Two trends are driving the medtech industry towards value-based contracts (VBCs): 1)the shift away from selling standalone products to platforms that include software and services in addition to device hardware, and 2) vertical integrations of pharmacies, providers, and payers in the healthcare landscape.
Sometimes referred to as value-based agreements, risk sharing, or outcomes-based contracts, VBCs are a new way for medtech manufacturers to get paid by healthcare providers or payers, in which revenues are based on value – also known as outcomes – delivered rather than simply the number of devices sold.
Almost 60% of health plan executives say innovating payment models over the next three years is a top priority, according to a recent survey by Deloitte. But should you consider moving to VBCs for your medtech solutions? It depends. A number of key criteria need to be met for such a shift to work in your favor, among them whether your solution has measurable outcomes, your ability to collect and analyze patient data, and the current regulatory environment.
Implications of the shift to platforms
The go-to-market effects of selling platforms rather than products are significant.
What’s the difference? A medtech platform is a foundational, connected layer of technology that can be built upon or integrated with. In contrast, a standalone medtech product focuses on delivering a specific solution or function and frequently lacks the ability to connect to other systems or a network.
Because a platform tends to have an ecosystem of products, software, and services associated with it, the following issues arise:
- Ownership and governance of data: Medtech companies must ensure privacy and security and comply with all relevant regulations when they collect and analyze patient data to improve outcomes and drive further innovations.
- Payment model: Platforms make new ways of selling possible, such as subscriptions or pricing based upon outcomes rather than volumes of products sold or used.
- Organizational structure: Developing connected platforms, especially those that incorporate digital communications and artificial intelligence (AI), can require medtech businesses to rethink how they operate. For example, they may consider creating a centralized digital R&D hub that contributes across all product lines.
Vertical integration: it matters for VBCs in healthcare
Vertical integration of pharmacies, providers, and payers drives medtech organizations toward VBCs. For example, UnitedHealth Group owns Optum, an increasingly large “health services company,” and Aetna is part of CVS Health. Managed Healthcare Executive’s State of the Industry survey found that most (58%) respondents picked vertical integration of healthcare providers such as hospitals and physician groups as No. 1 of the numerous consolidation trends most likely to accelerate this year.
When various players in the healthcare ecosystem come under the same ownership structure in this way, it can streamline care, cut costs, and improve outcomes. Hypothetically, and when appropriate, this allows all the entities to share de-identified patient data and access medical records more seamlessly.
This opens the possibility of VBCs and risk-sharing agreements because of the ability to monitor patient activities associated with medtech products or platforms and quantify outcomes.
The case for moving to VBCs
Although the value-based healthcare trend is primarily driven by the desire to improve the quality of outcomes while simultaneously emphasizing a patient-centric approach and reducing costs, there’s something in it for medtech organizations, too.
Most importantly, it helps them compete in crowded healthcare markets where they are vying for insurers and payers – including Centers for Medicare & Medicaid Services (CMS) – for coverage.
By quantifying the value, or outcomes, of using their solutions, medtech companies can prove that their particular offerings are more effective than those of competitors.
This is attractive to insurers because when fewer patients go to emergency rooms or are readmitted to hospitals, their costs drop significantly. By focusing on outcomes and quality, providers have a greater incentive to prevent diseases and complications, which can improve the management of chronic conditions and better coordination of care.
One successful VBC arrangement was forged in 2017 between Medtronic, a leading medtech provider, and Aetna, a large managed healthcare company. Type 1 and type 2 diabetes patients currently on multiple daily insulin injections to manage their conditions were provided with Medtronic’s insulin pump therapy system that constantly self-adjusts to keep patients’ blood sugar levels in range based on their personalized needs. The VBC measured health outcomes for each patient and tied Medtronic’s reimbursement to successfully meeting agreed-upon clinical improvement thresholds for them.
Some potential metrics for defining success in VBCs include the following:
- Survival rates
- Remission rates
- Decreases in tumor sizes
- Biomarker levels
- Progression of diseases
Criteria for evaluating VBC
Here’s a list of questions to determine if your solutions are good candidates for VBCs:
- Is this particular device appropriate for a VBC arrangement? The device should offer outcomes representing clinical endpoints, which can be observed over a specific period, reliably and objectively measured, and consistently obtained.
- Can I obtain measurable outcome endpoints to act as surrogates? This is important in smaller patient cohorts and to obtain timely data.
- Is the cost/value opportunity significant? What is the size of the opportunity, especially considering the alternative or combination solutions under consideration?
- Can you access or collect sufficient patient data? You need well-defined roles, responsibilities, and processes for collecting, standardizing, and reporting using payer claims, electronic health records, and other data sources.
As VBCs become more common, medtech should prepare
The increase in digital devices, particularly wearables like smartwatches and fitness trackers, is driving a rise in VBCs. That’s why it’s in the best interest of everyone in the healthcare industry to consider how to make the switch.
But there are many possible options in the VBC model continuum, ranging from performance-based arrangements – such as risk-sharing programs, which offer discounts or return payments if the outcome of using the device falls below a certain threshold – to conditional compensation models in which either financial payment or liability is based upon generating sufficient evidence.
It’s important to think all this through – especially the data part. You must have plans for collecting data, analyzing it, and reporting on it while keeping it private and secure in accordance with regulatory mandates.
The Organization for Economic Cooperation and Development (OECD) estimates that as much as 20% of healthcare spending across member countries is unnecessary or ineffective. And spending more doesn’t always lead to improved patient outcomes. By focusing on VBC, medtech organizations can address both the cost and outcome challenges while bolstering their own competitiveness.
