Pricing for profitability in the new MedTech ecosystem
September 13, 2019
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This post is sponsored by IQVIA MedTech.

Executives in the medical technology field cite pricing and profitability pressures among one of their continued top concerns. However, setting a price on medical devices is tricky. Once product positioning has identified an unmet need and a viable market, two key questions must be answered: Who is paying? And, how much are they willing to pay? The answers to these questions may affect other decisions, such as where to make and market the device.

Set the price too high and payers will balk; set it too low and lose revenue. Yet, if the product cannot be priced profitably, it will not generate the revenue needed to sustain it. This is why pricing must be considered early in any medical device lifecycle. Pricing decisions must be orchestrated with clinical, regulatory, manufacturing, marketing and sales teams, both to determine the cost of trial and approval, production and distribution, and because pricing decisions often inform product design and manufacturing decisions.

Considerations for setting prices and mapping the initial pricing strategy

Numerous factors must be considered in setting a price on a medical device, and the price may vary by market. The price must be set high enough to recover the costs of clinical testing and regulatory approval in each market where it will be sold over a predetermined period of time. Manufacturing, sales and marketing, training, product support and post-market surveillance costs must also be estimated accurately to set a profitable price. The prices of competing products, taxes, tariffs and contract terms such as rebates and outcomes-based payments also figure into the final price for a medical device.

Purchasers of medical devices include hospitals, clinicians, ambulatory surgery centers, research institutions, commercial health insurers, government entities, patients or some combination of these. Regardless, the payer’s goal is always to pay the lowest possible price and maximize value, which runs counter to the manufacturer’s goal of obtaining the highest reasonable price and maximizing revenue.

While the US is more or less a free market, provincial authorities control product procurement and pricing in China, with pricing in Europe negotiated and capped by governmental authorities. Pricing structures vary between and within European states, where advisory panels and health authorities evaluate value and determine coverage by publicly financed health care systems. Unlike in the US, European health authorities negotiate or set reimbursement levels to stay within a budget, and in some states such as Italy, regional authorities make coverage and reimbursement decisions.

The US is almost unique among industrialized nations in not regulating medical device prices, but price pressures exist in the US, and they are growing. Commercial and public payers in the US are trying to curb spending through bundled payments, value-based insurance design, coverage denials, reference pricing and other tactics. Hospitals, ambulatory surgery centers and clinicians are feeling the squeeze and making purchase decisions accordingly.

Meanwhile, consolidation has given these purchasers more negotiating muscle. Even patients who have insurance are highly price-conscious due to increased cost-sharing. Though the US and Europe may be the largest markets, they are not always the most lucrative for a given device. Through market research and analysis, companies can identify global markets, the payers in each, and the implications for profitability.

The competitive landscape and perceived value

Willingness to pay for a medical device also depends on the degree of competition for the device. First-to-market devices may be easier to price than products with existing competition. However, competition will eventually arise for any product. A comprehensive competitive analysis identifies current and future competitors along with their strengths and weaknesses.

A related consideration is value. Devices with demonstrated value can drive a higher price than lesser versions, and purchasers increasingly demand evidence of value. This can take the form of streamlined clinician workflows, positive patient outcomes, competitive market advantage, reduced cost of care, prevention of chronic conditions, reduced need for adjuvant therapies, improved safety and so on. Clinical trials that are designed to demonstrate value provide a competitive edge, and real world evidence generated post-approval may support price increases — yet another reason pricing decisions must be orchestrated across the enterprise.

Other global considerations

Regulatory approval costs and post-market surveillance requirements also factor not only into pricing decisions but also decisions about where to conduct clinical trials and to manufacture and market a device. Regulations in Europe are becoming stricter, while the US has actually eased regulations, to some degree, through harmonization. A thorough knowledge of present and future approval pathways and regulations around the globe is crucial to recovering regulatory costs.

Political and economic uncertainty should also be considered, particularly as Great Britain seeks to exit the European Union and the US and China continue trade wars. Tariffs of 25% on $200 billion worth of goods and raw materials from China have already hit the medical device industry, and tariffs might be the deciding factor in where a product is made and whether it can be priced profitably.

What does it take to set the right price?

Profitable pricing ultimately depends on deep domain expertise that enables all these factors to be taken into account. Key capabilities include access to real-time data on global competition, markets and regulatory requirements, as well as the advanced technological and analytics capability to analyze and leverage data from diverse sources. These sources should include clinical trials, survey panels, sales, insurance claims and wholesalers. Orchestration of product lifecycle stages and quality maturity reduce commercialization costs and improve profitability.

Prices on medical devices cannot be set in a silo. Clinical, regulatory, manufacturing, distribution and marketing teams must have input. Although this adds complexity to decisions, it is an opportunity to get pricing right to demonstrate value and ensure profitability. Insourcing the price-setting function may be possible, however outsourcing to a global expert partner with access to crucial data and analytics capability can ultimately be more economical.

IQVIA MedTech solutions and services help medical device and diagnostics companies to innovate with confidence, maximize opportunities, and, ultimately, drive human health outcomes safely forward. Learn more at www.iqviamedtech.com.