Innovation is critical to the growth of the medical devices and diagnostics industry (MDD). It is estimated that each year the industry invests approximately 12 per cent of sales into R & D. The industry’s ability to innovate is also critical to helping physicians, nurses and other health-care professional have new tools to better diagnose, treat and ultimately improve human health care
At the same time that the industry is making big investments, the environment around MDD companies is rapidly changing. One of the biggest changes is the movement towards evidence-based medicine and value-based purchasing. From payers to hospitals, there is a movement towards getting the best value for the purchasing dollar. While there is little published data to substantiate it, experience indicates that many MDD firms struggle to really understand the value of innovation and capture a fair portion of the value though value-based pricing. They often leave money on the table because they are not organized for success.
What is value?
Early in my career, I worked on a key account management team that managed contracting and pricing for a medical devices company in the United States (US). In the midst of customer negotiations, I would often hear key account executives say that we needed to give the customer “more value.” I soon learnt that this was a euphemism for we need to lower our prices. Price was often confused with value. Price is what you pay, value is what you get.
In medical innovation, Cutler and McClellan define value as “ the net change between the benefits and costs of the innovation.” In their definition of value, there are two dimensions to benefits. The most important is the value of better health – longer life as well as improved quality of life. The second benefit is the effect on the financial situation of others. Value is usually quantifiable and is based on consequences or outcomes. Value includes the economic, clinical and other benefits provided to stakeholders. Lastly, value is always relative to some alternative.
What is value-based pricing for MDD innovations?
Value-based pricing is a process of the following:
(i) Understanding the stakeholders ’ needs and jobs to be done.
(ii) Gaining deep insights on stakeholders ’ key value drivers, business model and economics.
(iii) Conceptualizing how the innovation impacts each stakeholder relative to other available alternatives.
(iv) Quantifying value and deciding on how to fairly share value through pricing.
(v) Preparing the organization to communicate the value.
Past experience indicates that many MDD companies struggle with this process. Yet, this shouldn’t be the case. It really comes down to getting organized to do value pricing. Based on experience and research, here are 5 key lessons:
LESSON #1: INTEGRATE PRICING AND VALUE INTO THE NEW PRODUCT DEVELOPMENT PROCESS (NPD): Given the regulated nature of the industry, medical devices and diagnostics companies must have a formalized NPD process. While the processes are different across firms, at a high level, many companies have some kind of stage gate process like those first introduced by Dr. Robert Cooper. Yet, it’s surprising how many companies fail to link pricing and value to the NPD process. The result is often new products without a clear pricing strategy, little evidence, value not well understood or no selling tools. Needless to say, this leads to underachieving the sales and profit potential for these new innovations. For innovators, step one is to integrate pricing and value into the NPD process.
LESSON #2: DEFINE CLEAR ROLES & BUILD SKILLS: Depending on the structure of the MDD business, there can be a variety of people involved in developing pricing and value strategies for new innovations. This can include groups who are highly skilled at pricing and value analysis. Unfortunately, this can also often include groups with little training or expertise in pricing and value. A recent survey of 155 businesses across industries revealed that 63 per cent did not have a pricing function. It’s not unreasonable to assume that a similar percentage applies to MDD businesses. Additionally, from experience, there is often also a lack of clarity on roles and responsibilities. Ensure there are appropriate skills and the roles are well defined are key success factors.
LESSON NO.3: CREATE LEADERSHIP AND ORGANIZATIONAL AWARENESS: “I’m not sure value pricing is going to work in this industry “ is something I heard from a senior marketing person in a MDD business where I worked once upon a time. The individual was referring to the need to understand and quantify the value that a product or solution brings to key stakeholders. The statement was deeply concerning on a number of levels. First, it showed a fundamental lack of understanding of what business-to-business marketing is meant to be. The days of selling on features and relying largely on relationships is coming to an end. Next, the statement clearly reflected a lack of understanding of value based purchasing trends for both payers as well as hospitals. So, building organizational awareness and leadership support is critical.
LESSON NO.4: INTEGRATE VALUE THINKING AND TOOLS INTO SALES FORCE: Most sales forces are thirsting for any training or tools that will help them be more productive, effective, sell more, and serve their customers better. Often the moment of truth in value-based pricing is how effectively can the sales force communicate the value that the innovation as well as the company brings to that customer. Preparing the sales team with the right messages, tools and training is essential to implementing value pricing. It’s not enough to simply set a price based on value. There’s a need to prepare sales to sell on economic and clinical value and not on price.
LESSON NO.5: HAVE AN EVIDENCE STRATEGY: Payers and hospital value analysis committees want evidence. This means both clinical as well as economic evidence. Evidence is the fuel for growth for a new medical innovation. It helps unlock reimbursement, persuades tough buyers, and gives the sales team confidence. Yet, it is surprising how many new medical technology innovations have poor or little evidence. Companies often invest in pricing related research studies like conjoint or other methods to try to determine willingness to pay. Yet, they lack evidence to substantiate the value and price. Obviously, there’s a strategic investment decision to be made. Developing evidence can be expensive. However, unless companies approach evidence generation strategically and proactively, they are likely to leave money on the table and have their innovations under-perform.
The medical technology market is moving to value based purchasing. If you’re not organized and ready to deal with it, you’ll likely leave a lot of money on the table and under-perform your potential. Some simple modeling reveals that the potential impact of a better understanding of value could be significant. If a company could gain just a 3 per cent higher price over an estimated 5-year life of the innovation, this would result in 10-15 per cent higher profits all things being equal. This is not to say that primary goal should be better profits. A better understanding of value will help lead to better investment decisions for the company and a better spending of our scarce health-care dollars as a society. This should result in real innovations that add to improving human health care, address costs and make care more convenient for patients and care givers – which should be the goal.
This post is adapted from a paper I published on medical technology pricing. For a copy of the original paper, please contact me.