Business Today

Shifting Focus to Outcomes

Like IT outsourcing firms, medical technology companies are now increasingly being forced to transition to outcome-based revenue models as health-care reimbursements come under increased scrutiny.
twitter-logo Chitra Narayanan        Print Edition: March 29, 2015
Shifting focus to outcomes
A Philips IntelliSpace Consultative Critical Care unit: Through frugal innovation, medical technology companies are working on bridging the health-care access gap.

Frugal innovation is the buzzword in the R&D centres of medical technology companies that are focused on emerging economies like India. The other two catchphrases are open innovation and outcome-based pricing. "Health care here [in India] is all about access and reach," points out Srinivas Prasad, CEO of Philips Innovation Campus, Bangalore.

To cut time and cost for patients, Philips created e-ICU or virtual ICU, which links intensive care units in remote hospitals to a big specialist ICU in a metro with real-time video image transfers and minute by minute consultations. A step further was its IntelliSpace Consultative Critical Care solution, which hooked up clinical care facilities in Tier-III or Tier-IV towns to a central command centre, transforming them into intensive care settings. "The command centre acts as the hub and remote care units act as spokes," explains Prasad. Clinical data from these spokes gets displayed on a dashboard at the command centre, where specialists view and monitor the patient's key parameters continuously and prescribe treatment.

If open innovation added velocity to product development as end users, students and even companies chipped in with ideas, then frugal innovation kept costs minimum. But Philips is not the only health-care company swearing by frugal innovation. Companies like Xerox and GE are all working in that direction in their R&D labs in India. Dr Manish Gupta, Director, Xerox Research Centre, India, and Vice President Xerox Corporation, describes how one such frugal innovation-driven product the company is developing is a thermal camera that uses temperature measurement analysis for breast cancer screening. The idea is to use low-cost mobile equipment to reach out to larger geographical areas and rural populations with limited access to hospitals.

But the true disruption is in the pricing model being followed by these companies for some of their products. "More and more hospitals want to pay as they use. They don't want to pay for the product, but only the usage of the product," points out Prasad. One step beyond pay-per-use is the outcome-based pricing model, where the remuneration is based on performance. This is not a new concept. IT outsourcing and aviation industries have successfully transitioned to this model, with aircraft engines being sold on the basis of air miles flown rather than product cost, and software evolving from a time and material pricing model to a usage and outcome-based model.

Now it's the turn of health-care companies to try out new pricing models. Risk-sharing schemes between drug makers and insurers have already been tried out. For its multiple sclerosis drug Rebif, EMD Serono, for instance, had a risk- sharing agreement whereby additional rebates would be given to insurer Cigna in case patients on Rebif had more than expected hospitalisations.

According to Solomon Darwin, Executive Director at Garwood Center for Corporate Innovation, Haas School of Business, University of California Berkeley, large MNCs like GE, DuPont, Johnson & Johnson (J&J) are seriously looking at outcome-based revenue models.

Solomon Darwin, Executive Director, Garwood Center for Corporate Innovation, Haas School of Business, University of California Berkeley
Solomon Darwin, Executive Director, Garwood Center for Corporate Innovation, Haas School of Business, University of California Berkeley
Frugal solutions from emerging economies is one trigger. The second is because of recent changes in the US health-care ecosystem and a slew of litigation on medical products. In a paper titled Three Rules in Medical Technology, Glenn Snyder, Faruk Abdullah and Michael Lefferts write: "The Affordable Care Act has catalysed changes in how medical technology customers define value and which stakeholders are involved in decision making."

Darwin says the Garwood Center was founded because most large companies like GE, J&J, DuPont realised that with the marketplace getting more complex, they needed another cycle of innovation to survive. "Twice a year we get the large corporations' chief innovation officers into one place and talk about each other's struggles, what we can learn from each other, what lessons can be drawn from other industries and what model will work," he says.

One of the biggest discussions at these meets, Darwin says, revolves around the pay-per-use model. "The days when you make, buy and sell and ship and make a profit is over. So are the days of charging for service or maintenance." Increasingly, medical technology companies also realise the need to talk directly to customers.

Darwin cites the example of J&J. "When there is a hip replacement procedure, usually the customer for J&J is the hospital or the surgeon. Now J& J is saying the patient has to be the customer who will pay only for good outcomes.

In an environment where there is increasing reimbursement scrutiny on medical bills, if J&J doesn't cannibalise its own business model, it's going to die, says Darwin.

Of course, outcome-based payment models can squeeze revenues unless there is scale. How do you monetise a resource like IBM Watson, the supercomputer that processes 200 million records per second, and can be a valuable ally for health-care professionals?

"A challenge we have set for our students this year is how does IBM make money from this asset in the cloud that has in its corpus all knowledge that no surgeon can compete against? It understands natural language - it is omnipotent, omniscient and omnipresent," says Darwin. The solution, according to him, lies in collaborating with a large hospital like Apollo. "They have shared patient data with us, which we have fed into the brain of IBM Watson." Watson mines the patient data and medical history and juxtaposes it with information already available with it (treatment guidelines, clinical studies, doctors' and nurses' notes) and comes up with a potential diagnosis.

"The value for the poor man in the village is he does not have to take a train from his village to Hyderabad, wasting time, money and resources," says Darwin. For Apollo, the value proposition is that it reaches out to more people. For IBM, the value is that the asset they created is being used by millions around the world. "It may be pennies, but billions of pennies is a lot of money, so there is economies of scale," he adds.

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