Pay-for-performance has emerged as a leading strategy

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1 SALES & MARKETING INSIGHTS Medical Device Strategies for Competing in a Pay for Performance Future Pete Masloski Pay-for-performance has emerged as a leading strategy for improving quality and reducing costs in the U.S. healthcare system. As hospitals and other providers sharpen their focus on delivering higher quality care, medical products companies need to understand how these shifts will impact their markets. As companies adapt to the evolving change, the challenge for most will be to transform their selling models to focus on delivering both clinical and economic value in this new and more complex selling environment.

2 Table of Contents 3 The Hospital Challenge: Cost and Quality 3 What Is Pay for Performance? 4 Implications for Medical Products Companies 8 Conclusion 2 ZS Associates

3 The Hospital Challenge: Cost and Quality Hospitals find themselves at the center of attention when it comes to the disappointing state and disproportionate cost of healthcare. Healthcare costs in the U.S. have reached 16% of GDP, and yet a record 15.9% of the population is uninsured. Further, there are great disparities in the quality of care provided across different hospitals in the U.S., and we lag significantly behind other developed countries in health quality statistics, such as overall life expectancy and infant mortality. Representing the single largest category of healthcare expenditure, hospitals find themselves at the center of attention when it comes to the disappointing state and disproportionate cost of healthcare. Healthcare reform is high on the list of domestic issues in Washington, and major reform may, in fact, eventually arrive. Yet even without radical reform, fundamental changes are being made to the way in which hospitals are reimbursed and evaluated, most notably in the form of pay-for-performance (P4P). What Is Pay for Performance? Pay-for-performance programs are the most visible of the new cost and quality control initiatives and are among the most promising. The driving principle behind pay-for-performance is simply that the hospitals that deliver higher quality care should be rewarded with higher reimbursements. By creating a direct financial incentive, P4P seeks to place a premium on quality care. In one of the first pay-for-performance pilots, the Center for Medicare and Medicaid Services (CMS) partnered with Premier, one of the largest group purchasing organizations, on the Hospital Quality Incentive Demonstration (HQID) project. Participating hospitals were ranked on a set of quality metrics and the top performing hospitals were given bonuses of up to 2% of Medicare payment levels per condition. The results have been compelling. Extrapolating from its experience with pneumonia, heart bypass, AMI, and hip and knee replacements alone, Premier estimates that savings could reach $1.4 billion and that 5,600 avoidable deaths could be eliminated nationwide. The success of this and other pilots is driving interest in broader implementation of payfor-performance programs. 3 ZS Associates

4 CMS and Premier are not the only supporters of P4P. Insurance companies and employers have been partnering with non-profit organizations such as the Leapfrog Group and Bridges to Excellence to help implement pay-for-performance programs for their members. P4P is continuing to gain momentum and appears to be here to stay. Medical device companies will more and more need to prove the value of their products and services, both in clinical quality and economic terms. Implications for Medical Products Companies Hospitals impacted by P4P are naturally placing a heightened emphasis on quality improvement programs. Hospital administrators are finding ways to engage sometimes-reluctant physicians by developing and adhering to evidence-based protocols and order sets, or standards of care. By linking a financial incentive directly to quality, P4P initiatives mean conversations regarding hospital quality outcomes will also include financial implications. Not all medical device companies, however, can prove that their specific products contribute directly to improved quality outcomes. Even fewer combine this clinical data with favorable economic data for payers and hospitals. The traditional formula of producing innovative products and providing excellent clinical support will not be enough. Medical device companies will more and more need to prove the value of their products and services, both in clinical quality and economic terms. Building a strong bank of clinical and economic evidence is important but is also costly, can take years, and by itself is not sufficient. So, what should sales and marketing leaders do? Here are five ideas for taking advantage of opportunities created by the success of pay-for-performance: Support the development of evidence-based protocols and order sets Stop giving away price unnecessarily Develop compelling quality and economic value propositions Prepare the sales force to sell on both clinical and economic value Establish a patient strategy 4 ZS Associates

5 Support The Development of Evidence-based Protocols and Order Sets One clear indication of the pursuit of improved quality metrics is the growing focus on evidence-based order sets. The Premier HQID project, for example, demonstrated that pay-for-performance led to consistently rising protocol adherence. In another example, by implementing evidence-based clinical pathway development programs, Adventist Health System has substantially increased the percentage of patients regularly receiving best practice care. By establishing quality improvement as a priority, they have saved more than $40 million over a three year period. Physician groups and boards are very active in defining protocols and order sets, and hospitals are engaging their medical staffs in setting standard approaches as well. By maintaining a productive, interactive presence with these groups, medical products companies can contribute to the quality protocol dialog and knowledge-base, while enhancing alignment with developing standards. As individual hospitals themselves further establish evidence-based order sets, companies need to ensure their clinical data is appropriately represented. Medical device companies should be actively supporting clinician group efforts. Stop Giving Away Price Unnecessarily This is much easier said than done. Pricing pressures will continue to increase, and as physicians agree on common protocols and order sets, the prospect of product standardization grows. Managing price erosion will therefore become increasingly important, yet many companies lack a disciplined approach to pricing and contracting decisions. Instead, these decisions are often based on emotion, incomplete information and inconsistent criteria. Exacerbating the problem is the fact that sales forces are typically compensated on revenue rather than profit and, not surprisingly, influential salespeople lobby hard for price discounts. In fact, in ZS Associates recent sales incentive practices study, we found that less than 10% of companies field sales forces have a pricing or margin component to their incentive compensation plan. However, when asked what future trends or changes they expect to emerge, incorporating a margin component was the number one response. 5 ZS Associates

