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How Not to Reduce your Reimbursement

ValueConnected
“The VALUE of medical technologies is determined by the market decision-makers’ expectations about the clinical and economic benefits of your product.”

Paraphrased by Xavier García, Commercial Excellence & Market Access Director at Smith&Nephew Iberia, this definition of the value of medical technologies was influenced by conversations with him and his team, who understand the market needs as only few do.

It might seem logical that medical companies should invest in demonstrating the value (benefits) of their products and fulfill the various expectations from decision-makers. However, most companies prefer to focus on price and price alone.

Let me share with you a real story about one of our customers. Hopefully this will help reinforce the importance of focusing on value over price.

For the sake of anonymity and better storytelling, we will call our customer ‘company-x’. A few years ago, company-x was enjoying a jump in sales in Germany with one of their invasive devices. The reimbursement was appropriate and, on top of the tariffs, there was an additional payment, due to NUB approval, making the total reimbursement even higher.

However, the positive reimbursement environment and market volume attracted competitors to the German market. These new companies, lacking the evidence and brand recognition, could only really compete on price. Price was never really the issue though. Knowing the value behind the device would be the true determinant of success.

This is never a situation to be taken lightly and, ideally, company-x would bring together commercial and market access teams to 1) define a short-term action plan to approach purchasers, and 2) develop a long-term strategy to protect the reimbursement, because there would certainly be a price reduction, at least from the competitors.

Instead, sales figures and internal pressure caused company-x to ignore long-term planning and instead, scheduled a meeting with sales teams to develop a defensive strategy focused on…price.

The 12 months following that meeting threw the company into a vicious cycle increasingly placing them in unfavorable situations.

  1. The company decided to negotiate lower prices with key accounts in Germany to “protect the relationships and volume”.
  2. A few weeks later, other hospitals demanded the same discount and the company accepted it.
  3. Eventually, all client hospitals were paying lower prices for the device.
  4. The major hospitals demanded further discounts for volume…and step 1 started over again.

Despite this downward spiral, the worst problem was yet to come. One year later, German authorities not only decided to cancel the additional payment scheme, they also reviewed the existing reimbursement downwards. Suddenly, total reimbursement for the device was reduced by 60%.

How could that have happened? Was it not a good idea to reduce prices within the existing reimbursement?

Fact is, German authorities calculate the reimbursement tariffs based on the data they receive from certain “costing hospitals” from the previous year. These institutions inform the German authorities of any variation in the cost of procedures, thus serving as the basis for reviewing the amounts for reimbursement.

When German authorities looked at the cost data of the related procedure, they immediately noticed the cost reduction, which was artificially generated by company-x’s decision to reduce product price. By reducing their prices, the company made a very loud and clear statement to the German authorities: we do not need reimbursement.

Today their teams wonder what would have happened if they had decided to differentiate on value and involved market access and commercialization at an earlier stage of their strategy development. Now, with lower reimbursement and completely unfavorable cost data, the situation looks bleak.

With our help, company-x is trying to revert the situation as much as possible. However, company-x has learned an important lesson: focus on value, not price, so that you do not lose sight of the big picture.

Need advice on how to avoid focusing on lower prices? Join our Value of Medical Technology group (https://www.linkedin.com/groups/8349394) and read insights on how to demonstrate benefits to clinical and non-clinical stakeholders. Also, subscribe to our newsletter and join the ongoing discussion.