We often hear from customers that one of their concerns is increased price transparency. It certainly is troubling when a company’s pricing isn’t completely defensible: The lower the defensibility, the greater the fear of price transparency. Most transparency risks are local, though in some cases, it can be regional. As a result, the transparency damage can be minimized. For widespread price transparency to occur, there has to be a catalyst. For medical device manufacturers, the impact of exposing indefensible pricing at a national level can lead to a devastating impact on ASPs and margins.
The catalyst for full-blown transparency appears to exist for the medical device industry. In January, the Government Accountability Organization (GAO) released a report titled “Lack of Price Transparency May Hamper Hospitals’ Ability to Be Prudent Purchasers of Implantable Medical Devices.” Senator Max Baucus (D-Montana) picked up on the report and is now calling for increased transparency to bring costs in line and minimize the wide pricing spread hospitals pay for the same device around the country. If these companies weren’t concerned about the far-reaching effects of transparency before, they should be now.
Pricing leaders in the medical device industry know there are many factors that drive ASP differentials. Among these are teaching vs. non-teaching hospitals, revenue or share commitments, and rebates. Whether or not this report and Senator Baucus’ comments lead to real action is yet to be known. Medical device manufacturers should be prepared, however, for the possibility. This means ensuring they don’t repeat the past by adding more skeletons to their pricing closets. These companies need to consider putting their organizations in a position to defend all pricing decisions in the event the Federal Government comes knocking on their doors and asking for all contracts. In other words, are they confident their organizations could pass the “red face test” or would they need to do some creative explaining?
PROS is here to help the medical device industry build a framework of price defensibility. With thousands of pricing decisions made every week, these organizations need peace of mind knowing that all of their pricing follows a consistent model, and exceptions are managed with a systematic methodology. Ultimately these companies will position themselves to pass the “red face test” and not dread the day the federal government requests copies of all pricing and contracts.
Phil Holladay is a strategic consultant with PROS, where he focuses on companies in the medical devices, high-tech, and industrial manufacturing industries. His primary role is to understand the issues faced by prospects and to demonstrate how PROS software can help overcome those challenges.