Outside of the development process, reimbursement and pricing are two of the most difficult challenges faced by medical device manufacturers. Unfortunately, many companies are not able to allocate resources to either issue until they are faced with a sales crisis. And often, that crisis can be traced back to their reimbursement or pricing strategy. Very few companies examine how their reimbursement and pricing strategies overlap. Nevertheless, the development of a consistent, coordinated reimbursement and pricing strategy is one of the key factors in achieving long-term success in the medical device marketplace.
Many manufacturers do not adequately address potential reimbursement and coverage issues prior to product launch. As part of the sales process, healthcare providers are assured that reimbursement will be available. However, if manufacturers do not follow through on solving reimbursement problems with payers, the end result will be a flurry of phone calls from field representatives trying to respond to providers that have purchased the device but can't get reimbursed. Nobody likes to be on the receiving end of these phone calls, and it is difficult to be in a position of trying to negotiate with payers after the fact. Developing a reimbursement strategy that covers each of the relevant markets (e.g., Medicare, Medicaid, and commercial payers) before product launch and in tandem with pricing strategies is not a luxury. Rather, it is a must.
Why is it so important? Reimbursement is the critical variable that is factored into a provider's algorithm when it is deciding whether to purchase a device. Providers understand the economics of their practice and the need to ensure that every patient visit produces revenue. A device that translates into a reimbursable procedure, with minimum hassle factor, has an excellent chance of reaching its sales target. Conversely, a device that results in payment denials could have a relatively short shelf life. Healthcare providers will consider the amount of time involved (and the associated opportunity cost if they could be seeing other patients), the sales price, the burden of resubmitting claims and appeals, and the relative ease with which the procedure can be incorporated into their practice. One of the primary variables they consider is the price of the device relative to the return they can expect to make on the procedure.
Payers, on the other hand, have a separate set of criteria they use to evaluate new devices. At the top of the list is how much the device will cost the payer in terms of direct claims expense. Ideally, manufacturers should provide payers with evidence that a device will result in an overall decrease in medical costs by one of the following methods:
• Substituting for more-costly but equally or less-effective technology.
• Reducing overall healthcare costs by reducing or eliminating hospital stays or other services.
• Reducing future healthcare costs through early detection.
It is incumbent upon manufacturers to provide payers with the clinical data needed to make the economic and quality arguments. The data should support a positive coverage and reimbursement decision.
The process used to establish a price for a new product varies from manufacturer to manufacturer. In most cases, however, it is based on one or more of the following variables.
R&D Costs. One of the components of the pricing decision is the need to recoup the costs associated with development. This is often one of the factors taken into consideration when developing the initial price for the product.
Operating Costs. The operating costs for the production, marketing, and sales departments should be a primary component in pricing methodologies. Many manufacturers look to overseas markets for production as a means of scaling back operating expenses and improving margins. Taken together, R&D and operating costs will lead to a cost-plus pricing methodology as a starting point.
Profit Margin. Target shareholder values and profit margins should be assessed and incorporated into the pricing algorithms in both public and private companies.
Price Elasticity. Elasticity is a very important variable in the overall pricing equation. Medical breakthrough products, which often have relatively inelastic prices, are uncommon in today's marketplace. Most new devices represent moderate improvements over current technology. As a result, price is more likely to be elastic, especially in an environment in which purchasers, such as hospitals, are being squeezed and pressured into reducing costs. The need to prove economic value becomes even more important in this type of market.
Market Comparability. How a new device compares with competitor products from both a clinical and economic standpoint is a critical element in the pricing process. To the extent that a new device is the first market entrant, the opportunity exists to price relatively high at the outset and then lower the price when competitors enter the market. If competitors already exist, manufacturers can gather considerable information from their competitors' pricing strategy and potentially gain market share through aggressive pricing.
Brand Identity. A strong brand identity can give manufacturers considerable leverage in terms of pricing. An established company with good brand loyalty can maintain a higher pricing structure than a new market entrant.
Market Share. A product's market share can help determine how likely a company is to adopt an aggressive pricing strategy. Companies that are trying to maintain market share can create a moderate pricing strategy, whereas those that are trying to gain market share can take a more-aggressive approach.
How Reimbursement Affects Pricing and Sales
Figure 1. (click to enlarge) The effect of reimbursement on pricing and sales.
The projected reimbursement from payers and the manufacturer's price play a very significant role in a provider's decision-making process (see the sidebar, “Balancing the Equation”). Providers evaluate the price of equipment relative to the reimbursement that can be expected from payers. If a manufacturer does not consider reimbursement in its price structure, the price-versus-reimbursement equation may never balance out. It is critical that manufacturers consider the relationship between pricing and reimbursement (see Figure 1). Although it is difficult to get a precise handle on the relationship prior to product launch, a great deal of information can be obtained through informal discussions. Also, an analysis of reimbursement issues for similar types of devices already on the market may be helpful. The following steps need to be taken to ensure that reimbursement issues have been addressed and can be factored into the pricing algorithm.
Identify Potential Problems. Approximately 12 months before launch, companies should begin the process of identifying all the potential reimbursement problems they are likely to encounter. This includes coding issues, such as whether an existing code will be used or whether a new code will be requested. In addition, a company must decide how the product will be reimbursed (e.g., through a separate procedure rate, bundled into an existing rate, etc.) and at what level. An action plan should be developed that will address each of these issues over the following months.
Research Reimbursement Levels. Within six months of launch, companies should begin more-detailed research into reimbursement levels for comparable devices and begin informally educating the payers. This process includes contacting payers to determine how they are likely to view a device, and what steps need to be taken to ensure that it will be covered and reimbursed. Contacting payers at this stage also presents an opportunity to educate the payers' medical directors about a device and assist them in their own planning process.
Once the information is obtained from the payers, the expected reimbursement can begin to be incorporated into the pricing structure. At this point, it is important to begin developing a provider reimbursement strategy that includes a methodology for disseminating reimbursement information to the providers. It should also contain ways to address the claim issues that will inevitably arise.
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Implement the Strategy. The three months prior to launch through the first quarter after launch should be used to implement the provider strategy and help smooth out the kinks in the process. This means ensuring that there is a way to respond in a timely manner to provider reimbursement inquiries. Companies must also be prepared to work with payers, on the providers' behalf, to resolve any issues that arise.
In many instances, very little—or nothing—has been done to obtain approval from payers before pricing a new device. This lack of communication greatly complicates the issue of how and whether reimbursement will be obtained. Payers will issue medical policy about reimbursing a new medical device following their own timeline. Once a policy is put into place, getting a payer to change or modify its policy is very difficult and often impossible.
Following the steps outlined above will not eliminate all the reimbursement difficulties that are likely to arise. However, it will enable companies to address these issues early on in the process and, hopefully, avoid the panic that occurs if the issues have not been resolved. Not only will doing so provide companies with time to resolve the issues prior to launch, but perhaps more importantly, it will enable them to develop a rational pricing policy. Such a policy should recognize the role that providers' decision-making processes play in achieving overall sales targets and require open and frequent communication with payers.
Brandel is a principal of Preferred Health Strategies (PHS). She may be contacted at email@example.com. Grenell is the founder and president of PHS. She may be contacted via e-mail firstname.lastname@example.org. Lovett is a principal with PHS. He can be reached at email@example.com.