Death of a (Medtech) Salesman?

Medtech sales is being turned on its head by policy changes and the growth of Big Medicine.   Sales reps and device innovators can pivot their strategy and still be successful if they properly identify stakeholders and adapt their value proposition.

Only a few years ago, a medical device sales representative (“rep”) could establish a relationship with a clinician, convince this provider of a new product’s clinical benefit, and close a sale.  These days, throughout the medtech industry, we often hear horror stories of hospital systems taking purchasing decisions away from clinicians, large group purchasing organizations (GPOs) stifling innovation, and physician-owned distributors trying to replace sales reps. What in the heck is going on with medtech sales?

Two years ago, I had an opportunity to find out when I jumped from R&D into sales at a small, market-development-stage medtech start-up.  I transitioned roles because I thought it was where I could benefit my company most and believed understanding sales would benefit my future product development work.  In sales, I discovered a world that was being turned on its head.  This is best explained in by a story that started with a request I received last January from a high-level procurement officer at a large hospital system.

The Pitch

To set up the story, I came back in-house in October 2011 after a year in direct sales, in order to develop the sales channel for our second product.  My responsibilities included finding physicians with a target profile, getting initial feedback on the product, vetting distributors, and developing training and strategy documents for the field.  A well-published physician in the southeast expressed interest in using the product and put me in touch with the head of the product committee for his hospital system.

After providing the procurement officer with basic information over e-mail, he asked me to fill out a 15-page application and come out in-person to the hospital to tell the committee two things: (i) how our product would save the hospital system money and (ii) why using our product did not violate their sole source contract with a large competitor.

I would have ten minutes to present this information to a group of 15 people.  No, I could not see the contract, the invitation list, or competitive pricing.  This presentation was to take place in 10 days, square in the middle of a conference I had already committed to attending.

Though the timing could not have been worse, I considered it a positive sign that they wanted me to come in quickly and felt that the momentum was worth the sacrifice of a cross-country redeye flight and cramming in the prep work.  That being said, the risks were high: if the committee decided that we couldn’t save them money or violated their existing contract, we would be shut out of a ~50 hospital system.  The reward itself was limited – the hospital would agree to trial the product, at no cost to them.  It seemed a bit crazy, but I didn’t feel like I had much of a choice.

I took my flight, got to the hospital early, and nervously waited for my turn to present.  After presenting and answering questions, I was informed that they had recently lost a critical clinical nurse manager and needed to hire a new one before making a decision.  “We’ll be in touch” was the last I heard from them.  Despite my persistent follow-up and diligent requests for updates from the surgeon with whom I initially contacted, it is now eight months later, and I have yet to hear a word.  The product committee is calling the shots; they’ve opted not to pull the trigger, and I can’t do anything about it.

The Forest for the Trees

If this were an isolated incident, it would be an amusing anecdote about a frustrating and expensive attempt to pitch a sale.  But this is not an isolated incident; it is the new trend.  With the advent of “Big Medicine”, as described in a brilliant recent New Yorker article by Atul Gawande, doctors are migrating from private practices to large hospital systems.  Now, instead of doctors making the decisions, hospital systems have increasingly sophisticated and bureaucratic practices for cost savings.  With this evolution, “black box” product committee decisions (and non-decisions) are becoming more common.

Consolidation across healthcare, as described in Gawande’s article, will likely result in better balance sheets for health systems and may even result in better patient care in the long run.  Certainly, however, the growing pains will significantly impact the medical device sales cycle and selling strategy.  At Stanford’s Innovator’s Workbench lecture last March, Alex Gorsky, CEO of Johnson and Johnson, stated that he saw a fundamental shift in medical device purchasing, nicely summarized by The JG Wentworth Health Care Blog:

In the United States, buying decisions will shift from surgeons to cost-conscious hospital buyers. And that may create demand for keep-it-simple medical devices – designs that provide 50 percent of the bells-and-whistles of current devices for 15 percent of the cost. In addition, he cited the need for more clinical information on efficacy and safety, to help hospital administrators justify medical device purchases.

When I attended this lecture, my gut told me that this was only part of what I was seeing in the field.  To figure out the rest, I recently interviewed ten people with hands-on medtech sales experience and the ability to see the forest through the trees.  My hope was that each could, in part, help me to understand what Gorsky was missing.

