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Who Pays and Why?

market driven innovation Feb 16, 2022
medical device payment strategy

It’s a critical decision that defines your commercial strategy – one that affects your market time horizon, pricing, marketing claims, distribution strategy, and more. Who pays and why?

It sounds fundamental - even obvious - but for many medtech innovators this question arises far too late in the development of a product. Often, innovators assume that the answer to this critical question will unfold after the product can be demoed.

However, this is backwards thinking.

To develop the right product, you need to first understand the perceived value, cost constraints, distribution models, maintenance responsibilities, data integration modalities, and more. This information will drive product architecture, component selection, feature sets, target volumes and unit costs.

If you defer this customer insight, it is likely that your product will miss the mark. As a result, significant rework will likely be required to reconcile customer needs that have been realized late in the game.

Note, customers in this context are not necessarily users. Often, in the medical device industry, customers are unique and distinct from the end users that may be device operators or patients. Gaining understanding of user needs is of equal importance – a topic that is covered in a separate post (5 Secrets to Developing Actionable User Needs in Medtech.)

What are the motivators?

It is important for medtech innovators to understand that a medical device is simply a vehicle to deliver an outcome. People aren’t purchasing a medical device because they think it is interesting, attractive, or fun – they are purchasing a medical device because it promises to provide a benefit or an outcome. This outcome is often defined and measured in clinical and economic terms. “Why the Endpoint Should be your Starting Point in Medtech” elaborates on this important topic.

The outcome that motivates a purchase will vary depending on the customer category.

For the general population paying for a product out of pocket, the motivation may relate to personal emotions – feelings of security, wellness, independence, and safety. A product that reinforces these feelings may provide sufficient motivation for the general population to purchase. This emotional motivation may be strengthened if the purchase is encouraged by the individual’s physician.

For clinician purchasers, motivators may be around maximizing the clinical benefit to a large volume of patients. This could mean that efficiency, workflow, and data integration are high on the list of motivators. Alternatively, clinician purchasers may be seeking status. Acquiring the latest and greatest medical technology may position these clinicians as being on the cutting edge – a potential differentiator among other clinical providers. Dentistry and cosmetic dermatology are two medical areas where purchases are often driven by desire to be on the cutting edge.

For healthcare institutions, their motivators may be around maintaining and improving their brand and reputation, avoiding litigation, improving quality scores, and reducing hospital incurred costs. For these institutions, a data-driven approach is likely required. While the value of a medical technology may be implicit to one group or department within a hospital, capturing the buy-in of administrators, legal officers, value analysis committees, and others requires objective evidence that the solution is effective both clinically and economically. This objective evidence is often an essential motivator when dealing with complex buyers, such as hospitals.

For public and private payers, motivators are primarily focused on reducing the aggregate costs of their insured populations while maintaining or improving clinical outcomes. Similar to healthcare institutions, these payer groups are motivated by evidence, and it is highly unlikely that new codes or coverage will be opened in the absence of compelling clinical and economic data.

What are the costs?

In addition to considering motivators, it is critical for you to evaluate the costs that various customer types will incur.

Most of the time we think of costs purely in monetary terms. However, costs refer to any resource that is depleted because of a decision (or a non-decision).

So, the costs of time waste, brand equity damage, inventory obsolescence, supply chain disruptions, employee turnover are very real and often outweigh the straight financial costs (or gains) that may be the basis of your value proposition.

In terms of financial costs, understanding willingness to pay (WTP) is critical to defining the appropriate customer target. WTP is typically much lower for general customers than it is for healthcare institutions or public / private payers that stand to gain a strong economic return on investment of a new medical technology that is supported by strong clinical and economic evidence. This understanding of WTP for your specific customer target should drive product cost of goods, which in turn will dictate feature sets, component selections, part count, assembly complexity, software requirements, and more.

How to gain customer insights?

To enact change – which includes adoption of your product – customer motivation needs to far exceed the costs incurred. How do you gain these insights into customer motivations and costs?

Gaining this perspective comes through primary research – interviewing an array of potential customers to understand the perceptions on standard of care and alternatives. This information rarely arises through online search and publication review. It is an exercise in psychology – getting into the minds of your potential customers to understand their current outlook – emotions, desire for status, desired clinical and economic outcomes, skepticisms, and resistance to change.

This is a non-linear and time-consuming process, but it is one that will shed light on the right path forward on this critical decision of who pays and why. The time that you spend here gaining customer insight will be a small fraction of the time that it would take to course correct if you chose the wrong path.

So, take the time to develop this customer understanding, and use this information to focus on the right solution with a complementary and integrated commercial strategy.

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