I recently saw Omar Ishrak, CEO of Medtronic, perhaps the world's leading Medtech company, give the second in a series of compelling presentations on implementing Value-Based Health Care (VBHC). It dates me to reveal that my first taste of VBHC was trying to "value-price" my innovative oncology software company offerings in 1993...decades ahead of the market. But VBHC is finally migrating to mainstream and, as I watched Ishrak, two things occurred to me:
1) VBHC will either become your best offence, or a necessary defence; and
2) Medtech companies should already be doing VBHC, but most don't, and they can fail because of it. Let me explain why below.
1) VBHC will either become your best offence, or a necessary defence.
In an increasingly cost-constrained world, payers and healthcare systems are refusing to follow the old Medtech industry model of paying more for incremental improvements in device performance, regardless of value delivered, and then passing the cost on to payers and ultimately patients. Going forward, innovative technologies will increasingly be required to deliver MORE value than the status quo, for LESS absolute cost. This may seem obvious to those outside healthcare, but it is a tectonic shift inside.
Based on Michael Porter and Elizabeth Teisberg's 2006 book: Redefining Healthcare, Value-Based Healthcare is the transformation from getting paid for performing tasks, to getting paid for positive outcomes: i.e. curing disease, restoring health, or preventing future adverse outcomes. VBHC reduces incentives to drive procedure volume (regardless of value), toward measuring and paying for positive outcomes. Medtronic has fully embraced this concept, and commissioned the Economist Intelligence Unit to assess health system preparedness globally for VBHC...see the EIU report and Medtronic's response here.
The concepts in Ishrak's presentation are the latest in a string of publications. They are compelling and convincingly state that all Medtech companies, regardless of scale, will need to understand what "Value Based Healthcare" is, and how to use it to their advantage.
Ishrak defined "value" in healthcare simply as = (Value of Outputs)/(Cost of Inputs). Anyone who has dipped even a toe into health economics will know that the devil is definitely in the details of that very simple equation. But Ishrak demands we "not allow definitional challenges to be an excuse for not implementing VBHC now, where we can". In fact, effective methods currently exist for classifying interventions amenable to VBHC, such as focusing on narrowly defined patient cohorts with clearly defined outcomes and circumscribed attributable costs, rendering the value equation practical and controllable. Unfortunately, there are many complex situations, such as: heterogeneous patient groups with qualitative or subjective outcomes; or those involving many disconnected provider groups. These don't yet lend themselves to VBHC rewards. Ishrak is committed to implementing in areas where VBHC makes sense, and the health systems involved have the information to support it.
Medtronic has spent years developing the processes and hiring specialists to ensure a VBHC approach is possible and cost-effective. What about the rest of us? Well Medtronic maybe the most vocal at this time, but they are by no means alone. In 2015, 3M and McKesson began publishing a series of white papers on VBHC, although more so from a payer's perspective. Medtronic's approach is more from the Medtech company's perspective, and looking to start the conversation with customers. While an MD+DI article correctly stresses that depending on whether your device is highly differentiated, or differentiated only by services or price, the complexity of VBHC may not be justified. The differences which Medtronic and this blog focus on surround risk sharing, which is currently achievable.
In my view (and supported by literature), VBHC will eventually sweep all developed markets. You can either understand now how it applies to your products, and proactively build competitive advantage through VBHC procurement, or wait for your competitors get there first. The drop in sales will hit you hard. You'll be having to retrofit your business model when you are off balance, and you may not recover. (Remember when software companies tried to switch retrospectively from a capital model to a SaaS model when new internet competitors came along in the early 2000's?)
Customers increasingly won't buy your products if they can't justify them from a value perspective, or lack the incremental funds. Traditional preferences of physicians or administrators will hold increasingly less influence going forward.
2) Medtech companies should already be doing VBHC, but most don't, and they can fail because of it.
VBHC is the embodiment of what all Medtech companies should consider axiomatic: creating a Value Proposition that shows how your customers and patients can derive value from your products and services. With a compelling, demonstrable Value Proposition, your ability to energize staff, financiers and customers to support you increases. The fundamental change is that if you truly believe in your Value Proposition, then you should be willing to step up and get paid handsomely on delivering demonstrated value, but not when it doesn't (i.e. risk sharing as referenced above). In addition, it may involve offering services beyond your hardware to enable providers and health systems to realize the benefits.
Dr. Pim P. Valentijn, of the group Integrated Care Evaluation argues here that VBHC is merely repackaging existing concepts in new wrapping. He makes good points that the most dramatic reforms will not occur without integration across services, professions and stakeholders...and he is correct. But that does not take away from the tremendous gains possible in VBHC, and that device companies pursuing risk sharing (under the right circumstances) are a fundamental shift. Oliver Wyman predicts by 2025 that value-based care delivery will account for 70 percent of total healthcare spending.
In Accelerant's experience, most Medtech companies have great difficulty concisely articulating their value proposition. A value proposition should be embodied in every aspect and within the finest detail of the product and the workflow around its use. When this is the case, the transition to VBHC is far simpler.
There are many methods of analyzing a product and its use and their related services within the broader patient trajectory that align with Value Based Healthcare. VBHC principles affect product design, product scope, claims, strategic alliances, and go-to-market in fundamental ways. If you can master this for your Medtech business, it will be a powerful tool in attracting investment, launching customers and ramping sales. If your customers or competitors get there before you, you will be playing a dangerous game or catch-up. In reality, VBHC is a concept that has already been inculcated in great Medtech successes...they just may not have articulated it that way. Inability to articulate a durable and compelling value proposition that customers can realize is one of the main sources of Medtech company failure (see my upcoming blog on this topic).
If you don't think your approach to product design, sales, delivery and pricing is true to VBHC principles, you'd better put this on your 2017 strategic calendar.
© John Soloninka, Accelerant Health Innovations, 2017
__________________________________________________________________
John Soloninka is the Founder and President of Accelerant Health Innovations Inc. a Meditech consulting company focused on commercialization, innovation procurement and value-based healthcare. He is a medical technology strategist, serial entrepreneur and former investment company CEO.