Beyond clinician support: how to successfully launch paradigm-shifting technologies
David Lee and Peter Ehrhardt
Simon-Kucher &, Partners
Paradigm-shifting technologies, defined as innovations that change the standard of care in a significant way, are the lifeblood of the medical technology industry. Increasing regulatory and economic considerations, however, have made bringing new technologies to market more difficult than ever.
What factors should a device manufacturer bear in mind when setting the launch price of a paradigm-shifting technology? How can higher prices be achieved over the existing standard of care? What are the implications of setting a high price? An examination of hospital administrator reactions to past product launches provides some insights.
1. Do not view current reimbursement levels as rigid constraints
New products can trigger changes in reimbursement if the technology has sufficient paradigm-shifting potential, so existing reimbursement levels should not be viewed as a hard limit on pricing. When bare metal stents were launched they only received the reimbursement level associated with balloon angioplasty. The Health Care Financing Administration (HCFA) (now Centers for Medicare and Medicaid Services (CMS)) issued a new code for percutaneous coronary stenting, and resource usage and costs were tracked against that code, before Diagnosis Related Group (DRG) rates were raised for the new procedure. The losses incurred prior to higher reimbursement were painful for hospitals, but eventually DRGs were raised to better reflect the costs of the new procedure.
“We were losing money hand-over-fist when stents first came out, but eventually stenting received its own procedure code with a higher reimbursement level since it was a new procedure.”
– COO, early adoption site of bare metal stents
2. Disconnect the new product’s price from the standard of care with appropriate value messaging
Building clinician support for a new technology is a primary focus for all medical devices, including paradigm-shifting products. The difference lies in a paradigm-shifting product’s ability to reframe the pricing discussion in value terms that make sense to hospital administrators. This allows for the shedding of metal price anchors and helps to make a clean break from the existing standard of care pricing. Value messages that have successfully persuaded hospital administrators to accept a higher price include:
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"Building clinician support for a new technology is a primary focus for all medical devices, including paradigm-shifting products."
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- Saving operational time: If use of the technology can save operating time, it can be very compelling for administrators. This was the primary driver behind the use of vascular closure devices following both diagnostic and interventional cardiac catheterization procedures.
“We were a high volume shop that was desperately trying to turn over rooms. We sometimes had nurses applying manual compression for 45 minutes after the case. The ability to avoid this, and do more cases made it worth using a (vascular closure) device.”
– Cath lab manager, early adoption site of vascular closure devices
- Enhancing reputation in eyes of patients: When platinum coils used in the treatment of brain aneurysms were first launched, at a cost per procedure in excess of three times the cost of the existing standard of care (in the form of a surgical clip), the uptake was brisk. Hospital administrators felt that the clinical case put forth by their interventional neuroradiologists was very compelling, and that patient demand for minimally invasive surgery would be strong.
“Platinum coils [instead of clips] were a huge improvement in patient care for certain patients, due to their reduced invasiveness. Our clinicians let us know that this was a transformational technology that patients would prefer, so we decided to push hard to get access to training and technology for our team.”
– CFO, early adoption site of platinum coils
- Driving new referrals to clinicians: A similar sentiment has been seen in the adoption of robotic surgery techniques, where factors like the ability to pull case volume from neighboring hospitals, have factored heavily into adoption decisions beyond procedure level profit calculations.
“Robots are sexy and a major draw for new patient referrals at the hospital. In order to justify the big upfront investment, we had to go way beyond procedure profitability and focus on the robot’s ability to drive case volume to our clinicians, and take business from competing hospitals.”
– CFO, early adoption site for robotic surgery
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"If use of the technology can save operating time, it can be very compelling for administrators."
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- Providing value as a “loss leader”: If the new technology causes the hospital to lose money (either in absolute terms or in relative terms compared to the current standard of care), but it can generate enough profitable procedures to offset those losses, then the new technology can safely claim loss leader status. This was the case with “keyhole” coronary artery bypass graft (CABG) surgery, which allowed for CABG to be conducted through a smaller incision than a traditional CABG procedure:
“We were early adopters of keyhole CABG surgery, which cost us more money to perform, than traditional CABG surgery…referrals came pouring in. Only a small number of the new referrals (15-20 per year) were good candidates for the keyhole procedure, but we just referred these patients for a traditional CABG at our facility. Even though we made less money on the keyhole procedures, offering the procedure doubled our overall CABG volumes.”