6 Companies need to clearly define their value proposition to prevent price erosion and move the conversation from the product to the full value it creates. In addition, companies rarely hold their customers accountable when promised increases in market share are not realized after price discounts are agreed to. Implementing a more disciplined approach requires a clear understanding of situations when price discounts are appropriate, such as for accounts that can effect measurable change in physician behavior to standardize product usage. The most effective strategy for stemming the tide on price erosion is to shift the customer s focus from price to value in other words, successfully implementing value-based selling. Develop Compelling Quality and Economic Value Propositions Successful value-based selling requires a core set of value propositions the sales force can leverage. Salespeople will need to communicate a compelling value proposition that encapsulates both clinical quality and economics, and comprises service and support as well as product function. Although lengthy and expensive clinical studies are becoming more necessary than ever, proving value in the pay-for-performance world will involve more than simply expanding the number of clinical studies and collecting more data. Companies will also need to develop a stronger evidence base to support their economic claims. This will require them to embrace alternatives such as patient registry studies and claims data analysis as well. Increased data analytics capability and health economics analytic tools will allow companies to better understand and clearly define the value their offerings create. Medical device companies also provide value to hospitals in ways beyond the core clinical and economic value of their products, such as staff training, patient education, and enabling new hospital business through access to new technologies and referral development. Companies need to clearly define their value proposition to prevent price erosion and move the conversation from the product to the full value it creates. 6 ZS Associates

7 Prepare the Sales Force to Sell on Both Clinical and Economic Value Of course, having a clear and well-supported value proposition is great, but it means little if the sales force is not capable of executing value-based selling. As many medical companies evolve, the sales force remains fixed on the clinical and educational aspects of the selling process, and unfortunately the development of economic selling and complex account management skills lags behind. Some companies have addressed this gap by establishing specialized roles requiring health economics expertise, or by changing the sales force hiring profile to ensure their salespeople are able to handle the diverse demands of the new value-based sales process. Because the traditional sales force is not usually the best channel for reaching payers and patients, companies also need to ensure their go to market strategies include an appropriate channel for these influencers as well. This often takes the form of a key account management team focused specifically on payers. Salespeople and their managers must cultivate the right skills and have the right tools to execute value-based selling. Training the sales force on how to sell both clinical and economic value is an important starting point. Tools and information that salespeople can use to profile their accounts, to better understand their clinical and economic needs, and to support the account planning process are essential. Additionally, as sales channels increase in complexity, with new positions such as reimbursement specialists for example, tools to coordinate sales activities and share account information will become more important. Perhaps the most important are tools, such as ZS Account Management Solution, that can help the sales force customize the clinical and economic value message to individual accounts in an effective way. Establish a Patient Strategy Focusing on the clinical and economic decision makers will continue to be important, but patients are also playing a more active role in decisions affecting medical device usage. Consumers have always been actively involved in making decisions regarding elective surgery, for example. Today, patient influence is extending into areas once thought 7 ZS Associates

8 A key premise underlying P4P is the notion of the educated consumer who, armed with better information, will seek out higher performing healthcare providers. to be the sole domain of the medical community, such as cardiovascular devices. For instance, Boston Scientific s well-publicized implantable defibrillator problems created much patient concern and led to a slowdown in the overall market for these devices. A market that had been growing above 20% per year suddenly retracted and sent stock prices tumbling. In response, competitor Medtronic announced a $100 million campaign focused on consumer awareness and education. Orthopedic implant manufacturers such as Stryker and Zimmer have also invested significantly in direct-to-patient advertising. Just how far will patient involvement in medical device decisions ultimately go? A key premise underlying P4P is the notion of the educated consumer who, armed with better information, will seek out higher performing healthcare providers. In this way the broad publication of quality data acts as an incentive for hospitals to improve quality. It is also conceivable that we will see a health benefit structure where insurance pays for a basic device and the patient is responsible for the difference for more advanced devices. In this environment, a clear value proposition, branding and channel strategy for reaching patients will be critical. Medical device companies need to develop comprehensive patient strategies in preparation for escalating patient involvement. Not every company will be able to invest $100 million into an advertising and public awareness campaign, and not all companies will be affected to the same degree by patient influence. However, those companies that can find a way to appeal to patients and cost effectively reach them will have an advantage. Conclusion The increased emphasis on both quality and economics in health care purchasing makes it critical that medical products manufacturers more clearly define and communicate the full impact of their offerings. While hospitals and physicians increase standardization, device companies need to ensure their sales force can deliver a clear and well-supported value proposition to avoid unnecessary price erosion or restriction by unfavorable protocols. Supporting the development of greater evidence 8 ZS Associates

9 base and marketing to patients can strengthen the company value proposition. By recognizing the opportunities created by a changing quality and purchasing landscape, forward thinking medical products companies can ensure their sales and marketing efforts sustain growth and profitability in a pay-for-performance world. 9 ZS Associates

10 About ZS Associates ZS Associates is a global management consulting firm specializing in sales and marketing consulting, capability building, and outsourcing. About the Author Pete Masloski is a Principal with ZS Associates and leader of the Medical Products and Services practice. He may be reached at: pete. masloski@zsassociates.com. ZS Associates inquiry@zsassociates.com ZS Associates, Inc All Rights Reserved All trademarks within this document are either the property of ZS Associates or their licensors.