How do manufacturers of a new medical devices determine what is the best price for their product? The typical method is to look for similar products in the marketplace and arrive at a price which will be competitive. However, there are certain circumstances that will allow you to set a higher price based on what is called ‘value-based pricing’.
No doubt, developing the right price for a medical device is one of the most difficult decisions for manufacturers. The price of a new medical device established is essentially a message about its clinical value. Medicare and private insurers, hospitals, physicians, patients, investors and suppliers have a different perspective of price-as-value and these perspectives frequently conflict. Pricing by manufacturers is based in part by its impact on anticipated sales and market capture, that is, they want the cost to be as high as possible without creating obstacles to sales. Insurers typically want the exact opposite, to keep costs in check in order to keep their premiums to employers and individuals competitive. Physicians will buy medical devices that will be able to achieve a sufficient return on investment and contribute to their practices, either by saving them time or money, attracting new patients or improving the clinical outcomes of their patients. Venture capitalists want to make sure that the price is high enough to support a company’s potential revenue and profits.
Medical devices that are true innovations can typically charge a higher price than those that represent incremental improvement to an existing technology or procedure. They can provide additional benefits to hospital and physician customers by drawing in new patients for new services or for services that provide additional care. Hospitals will pay more for a medical device that will significantly reduce other costs. New medical devices that are first-to-market can typically add a premium, at least initially, due to the absence of competitors with the high probability that pricing will be reduced once competitors enter the market. Those devices that address areas of unmet clinical need can generally add a significant premium to base pricing. This is particularly true if this is a clinical problem affecting a large number of patients. Ground-breaking medical devices that can substitute for expensive procedures or long expensive treatments can also allow a higher cost. The value premium can be somewhat higher if cost-savings occur. Improvement of quality of life can lead to a higher price, particularly if there is strong patient demand. Pricing can reflect on a medical device’s benefits, like ease-of-use, reduced rate of downstream inpatient admissions and the decreased need for more intensive treatments. In summary, the ultimate goal of pricing strategy is to develop a product price that is defensible to all the stakeholders above.