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"Never mistake motion for action.

" Ernest Hemingway

Pricing Strategies in the Health Care Industry

The medical device industry is more open to strategic pricing activities than many other market sectors. This is because the majority of other sectors are required by law to display the prices of their goods prominently so that the customer can see what they will be asked to pay before they begin to consider the quality of the product they are buying. However, this scenario does not occur readily in the medical device sector. Even though the first question that the purchaser of a medical device may want to ask is How much is this going to cost me? they will probably first be subjected to literature extolling the merits of the device and then be faced by salespeople who will reinforce the message of the products virtues before answering the question of how much it will cost the customer. This is a form of value pricing, where, if the sales person and the product are very good, the customer may feel that for the value the product gives them, the final cost quoted is a bargain. Of course companies do have list prices for devices, but they are not easily accessible and therefore it can be difficult for medical device customers to conduct comparative window shopping. However, for certain medical devices and medical services, customers have taken pricing power into their own hands by asking medical device companies to approach them with tenders for the products and services they would like to buy. This gives the customer the chance to compare and contrast the offerings of the various companies and choose which company to offer their business to. In this consideration price plays an important part of the decision making process accounting for about 50% of the weighting in Italy and 65% in the Netherlands for example, with value and service making up the remainder. Figure 1 - The influencing factors on medical device pricing

Tendering is mainly confined to purchase considerations of high value items, but medical device purchase is frequently structured so that purchaser/supplier contracts are arranged for a number of years, which means that large amounts of money are involved and so, just as with tendering, it is vitally important that in such arrangements companies set their prices appropriately. However, as Figure 1 illustrates there are many factors that influence pricing levels and companies have to balance these against each other in order to arrive at a price for their customers. The costs of researching, developing, producing and marketing a product form a platform on which the repercussions of a pricing strategy can be based. This points to the simple strategy of estimating the costs, estimating the number of units that will be sold, deducing the price that each unit would have to be sold at in order to gain a profit and adding a margin. This is known as cost plus pricing, but it is a system that is rarely used in the medical device industry and one senior expert in pricing strategy stated in interview that, this is the minimal strategy that any company should use as it doesnt take account of the changing state of the market. A point is also made in the figure below which states that innovative products can command a higher price. There is continuing debate, especially in western industrialised nations as to the validity of this given the immense burden that this places on healthcare structures. This can essentially be considered a matter of product differentiation. Consistently it has been demonstrated in the medical device market that products that are unique when they initially enter the market, such as the first pacemakers, can command a high price and then when other similar products begin to enter the market the prices decline. However, companies can slow this trend or even reverse it through using the correct tactics, and adding unique or valuable services to the product offering. In the computed tomography (CT) market for example it can be argued that Toshiba, which is close to launch of its 128 and 256 slice scanners, has the most advanced technology for performing cardiac CT and yet they are keeping the prices of their products low. With its 64 slice CT technology Siemens offer finance packages, education programmes, strong service agreements, and other value added products that enable them to continue taking market share while maintaining their higher prices. A problem with a truly unique product is that the market may not be ready for it and the reimbursement systems may not be in place for customers to be able to afford it. This has occurred on many occasions in the medical device market and a tactic that is frequently used is for companies to lobby to gain a new reimbursement coding for the device to set it apart from competitive, but less advanced technologies. However, this is not an easy process as each country has its own reimbursement structure and companies therefore tend to decide which market their product will have the most success in and target that countrys reimbursement system first. In most instances gaining appropriate reimbursement approval is pivotal to the successful launch of a product, but if the device is not only unique and there also exists a great demand for it, then the product can withstand having a higher price than insurance systems will reimburse. This has happened for products such as the Charit artificial disc manufactured by DePuy Spine, Inc (J&J) which is currently the only device of its kind in the US market. The US reimbursement system currently codes this product under disc excisions with average reimbursement of approximately $4,700 to $7,200 whereas the cost of using the disc is around $11,500. Due to its unique quality however, customers are willing to pay the extra. It is not only the uniqueness of the product that persuades customers to pay the extra, but also the medical need for it. In general, the greater the medical need for a product the higher the price it can command. Products such as defibrillators therefore, can command a much higher price than wound care

products, and whilst it is easy to assume that a defibrillator is much more technologically advanced than a dressing this is not necessarily the case. The technology in many of the established defibrillators is now pretty much off-the-shelf electronics whereas some of the advanced wound care dressings incorporate cutting edge biotechnological engineering solutions. In addition, although the defibrillator makes contact with the body the wound dressing is in contact with blood and exudates and both therefore have to undergo extensive clinical trials. Additionally, whereas defibrillators are used in relatively few patients, wound dressings are used on many and in assessing their pricing strategy, wound care companies know they can go for profit on volume sales and adjust their price to that of competitive but less advanced products. One of the major influences on pricing in a market is competition. As the General Manager of Business Development of Omron Healthcare, Inc in the US stated, the competition plays a critical role. If the competition sets the price low, we have to be competitive; therefore we cant set our price too high. However, if our product can be differentiated from theirs we do not have to price as low as the competitor. On the other hand, if they set their price high, we should not set the price too low. Having said this we do not have to follow the competitors as this is a very dynamic area, and we need to be flexible and responsive. This summarises the situation nicely but it is not quite as simple as that. A company needs to understand where its product fits in with the competition in terms of value. This competition does not have to be from external companies but can also come from within the company itself and the value that their products offer. For example, Guidants dual chamber pacemakers had an average price of $6,200 in 2002, whereas its single chamber Discovery pacemaker had an average price of $3,222. This is market segmentation, but knowing where your product stands in relation to your other products and that of the competition is a major factor in any pricing strategy. Although gaining information on the competitions pricing is not easy. For example, in 2003 Medtronics dual chamber KDR700 series pacemaker had an average price of $5,082, but many hospitals were paying an average of $4,914. This illustrates the discounts that can be provided to customers and in order to discover what discounts are being made by competitors companies use a variety of tactics. A marketing executive of Synthes, said of the market in Spain, a very useful tool is public tenders. Whenever there is a public tender the information is transparent, but some hospitals do more to help gain access to this information than others. The most transparent hospitals publish all information on the website, but it is not that widespread. I would say 5-10% hospitals publish the information online. But they are required to provide that information, so sometimes you have to go and ask for it and sometimes they let you see it, but they dont give you a copy so you have to sit at the table and write down the prices physically. However it is more difficult than it should be. Medical device companies have to consider the full range of market pressures if they are to develop an effective pricing strategy. Unfortunately, the structures of many companies pricing infrastructures are so complex and the communication between sales personnel and pricing managers so unorganised that there can be problems with tracking up to 6% of sales revenue. With this realisation some medical device companies are starting to overhaul their pricing infrastructures by following the procedures illustrated in Figure 2, but any strategy developed has to retain flexibility within its structure in order to be able to adapt to the ever changing demands of the market. Figure 2 - Improving a companys pricing strategy

Author - Duncan Fatz - Consultant