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Hi. I'm your host today, Vance Moore, and I'm a former healthcare executive. I spent 10 years with Baxter/Allegiance, and Cardinal, and then I spent about 19 years with Mercy Health in St. Louis as a healthcare executive in the supply chain area and other areas, and I retired just a few years ago. I'm lucky enough also to be an executive in residence with L.E.K. Consulting. Today, I'm going to be questioning some experts from L.E.K. on the areas of pricing in the med tech industry.
In this episode, we'll discuss a couple of different areas. First are issues that are changing the way med techs need to think about pricing because historical approaches really don't apply quite like they used to. The second area is looking at effective guiding principles that can be employed in a systemic approach to developing evergreen optimal pricing strategy. To provide insights on these topics, let's welcome Ilya Trakhtenberg and Nathalie Herman.
Ilya and Nathalie, please take a moment and introduce selves.
Thanks so much, Vance. Pleasure to be here today. It's an important topic and one that's important to many of our clients. My name is Ilya Trakhtenberg. I'm a partner and managing director with L.E.K Consulting based in Chicago. I've been with the firm for more than a dozen years and spend my time in the healthcare space working with med tech clients and the healthcare supply chain. I've had the pleasure of leading a lot of our work in pricing and look forward to sharing a bit more on that topic.
Great. Thank you. I'm Nathalie Herman. I'm a principal with L.E.K.'s med tech practice. I spent a lot of my time in the pricing space along with Ilia, working side by side in a lot of these key questions I will be talking about today.
Fantastic. Thanks so much, so let's get started. To start out, how have you seen med techs approach pricing and how does that need to evolve?
It's a great question, Vance. Thank you for bringing it up. Many of our med tech clients have approached pricing in different ways over the last decade. We've seen pricing be top of mind and front and center at times, other times be very much on the back burner and, frankly, for some organizations treated more as an afterthought and pricing being primarily driven by a cost-plus-mental mindset. What we're seeing is that the market environment is requiring organizations to elevate pricing from more of a housekeeping item to more of a strategic item, setting pricing strategy and being much less reactive and tactical around decision-making because they are just, frankly, leaving too much value on the table and there is increasing risk at not having a more strategic approach towards pricing.
This is also related to just the changes in the environment that are causing increasing pricing transparency and, frankly, growing customer leverage with consolidation among providers that's making it more and more important for med tech organizations to have a more thoughtful and strategic approach and has created some urgency to taking that kind of attack here versus what historically worked.
Another aspect of what we're seeing is that just med techs are having to be more flexible and agile in the way they pursue pricing. The complexity of customers, also the increasing complexity of med tech offerings, products that are no longer typically just a widget, but have often data or service components to them, this is causing a need to really think about pricing models more creatively and to also think about more account-specific trade-offs when setting pricing and determining more flexible options for how to actually set pricing with different types of customers for different types of product.
The last thing I'll just say on this topic is around pricing as a strategic capability. The reality is, related to all the things that I just mentioned, med techs have historically under-invested in the pricing function as a strategic capability. In the coming years, we anticipate more investment in both the talent as well as the data and systems required in order to have more sophisticated and proactive value-creation lever coming from pricing.
Nathalie, help us understand what trends you've seen that are impacting the need for med techs to elevate their pricing strategy, and give us some insight to why is that important now.
Thanks, Vance. It's a great question. We've seen impetus around inflation, how that's really required an elevated role of pricing because of significant margin compression that both med techs and providers are facing. Just a couple of trends that we want to highlight and we've seen really come to the forefront, first of all, around hospital customers increasingly becoming more sophisticated buyers. This is a trend that has been occurring over the last many years, but health system consolidation, as you think about growing consolidation and centralization of supply chain decision-making really increasing provider negotiating leverage. As we think about also providers increasing their access to competitive intelligence, benchmarking, driving greater pricing transparency is really leading towards hospital customers changing how they think and are able to collect data around pricing.
Second of all, we wanted to mention the operating margins that hospitals are experiencing. They've declined significantly post-COVID, driving hospitals to seek significantly larger discounts on medical products. We've seen growth in labor costs and outflow of procedures to ambulatory surgery centers and lacking increases in reimbursement, requiring hospitals to seek out cost savings through purchasing and procurement more so than they have been in the past.
Another trend we've been seeing is around distributors increasingly putting pressure on branded med tech products and margins. We've seen distributors continue to expand their private label, self-manufactured portfolios. As a result of that, some of the premiums of branded products have diminished as that private label has been able to expand in the market.
Further, I think hospitals are increasingly seeking creative pricing models and contracting offers across service lines. Med techs are no longer widget suppliers. They are expected to be broader partners to providers, enabling pricing models such as anything as a service. We've seen this a little bit more recently that providers are considering other pricing models that have historically been a bit more at the fringes such as risk sharing, for example, or pay-per-use models that are coming at the forefront of providers today.
