Value-based contracting in the medical device industry: A new direction in revenue management

The medical device industry is transforming significantly from simple, disposable products like syringes and wheelchairs to complex, multifunctional devices capable of diagnostics, remote monitoring and direct patient interaction. These advancements promise better treatments and outcomes, which is the goal of our healthcare system. However, these innovative devices often come with higher costs. As a manufacturer, you're likely wondering how to bring these devices to market while controlling costs and maintaining profitability.

One path forward is no longer about volume or sales – it’s about value. With innovations that redefine patient care, manufacturers are discovering that success lies in aligning device pricing with the measurable outcomes they deliver. 

Mapping the future: Understanding value-based contracting

Value-based contracting (VBC) ties the final price of a device to the value it delivers. For example, a cardiac device might be priced based on its ability to reduce hospital admissions, while a diagnostic tool might be valued for speeding up patient treatment. To succeed with VBC, you must articulate – and quantify – the benefits your device provides, translating them into measurable outcomes that impact healthcare providers' bottom lines.

Examples of measurable benefits include:

• Fewer emergency room visits
• Reduced hospital admissions
• Less invasive surgeries, leading to shorter hospital stays and quicker recoveries
• Remote monitoring, reducing the need for in-person appointments
• Faster diagnostics, allowing for earlier and more effective treatments

These outcomes can directly translate into cost savings; the challenge is assigning a monetary value to each. For instance, the cost of an emergency room visit is relatively straightforward. Still, it’s critical to determine how much a reduction in visits would save both the provider and the patient.

How do you chart a new path to make VBC work in practice? It’s not just about creating a contract—it's about having the right tools and systems to execute these agreements. Here’s what you need to consider.

The compass for success: Data as your guide in value-based contracting

To make VBC successful, having access to the right data is essential. You'll need to track the clinical outcomes of your devices, often by accessing patient records and device-generated data. This information is crucial for determining whether the expected value is being realized. Without it, there's no way to measure if your device has met the contracted value thresholds, making it impossible to execute the pricing adjustments or rebates promised in the agreement. This is where an end-to-end revenue management solution becomes indispensable. You need the ability to:

• Collect, organize and secure patient data in compliance with privacy regulations
• Scrub and standardize the data for easy analysis
• Track performance metrics that tie directly to your value propositions
• Define pricing structures based on specific clinical outcomes, like fewer hospital admissions or reduced readmission rates

Your system should allow flexible contract management, accommodating multiple VBC agreements with varying metrics and payout structures. For instance, you might offer a sliding rebate scale based on the number of emergency room visits prevented by your device:

• 0 visits prevented: no rebate (the device performed as expected)
• 1 visit prevented: 10% rebate
• 2 visits prevented: 30% rebate
• 3 or more visits prevented: capped at a 60% rebate

This flexible contract structure ensures the payer only pays the full price if the device meets its intended value, aligning the goals of all stakeholders.

Steering clear of danger: Why outdated systems can’t handle VBC 

Managing value-based contracts manually or with outdated systems is a risky proposition. The complexity of tracking outcomes, calculating rebates and ensuring compliance with evolving regulations requires a robust revenue management platform that can handle the entire process from pricing to payment.

An advanced revenue management system should provide:

• Contract Flexibility: The ability to handle different VBC terms, from straightforward rebate structures to more complex, multi-year agreements
• Data Integration: Seamless integration with clinical and operational data tracks device performance in real time
• Clear Reporting: Transparency and reporting tools to demonstrate the value of your devices to payers and providers, supporting more favorable contract terms in future negotiations
• Predictive Analytics: Use data to forecast performance and refine your value propositions, improving your chances of success in future contracts

In short, value-based contracting cannot succeed without the right revenue management infrastructure. A sophisticated solution allows you to handle the complexities of pricing and contracting and provides the data clarity necessary to build and execute successful strategies.

The journey ahead: Benefits and challenges on the value frontier 

4 Key advantages to moving forward with VBC

1. Improved Patient Outcomes: Tying payment to clinical success ensures patients receive devices that deliver tangible benefits, improving overall health outcomes
2. Cost Control: VBC helps control healthcare costs by aligning payments with device performance, reducing unnecessary spending on less effective treatments
3. Boosting Innovation: Manufacturers are incentivized to develop devices that offer significant value, driving innovation and technological advancements
4. Transparency: VBC promotes greater transparency by clarifying the actual value of medical devices to all stakeholders, from patients to providers and payers

3 challenges to overcome

1. Data Collection and Analysis: You need a robust system to gather and analyze data accurately to meet your value-based agreements
2. Metric Agreement: All parties must agree on which metrics will be used to evaluate device performance and how those metrics will be valued
3. Collaboration: Strong collaboration between manufacturers, providers and payers is essential to the success of VBC programs. It ensures that all parties are aligned and working toward the same goals

Setting sail: Looking ahead

While still in its early stages, VBC is poised to become a dominant trend in the medical device industry. As more manufacturers, providers and payers recognize its potential to improve outcomes and control costs, the adoption of VBC will continue to grow. But to take advantage of this shift, you'll need the right tools, data and systems to manage these complex agreements effectively.

With the right knowledge and tools, you can be prepared for this growing trend. Learn more now to begin strategizing how you will incorporate VBC and other pricing models into your business: