Economic Data Strengthens Strategic Decisions
BBI Newsletter, 2000
Nancy L. Reaven
President, Strategic Health Resources
As anyone in the medical device business will tell you, the road to product success is a rocky one studded with roadblocks and dead-ends. Difficult under ideal circumstances, the scarcity of available investment capital makes the situation more challenging as investors want bigger results faster than ever. That’s why device manufacturers are trying to assess the potential of new devices as early as possible in the product development process and to plot development and roll-out carefully.
Not too long ago, a device company had to clear three primary hurdles to ensure a product’s success. First, the device had to meet the Food and Drug Administration’s (FDA) standards for safety and efficacy. This has always been easier said than done, but the process is somewhat less time consuming today because of changes in the FDA Modernization Act of 1997. The Act mandated faster, and in some cases abbreviated, reviews of medical devices, and assessed device companies to support the accelerated review.
Secondly, device companies had to understand the competitive environment, note the portfolio of products offered by competitors and differentiate their product in marketing and collateral materials.
Finally, device companies had to devise a competitive pricing strategy and a successful sales force. In fact, selling some products in the recent past was so straightforward that the sales force of some large device companies became ‘order-takers’ as opposed to hungry sales people.
Not so anymore. In today’s market, device companies must still handle these challenges while juggling several new ones and continuing to make innovations to the core product line. The new challenges include: positioning for favorable coverage and reimbursement; justifying the cost of new technology; and assessing the profit potential for each new group of users.
Moreover, the stakes have become very high. More technology is being developed and introduced faster than ever before, so each new product’s time-in-the-sun is getting shorter. Device companies have to ensure that their technologies have a fighting chance in an increasingly crowded field. – In other words, they have to assess a technology’s potential early in development, make good decisions about targets and indications and position the technology well before the actual product launch date.
Health economic data has become essential as decision-support information every step of the way.
In large part, decisions about whether to proceed with a new technology rest on a product’s market potential. Market size and revenue potential are cornerstones of this assessment. However, appraising a product’s revenue potential means more than identifying its clinical indications and projecting market size through estimates of the number of people who have or are likely to get the condition treatable by the new product. In the current health care marketplace, the reimbursement environment can dramatically alter potential market size. For example, if physicians cannot get reimbursement for a particular procedure performed on Medicare patients, they are less likely to buy or advocate for the purchase of the new technology employed in the procedure. The effective market size and revenue potential for the technology is markedly reduced as a result.
Early in product development, device companies are assigning relative risk probabilities to factors like reimbursement to better assess the potential for revenue and eventual profitability. This kind of analysis can inform go/no-go decisions very early in product or upgrade development.
Cost-effectiveness is becoming a prime factor in reimbursement decisions by public and private health insurers. So, device companies are examining a new technology’s potential impact on health care costs as part of their overall product feasibility analysis. Understanding the cost-effectiveness of a developing technology can be accomplished in a couple of different ways. Economic endpoints can be added to clinical trials, so that both the clinical and economic efficacy of a new technology can be measured at the same time. Alternatively, health economic modeling, using actuarial data or statistical sampling can provide important information well before the clinical trial period. In fact, some device companies use actuarial modeling to determine which economic endpoints should be analyzed during the clinical trial, ensuring that their clinical trial funds are used efficiently.
Coverage and Reimbursement Positioning
Coverage and reimbursement decisions can make or break a new technology. Physicians and hospitals are often reluctant to invest in technology that is not covered by health insurance or subject to favorable reimbursement policies. This is particularly true for technology used in a clinical area in which alternative covered technology exists.
Few new technologies are clinical breakthroughs. In the current environment, a device with potential to save costs has a better chance of getting reimbursed than a technology that promises to add costs for minimal clinical return. Health economic studies can establish the cost-effectiveness of a new technology, making it more attractive to insurance plans and reimbursement decision-makers. In addition, health economic data is used to illustrate the cost-saving features of a new technology under existing fixed reimbursement, pinning down the profit potential for providers and purchasers. Health economic analysis also helps manufacturers decide whether they should advocate for a new or modified reimbursement policy through the acquisition of new Current Procedural Technology (CPT) or Diagnosis Related Grouping (DRG) codes.
