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Tuesday, November 1, 2011

It's all in the contract - part 2

by Torsten Bernewitz

Yesterday I wrote about checks and balances in the contracting negotiation between health plans and manufacturers, and asked the question what strengths a health plan can leverage in this process (

For medical devices, this is a complex and difficult question. First: who do we actually negotiate with – providers, manufacturers, or both? Second: what do we negotiate for - reimbursement rates or rebates (or both)?

Contracting scenarios

With whom to negotiate, and what to negotiate for, depends on the money flows, and on the type of device under consideration, and the contracting scenarios can be very different.

In many cases, the provider will purchase the device from the manufacturer and seek reimbursement from the payer. Provider reimbursement is the common model in the hospital setting, and typically includes products like implants or pacemakers. Payers and providers can contract for inclusive payment for certain procedures (i.e. including the cost of the device in a case based lump sum), or separate payments for the device and the intervention.
Separate payment - although less common today - may be the smarter choice for the payer, as will be discussed below.
In other cases, the provider is not involved in the money flow, and the payer reimburses the patient directly. Patient reimbursement is most common in outpatient settings and home care, typical products in this category include insulin pumps, glucose monitors, nebulizers or negative pressure wound therapy. Here, success factors and strategies and very similar to negotiations with pharmaceutical manufacturers.

Unbundling can be an effective way to obtain better leverage

If the payment is inclusive, it may seem that the payer does not need to worry about the cost of the device too much; this question is then more a concern for the provider’s financial officers, and the contract they have with the manufacturer. However, payers still need to keep close tabs on device costs to make sure that they are not paying too much when the provider uses cost increases as an argument to ask for fee increases. And anyway, it is generally a good idea to understand the individual cost components of the procedure to estimate provider margins and estimate the resulting room for negotiation of reimbursement rates.
If the device payment is separate, payers will aim to contain provider reimbursement rates. In particular, they will try to squeeze out potential provider margins on the device (i.e. reimbursement should be very close to the net amount the provider pays to the device manufacturer). Alternatively (or in addition), the payer may go to the manufacturer and negotiate a rebate. Rebating to the payer may be beneficial to the manufacturer as well. If there is more room for reimbursement to the provider, utilization controls may be less restrictive, and the manufacturer’s market penetration can increase.
Unbundling - moving from inclusive payments to separate payments - is probably in the interest of payers, at least as long as the fee-for-service model prevails. This strategy is similar to the moves payers are making to shift specialty pharmaceuticals – the big drug spending headache – from the buy-and-bill model under the medical benefit to the pharmacy benefit, which can be better controlled.

The model for patient reimbursement is equivalent to contracting for pharmaceuticals. Payers and manufacturers negotiate rebates for “market access”. There are different dynamics at play in this environment - more about that in a subsequent post.


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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