Everyone wants advances in medical technology, but getting paid for innovation is tough even with the most convincing story about improving care and saving costs. Hospitals are understandably skeptical; can these magical benefits be realized in our institution, or will we just get stuck with the bill?  Better to keep doing what we do now, right?  As advisors to companies attempting to create and grow markets for new medical technologies, usually without killer data or labeling out the gate, S2N is keenly aware of the current economic realities in healthcare. But we also believe there is measurable value in many med tech innovations.  So how do innovators persuade customers, particularly early ones, to take that leap of faith to gain a foothold, or even a toehold, in the market?  Overstating claims is generally frowned upon by the authorities (sorry Acclarent executives), so maybe the answer lies in risk sharing - putting some skin in the game against the demonstration of realized benefits with actual use of new technology.

If it sounds a bit scary, it is. The conditions are perfect, though, for risk sharing to emerge as standard course of business between health care providers or payers and technology companies: increasing availability of data related to every facet of healthcare delivery, intense budget pressure from the facility to the national level, and a growing demand for more value per healthcare dollar spent. Seeing these forces in the market, big med tech companies are starting to explore various risk-sharing arrangements, although the specifics are a bit murky.

“[We are] ...transforming ourselves from a device business to a healthcare solutions business around our therapies by starting to make partnerships and alliances with our hospital customers around specific disease areas or big departments, which we can manage together, with some levels of risk sharing.” -Omar Ishrak, Goldman Sachs Conference, 2013

There are three basic approaches to risk sharing path that emerged from the pioneering experiences of pharmaceutical companies over the last 10-15 years; many of these early risk sharing deals were between pharma companies and payers, and primarily in Europe where governments are the primary healthcare payers and providers. For med tech, the negotiating counter-party is more likely to be a hospital, healthcare system or ACO (looking forward), but despite these differences, the structures of risk-sharing arrangements come in three basic flavors:

  1. Conditional use: This is similar to the concept of "Coverage with Evidence Development" which CMS has embraced for everything from paying for devices in clinical trials to pulling reimbursement for budget-busting products or applications lacking sufficient evidence of efficacy. In the positive med tech case, though, the goal of conditional use would be to receive "provisional" payment for innovative products from customers or payers while the benefits are being validated with real-world use.The goal of conditional use risk sharing arrangements is to receive "provisional" payment for innovative products while the benefits are being validated with real-world use. One could say that med tech companies engage in this form of risk-sharing routinely, otherwise known as the “eval”. However, current medical device evals are often conducted in a non-rigorous fashion – if the evaluation site likes the technology, finds it easy to use, helpful and economical, they agree to continue to buy it or buy more; if not, it goes back. With conditional use under a risk-sharing agreement, the hospital or health system agrees to purchase if clinical benefits or cost savings hit certain pre-determined performance benchmarks during the assessment period. Success here is all about how to define and measure performance, which is likely to require more extensive use of the technology than a typical eval process (one benefit of risk-sharing for the company).

  2. Warranties/rebates: This type of risk-sharing agreement, which offers downside protection for hospitals if specified performance expectations are not met, can be linked to device-related disappointments or non-delivery of anticipated clinical or cost-saving benefits. The latter has already made an appearance in med tech, for example St. Jude Medical is currently offering to pay hospitals a 45% rebate on the price for cardiac resynchronization therapies if a lead revision is needed within the first year. Offering rebates or warrantees for failure to meet clinical or economic benefit benchmarks is a space where med tech has yet to play in a meaningful way, but pharmaceutical companies have been trying to make this work with mixed success. The pharma side of J&J cut a deal with UK’s NICE for a cancer drug called Velcade, offering to rebate the cost for patients who didn’t experience clinical benefit defined as a 25%+ reduction in serum M protein, a validated biomarker of treatment response. In actuality, it turned out to be quite difficult to track treatment response as proposed, and the analysis of the data was delayed year after year.

  3. Upside sharing: Going into business with healthcare customers and "splitting the profits" generated by new technologies is certainly a radical departure from current med tech business practices, and is fraught with regulatory peril, but this type of risk sharing may ultimately be the way forward if we believe our own cost-effectiveness stories. As big med tech companies add services to their device offerings to provide customers with turn-key solutions (see the timely news of Boston Scientific adding value-based offerings to its Cardiovascular line), the stage is being set for sharing the financial gains from quality and cost improvements. For upside sharing to work, however, there must be strong compliance with use of the products and services involved, particularly if the gains are to be quantified at a systems or population level. Timeframes need to work for both parties, too, requiring some balance between upfront and back end payments.

While risk sharing is still in its infancy, particularly in med tech, it could represent a significant source of competitive differentiation and revenue growth in the future. In a recent Ernst & Young survey of 162 healthcare institution purchasers in the US and Europe, risk sharing, along with related factors such as demonstrating value and outcomes, are emerging as critical decision factors beyond straight-up price. How to structure and implement risk sharing – especially in the US legal context – still needs to be sorted out, but conceptually risk sharing should be a win for manufacturers, providers, patients and payers.