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Monday, October 31, 2011

It’s all in the contract – how payers are tackling the increasing costs of medical devices

by Torsten Bernewitz

Rising costs for medical devices remain a big headache for health plans and their sponsors, as well as patients who will have to share the burden in some way. Although lately the growth of expenditures may have slowed a bit, the driver has not been better prices, but the postponing (or avoiding) of elective procedures in the light of the economic troubles, as well as some payer pushback based on studies that suggested that a significant number of implants may have questionable medical benefit.
The reprieve may thus be short term. The underlying factors for cost growth, the aging population on one hand and a stream of technical innovations on the other, are still there, and will continue to drive costs perhaps as much as 10% annually, in particular if the economy improves and when more people join the system by 2014.
Unless, that is, if this growth can be capped. And healthcare payers are looking for ways to do just this.
One way of doing this is through more effective contracting, both with providers and manufacturers. And although it may appear at first counterintuitive, manufacturers may benefit as well.

Healthcare checks and balances
Manufacturers, of course, are trying to maximize sales and profits for their products. This is legitimate and provides the incentive to keep innovations flowing. It is a necessary component of an efficient healthcare resource allocation process.
The payer provides the necessary checks and balances in this process. What is the product or service really worth? What is the net benefit of the procedure on health outcomes and patient experience? How much are employers and patients willing to pay, with the health plan as the intermediary to facilitate these choices.
Some payers simply peg reimbursement rates at some percentage of Medicare. But that is not negotiation, that is side-stepping the issue. It may leave money on the table that smarter negotiations could obtain.
Two strong negotiation partners make a better contract in the long term than a strong and a weak one. The manufacturer’s potential strengths - and thus sources of value - are the importance of the disease and the efficacy, safety and uniqueness of the product or service.
So what are the strengths that a health plan can leverage to create an effective counter balance?

I am planning to provide some thoughts about this question over the coming days.


Torsten Bernewitz is a healthcare industry analyst and management consultant.
He is Managing Principal, Healthcare Insurers and Payers at
ZS Associates.

This post is the author’s own and does not necessarily represent ZS Associates’ positions, strategies or opinions.

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