Successful medical device companies must integrate payer reaction early into product design and development.

9 Min Read
Economic and Clinical Value: Key Drivers for New Product Development Strategy


Jill Sackman


Rita Numerof

To be successful in today's dynamic and increasingly cost-conscious healthcare environment requires medical device companies to fundamentally change the way they think about their products. Companies need to develop an understanding of how their products contribute to improved clinical outcomes against existing therapies and what data they will need to prove it. Government agencies are increasingly resistant to providing reimbursement at premium--and sometimes even par levels--without solid data showing significantly improved outcomes. Even with solid outcomes, if the product fails to demonstrate critical economic and clinical value against existing technologies, reimbursement decisions can be less than favorable. As national agencies try harder to contain the cost of healthcare, adaptation to the new rules of pricing and reimbursement will continue to be a major challenge for medical device companies.

The Cost of Not Having the Right Data

The price of not having solid health economic data can be high. Payer decisions about reimbursement have the ability to make a significant difference in clinical acceptance, market penetration rates, and overall product profitability. In spite of this, many medical device companies continue to treat reimbursement strategy as an afterthought. Creation of health outcome driven strategy for reimbursement needs to start early in the product development process and should be reviewed at regular intervals, similar to product design.

A notable example of successfully engaging payers in reimbursement decisions early is the Cypher drug-eluting stent. Johnson & Johnson's Cypher  was the first medical device ever to be assigned a coding classification prior to obtaining FDA approval. The Center for Medicaid and Medicare Services (CMS) historically had been unwilling to engage in dialogue regarding product reimbursement prior to FDA approval. Despite this history, the Cypher product team was successful in convincing CMS to look at the clinical and health economic findings as soon as they were available. Not only was coding obtained prior to FDA approval, Cypher was given a newly created coding classification that carried a significantly higher payment rate. Cypher owes much of its early success to exceptional planning and execution of the types of data to report and the development of economic models to maintain and improve on existing outcomes. In contrast to Cypher, Visudyne (Novartis) represents a cautionary story.

Visudyne (verteporfin), an injectable light-activated drug used to slow the progression of neovascular, age-related, macular degeneration, also represented a first-to-market breakthrough technology that used a low-energy laser. In contrast to the Cypher, its fast-track to market did not successfully include engaging payers in early conversation regarding relevant health outcome data. As a result, the Visudyne product team made assumptions that were not in the end supported by economic and clinical data. Visudyne received approval from FDA in April 2000, but did not receive a reimbursement decision covering a significant portion of eligible cases until almost four years later. During this time, CMS repeatedly asked the Visudyne team for more comprehensive data. Waiting for years to achieve coverage of almost half of the total projected market clearly blocked the product from obtaining its financial goals. Less than one year after Visudyne achieved full patient reimbursement, Eyetech Inc.'s Macugen, a competitive product, was on the market. Visudyne's parent company, QLT Inc., saw its stock price drop from $55/share in 2000 at product approval, to less than $10 in 2005.

Payers: A Very Important Customer

This new world of pricing and reimbursement creates challenges and opportunities for device development, but economic and clinical value must be considered early and managed throughout the product life cycle. Success requires viewing the payer as a foremost customer that can ultimately determine the success, or failure, of a new product. To engage this perspective requires developing an understanding of the needs of payers and valuing product innovations from a payer's point of view early in the process.

Globally, payers have introduced a range of initiatives focused on healthcare cost containment. Most include price regulation and expenditure controls. Examples include reference pricing, international price comparisons, price-volume agreements, rebates, and usage restrictions. The latest payer trend is toward risk-sharing. Agreements are being negotiated between payers and manufacturers of premium-priced products that define payment contingent on patients achieving a predefined clinical target. The good news is that despite continuing evolution of policies, rewards for product innovation based on tangible improvements in outcomes will still be available--regardless of tight budgets.

Historically, medical device companies have operated under the assumption that if they  built it, physicians would buy it. This assumption is no longer valid. With increasing focus on cost containment, even legacy products are being challenged for compelling health economic data.  From the payers' perspective, medical device companies need to prove to them why they should pay for new technology. Understanding and incorporating the payer perspective early in product development is an essential part of successful market strategy. Reimbursement (i.e., payer) input needs to be viewed as critically as regulatory agency input and approval. It is essential to seek payer input early, listen closely, and integrate expectations just. Addingearly payer input will likely require a fundamental shift in how an organization thinks about market strategy and product development.

