EU Directives and Public Procurement Regulations push: true cost of care and value-based trial periods in procurement – PART II
As discussed last week in Part I, new EU directives and regulations are emphasizing life cycle appraisals in procurement processes and stressing the need for sustainability of production, social services and competitive practices.
There are two consistent challenges in today’s world-wide healthcare industry:
- Annually increasing healthcare costs
- A wide variation of clinical outcomes
Value-based pricing targets both these issues at the root of procurement, whilst acknowledging healthcare as an ongoing pathway.
In this article we will explore how non-cost-based pricing is present in healthcare procurement, the revived trend of value for money, and exemplify value-based procurement cases that tie into the new EU directives embodying the future of sustainable procurement.
Value-based pricing: not new, but newly appreciated
Traditionally it made sense to price a product according to what it cost to make it; e.g. to research its creation, to cover the sourcing of its components, its production, and the marketing. In other words, a simple formula including a mark-up to cover all overhead costs, to ensure the motivation of manufacturers, and to allow research to continue and finance new productions.
When looking at healthcare markets holistically, cost-based pricing no longer makes economic sense. The range, competition and variations of outcomes of available therapies on the medical market, the various argumentations justifying large profit margins or immense differentiation in pricing based on demographics, the high expectations around clinical outcomes, and –last but not least- the immense pressure on public budgets, have distorted a theoretically neat cost-based pricing mechanism.
Professor Michael Porter extensively explores this point and the economic necessity of seeking the maximum value in the entirety of a care path, in his book Redefining Health Care: Creating Value-based Competition on Results.
Value-based approaches will shape the procurement rational of the future, where one measures long-term and successive health-related costs resulting from a particular treatment path, rather than just the immediate cost price or particular deal offered by the supplier. The key is:
- The longevity/sustainability of a medical product’s benefits
- How it translates economically to provide the best clinical and cheapest financial outcome
Quality-adjusted Life-year (QALY) and Life Cycle Assessment (LCA)
QALY has been around since the 1970s, and LCA since the 1960s, if not earlier under different terms. Both in their own right seek to include factors of the consumption process beyond the immediate scope of production and purchase.
More holistic approaches to healthcare and pricing have been around since almost the beginning of procurement, yet in recent years the approaches are each time becoming more inclusive and sustainability-minded.
Focusing on the true cost of care
The Boston Consulting Group (BCG), inspired by the new Directive2014/24 EU (discussed in last week’s blog), has created a new “value-based procurement framework”. Their paper Procurement: The Unexpected Driver of Value-based Healthcare starts by exemplifying the substantial variations of patient outcomes for different conditions, and the consistently rising costs of healthcare; costs that cannot be sustained, and variations that cannot be left unchallenged.
It argues that the price-based procurement does not incorporate quality indicators nor the totality of accumulated costs of a patients care path.
Importantly, it points out, that “a focus on low prices reduces innovation and discourages the adoption of new technologies”. Low prices are not the solution to financially strained healthcare systems.
Another very interesting point they make, to incentivize quality and commitment from the medtech industry, regards risk-sharing practices. For example, if a supplier promises that a product will function for X years, yet their product flaws prior to reaching the promised date, then the supplier could be held liable to cover the replacement costs for the patient.
In conclusion, it presents the following value-based framework to be applied when appraising a product, where outcomes are divided by costs, surrounded by stakeholder values from patients, the health system, professionals and providers.
At the core of value-based pricing is the actual patient-outcome, and the full cost picture of the product/service; whether it will reduce total costs, and/or what possible additional costs it may incur.
TforG case studies:
TforG regularly performs studies investigating the decision makers and factors in hospital procurement processes. Depending on the size of the facility and the cost of the supplies needed (whether it is a pain pump, an artificial heart valve, or a disposable needle) there will be clinical and non-clinical decision makers involved, whose weight in the final decision step will be tipped by budget capacity.
A growing trend: Procurement processes using value-based trial periods
A study performed by TforG on disposable needles revealed that many hospitals in the Benelux prior to making a product procurement choice would first use a particular brand and or type of catheter needle over a period of 2-3 months to evaluate the practical use value, and the degree of potential complications; indicators that imply additional costs and time consumption.
The clinical team would pass on their observations to the procurement department, who incorporate the product’s impact in the overall cost evaluations of the patient stay and health outcome. A lesser priced needle leading to higher infection or prick wound probability, would be eliminated from the procurement selection even if the immediate purchasing cost was lower than another needle option.
Similarly, many other products, for example heart valves, are often tested and compared prior to committing to a particular brand/contract. Cost and healthcare-outcome indicators such as: the years that the artificial valve is meant to last prior to replacement, and the probability of complications, are both factors that not only impact the quality of life of the patient, but also have potential to substantially incur costs for a public healthcare system or not.
Challenges with value-based pricing
The principle hurdle with any value-based pricing is selecting –and accordingly obtaining- the critical data needed to measure that value.
Furthermore, it will be interesting to see which non-financial factors are included (if any), and how these are translated into financial discussions and appraisals.
Returning to the Directive and its intention to improve tender biddings; it will be key to have all value-based biddings to be in the same terms, to allow effective juxtapositions. If each bidder presents a different set of value-factors and the resulting cost-estimations, then it could become inconclusive which is truly the most economically sound product or care path in the long-term for the given healthcare system.
A TforG Case study:
A changing healthcare landscape – Moving from device delivery to service delivery
Several studies on remote monitoring systems for cardiac device implant patient, showed that hospitals seek to reduce costs and workload related to post-operative patient follow up.
Although remote monitoring is often not reimbursed, hospitals often chose to install tele-monitoring systems for these patients, to improve the follow up efficiency.
Several device companies not only provide the required technology but also the data analysis and patient monitoring services to improve the overall cost picture for the hospitals.
Medtech companies have been growing more holistic in their approach to medical solutions, and shifting from delivering mere products to more inclusive service packages. Providing solutions for the follow-up and long-term impacts of an illness is a value-based approach to healthcare, which must be considered at the procurement stage, calculated into total cost estimations and factored into reimbursement.
To read more about how mobile health technology is reshaping the healthcare sector please have a look at our previous article.
In continuation of this topic, we will discuss value-based pricing in relation to patient care paths next week; the importance of understanding different treatment options (i.e. care tracks) in terms of clinical outcomes, decision points, reimbursement mechanisms and final cost frames.
To learn more about a particular patient care track, or for further quantitative and qualitative information on particular healthcare systems, their regulation, and their macroeconomic climate in Europe and worldwide, please look into our Business intelligence platform or order the TforG Deep Dive report for the country that interest you, containing volumes of 984 unique surgical procedures in 13 specialisms.
About Laura Weynants
Performs primary and secondary market research to create Country Deep Dive Reports at TforG. Interviews KOLs and medical sector professionals to build on TforG’s healthcare market expertise and competence networks. Complementing five years of sustainability policy and CSR communication, she now focuses on grasping key medical market trends, structures and opportunities in medical sectors worldwide. Coming from an international background of living in Germany, Spain, USA, UK and Belgium, she has gained a keen insight in international organizations and language skills to perform first hand investigations. She graduated from Sussex University Brighton, UK with a BA English Literature and Sociology and achieved a Master Degree in Sustainability and Corporate Social Responsibility in EOI Business School in Madrid, Spain.