Medical Device Link.

Originally Published MX January/February 2002

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Optimizing Reimbursement for New Medical Devices

Medtech manufacturers seeking to introduce new products or technologies can use resource costing and market research to maximize reimbursement levels—and also to boost market share.

Allan Fine and Mitch DeKoven

The pressure for medtech companies to develop new products and technologies that lead to new and enhanced treatment modalities is enormous. The financial investment in research and development can be staggering, particularly when there is no guarantee that the product will be a success, or even that it will receive the necessary regulatory approvals. Yet medtech companies have to meet market and shareholder demands, which require that they gain competitive advantage and continually improve their financial performance. One way that medtech companies can accomplish this is through acquiring and retaining market share.

Medtech companies can effectively gain market share through the introduction of new products and services. With any new product or service, there is a window of opportunity to maximize the level of reimbursement prior to the patent expiration. It is during this time that medtech companies hope to recoup some or all of their R&D investment, while simultaneously achieving specific revenue targets for the given product.

Both government and commercial insurers establish reimbursement levels for new medical technologies and devices. Most, if not all, insurers base coverage and reimbursement decisions on clinical outcomes and cost-effectiveness data.

However, a substantial number of medtech companies fail to recognize that payers—particularly governmental payers—will consider requests to evaluate the potential merits of increasing reimbursement for specific cases that can justify their unique offering and appreciably higher resource costs.

The Centers for Medicare and Medicaid Services (CMS; Baltimore), for example, frequently develops new payment methodologies in the absence of adequate data regarding industry costs or charges. CMS is also known to establish payment methodologies based solely on the marginal or variable cost of service to Medicare patients, rather than the average or full cost.

To optimize reimbursement coverage and payment decisions for new products and technologies, medtech companies must be able to combine resource cost data with market research. This article outlines the methodology behind such an approach and discusses how medtech manufacturers can use it to increase their market share.

Resource Costing

In building the case to support their petition for appropriate reimbursement for new devices or technologies, healthcare organizations must be able to identify and understand the costs associated with administering these products and services. If payment levels fail to reflect the costs of these important new therapies, it is likely that hospitals and other healthcare providers will not use them. As a result, it is critical for medical technology companies to understand reimbursement methodologies and to be cognizant of potential changes. One way that medtech companies can do so is by collecting and analyzing resource cost data.

Resource cost analyses can provide relevant financial data to assist CMS and commercial private payers in understanding the costs associated with new devices and technologies so that they can adjust their payment levels accordingly. The limited cost accounting that occurs in hospitals and other settings where healthcare services are offered, such as ambulatory surgical centers, has made the use of resource costing particularly appropriate to the healthcare sector. Industry experts support the belief that resource cost data are the most accurate and best measures of cost, but agree that they are very difficult and expensive to obtain.^1,2

Resource costing essentially consists of three steps. First, insights garnered from practitioners, observation, and interviews are used to fully document the process that is under study and to define program components. These insights are used to develop a resource profile that describes a specific activity or service, identifies the resources required to provide the service, and discusses the interrelationships of the required resources. Resource profiles should include all possible variables to ensure their utility for any procedure studied using the model (see Table I).

Second, the direct and indirect resources required for each set of activities are separated and identified, and each major cost category is divided into its component parts. Direct resources are those that are clearly associated with the cost objective, such as professional and technical labor, supplies, and equipment.³

Classification of a cost as direct eliminates the need to use allocation methods to attribute cost to a product. Allocation of costs is always less precise than direct attribution. For this reason, equipment costs, which are almost always defined as indirect in traditional accounting, are separated into direct and indirect components in resource costing.

Direct equipment costs are those associated with equipment that is used only for a specific procedure or a small number of related procedures. Indirect resources relate to all nondirect activities supporting the area in which the process is completed, such as space, utilities, maintenance, housekeeping, and administration.⁴

Indirect equipment costs include both costs that may be required to perform a procedure and costs of equipment used to support broad-based activities. Once each resource used in each activity of the process is identified, the volume of resources is measured.

Third, the unit cost of each resource is obtained from payroll records (costs of labor), purchasing invoices (costs of supplies and drugs), and depreciation records (costs of equipment). Labor costs are converted into cost-per-minute values to be applied to the minutes of time identified in the resource profiles. Unit costs that cannot be found in facility records may be gathered from national and regional suppliers. Different examples of resource profiles can be found in Tables II, III, and IV.

By having an appreciation of the specific costs associated with new devices and technologies, medtech manufacturers are much better equipped to understand the aspects affecting their potential profitability.

Examples of Using the Methodology

The following examples describe how resource costing can be used in conjunction with market research to support petitions to various payers for increasing reimbursement coverage levels.

A pharmaceutical manufacturer awaiting FDA approval for a new oncology drug having unique administration resource requirements beyond those of existing therapies was able to optimize reimbursement by conducting a study designed to quantify the costs associated with the administration of the drug. These costs were then compared with payment rates for current Medicare diagnosis-related groups (DRGs) and ambulatory payment classifications (APCs), the basis of payment for the recently implemented Medicare outpatient prospective payment system.

The findings of the study indicated that the drug administration costs exceeded current Medicare payment levels (see Table V). The results supported the company’s position regarding the necessity of creating a new APC to address the unique resource requirements of its new therapy.

A medical device manufacturer interested in the economic effect of its various laparoscopic instrument types on the cost of laparoscopic surgery designed a resource cost analysis to examine the effect on surgical profitability as a function of using the company’s various instrument types (see Table VI). It was determined that there were significant potential cost savings for hospitals using a combination of the company’s laparoscopic instruments. These financial findings served as the basis for, and were compelling in the design of, the company’s marketing materials, which targeted both prospective and current customers.