Critical Elements of Building Effective Strategy

Developing a health economic strategy for new products is not just a box to be checked at product launch. Payers are looking for compelling data to support a company's market plans for new products. To achieve this requires ample planning time. Investing time and resources to develop a robust economic and clinical value strategy early in product design and development can ultimately pay dividends through smooth product launches, rapid market uptake, and clinical acceptance.

Critical inputs to a health economic and clinical strategy should include the following:

  • Seeking relevant regional payer input on proposed product positioning, anticipated health outcomes, and associated pricing strategy early. By seeking input at the start, there is opportunity to build evidence generation plans to support product development and market strategy. Engineering, clinical, and preclinical teams can offer critical insight at this stage regarding what is technically feasible and what timelines are required.

  • Taking a more market-driven than product-driven approach to strategy. This requires developing a better understanding of market needs such as cost drivers, healthcare decision making, alternative therapeutic approaches, and preventive care strategies versus the single product and acute intervention perspective that has been historically common in the industry.

  • Understanding which products and technologies are currently the standard of care in the target market. What gaps exist in current therapies? How costly are these gaps to the healthcare system? How much does your new product improve clinical outcomes? How critical to the system is closing these gaps?

  • Understanding what other relevant socioeconomic factors should be considered. Cost of labor? Societal view on reuse and reprocessing? Access to healthcare facilities? Current standard of healthcare?

By taking time to systematically work through this strategy exercise, companies can develop a solid sense of where their new product fits in the healthcare continuum. Organizations need to seriously consider how their product impacts a particular disease process and how much their intervention is worth.

Product value considerations should include the following:

  • Consideration of how much the clinical care gap the technology closes is worth. As an example, a sophisticated surgical device might reduce immediate mild postoperative swelling and pain, allowing patients to eat solid foods hours earlier,  but when the cost to the system of this device is compared with standard, low-cost alternatives, the several hours of reduced pain on swallowing is not viewed as worth the cost to payers.

  • Understanding the value of the solution. What you can expect to price a product for is directly related to the value of the clinical outcome the product brings in the market of interest. New technologies in new categories of therapy (i.e., artificial disk replacement; gastric banding) can expect to be required to provide more compelling economic and clinical data than second generation, and me-too products.

Bringing New Process to Life

A health economic and clinical evidence strategy should be viewed as integral to a company's strategic marketing plans for a new product. Building an effective plan requires engaging cross-functional perspectives. Although marketing may ultimately own the product strategy, payers, health economists, clinical and preclinical affairs, engineering, and regulatory need a seat at the table. These groups are can offer perspective, challenge assumptions, and ensure a productive and multifaceted conversation. Why is such a mix of perspectives so important? Taking the time to engage a cross-functional approach to health outcome strategy often mines new approaches and strengthens the development of an effective and competitive strategy. In the competitive medical device industry, who can afford not to ensure that no stone is left unturned and every perspective considered? Cross-functional strategy sessions should be approached as competitive war games and an organization needs every player on the field.

Too often, organizations approach a health economic strategy by hiring someone new, creating a new function, realigning reporting structure, or purchasing the latest IT software. This method is rarely effective. Successful organizations embed health, economic, and clinical value thinking into every part of their product development strategy. It is not unusual for this approach to require fundamentally rethinking processes, organizational skills, and attitudes toward the market. By engaging other support functions in a health outcome strategy, it asks them to take a stake in strategy ownership. They move from an operational role to being more visible and to thinking from the customer's perspective. Making this role transition may be uncomfortable for individuals who have been accustomed to completing technical tasks without much visibility. It can also be invigorating for those who have more to contribute. By integrating economic and clinical value early into product development strategy, organizations have the opportunity to develop a unique differentiation strategy that ultimately drives competitive growth.

Jill Sackman, DVM, PhD, is a senior consultant and Rita Numerof, PhD, is a president of Numerof & Associates, Inc. (NAI), a strategic management consulting firm.  They can be reached at 314/997-1587 or via e-mail at [email protected]. NAI works with clients to increase revenues, reduce costs, enhance service delivery, and sharpen strategic focus.  NAI provides consultation in three broad areas:  strategy development and execution, operational excellence, and organizational infrastructure.

© 2009 Canon Communications LLC

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