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Cost Justifying Innovation

Hospitals have always asked suppliers to cost justify their products. If you sell a comparable product at a lower cost this is a pretty straight forward analysis. However, if you are selling a more expensive technology that reduces cost of care (e.g. length of stay, OR time, reduced adverse events and complications), it is not an easy task. Finances of the organization are always secondary to the primary mission of a hospital, and the total financial impact is not always apparent or understood in all levels of the organization.

Often department managers, the ones who order the product, only have a view of their department budget, and material cost is their only concern. If they add a new product to inventory, they want to see the elimination of a product, or combination of products, of at least an equal value. Improved outcomes, lower adverse events, labor cost savings and other major cost drivers are dismissed as soft costs.

Many times a department head is incentivized to do more invasive higher RVU value procedures because they get more department budget credit. In other words, functional departments are incentivized to increase patient cost of care. Given that hospital gets paid by the diagnosis this approach ultimately costs the hospital money.

Methods of showing cost of care include publications and white papers, and likely most effectively a cost calculator that lets the hospital input their own costs and see their own savings. Keep the sales tools clear, and easy to understand at a glance. Realistic comparison to standard practice is key. Have a strong simple story that can be understood both by clinicians and materials management and administrators.

Just as important as the story is making sure to tell it to the right person, someone who has the perspective on the total cost of care to appreciate the savings your technology brings. It is difficult if the manager who owns the budget is not that person. You may have to help that manager to present your technology to their manager or to someone in administration. This may be the only way they get the budget to support your product.

Clinicians are becoming more educated in the economics of the healthcare. There is a better understanding of the impact of labor and patient location on cost and capacity. There is an increase focus on financial incentives for hospitals and clinicians to improve outcomes and reduce adverse events. Support that education with information on the cost of care for the patient population your technology addresses. Help educate on reimbursement approaches, CPT, DRG, RVU, etc.

There is no doubt the most important value proposition of new medical technology is to improve patient outcomes. Improving outcomes almost always leads to cost savings. However, in order to gain acceptance and become a new standard of care it is critical to connect those dots for potential customers with a strong simple economic story.

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