Healthcare System Pricing a Source of Distrust

Edition: February 2003 - Vol 11 Number 02
Article#: 1449
Author: Michael Richardson

The year 2002 may go down in history as the year of corporate distrust. Scandals at Enron, WorldCom and Imclone – to name only a few – have shaken our belief in business integrity. Although not quite scandalous, the healthcare supply chain is by no means immune from such distrust. At NCI’s recent IDN Summit and Expo, Lawton Robert Burns, Ph.D., author of The Healthcare Value Chain, delivered an insightful lecture that detailed the high level of distrust among manufacturers, GPOs, IDNs, hospitals, physicians’ practices and distributors – the principal players in the healthcare supply chain.



Where Does Distrust Originate?

One principle source of distrust is the lack of pricing integrity throughout the supply chain. What do I mean by pricing integrity? Pricing that is consistent, structured and defensible.

Oftentimes, significant variability in discounting is the result of “just doing business.” In the tightening economic environment of healthcare, reps gain or “save” accounts by giving price concessions to a particular hospital or physician practice. Soon, the news gets back to another facility, IDN, doctor’s office or GPO. Let’s face it: In today’s information and communication age, everyone’s pricing is transparent. There are even companies that make a business out of uncovering these discrepancies. So, assume that nothing is confidential and that inconsistent discounting has become more visible among industry players.

The problem is, pricing aberrations without merit promote distrust. How would you feel if you knew your biggest competitor got a better deal from your supplier for the same product or service?

Once a skilled materials manager, office manager or consultant catches hold of inconsistent pricing, he or she will effectively leverage it against reps in negotiations. Because of the inconsistent pricing practices to which they have been exposed, materials managers and office managers do not even believe that true pricing and discount policies actually exist! They know they can likely negotiate better deals, and often, they’re right. When their customers point out pricing inconsistencies, reps can offer little or no rationale for failing to give further ground on price.

Such events compromise the integrity of the supplier, and send pricing – and therefore profitability – into a “death spiral.” Distributors are often caught in the middle of these pricing dilemmas, which cause conflict and increased administrative costs associated with constantly adjusting and rebating price.



A Value-Based Pricing Framework

Pricing integrity needs to be restored. How? By understanding the value that products and services provide to unique sets of customers.

Comprehending value requires a thorough understanding of customer business models, preferences, needs, and the ways in which your products and services provide value to your customer’s business. How do your products allow the provider to either reduce their costs or increase their profits or reimbursement? If you understand this, you’ll avoid making price concessions to gain or retain accounts.

Not all customers receive the same benefit from your products. Inevitably, products and services deliver different levels of value, or offer different results, to different customer segments. For example, one healthcare company with whom we worked was dramatically losing price and profitability on a mature product line. Through customer research, we uncovered a segment of the market that was receiving incremental value through a service the company was giving away. We quantified the value of this service, and the client began charging for it. This resulted in over a $10 million turnaround in revenue in the first full year of implementation.

Manufacturers and distributors must identify and target different customer types effectively. They must also develop high and low value offerings, which include and exclude various elements of value. They need to provide different product offerings with various features or functionality, different levels of product support, adjustable payment and finance options, or various packaging or shipping options. Providing such choices forces all customers to make tradeoffs between price and value. In this way, reps can offer lower-value products and services to truly price-sensitive customers without compromising the integrity of their pricing on higher-priced offerings, which include more value components. More important, prices can remain consistent, structured and defensible.

Working to establish a value-based pricing approach often yields insights about what customers need and are willing to pay for. The process can also highlight deficiencies in the relative performance of products and services, and skill gaps in sales reps.



Making the Transition

Making the transition to value-based pricing and selling requires support from executive management, sales training, and effective value communication tools for everyone who is directly and indirectly involved in purchasing decisions. Management, marketing and sales must all align themselves around this common goal – basing pricing on value. While the effort is significant, companies that succeed will improve profitability and build better, more trusting relationships with their customers.

It can take years to make the transition to a more disciplined approach to pricing, especially if pricing is relatively fixed due to long-term contractual commitments. However, your company can take firm and immediate steps to hasten the transition:

· Plan ahead and determine which products have quantifiable value over the competition.

· Make sure that you convey the differential value to your customers and do the research to uncover the information needed to justify your pricing.

· When contracts come up for renewal, begin to implement your strategy for value-based pricing.

· As new products and line extensions are introduced, set the value-based pricing into action. It’s much easier to set pricing and discount policies from the start rather than trying to make changes “in the middle of the stream” or at the peak of your market share.

Over time, your customers will be more loyal and accepting of your pricing because they understand the value you’re delivering relative to your competition.



Providers, Take Off the ‘Price Blinders’

Providers have some obligations, too. They need to evaluate the value of a given product, not simply its transactional price. Taking the “price blinders” off calls for sophisticated consideration for the balance between increased quality care, overall healthcare costs and profitability. They may need improved systems that incorporate financial data with clinical outcomes and opportunity analysis.

Providers may also need to assess and raise the “ability” of their personnel who interface with vendors, or simply exercise a willingness to listen to a value-based argument. If providers become more receptive to these discussions, however, manufacturers and distributors must do their homework and quantify the value they deliver. If they don’t, the value discussion will likely be dismissed.

In conclusion, situational negotiations result in a lack of pricing integrity and cause distrust. On the other hand, a value-based pricing strategy conveys integrity -- something we are all seeking and, more important, should try to exemplify!

As M.H. McKee stated, “Integrity is one of several paths, it distinguishes itself from the others because it is the right path, and the only one upon which you will never get lost.”





Michael Richardson has over 15 years experience in the healthcare industry and is currently the director of business development-healthcare at Strategic Pricing Group (www.strategicpricinggroup.com). Based in Waltham, Mass., Strategic Pricing Group helps companies create more profitable pricing strategies for business-to-business products and services. He can be reached at mrichardson@strategicpricinggroup.com or 770-271-9266.