.

  • The median estimated overpayment on incentive rebates was 5% of rebates paid annually.

  • Estimates of overpayment on administrative fees reached 5% of the administrative fees paid.

These results confirm the importance of managing the revenue life cycle in a holistic manner and suggest there is ample opportunity to improve existing practices.

Aligning Pricing with Profitability Goals

In considering the various stages of the revenue life cycle, the pricing and offer-development stages are seen as areas in which medtech companies have made process improvements. Nevertheless, companies still encounter challenges when seeking to align their pricing plans with revenue goals and implementation in the field. Most survey respondents feel that they have done a good job of establishing and publishing clear processes for pricing and contracting. However, respondents indicate less satisfaction in the following areas.

  • Optimizing pricing based on specific customer contributions.

  • Pricing and contract-optimization systems.

  • Ability to accurately align account manager incentives with contract profitability.

It appears that manufacturers are making little progress in aligning these metrics, as previous benchmark studies also identified these issues as areas of concern.

The survey results suggest that automated systems for pricing and contracting, and online pricing access for field sales reps, are two measures that can elevate satisfaction levels in key areas surveyed. Having automated systems and online pricing access also results in a consistent reduction in the time spent by contract organizations supporting administrative functions related to pricing and contracting.

Contract Compliance: A Consistent Revenue Risk

The management and use of information about performance and compliance to contracts emerged as consistent risk areas for revenue exposure, especially for companies with manual processes. Of the companies responding to the survey, nearly two-thirds (63%) indicated that failure to comply with contract terms contributed to lost revenue in their organizations.

Overall, respondents estimated that the average loss of revenue from contract noncompliance is 8%. However, that figure drops to 1% for companies with automated systems for monitoring contract compliance, and increases to 9% when companies use manual or other methods for monitoring compliance.

Automated Systems Are Key

The processes involved in validating and paying settlements were also considered potential risk areas for revenue exposure. According to the survey results, nearly half of medical technology manufacturers believe that their settlement processes need improvement, and 45% believe these processes lead to lost revenue.

More than two-thirds of respondents (70%) indicated that their companies sell through distribution channels. The survey base further reported that, on average, 29% of all sales are made through distributors. The survey also shows that rebates are used in 14% of contracts.

Among the surveyed companies, strong differences emerged in the use of automated and manual systems for managing administrative fees, and membership and distributor rebates. The survey results suggest a strong correlation between greater contract volume, increased use of automated systems, and greater ability to foresee overpayment risks. Conversely, the majority of companies that do not know whether settlements are being overpaid are those using manual or other patchwork processes.

Postpayment adjustments consume additional time and resources in an already constricted environment. Surveyed companies reported that a substantial number of distributor rebates require postpayment adjustment. In a third of these cases (33%), the need for adjustments is due to product, pricing, and contract errors, while 14% are due to customer and membership errors (see Figure 1).

Figure 1: Estimates of postpayment adjustment based on error types. Source: Model N (Redwood Shores, CA).


Regulatory Compliance Less of a Concern

When compared with data from a parallel survey of the pharmaceutical industry, results of the medtech survey suggest that medical technology companies are much more confident in their ability to manage government regulatory compliance. However, addressing increasing levels of regulatory control will continue to be an issue.

Companies' recent focus has been on compliance with Sarbanes-Oxley and Federal Supply Service requirements.5 But the complexity of compliance requirements is likely to increase as devices converge with pharmaceuticals and new government programs, such as Medicare Part D, begin to extend coverage into the medical technology world. One example of such increasing requirements that is creating some noise is a bill recently introduced in the U.S. Senate by Senators Charles Grassley (R–IA) and Arlen Spector (R–PA). Called The Transparency of Medical Device Pricing Act of 2007, the proposed legislation would require manufacturers to submit quarterly reports of their sales price data for implantable medical devices, including both average sales price and median price.6

Respondents were asked to rate the ability of their government pricing and reporting systems to keep up with changing federal and state regulatory policies ( see Table I). Just over a quarter of respondents (27%) felt their government reporting systems can keep pace with the changing regulatory environment. The rest were neutral or had some level of concern, which increased as company size increased. The highest level of faith in current systems was found in government pricing, where 36% of respondents expressed confidence in their system's ability to remain compliant with government pricing regulations and none expressed a lack of confidence.

Compliance Issue

System's capability in meeting the requirements of a government audit.

Company's compliance with government pricing regulations.

Company's ability to manage the linkage between commercial and government pricing.

Ability of current processes and systems to satisfy Sarbanes-Oxley requirements.

Company's ability to effectively and efficiently access historical data related to government pricing.


The ability of systems to access historical data and to manage the linkage between commercial and government pricing drew the lowest overall levels of confidence (36% and 27% had little confidence, respectively). Preparation for Sarbanes-Oxley compliance received higher marks, with only 18% expressing little confidence. When comparing the overall survey base to companies with higher percentages of government business, the medtech results are consistent with general industry patterns.

Conclusion

When compared with data from previous years, results from the 2007 survey reveal that the issues involved in the medical technology industry value chain are not getting simpler. Distributor and provider networks continue to require more competitive pricing and contracting terms, while government regulations continue to get stricter and more costly to satisfy. To stay competitive in this dynamic environment, medical technology companies should carefully examine their revenue management practices and take advantage of opportunities to make improvements.

Companies that invest in improving their pricing, contract, compliance, and settlements processes will drive higher productivity and protect more of their hard-won revenues. By improving their business practices and implementing automated revenue management systems, medtech companies can close the gaps in their revenue management practices, while also reducing their regulatory compliance risk.

References

1. Sarbanes-Oxley Act of 2002, P.L. 107-204 (July 30, 2002).

2. Z Rinat and J Schein, “ Customer Contract Compliance,” MX 3, no. 6 (2003): 54–61.

3. Van Diamandakis, “Making the Most of Company Revenues,” MX 5, no. 2 (2005): 22–29.

4. GV Rao and RS Matsuk, “Medtech Revenue Management Practices,” MX 7, no. 1 (2007): 24–31.

5. Federal Supply Schedule Service; Dental and Other Medical Products [online] ( Hines, IL: Department of Veterans Affairs, Office of Acquisition and Logistics, National Acquisition Center), available from Internet: www1.va.gov/oamm/oa/nac/fsss/dentothmedfss.cfm.

6. Transparency in Medical Device Pricing Act of 2007 (S 2221); available from Internet: www.govtrack.us/congress/bill.xpd?bill=s110-2221.

Gopkiran Rao is senior director of industry marketing at Model N Inc. ( Redwood Shores, CA), a provider of integrated revenue management solutions for the life sciences and high-tech industries. The 2007 Revenue Management Excellence Survey was conducted by Computer Sciences Corp.–Global Health Solutions ( El Segundo, CA) and Model N.

© 2007 Canon Communications LLC

Return to MX: Issues Update.

Sign up for the QMED & MD+DI Daily newsletter.

You May Also Like