Finally, we've been seeing that care is quickly shifting to alternative sites, for example, ambulatory surgery centers that has really been accelerated by COVID. These providers are often more price sensitive. Non-acute care sites typically have lower budgets given some of the economics of those providers. As we've seen, some of the convergence of both acute and non-acute care systems, customer pricing needs are becoming more complex, more nuanced. They require varied offerings across care settings to really understand how do you price for those different care settings given their different budgets and needs.
With all these dynamics converging on the med tech industry, what does L.E.K. Consulting recommend for those med techs in the industry that are really wanting to involve their pricing methodologies?
Yeah, Vance, that's a great question. Look, the reality is that we think it's important to step back and for med techs to really reevaluate their approach to pricing more generally. This may actually be a really good time, too. I think, last year, there were a lot of pricing changes that were done relatively quickly in reaction to significant economic pressures. I think everybody's having a little bit more time now to step back and think about what are the longer-term implications, how do we transform some of the decisions that we made in the near term to deal with inflation and margin pressure into longer-term sustainable strategies?
L.E.K.'s approach to this is a pretty systematic framework. We call it the Five Ds. I'll let Nathalie talk through how we usually think about it, but it's a logical flow of starting with diagnosing what's going on and where the opportunity might be defining, developing, designing, and deploying the pricing strategy with pretty, I would say, heavy dose of data-driven analytics, but also market insights so that it's not just an internal exercise that isn't grounded in any way into or grounded on market realities, both customer needs, willingness to pay, as well as competitive comparisons and benchmarks.
Let me pass the baton to Nathalie and ask her to share a little bit more about our methodology.
Great. Double clicking into each of the different components, so starting off with the first D around diagnosing the critical exposure and leverage points, and here it's really around the analytics that can drive identification of some quick wins and opportunities. As you think about pursuing a rigorous pricing strategy, looking at historical sales data, understand differences in the price spread across different customer types is really powerful in understanding and diagnosing what the current landscape looks like in terms of price level, ASPs, as well as the price spread.
Second of all, defining the dimensions of your tailored pricing strategy, there's a really important point here to make that one-size-fits-all approach to pricing should be avoided, and it's really around understanding the different dimensions of customer behavior, segmentation and really understanding the strength of the value proposition of the specific product.
The third D is around developing actual segment-specific, flexible pricing levers and defining what those price points are for each of the individual customer segments. On the other hand, reimbursement dynamics are going to be critical to consider here as you set those price levels and the price spread across those different customer segments.
The fourth point is around designing a strategy that ensures successful, both internal and external, execution. Pricing is definitely a nuanced topic, and execution requires very effective management across a range of stakeholders, both internal and external. They require governance and organizational design that can be really important to address, sales teams' incentives, decision rights, pricing alleys for different members of the sales team and, finally, around deploying that strategy, managing and monitoring it to ensure that's an evergreen pricing model. It's not you said it once and you leave it alone. This is something that you continuously have to iterate on as the strategy develops and the market continues to grow.
Our view is don't make this a one-off event and actively monitor the key market drivers around inflation, other macroeconomic environment, the competitive context to continuously update and ensure that the pricing strategy is reflective of the market.
Thanks, Nathalie. I think I would just finish on that. I think there's often a misconception of the key challenges that prevent med techs from developing a stronger capability here. There's a fair amount that's organizational and around building the governments and systems in place. While those are usually fairly well-developed, they're not particularly dynamic. I think that's one of the things that's going to have to change as the industry gets better at this.
I like that you have a five-part plan to address the issue. To me, that's very good in giving somebody a formulaic approach to at least consider solving the problems in the industry. Also, it came through very clear that you had in the earlier questions the multidimensional aspects of the things that are coming at the med tech industry from a pricing perspective today. That's extremely important. I think a lot of people will say I've got this one problem because they only see it from this angle, and that becomes an issue for them, but what ends up happening is you guys are seeing a much more broad overview of what's taking place and then you can distill it down into an area to where you can actually approach it in the process.
Maybe one thing to add is that this has become an issue that we've had numerous conversations about very recently in the last 18 months, whereas five years ago this wasn't as much of a forefront. It's really the impetus around margin compression is requiring med techs to look at this as a core capability going forward.
Maybe that's the way we approach it. As we close out this section, I think what we're seeing is two things creating the perfect storm. We're seeing pressure on margin. Traditional methods by which pricing was set in the past just doesn't quite work as it once did. I think that that's where, when we see L.E.K. bringing to the table creative ways in which you can counteract those two forces, that ends up creating a great deal of value for your customers.
Thanks a lot folks, and to close out this conversation, I'd like to thank our experts, Nathalie and Ilya, for their insight and expertise regarding the best practices for the med tech industry. We are happy to provide more detailed discussions, and we invite you to connect with us to learn more about how L.E.K. Consulting has helped our clients deliver value-creating growth by addressing key strategic and operational issues.
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