Unfortunately, the answers diverged. Everyone agreed that a doctor’s decision-making power was waning while product committees were gaining.  This was leading to more bureaucracy and longer product adoption cycles.  Beyond this, some of the interviewees railed against the cost of doing business with GPOs and the power distributors held over them.  Others pointed me towards the changes in CMS, with the push towards Accountable Care Organizations and value-based purchasing.  Some had difficulties with reimbursement for their new product or trouble breaking into specific markets.

Different Product Categories Face Different Challenges

Taking a step back, I realized that the conflicting views were actually all justified; problems described were actually dependent on the type of device that they had experience selling.  Simply put, devices can be broken out into three categories: high-volume and low-cost commodities (e.g. needles), low-to-mid volume with mid-to-high cost with comparables (hip implants) and first-in-category products (such as a new drug-eluting bioabsorable stent for the sinus).

The first category, high-volume, low-cost devices, often struggles to break into markets controlled by large GPOs, distributors and hospital systems even if it may result in significant cost savings.  This issue was detailed in a disturbing yet enlightening article in the Washington Monthly in 2010 by Mariah Blake.  Blake details the struggles of breaking into virtual monopolies where incentives are not tied into saving money for the hospitals, but instead tied to driving up the revenues of GPOs.  In particular, it details how the inventor of a safety needle could not successfully sell his product, despite strong evidence of reduced number of needle sticks and nearly identical pricing to conventional needles.  The cause was potentially monopolistic practices by manufacturer Becton Dickinson and GPOs Premier and Novation, alleged in a lawsuit that was settled out of court.  Despite attempts at reform, this system still presents a significant barrier to entry for high-volume low-cost devices.

The next category, low-to-mid volume with mid-to-high cost and a comparable, is most easily subject to pricing pressure.  This category includes most implants, negative pressure wound products, ablation catheters, pacemakers, stents and many other products.  Innovation with regard to service and product that brings down cost for these products can be justified, but continued innovation around new features to justify a higher cost product will get more difficult because non-clinician decision makers will struggle to understand how the changes bring value to the hospital.

Finally, first-in-category products are in the best position for innovation and driving premium value.  It is important to define these products by the clinical benefit of the device, not necessarily by how it delivers the benefit.  This category includes products like Intersect ENT’s Propel and Abbott Vascular’s Mitraclip.   Since these products stand alone in new categories, there will be less pricing pressure by product committees.  However, evidence around cost-benefit will continue to grow in importance. There is anecdotal evidence that for these cutting edge products, obtaining new reimbursement codes and coverage is getting more difficult.

Beyond the category-specific challenges for devices, there are also significant differences emerging in channels into which devices are sold, and wide-sweeping changes occurring at hospitals due to policy change.  Many policy changes are being driven by the Affordable Care Act, such as the introduction of Accountable Care Organizations (ACOs) that will initially receive financial incentives based on quality measures but may eventually transition towards a payment for patient care model.  The incentives for ACOs have accelerated hospital consolidations in many markets.

In addition, there are several other quality-based measures that will be introduced by Medicare.  The Value-Based Purchasing Program starting this month will make incentive payments based on how hospitals perform in two areas: (i) clinical process of care measures and (ii) patient experience of care dimension.  The current measures are focused on time-oriented delivery of services/medications and will have limited effect on medtech sales but should be monitored for expansion of the measures.  The Readmission Reduction Program read hosting reviews online (clearly explained in this HealthAffairs blog post) also begins this month and will impose payment reductions for hospitals that have excessive preventable 30 day readmission rates.  It is initially focused on a limited number of conditions but there are plans for significant expansion.

How does all of this affect medtech sales?  It is difficult to say, but it will encourage hospitals to improve their outcomes on these measures.  Devices that can help hospitals achieve improvements in the new quality measures may see increased sales.

