Special thanks to co-author Joe Cabe, Manager, Pricing, Contracting & Market Access.
It’s common to lump the medical device and pharmaceutical industries together. Both are essential to the healthcare industry and have similar business models. However, when we examine each, we uncover vast differences between the two markets.
Fundamentally, medical devices are mechanical in nature, while pharmaceuticals are chemical in nature.
Medical devices, which range from syringes to cervical plates, have less impact to the human body, and their efficacy is directly related to their usage. In addition, proper training, education, service and maintenance, and distribution impact marketing and contracting strategies. Pharmaceutical products, on the other hand, can prove effective on their own, but may have serious impacts to health. Pharmaceutical manufacturers target doctors, hospitals, insurers, and pharmacies in their marketing, but medical device manufacturers may have many more stakeholders involved. Their target market includes the same doctors and hospitals, but also includes hospital managers, nurses, and case workers.
A common practice in the pharmaceutical industry is to use clinical trials to prove efficacy. Since a cervical plate cannot be surgically implanted for trial purposes, the use of clinical trials in the medical device industry is not a common practice. Instead, medical devices are evaluated on efficacy based on data acquired from investigations.
These fundamental differences affect the usage and marketing of medical devices and pharmaceutical products. But what about the impact of pricing and contracting practices on manufacturers? Due to increased market pressures, manufacturers must find competitive strategies for pricing and contracting to gain an advantage, and although the methods are similar in the two industries, each present unique variations due to the nature of their products.
Differences in Contracting and Rebates
Since the medical device and pharmaceutical industries share similar customers, pricing and contracting practices are also similar. Both industries offer a portfolio of products to their customers at discounted rates, which includes direct discounts, as well as additional off-invoice incentives. These practices and incentives are designed to encourage purchasing through various purchase models. But there are also key differences:
The process for managing customer eligibility for contract prices and off-invoice rebates is fairly consistent between both industries. However, one key difference is that medical device companies offer Letters of Participation (LOP) for their Group Purchasing Organization (GPO) customers. If a customer is a member of a GPO, they must first sign an LOP to become eligible for pricing and rebates under contract for that GPO. In pharmaceuticals, eligibility is dynamic, where members of a GPO are automatically eligible to access pricing and rebates for that GPO.
II. Capital Equipment
Another key difference between medical device and pharmaceutical contracting is that some medical device products revolve around a piece of “capital equipment,” which is the device itself. The contracting and sales for related products, such as items consumed by the device during its usage (disposables) or replacement parts, are tied closely to the device itself, whereas pharmaceutical products are sold on their own.
A. Pricing and Tracking
Capital equipment presents unique challenges for medical device pricing and contracting. Whereas pharmaceutical products are often a one-time purchase and use, capital equipment is used repeatedly throughout product life cycles. Medical device manufacturers offer various pricing options for equipment, including purchasing, leasing, or even installing equipment for free. However, all options, and their respective pricing, are dependent on customer commitment and compliance with targeted purchase volumes of the related disposable products. Some contract pricing also depends on the number of equipment currently in-use at customer locations. Thus, tracking specific equipment and how long the equipment is stationed at customer locations are essential to medical device contracting.
Bundling is hugely popular in the medical device space as it relates to pricing and contracting. And manufacturers may offer product bundle arrangements that are not allowed in the pharmaceutical space.
There are opportunities to offer ownership incentives for a device, while offering the related disposables at a higher cost. This is commonly referred to as the “Printer and Ink Model,” where the manufacturer offers the printer at a lower cost while pricing the ink cartridges at a higher price with the hopes of gaining profitability from the ink cartridge sales. Medical device manufacturers use the same practice: for example, offering an X-ray machine at a discounted rate, while offering the disposables of the X-ray machine, such as the batteries or lights, at an increased price. In this example, the X-ray machine will only be offered at the discounted rate as long as the customer commits to purchasing a certain number of disposables during a specified period. These discounts and incentives are awarded to customers after their compliance is measured according to specific contract terms.
C. Performance Measurement
Measuring contract compliance for capital equipment and these unique bundle arrangements can be a difficult task. Transactions for both capital equipment and disposables must be tracked for accurate compliance measurement. Managing timeframes and returns can also become complicated since these contracts can last for the life of the equipment. When compliance is not met, capital equipment must be returned to the manufacturer. This process requires alignment from multiple areas within a medical device company.
III. Managed Care and Medicaid
Managed care and Medicaid rebates are typically only used in the pharmaceutical industry since these types of rebates are designed primarily around reimbursements for drug prescriptions. These rebates are paid to Pharmacy Benefit Managers (PBM) and Managed Care Organizations (MCO) as reimbursements for discounts to drugs purchased directly by consumers from pharmacies. Managed care and Medicaid rebates are not utilized in the medical device industry since medical devices are not usually purchased directly nor used by consumers, but are instead administered by medical professionals.
Regulatory and Legislative Differences
Since technical improvements typically occur within a few years, medical devices often have shorter product life cycles than pharmaceutical products where improvements are more likely to take decades. Applying the same regulations to medical devices and pharmaceuticals would delay access to vital medical resources and procedures without necessarily increasing patient safety. Thus, different regulations are in place in both U.S. and international markets to allow for faster innovation and release cycles for medical devices, as well as for contracting strategies that involve bundling related products.
“Medical Devices and Pharmaceuticals: Two Different Worlds in One Health Setting.” MedTech Europe, http://www.medtecheurope.org/node/679. Accessed 26 May 2017.
Moore, John G., J.D., Ph.D., and Adele M. Kaplan Gilpin, J.D., Ph.D. “Distinguishing Devices from Drugs.” Contract Pharma, 14 Nov 2011, http://www.contractpharma.com/issues/2011-11/view_fda-watch/distinguishing-devices-from-drugs. Accessed 26 May 2017.
Strouts, Paul. “Medical Devices vs Pharmaceuticals – A Brief Guide to the Differences.” Hays, 21 June 2016, https://social.hays.com/2016/06/21/medical-devices-vs-pharmaceuticals-a-brief-guide-to-the-differences/. Accessed 26 May 2017.
Co-authored by Joe Cabe, Manager, Pricing, Contracting & Market Access.