Value-based Pricing Efforts - Are They Enough?

Value-based pricing—the ability to define the efficacy of a drug or the results of a medical device against the price charged—has been a much-talked about but little-implemented strategy for the healthcare system in the past three years. This year, about “15% of global healthcare spending will be tied to value-based models.”1

This won’t be enough. There will likely be a new push for rate-setting, along with proposals in Washington for “Medicare for All.”  While these may be popular topics with Americans as they begin to pay a larger overall chunk of their healthcare bill, this will further escalate cost pressure on hospitals. This cost pressure could easily translate to unprepared suppliers as well.

Well-managed hospitals in the U.S. that have significant numbers of Medicare patients have set goals over the past five years to reduce their costs, and “break-even” on their Medicare business. It has been a tall order, with many providers having to slash between 15% and 20% out of their cost structure to achieve the goal.  

To survive, or better yet thrive, acute care hospitals are going to need to pull more costs out of their budgets. Unfortunately, much of the “low-hanging fruit” has already been picked. Simple solutions like trying to drive down the acquisition cost of goods and services may be too little, and in some cases too late. More will need to be done to address utilization and process costs. Even high-compliance group purchasing pricing contracts, historically a winner when it comes to pricing, will have their limits in terms of solving for the cost pressure.

Adding to the dialog for rate setting “… are studies showing sharply rising hospital charges, particularly in consolidated markets.”6 Wasn’t cost reduction one of the primary reasons for the great wave of provider mergers and acquisitions during the past three years?  Large health systems will be called upon to consider additional (or other) options in terms of managing their supply chains. What’s being done today simply isn’t enough in many cases.

For Healthcare Providers, especially supply chain executives, expect nearly constant pressure to reduce the cost of goods and services. This should mean looking beyond the acquisition price of these goods and services and examining how they impact your costs in use.  This is classic Value Analysis, but unfortunately translating VA from the manufacturing floor to the hospital often means that process costs can get lost.  Providers must challenge their own processes, and how goods and services are being consumed, and move beyond a laser-like focus on purchase price.

Efforts by providers will mean that Medical Technology Suppliers as well as the suppliers of more commoditized goods must begin to dig into the details of what makes their products, equipment and services cost effective—or not.  Unfortunately, over the past thirty or more years, too many have used the mantra of cost savings—without showing how their products deliver value. It will require significant new work in the coming years to prove your point.