– COO, early launch site of minimally invasive ‘keyhole’ CABG surgery
- Focusing on R&,D and training: Highlighting the significant R&,D investment required to bring a single successful device to market, as well as the extensive training required after launch, supports a high launch price. When implantable cardioverter-defibrillators (ICDs), battery powered implants designed to treat patients at risk of sudden cardiac death, were first brought to market, the significant R&,D costs and training requirements were both accepted as substantiating a price increase above the previous standard of care.
“You can tell that the device is really complex, and that there were a lot of years of R&,D and billions of dollars invested to bring it to market. Not to mention the support and training from the company’s clinical representatives that we get to make sure the devices work properly.”
– CFO, at launch of ICDs
3. Prepare for “the pioneer’s burden”
The excitement of being first to market with a major innovation notwithstanding, triggering some degree of monopolistic resentment in the eyes of hospital administrators is unavoidable. At this stage of the product lifecycle, customers have a tendency to perceive medtech companies as being arrogant and taking advantage of a temporary monopoly. Defining the critical price thresholds that might provoke this kind of response is critical to the long-term health of the business. Remember to take note of the following steps:
- Pricing high but not out of line: Hospitals and clinicians expect new technology to be expensive, but care must be taken not to go to levels considered excessive. During the launch of bare metal stents, there were many hospital administrators who felt that the price of the new technology was excessive, which had a long term impact on their relationship with the manufacturer.
“I told them we would pay them back for gouging us on price, and we were true to our word. As soon as competitors were available, we switched, even though their prices weren’t lower.”
– COO, early adoption of bare metal stents
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"Hospitals and clinicians expect new technology to be expensive, but care must be taken not to go to levels considered excessive."
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An excessive price may also have implications on the broader relationship with a given manufacturer. Savvy hospital administrators know that they can pull multiple levers when negotiating with manufacturers, and may seek additional discounts on a manufacturer’s other product lines to make up for the new product’s premium.
“When they didn’t give me any discounts on their new product, we pushed for incremental discounts on their existing products where we had multiple vendors to choose from, to offset the losses we saw on the AAA stent graft.”
– Director of Supply Chain, at early AAA stent graft launch site
Staying away from excessive price threshold levels can mitigate these negative spillover effects.
- Making sure you do everything else right: If you charge a very high price, take special care to make sure that all other aspects of your business are delivering at a level befitting this premium. This includes:
• Making sure that sufficient supply is available at launch
• Complying with the hospital’s customary inventory policies
• Providing some price flexibility at launch
• Delivering superior services
Customer expectations are elevated when you charge a high price, and this is seen in diagnostic imaging systems.
“All in, our new imaging system cost us $2 MM. Everything was great for about 2 months, but then we noticed that their customer support performance started to fall off. If I’m paying top dollar, I expect top service. If I felt like I was getting a deal, we could live with reduced support levels.”
– COO, at early launch site of new diagnostic imaging system
Conclusion:
Even for the launch of truly paradigm-shifting innovations, “duck and hide” is no longer a winning strategy when dealing with hospital administration. While in the past, strong clinician support may have been sufficient for a smooth adoption of paradigm-shifting technologies at virtually any price, today economic considerations are paramount. An innovator will only be successful if the hospital administration views them as a partner and not as a threat to their bottom line.
The partnership approach entails:
• Charging a price that is still viable for hospitals
• Supporting hospitals in building a broader business case around paradigm-shifting technologies and highlighting benefits such as an increase in referral volume, an increase in profitable secondary procedures, and gains through operational efficiencies
• Generating evidence around the business case and helping secure buy-in from high-level hospital administrators
Innovators who ignore these principles run the risk of either failing to achieve adoption at launch or falling into the monopolistic resentment trap: administrators have a long memory and may force the innovator out once there is a viable alternative available.
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About the author:
David Lee is a Director in Simon-Kucher &, Partners’ Medical Technologies practice in Mountain View California. David focuses on helping medical technology clients determine optimal marketing, sales, and reimbursement strategies. He can be reached at david.lee@simon-kucher.com.
Peter Ehrhardt is a Partner in Simon-Kucher &, Partners’ Medical Technologies practice in Boston, Massachusetts. Peter specializes in consulting to clients in the medical technology segment, mainly in the areas of strategic marketing, pricing excellence, contracting, market entry strategies and P&,R strategies. He can be reached at peter.ehrhardt@simon-kucher.com.
Simon-Kucher &, Partners is a global consulting firm with 585 professionals in 23 offices worldwide focusing on Smart Profit GrowthSM. Founded in 1985, the company has over 25 years of experience providing strategy and marketing consulting, and is regarded as the world’s leading pricing advisor.
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