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The (calculated) risks of value-based contracts

Risk & Reward

Image credit: AIC

As part of the shift to Value-Based Healthcare, manufacturers of medical technologies are seeking opportunities to partner in innovative ways with providers, sharing risks and benefits around new payment models.

These opportunities include agreements based on value-based contracts, tying payments to real outcomes. Among the challenges is the fact that medical companies must now consider metrics beyond their own control.

However, large manufacturers such as Medtronic, GE Healthcare, and Philips, as well as smaller medical companies, have found ways to take calculated risks and develop strong partnerships with physicians, hospitals, and clinics around value metrics. This article looks into a few of the aspects, and benefits, to consider when developing value-based contracts.

Price arrangements

The volume-based discount approach remains the dominant approach for many products, especially those acquired in large volumes. However, the major focus on product price rarely reflects the implications of using lower-quality materials with patients.

As an example, a hospital may decide to acquire a catheter that is half the price of a premium brand. When considering price and the fact the hospital will acquire hundreds, if not thousands, of units, this sounds like a no-brainer.

However, the more these low-cost catheters are used, the higher the risk for a negative outcome such as infection. And it only takes a couple of these occurrences to make the “low-cost” catheters the most expensive option for the hospital.

Purchasing departments are rarely aware of the clinical implications of their choices, which is actually not part of their roles. Hence, medical companies willing to focus on value have the responsibility to help purchasers, doctors, and other stakeholders see the full picture, and price arrangements seem to be one of the best methods to achieve this alignment of perspectives.

Take the example of Medtronic’s Tryx, the antibacterial sleeve. If the product fails to prevent infection, the company will reimburse hospitals. Therefore, the risk for the provider is low even if they are using an additional product that is not covered by the existing reimbursement. Although Tyrx is not reimbursed separately, providers understand that an infection will cost several times the price of the product, and that they will be refunded even in the unlikely situation that Tyrx does not generate the expected outcomes.

In a traditional approach, Tyrx would not be used because a) it was not reimbursed, and/or b) it is an additional cost. But in value-based healthcare, the high price option may actually be the low-cost alternative.

How many companies have a product with a potential strong value message but still focus on price?

Contract flexibility

Linking prices to patient outcomes is not an easy task, as medical companies must be sure to effectively monitor the appropriate metrics under the proposed agreements with providers.

Monitoring the proper outcomes will also help manufacturers to inform product development on what is most clinically relevant and which products are generating gains of efficiency and quality. This directly supports the right investments to move companies into stronger market positions.

On the other hand, when proposing value-based contracts medical companies must consider the possibility at adjusting agreements quickly and adapting to unexpected changes in the environment such as patient volume and profile. If a certain goal of metric is no longer relevant for either the provider or company, then there is no point in keeping the focus on it.

Which current agreements you have could be adapted to value-based contracts? If you consider volume-based discounts, which metrics could make providers perceive the value of your products? Contact us if you want to explore these and many other aspects around Value-Based Healthcare.