Eva Marchese, Lorenzo D’Angelo, and Amy Niu from the global consulting firm CRA explain how indication expansions, equipment financing, and innovative pricing can help overcome challenges in selling high-cost medical devices when the market and account requirements are understood.
Selling high-cost innovative medical devices is becoming increasingly challenging: buyer-side budgets and reimbursement are being carefully examined and it is now largely the responsibility of manufacturers to help buyers secure sources of funding by ensuring procedures that use a new device are reimbursed adequately. In addition, high-cost device manufacturers need to justify to buyers why the expected use of an innovative device is worth the upfront investment. Price premiums can be defended if a device lowers the other costs incurred by the buyer per patient, per use. More importantly, a high expected rate of use will motivate hospitals to acquire a new device. The speed at which a device will help its buyer recoup acquisition costs and start generating profits will depend on the frequency of use and reimbursement level for associated procedures. A high reimbursement rate will ensure that procedures will help cover the cost of device acquisition and maintenance on top of the costs incurred to perform the procedures.
Innovative business models
One way to reduce buyer budget pressure is to pursue an indication expansion and multiple purposes for a device. For example, adding additional robotic arms with different precision levels would allow doctors to use a surgical robot in more types of surgeries. In another example, cancer radiotherapy devices can now be used to treat multiple cancers such as lung, liver, pancreas, head-and-neck, and many others. By broadening the indicated use and increasing the frequency of use of a device, upfront procurement costs can be recovered more quickly, thus making a device more attractive from a budget perspective. This means that high-cost device manufacturers need to plan life cycle strategies starting from the development phase to explore their products’ full potential for potential buyers.
Another widely used method to reduce buyer budget pressure is through equipment financing/leasing. Siemens Healthineers is one of the pioneers in this area. By signing customised leasing agreements with individual hospitals, the company offers flexible contract terms based on the length of the contract, monthly instalments, depreciation, maintenance, servicing, upgrade frequency, and other factors. In emerging markets such as China, where most hospitals do not have the budget to acquire a million-dollar medical device, Siemens entered the market by cooperating with distributors that specialise in opening diagnostic imaging centres. Siemens also offers vendor financing solutions to potential distributors.
Equipment financing compared to one-time payment will ensure a longer-term revenue stream for manufacturers. It offers the potential to sell to additional buyers that cannot afford one-time payments, and therefore could help innovative device developers break into a market that is held by established manufacturers. However, it adds to the burden of contract administration and manufacturers should be prepared to support buyers in justifying contract renewals.
Innovative pricing models can also be used to lower buyer side pressure. Some manufacturers have entered into shared-savings contracts with hospitals, in which devices are supplied at a low price in exchange for a portion of the revenue gains from using the products. For example, GE Healthcare entered into an agreement with Temple University Health System (TUHS) to provide radiologic imaging equipment and services over a seven-year period. During this time, GE is responsible for using new technologies to optimise TUHS’s operation processes and is entitled to receive a portion of the shared savings if performance goals are reached. In this agreement, the seller and the buyer are aligned on the objectives to lower costs, improve patient care, and increase the overall quality of service.
One downside of innovative pricing models is contract administration, particularly agreeing on the metrics and the consequent implications for payment. These efforts increase the costs to serve customers from the manufacturer side.
Summary and recommendations
Expansion into new indications, alternative forms of financing, and innovative pricing are models that medical device manufacturers often use to address challenges when selling innovative high-cost devices. Each model presents benefits and risks that generate implications for commercial, research and development, and access strategies of device manufacturers. Our recommendation is to develop a go-to-market strategy early, including a business model that reflects both the value of a device in the eyes of potential users and buyers considering alternatives on the market, and the willingness to pay of decision makers for each potential reimbursement pathway, including their openness to innovative pricing approaches. Given these considerations will vary across countries and hospitals, an adaptive approach will be required that offers different business models depending on the market and on the account or account archetype.
To inform the development of this approach, we recommend research and direct interactions with physicians, hospital managers and local and national payers to understand their needs, expectations, and willingness and ability to pay. Leveraging and analysing insights resulting from this understanding will help find an optimal price point and business models for each country and account or account archetype. Ultimately, the right price point and business model will make high-cost medical device acquisition and use economically profitable for both manufacturers and healthcare providers.