New Business Models Emerging

As hospitals adjust to the policy changes, different channels for selling medical devices have been created, as detailed in a recent commentary by Marakon.  I was able to validate in my interviews that there are four main hospital segments emerging:

1. Traditional: physician preferences still rules
2. Price-sensitive: willing to force the use of certain devices to save costs
3. Partners: using a preferred vendor to reduce cost and/or improve offers in unique ways
4. Centers of excellence: building “best-in-class” capabilities with the latest and greatest devices

Each category requires specific strategies for achieving sales success.  The commentary goes on to state that growth slow-down in device-oriented fields such as cardiac and orthopedics has driven a need to reduce cost by applying pricing pressure on suppliers.  New competitors are taking advantage of this by creating low-cost, low-touch products.  They conclude by suggesting companies customize sales towards each model and move resources away from R&D, Marketing and Sales in order to improve their balance sheets despite potential reductions in ASP.

Taking this a step further, recent articles have called for the demise of sales reps.  Emerge Medical is a proponent of “rep-less” implants, and has recently inked a deal with Cardinal Health to distribute generic orthopedic devices.  This movement is in response to the tremendous amount of money spent by medical device firms on compensation for sales reps.  According to the Orthopedic Network News, the seven largest Orthopaedic companies spent more than 43% of the cost of an implant on expenses from selling, general and administrative (SG&A) in 2009.  In comparison, the cost of goods for an implant was less than 30%.  Though SG&A includes several components, the largest is payment to the sales group.  Large budgets like these may incentivize unethical practices despite codes of conduct enforced by companies and clinicians.

Just last month at AdvaMed 2012, the Boston Consulting Group released a report stating that the business model for medical device industry is unsustainable.  This report emphasizes the effect ACOs will have on de-emphasizing the “relationship sell” between the doctor and the sales rep and re-focus devices sales on products that bring significant value to hospitals.

How can reps provide value to their customers?  Let’s go back to the incident about the product committee to understand.  Procurement offices are being dealt tremendous power in deciding which products clinicians use without clinical understanding of the implications of using one product over another.  They are barraged by clinician requests to use different products while simultaneously pressured by hospital executives to cut costs.  Unfortunately, in a complex system of payers, providers and patients, value analysis decisions can be difficult, and sometimes counter-intuitive, depending on how an institution assigns values for items such as nursing time, operating room time, length of hospital stays, home care, etc.  If you include billing variables, deciding the value of two products can be overwhelming for a procurement officer with a hundred product lines to manage.  In the face of this complexity and lack of information about the value a different features, the best decision is often not to make one at all.

Novations CEO Jody Hatcher thinks that the data that GPOs collect around product cost, utilization data, market share data, and outcome data will further empower procurement officials (MassDevice) and help them make better decisions.  But, as an investigative series in the New York Times detailed, because GPOs get paid by manufactures based on the amount of sales driven, they may be inherently biased, raising the question of whether procurement officials need an independent solution for information related to product value.

Companies like Procured Health may have an answer.  By collecting and organizing objective information about different products, they aim to help hospitals better discover, evaluate, compare, and adopt quality medical devices.  Procured Health drives home the need for sales reps to establish relationships with POs to understand how they can help them make product decisions.  Understanding the various methodologies hospitals use can shape marketing and clinical investments.  Taking this a step further, understanding how health systems value products may guide product development decisions.

Adapt or Die

Perhaps sales reps will ultimately be quoting Mark Twain: “The reports of my death are greatly exaggerated.”  What is clear is that a significant shift is upon us, and reps’ roles are changing.  At Stanford Biodesign, one of the tenets of clinical need identification and screening is flushing out the stakeholders in order to target the decision-makers around a new technology and drive adoption.  The power of stakeholders in health care is rapidly shifting and, to continue to be successful, we need to pivot and dig into their needs—not just in creating our sales strategy, but also in formulating the clinical need itself.

Back in March, Alex Gorsky said that the “days of incremental innovation are over.”  Given the changes in medtech sales, early-stage medical device companies may do well to heed these words.  Focusing on the cost-benefit of products is obvious, but probably not enough to ensure rapid adoption, especially if you are creating products with comparables.  Creating technology to help hospital systems achieve better margins, as well as quality measures set forth by CMS, is a significant opportunity.  Finally, to stay alive, sales reps must re-focus on providing the products and services needed by the new breed of stakeholders, product committees and procurement officials.

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Evan Anderson is an alumnus of the Biodesign Innovation Fellowship and is currently helping to drive adoption of innovative wound healing technologies at Spiracur, Inc. He also served as the first president for the Stanford Biodesign Fellow Alumni Association.