A medical device manufacturer awaiting FDA approval for a noninvasive biological imaging device used in the detection, diagnosis, treatment, and monitoring of breast cancer conducted an analysis designed to assess the cost effect that its new technology would have on the cancer detection process (see Table VII). A resource costing methodology used in the initial aspect of the analysis was subsequently supported by market research, which helped to assess purchaser decision-making and provided insights about the ways that pricing and other economic positioning strategies may affect market adoption. These findings will be used to support the manufacturer’s position in seeking higher reimbursement coverage from CMS.

The Importance of Market Research

As medtech companies attempt to position their new device or technology with prospective buyers, payers, and key purchasers, qualitative market research supporting the quantitative analysis derived from the resource costing methodology will be critical to success. The information gleaned from market research can also be advantageous in supporting negotiations with potential commercial partners, if such a strategy is pursued or deemed appropriate.

In addition to clinical benefits and health policy considerations, it will be important to understand the reasons why various stakeholders will potentially decide to adopt a new device or technology. In the examples described earlier, as the manufacturers were presenting their cases for securing optimal reimbursement, market research revealed the receptivity of the marketplace, as well as the objections and concerns regarding these new devices.

Medical economics will also play a significant role in the ultimate commercial success of the new device or technology. Currently, the outpatient prospective payment system creates incentives for the users of new devices and technologies to render services at a minimum of cost, often substituting costly therapies with less-expensive alternatives.

As a result, medtech manufacturers need to understand how their devices and technologies are used and adopted, and to effectively perform market research in order to avoid reduction in the use of their products and services. It is through market research and targeted interviews that medtech companies can investigate how the economic effect of the new device or technology should be measured and communicated to the relevant stakeholders.

It behooves medtech manufacturers to expend the necessary resources during the R&D and prelaunch stages to design the appropriate clinical research and outcomes studies, as well as to conduct the economic and market analyses that will address all of the anticipated concerns and issues raised by the stakeholders (see Table VIII).

Since each stakeholder has a unique set of economic concerns and criteria, a one-size-fits-all approach to developing an economic positioning argument would be neither appropriate nor effective. Furthermore, stakeholders are not equal with respect to their effect and influence on the purchase, use, endorsement, or approval of the new device or technology.

The Market Research Process

The process for conducting primary market research can vary, but a successful approach should include the following steps.

• Medtech companies should understand the economic purchase and use criteria, as these enable them to compile substantive data during the clinical development process and to develop credible models that can be used to support the launch of new devices and technologies, thereby achieving optimum reimbursement.
• Medtech manufacturers should become familiar with the competitive environment, including perceptions of technologies that may perform the same or similar functions.
• Medtech companies should identify the economic positioning attributes that are of greatest significance to the various market segments and be able to strategically communicate them to the different stakeholders in order to gain market share.

A Strategy for Differentiation

In a competitive market, medtech manufacturers must continually identify tangible approaches by which they can differentiate their new device or technology. Differentiation can be observed on the basis of price, service, design, target markets, distribution, availability, testimonials, reputation, track record, and other attributes considered important by the user of the device or technology. These factors should be considered in the company’s development, refinement, and implementation of a market-positioning strategy.

Customer perceptions are not always accurate from the company’s perspective, but they nevertheless portray a reaction, concern, or expectation that can have a profound effect on the initial and continued use of the company’s new product or technology. Medtech companies must therefore continually monitor customer perceptions as they evolve, and make adjustments to their positioning strategies when appropriate.

Once the initial analysis is completed, companies can further differentiate their device or technology by promoting the fact that they are attempting to, or have actually secured, approval from selected payers for a higher level of reimbursement (e.g., a unique APC code). The marketing message should be tailored to the specific stakeholders being targeted. A benefit of the market research process is that it will enable companies to more fully comprehend and appreciate the sensitivities of their customers as they make purchase decisions.

It is a propitious time for medtech companies to apply a differentiation strategy in their marketing efforts by using the insights gained from resource cost analysis. It is perhaps the most effective way to engage the governmental or commercial payer, and to capture their interest in considering the company’s request for higher reimbursement.

As R&D efforts intensify and the pressure to launch successful new products mounts, payers will increasingly be inundated with requests for higher levels of reimbursement. It is therefore reasonable to assume that payers will react more favorably to those companies that can provide evidence of having conducted a resource cost analysis.

It is inevitable that the payer will pose questions, seek additional supporting information and data, and challenge some of the findings of a company’s resource costing, but such an analysis will enable the initiation of dialogue with the payer. The latter achievement is the first barrier that has to be overcome.

Conclusion

Medtech manufacturers should be careful not to allow the enthusiasm associated with the potential of a new device or technology to alter the methodologies described in this article, since payers have their own objectives, goals, and priorities. While there are no guarantees to gaining payer approval for higher reimbursement, a comprehensive analysis involving both resource costing and market research is beneficial in advancing a company’s position. Medtech manufacturers must balance speed to market with a well-conceived approach.

REFERENCES

1. JH Burkhardt and JH Sunshine, "Core-Needle and Surgical Breast Biopsy: Comparison of Three Methods of Assessing Cost," Radiology 212 (1999): 181–188.
2. M Grady and K Weis, "Cost Analysis Methodology for Clinical Practice Guidelines," in Proceedings of the Annual Conference of the Agency for Health Care Policy and Research (Rockville, MD: Agency for Health Care Policy and Research, 1995).
3. SA Finkler, Essentials of Cost Accounting for Health Care Organizations (Gaithersburg, MD: Aspen Publishers, 1994), 13–14.
4. Finkler, 13–14.

Allan Fine is vice president of and Mitch DeKoven is a consultant for CHPS Consulting (Chicago and Columbia, MD).

Illustration by Chuan Khoo/Artville.

Copyright ©2002 MX