Imagine buying a new car only to learn that it doesn’t work as advertised and there’s nothing you can do about it. That’s essentially what happens when you take a pricey medication or need an expensive medical device like a heart valve or new knee — there’s no guarantee it will work and you won’t get your money back if it doesn’t.
In most realms of commerce, if a product fails to deliver what’s been promised, consumers are financially covered through refunds and warranties. This has never been the case with pharmaceuticals and medical devices. Increasingly, however, that’s going to change.
In an attempt to stem the growth of health care costs, hospitals, private insurers, governments, and other purchasers of these products are resisting price increases and the introduction of expensive new products. They are also looking for more evidence of effectiveness. At the same time, drug and device makers need new ways to convince skeptical payers that their products are worth the price. To do so, they’re borrowing the kind of guarantee we’re familiar with from other industries: If the product doesn’t work as intended, you don’t pay.
Consider the surgical sponge. These pads are used to absorb blood or other fluids from the site of surgery. They are, of course, supposed to be removed before the operation is over. But a sponge is left behind an estimated 11 times a day in the United States. That can cause grave problems for patients. Stryker (SYK), a medical device company, developed its SurgiCount system to accurately track these sponges. This March, it announced it is backing the product with a $5 million guarantee. If the system is used as designed and a surgeon leaves a sponge behind, Stryker will pay up to $5 million in legal costs associated with rectifying the problem. The company will also reimburse the hospital the difference in price between what it paid for SurgiCount and what it would have paid for generic sponges.
In the pharmaceutical arena, Cigna (CI) has announced signing contracts for two new cholesterol-lowering drugs that would reduce the price paid if real-world outcomes don’t match the results of clinical trials. Cigna will be given access to patients’ cholesterol levels and be able to tell how well the new drugs are working.
These examples reflect the new level of pressure that payers and providers are exerting on price and use. Employing real-world clinical data is perhaps the best way to establish a product’s true value, moving beyond traditional pricing and reimbursement practices that involve complex estimates and rebates. This approach also provides manufacturers the opportunity — and the challenge — of standing behind the performance of their products.
Some of the pharmaceutical and medical device executives I talk to have a “this too shall pass” mentality. They’ve been through the wringer before and hold onto the hope that today’s headlines will fade and the media will find new dragons to slay tomorrow. But wishing that something else will pull the spotlight away from the high cost of drugs and devices isn’t a solid strategy.
Risk sharing is part of the next chapter in drug and device marketing. It is all about finding new ways to achieve better outcomes and reduce costs. Success requires that manufacturers focus on developing products that have a significant impact on critical health problems, not just on incremental improvements. Shared risk means that the payers must have skin in the game, otherwise this is all just a euphemism for cost concessions.
The pharmaceutical industry is on its heels in the current political and media environments. Embracing true reform of the payment model is one way it can begin winning back goodwill. This is market-based health care at work, which is a good thing for us all.
Rita E. Numerof, PhD, is president of Numerof & Associates, a firm that helps businesses across the health care sector define and implement strategies for winning in dynamic markets.