BBI Contributing Editor
As financial pressures continue to squeeze the hospital industry, medical technology companies are increasingly relying on strategies to prove the value of their products to purchasers. The utility of using a "value proposition" to increase sales and successfully position a product is dependent on the credibility, relevance and appeal of the proposition itself.The challenges to the nation's hospitals are varied and seemingly unrelenting, ranging from reimbursement rollbacks to cost increases to labor shortages. As recently as Oct. 31st, the Centers for Medicare and Medicaid (CMS) issued rules for the hospital outpatient payment system that are expected to reduce payments to hospitals by about $1 billion in 2002. Although the precise damage won't be clear until early December, this ruling, coupled with rising medical costs (a 4.5% projected increase in medical CPI in 2002 the largest increase since 1995), continuing labor shortages and unexpected expenses associated with disaster preparedness related to the terrorist threat has hospitals' hands full and their budgets depleted.
In today's hospital environment, the concept of value is pretty straightforward. Hospitals are most accepting of products that 1) improve clinical outcomes (or reduce medical errors) while 2) reducing hospital expenses and/or 3) generating reimbursement that covers the cost of the technology and then some. The problem is, there are few products that can meet these ideal criteria. Many products modify the clinical process without documented evidence that they improve outcomes. Other products raise short-term expenditures but may reduce long-term costs by improving hospital efficiency, and still others generate reimbursement that may or may not cover the acquisition price of the technology.
The key is to develop a value proposition that illustrates how a particular technology meets one or more of these criteria and then substantiates that claim with credible data.
The first step in developing a value proposition is identifying how the technology improves the status quo. Sometimes this improvement is an incremental one, sometimes it is transforming. The important thing is to clearly define the nature of the improvement and to measure the outcome of the improvement. However, outcomes are not limited to clinical outcomes alone. There are many technologies that have little or no documented impact on clinical outcomes (reduced mortality, reduced complications, etc.) but have a significant impact on the procedure itself. The technology may help to save time or save expenses, or move the procedure from one setting to another, or from an invasive to noninvasive approach. Each modification of the conventional procedure carries with it corresponding changes in the procedure's clinical and economic environment. The value proposition should incorporate precise measurements of these changes as well as more standard measurements of clinical improvements.
The ability to quantify the impact of technology often is limited by access to data. Clearly the ideal approach is to take direct measurements of the impact in a controlled clinical environment. That's why some technology companies are adding economic sub-studies to their clinical trials. The advantage of this approach is that the measurements are performed at the same time and within the same setting as the trial. The disadvantage is that most clinical trials are designed to prove safety and efficacy within the narrowest definitions possible that still allow for favorable labeling.
In real clinical practice, the technologies are likely to be used somewhat differently and where the benefit may be much greater. So tying an economic study to the clinical trial can underestimate the real impact of the technology. Some technology companies are commissioning studies that are independent of the clinical trial to try to obtain realistic measurements of how the technology modifies the convention. These studies may include direct observation of the technology in clinical practice compared to competitive technologies and/or the conventional approach, measuring time, use of hospital staff and medical resources, impact on inpatient length of stay, in-hospital complications and so on.
In some situations, the impact of the technology may take months or even years to show up. Prospective studies may be impractical, so retrospective data is used. Some databases contain long-term information on patients (cleansed of confidential information) and can be used to follow their care and the resources used over time. The incidence of disease or clinical events and their associated costs can be calculated over a specific time period and compared for patients who did or did not receive a particular technology or procedure. To the extent that patients are matched on certain criteria, like age, gender and co-morbidities, the results of these studies can be compelling despite the fact that they use historical data.
Making a value proposition relevant
In an ideal world, the concept of value would be a unifying concept, based exclusively on the impact of technology on patient care clinical outcomes. The reality of the U.S. health care system is that a large number of stakeholders hold independent and sometimes conflicting views about what constitutes value in a product. So technology manufacturers have to think carefully about which group(s) the value proposition should target. Even within the hospital community, individual hospitals react quite differently depending on their market situation. In the western U.S. (a managed care and fixed reimbursement stronghold for many years), for example, expense reduction is a message that resonates with financial decision-makers. In the Northeast, on the other hand, garnering favorable reimbursement, or justifying the use of the technology despite inadequate reimbursement, is more relevant to decision-makers.
A basic understanding about the mix of insurance programs managed by the hospital can point the way for development of the value proposition. A simple test is to ascertain the percentage of a hospital's admissions or discharges covered by Medicare vs. commercial insurance. This information can be had either by surveying the hospital's marketing or public relations department or by accessing hospital data available in nearly every state.
Hospitals with a high percentage of Medicare patients have faced particularly tough reimbursement cuts during the last couple of years because the Medicare program has been systematically reducing reimbursement. And Medicare's inpatient reimbursement, based on diagnosis-related groups, creates financial incentives for hospitals to favor technologies with cost-saving characteristics. Thus, a value proposition that emphasizes cost control may be most appealing.
Hospitals with large numbers of commercial insurance patients, on the other hand, often face somewhat different incentives because they receive reimbursement that may still be based on billed charges, although usually steeply discounted. In this situation, hospitals are focused on the reimbursement attached to the procedure using the technology and whether there is any prospect for reimbursement of the technology itself. A value proposition that clearly incorporates the potential for revenue enhancement through technology reimbursement would be of keen interest to this group.
Technology companies that can develop flexible approaches to using and displaying the data underlying their value propositions can address the individual needs and perspectives of hospital customers facing different challenges in different parts of the country or world.
A second but equally important element underlying the relevance of the value proposition is an appreciation of the variety of individuals within each hospital who are involved in the technology decision. In some hospitals, decisions about technology use are heavily influenced by clinicians, usually based on their ability to drive admissions or procedures. In these facilities, financial staffers are used primarily to ensure that the department budgets contain accurate projections of the purchase expense. In other hospitals the clinical personnel have much less discretion over purchasing decisions, and the department administrators and the financial staff work closely together to make these decisions. In both situations, clinical department administrators have a keen interest in technology purchases and often are the primary point of contact for the shrewd salesperson. Department administrators may be one of the few persons who can comprehend the complete picture of the technology because they have to manage relationships with demanding clinicians and the equally demanding financial staff.
Scientific notions of cause and effect, or more simply, symptoms and treatments, drive clinical decision-making. Notions of revenue and expense drive financial decision-making. In building a value proposition, the data and financial analyses should be presented in the language and within the professional context of the individuals who participate in the decision. The clinical impact of a technology has to be appropriately measured in the language of science, but it then has to be translated into the business context of revenue and expense if the financial decision-makers are to be expected to understand it except in the most superficial way.
Some technology companies are adopting a strategy from the pharmaceutical industry by building interactive software models that calculate and display the value proposition for individual customers. In addition to containing data covering the clinical benefits of the technology, these models are capable of calculating the corresponding economic outcomes. The results of these analyses are often presented in the language of cost accounting, the financial language familiar to hospital financial planners and executive staff. These can be powerful and credible tools to provide evidence of technology value.
Technology companies that are sensitive to the situations of the hospital customers spend the time necessary to understand their challenges and develop value propositions that are specifically directed to these challenges. They will succeed in two ways. They will sell more products, and perhaps more importantly, they will offer information and support of real value to their customers, which will solidify their relationships over the long term.