Marketing cost savings in a fee-for-service environment

January 2013

Due to the prevalence of lump sum fixed reimbursements (e.g., DRG* / PPS**) in the US and Europe, many Western companies have focused their product development efforts on creating products that reduce the total cost of care related to a specific illness. In a DRG / PPS environment, products are able to command a price premium if they are able to reduce other care-related costs. In Japan, most reimbursements are on a fee-for-service basis. As a result, products with benefits that reduce the need for other products and services can inadvertently reduce the overall rate of reimbursement to a hospital or institution. Because of this, a product that reduces the total cost of care and increases profitability in the US or Europe may accidentally decrease the profitability of a treatment when used in Japan.

Because of the difference in reimbursement dynamics, Western companies must exercise caution when bringing cost saving devices into the Japanese market. Home care and products often face significant obstacles to success because they inadvertently reduce profitability to the physician while simultaneously increasing perceived risks to the patient - whom most physicians believe is best served in a hospital or clinic environment.

How do companies successfully market cost saving therapies in a fee-for-service environment?

There are a number of tactics that companies can use to ensure that cost saving products have a positive direct impact on hospital economics in Japan.

1. Optimize reimbursement

The Ministry of Health, Labor and Welfare (MHLW) is incentivized to reduce the total cost of care. The primary mechanism for doing so is the establishment of reimbursement rates that encourage the use of cost saving products. Unfortunately, many companies launch devices with cost saving features using the same reimbursement category used for other products. As a result, the cost saving product receives the same reimbursement as other devices and is unable to generate a reimbursement premium to offset any lost revenue caused by a decreased need for other ancillary devices and procedures.

Although there may be additional costs involved, companies should consider the opportunity to establish a new C1 (product) and / or C2 (procedural) reimbursement code for new cost saving devices / treatments. A higher reimbursement rate is the most direct way to create an economic incentive for adoption. New reimbursement codes also create a defense again R-zone based price reductions by reducing the variety of products considered in the competitive set when reductions are calculated.

2. Repositioning product benefit to fit Japanese environment

Whether or not differentiated reimbursement is available or justifiable, companies should also review the value proposition for their products. A product which is primarily marketed based on cost effectiveness in other markets may find more success if it is marketed on other attributes in Japan. For example, a hospital or physician may be willing to forego higher profitability if a product delivers a higher quality of life, better patient outcomes, reduces the need for hospital staff time, or enables the hospital to acquire new patients. A company may find that benefits which are secondary in other markets are of primary importance in the Japanese context.

3. Customer segmentation and targeting

Lastly, it is important to understand the customer. The importance of economics varies by hospital type. Small private institutions are the most sensitive to the economics of a product or therapy. Private institutions are unable to fall back on government subsidies to cover losses. Smaller institutions are particularly vulnerable because they are often in economically disadvantaged rural areas or face strenuous competition from their larger competitors.

If a product reduces profitability, the company may find that public and University hospitals are more apt to appreciate secondary benefits. Public institutions have a mandate to serve the public good and may also rely on the government to offer financial support. As a result, they are better able to justify losing money for the sake of other benefits. University hospitals tend to be more financial stable. They are also at the forefront of healthcare and view new products as important to overall branding, reputation, and patient acquisition. Although University hospitals are financially accountable, their relative strength vis a vis other institutions provides some leeway to experiment with new products, particularly when they have been successful overseas.

In order to be successful in the US and Europe, companies are increasingly finding that they must develop products that reduce the overall cost of care. Unfortunately, in the Japanese context, cost reduction does not always improve procedural profitability and can, in reality, be a deterrent to adoption. For a product to achieve its full market potential, a company must review its value proposition -- optimize reimbursement, reposition product benefits to suit the local market, and carefully target the most appropriate customer segments.

*Diagnosis-related group (DRG)
**Prospective payment system (PPS)

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