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Medical Device Reimbursement – Lean Startup Implementation

A lot has been written about how Lean Startup methodology might help entrepreneurs build successful medical device companies. In this article we provide a real-life failure example of one of our clients and suggest a process to implement Lean Startup methodology to decrease the likelihood of such failures.

To get a broad understanding of Lean Startup, interested readers may access the website of Eric Ries, one of the originators of the Lean Startup methodology.

1. The Problem

Over the last 7 years, we provided consulting services to more than 150 different medical device startups. The sad truth is that most of them failed.

They failed because they did not manage to bring to market a commercially successful product before running out of money. Note they succeeded in bringing to market all sorts of very sophisticated products, but such that nobody was willing to pay for.

Developing a non-commercially successful product is called ‘waste’. ‘Waste’ is defined as a product which may perfectly meet specification or demonstrate an engineering breakthrough, but still cannot be sold.

2. A Real Life Example

One of our clients developed an innovative product, which consisted of an array of electronic stethoscopes that passively monitor vibration energy from the lungs. The product enabled clinicians to monitor sites of airway obstruction without exposing the patient to radiation or invasive procedures. The company conducted a clinical study that demonstrated the accuracy of its system and received the FDA’s clearance with the intended use of “monitoring lung sounds”. At this point they approached us and asked that we help them develop their reimbursement strategy and implement it in the US.

After doing some homework we interviewed a couple of US payor representatives who immediately told us that: “It is going to be a cold day in hell before we pay for this technology!” Had the product helped clinicians differentiate between Asthma and COPD, they would consider it, but since they don’t see what different clinical decisions could be made by “monitoring lung sounds”, they won’t pay for it. Such a product is an example of ‘waste’.

Apparently, a lot of management and engineering time and efforts were spent on making decisions, designing, developing and testing features that one of their stakeholders (payors) were not willing to pay for. In order to develop a new version, differentiating between Asthma and COPD, a large chunk of the work was thrown away, not to mention conducting a new clinical study and applying for a new FDA clearance.

Lean Startup calls this change in the product’s goals and design a ‘Pivot’. Since this Pivot came at a relatively late stage, there was very little money left to support this change. Consequently, at this point, no one was willing to invest anymore money and the company shut down.

3. Implementing Lean Startup Methodology

Lean Startup offers a few basic tools, one of which suggests building a product incrementally and iteratively. Accordingly, instead of developing, testing, obtaining FDA clearance and only then obtaining payors’ feedback, our client above should have sought payors’ feedback a lot earlier.

But how could anyone obtain a payor’s feedback before the product is complete? This is where Lean Startup introduces the concept of a minimum viable product (MVP). A MVP is the version of a new product which allows the collection of stakeholders’ feedback with the least effort and as quickly as possible.

We call the MVP that we develop for our clients a ‘Pseudo Dossier’. This ‘Pseudo Dossier’ includes most of the documentation the company expects to obtain in the future, once the product is fully developed and cleared/approved for marketing. However, it is based on the company’s estimations, not actual data. The included pseudo data may indicate estimated clinical trial results, product price, etc.

Following the development of this ‘Pseudo Dossier’, payors may be approached at an early stage and asked to comment on the ‘Pseudo Dossier’, as if it was based on actual data (expected only within a year or two). Their feedback may be used to ‘Pivot’, i.e. make changes to the company’s product, application or clinical plan at a very early stage, minimizing creation of waste and increasing the chances of developing a commercially successful product before running out of money.

4. Developing a ‘Pseudo Dossier’

When we develop a ‘Pseudo Dossier’, we typically take the following Steps:

1) Draft a Value Story, indicating specific claims that explain how the use of the new device provides clinical and economic benefits compared to the existing alternatives.

2) Develop an Economic Model, quantifying the economic benefits and allowing for sensitivity analysis.

3) Verifying that existing clinical data supports the clinical and economic claims in the Value Story and Economic Model or adding reimbursement related aspects to any planned clinical study protocol, along with the company’s estimated results.

The above Value Story, Economic Model and existing/planned clinical data (including the estimated results) are presented to relevant physicians and payors, seeking their feedback as if the product is complete and the estimated clinical study results represent the actual results that may be obtained within a year or two.

The completion of such a ‘Pseudo Dossier’ can be achieved within a couple of months, early enough to impact the product’s specification, planned applications and clinical studies. In case of negative feedback the company should consider changing the Value Story, Economic Model, clinical data or product and then seek payors’ feedback again until receiving positive feedback. Only upon receipt of positive feedback, it would make sense to continue with the development work and clinical studies. Otherwise, it is just an expensive gamble which may lead to the company’s failure.

5. Summary

We have been implementing Lean Startup methodologies, including the development of MVPs (in our case ‘Pseudo Dossiers’) and using them for early validation with payors for more than 5 years (before we even knew about Lean Startup). This process was proven to be a success. It minimized the creation of waste and increased our clients’ ability to bring to market a commercially successful product.

Amir Inbar is CEO, Mediclever Reimbursement Consultants , 27 Old Gloucester St., London, WC1N 3AX, UK; tel. +44 20 8099 7435.