Strategic Marketing and Product Roll-out
Understanding the marketplace and categorizing it into accessible segments is a standard marketing practice. This practice allows companies to develop targeted strategies and specific marketing materials for each identified segment, train sales staff to understand and concentrate on the needs of potential buyers in each segment and develop specific pricing and promotions for each segment. With a limited sales force, however, the overriding question has always been how to prioritize each market segment to maximize returns to the device company. In other words, where is the "low hanging fruit", and how to best pick it?
Health economic data, including information relating technology costs to reimbursement and clinical practice provides essential information about market sequencing. The complex relationship between market demand for a technology (disease incidence, procedure incidence and actual patient demand), technology cost (measured as purchase, maintenance and/or operating costs), procedure reimbursement for purchasers and providers, clinical practice patterns and potential medical cost offsets determines the essential characteristics of each market segment. For example, although the clinical indications for a new device and related procedure might be most relevant to the Medicare population given projected disease and procedure incidence, the combination of DRG and RBRVS reimbursement to hospitals and physicians may make the business appear unprofitable based on the planned acquisition and maintenance cost of the equipment. In this case, maybe a roll-out strategy for non-Medicare business is the best initial route. But hold on, once medical cost offsets and procedure efficiencies are taken into account, the profitability under Medicare reimbursement may improve to where it is approximately equal to existing procedures under the same reimbursement. In this case, the analysis comes full circle—supporting a Medicare roll-out strategy after all. When device companies fail to fully examine these factors, costly mistakes can be made.
The following examples illustrate some of the potential problems. A diagnostic company decides to approach HMOs with it’s hospital-based screening technology as the initial market segment, citing several reasons: (1) company management believes HMOs will best understand the device’s potential efficiencies and resulting financial returns; (2) HMOs will be able to direct their doctors to change their current practices to use the new procedure, enabling a quick ramp-up of procedure volume; and (3) the concentration of potential procedure volume makes HMO business very lucrative quickly. What the company doesn’t understand is that only a couple of HMOs actually employ their doctors in the US. Most contract with physicians and have few opportunities to influence, much less dictate, physician behavior. Even if the HMOs did cover and reimburse for the procedure, the migration of the procedure through the organization’s practicing physicians is only minimally faster than in the open market and hospitals would still have to be convinced to buy and install the equipment. In this case, focusing on HMOs as the primary market segment would, at best, result in limited market penetration and, at worst, could result in a serious roll-out failure.
Finally, take the case of a well-known technology company with an expensive piece of equipment destined, by strategy, for hospitals. In rolling out the product, the company failed to understand: (1) that inpatient reimbursement for these procedures was fixed through DRGs for Medicare patients and per diems for non-Medicare patients, (2) the cost of the equipment was prohibitive given the current reimbursement environment, and would reduce inpatient profitability for this procedure compared to existing technology; and (3) the procedure was more time intensive for physicians to perform, with no immediate prospects for additional reimbursement. Needless to say, the roll-out stumbled badly and the company lost precious time, money and reputation despite the fact that the device represented a medical advance over current procedures. Had the company done its homework—assessing reimbursement, per patient procedure and equipment costs, medical cost offsets and potential profitability outcomes for its users--it could have predicted these challenges and developed effective strategies to deal with them.
Strategic Sales and Evidence of Value
Increasingly, purchasers are demanding that device companies prove the value of their technologies. Specifically, they want to understand the amount of financial return they can expect, based on their unique business situation. If a device is likely to save them money through reductions in length of hospital stay, procedure efficiencies or reduced need for expensive drugs, they want to know where and how much they’re likely to save.
Does this mean that a new technology will only be accepted if it saves money? Not at all; but if a new technology is going to add costs, purchasers want to know how much, so they can budget for it.
As health care costs tick upward, data delineating the financial -- as well as clinical --value of new technology takes on more importance for purchasers and coverage and reimbursement decision-makers. These data help device manufacturers make sophisticated market decisions, provide valuable information to their prospective customers—a must in strategic selling -- and help justify the sale itself.
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