Devicemakers explore risk contracts with hospitals

Tiptoeing into the broader accountability movement, some of the largest medical-device manufacturers are negotiating experimental deals with hospitals to take on performance-based financial risk for their implants.

While drugmakers have been testing risk-based contracts for several years, devicemakers are just beginning to explore taking on risk for products such as pacemakers and other implantable devices. Experts say cardiac devices are a primary focus of new risk-sharing agreements under discussion, likely because hospitals face potentially lower payment rates for congestive heart failure patients. “They're aligning risk to the kind of risk that matters to providers,” said Brandi Greenberg, a managing director at the Advisory Board Company.

Experts say each risk-based contract between a hospital and devicemaker is structured differently. Some agreements may stipulate that the manufacturer return a percentage of the device's price if it doesn't meet certain performance goals or fails within a set period of time. Under other agreements, a hospital pays more for a device that fulfills a manufacturer's quality and economic claims.

For years, device manufacturers have been able to charge premium prices for implantable devices. But that is changing as hospital systems get bigger and gain access to a broader pool of data, enabling them to better evaluate device performance. Companies exploring risk-based deals include Boston Scientific, Johnson & Johnson, Medtronic, and St. Jude Medical.

Manufacturers “realize they have to be strategic, they have to play the game,” said Rob Littlefield, a senior analyst at GlobalData.

St. Jude Medical said it will pay hospitals a rebate that is 45% of the net price for cardiac resynchronization therapies (CRT) if a lead revision is required within one year of implantation as the result of four factors determined by the company, according to an investor prospectus filed this year. “This form of risk-sharing… allows providers validation and confirmation of the novel technology being utilized to improve patient outcomes…” the company said.

Other manufacturers are considering assuming a portion of Medicare's hospital readmission penalty if a patient who receives a cardiac device is readmitted for heart failure. The company is “working with hospitals to track data, define outcome measures and track against those baseline measures,” a company spokeswoman said. “When there are cost savings as a result, Medtronic and the hospital share in that benefit. Same if the outcome measures are not met.”

Medtronic is talking with several hospital systems to establish risk-based contracts based on outcomes for patients who receive one of the company's cardiac or vascular device implants, said Sheri Dodd, a Medtronics vice president. She declined to provide details, noting that no contracts have been signed yet.

At a conference in October, Michel Paul, a Johnson & Johnson group chairman, said his company is considering risk-sharing and limited warranties on some products. One challenge is how that approach affects the traditional sales model, which rewards sales based on volume, he said.

A spokeswoman for Boston Scientific said her company also has started to engage in risk-sharing contracts.

“There's a recognition that it's a much more competitive landscape with financial pressures on both sides,” Greenberg said. “Suppliers are asking, 'How else can we differentiate ourselves?'”

Manufacturers and hospitals characterize the contracts as a way to establish long-term partnerships. That may explain why the negotiation process is slow and manufacturers are testing contracts on a hospital-by-hospital basis.

“What we are hearing and seeing is that manufacturers are experimenting with risk-based contracts on their own first—one-on-one with advanced health systems and/or payers,” said Blair Childs, a senior vice president at group purchasing organization Premier. “Their plan is to bring their successful practices to scale through GPOs.”

This is one move by manufacturers to experiment with a range of sales and marketing tactics to offset ongoing pricing pressure from providers, and develop data to better prove the value of their devices. That pressure is one factor driving Deals: billions of dollars in deals in the medical-device sector this year.

“That is creating a very different mindset in the marketplace,” Greenberg said. “What does it mean to be accountable for a product or a service?”

Follow Jaimy Lee on Twitter: @MHjlee