A global Cardiovascular Medical Device Company was experiencing a sharp increase in competition across the UK market, leading to product commoditization and growing price erosion.
The product the Company offered, an implantable defibrillator device, was similar to its competitors’ product. However, the Company's product had one key difference – the duration of the battery. While the competing batteries last for 5-7 years on average, the Company claimed its product batteries would last for 10-12 years.
This is a dramatic difference. It affects not only the Company, but the lives of its patients – when a patient's defibrillator device runs out of battery, he needs to go through surgery in order to replace it. Also, when a hospital performs less surgeries, patients suffer fewer infections. Hence, a device with longer battery life would allow patients to undergo less surgeries, or undergo them after longer periods of time.
However, the Company had one obstacle – its claim for long battery life is exactly the thing that prevented it from running standard clinical trials, that will prove the battery's durability. Standard clinical trials mean that the Company must collect results for 10+ years, starting from now. As a result, these trials include a massive economic investment.
The Company approached Tefen, asking it to assist in developing a new pricing model.
After carefully examining the Company's data, Tefen decided upon three main objectives:
1. Assess the Company's current pricing model and its effectiveness
2. Develop new pricing model and leverage the value proposition on strengths (battery life) and health outcomes
3. Ensure a successful launch of the pricing model, with the end goal of promptly commercializing it
Fig. 1: Changing the Industry Paradigm
Tefen executed these objectives by performing in-depth studies of the UK population, and the product's potential impact on the UK healthcare system and hospitals. In this mapping, Tefen mapped the potential affected population's age (the people who use the device) and their life expectation, and assessed the impact of every implant on the Healthcare System and hospitals (because in the long term, hospitals using the Company's products would be required to perform fewer medical procedures/operations). In other words, Tefen performed a health economic and epidemiologic evaluation.
Based on this transverse evaluation, Tefen developed an innovative pricing model, that focuses on the “Pay for Performance" concept; meaning, the hospital would pay for the product's price in yearly installments, while relating directly to the years of actual battery duration.
As part of this pricing method, if the Company's battery lasts more than the competitors' battery does – the hospital will pay the Company a premium, as it'll save on a surgery. Meaning, the Company would be sharing risk with the hospitals.
This new pricing model took into consideration the Clients' specific characteristics (e.g. number of procedures). Tefen included these elements in the Client's pricing options outline. The new pricing model considered maximizing the profit and loss results and the cash flow deriving from the Company's operation around the product.
This method would allow the Healthcare System to pay for the effective value of the product, while the Company would grow their market share as well as retain its product's price.
As part of this new pricing model, Tefen identified another area to take into consideration: what happens if a patient passes away before the battery depletes? Part of the defibrillator value for the Healthcare System would be lost.
Given the fact that the new pricing model was based on the risk shared between the Company and the hospital, Tefen identified an interesting option: if the patient passes away, the Healthcare System would stop paying installments for the defibrillator, as if the battery had depleted. This option would allow the Company to share the mortality risk with the hospital, and would position the Company similar to an insurer.
In addition to the innovative pricing model design described above, Tefen included a remote follow-up service with the patients, which monitors the defibrillator's performance on a regular basis over the course of several years. This multi-year follow-up service created an additional revenue stream for the Company as a partnership with the hospitals.
After developing this elaborate pricing model, Tefen created a detailed internal instruction program, explaining how to use the new pricing model and its value proposition. Tefen also performed training on selected employees from the sales team, and provided the following deliverables:
• A booklet which explains the model
• Questions & Answers for model users
• Objection handling guidelines
• Training materials
Finally, Tefen fine-tuned and tested the model's in-Company implementation, ensuring its successful launch with the end goal of promptly commercializing it.
The new pricing model created benefits for all stakeholders involved:
Improved patient care:
• Longer patient life
• Improved patients' access to care
• Reduced readmissions and complications
• Positive impact on waiting lists
• Fewer budget constraints
• Lower costs due to risk sharing
• Higher capacity and better outcomes
Less costs for Hospitals:
Potential savings of above 30% over a 15-year period could be achieved by:
• Extended longevity, including savings related to the device itself and the procedure's costs
• Lower costs of managing complications
• Reduced number of battery replacements, which creates capacity for additional patients
Written by Paolo Correale, a Director at Tefen Italy, and the Head of Pricing at global level
Life Sciences Sales and Marketing expert, Leader of Pricing practice