Who Stands to Win the IVD Price Wars?

Diagnostic Insight, Spring 1996, Vol. 23, No. 2, p.p. 6

DIAGNOSTIC INSIGHT extends its appreciation to CaseBauer and Associates, Dallas, Texas for the design and implementation of this reader survey.

According to the results of the most recent DI survey, eighty-eight percent of readers do not think the IVD industry is handling price pressures well. More than a third of reader respondents characterize the situation as a highly aggressive or dangerously aggressive price war. According to Kevin Keene of Beckman Instruments, "the greatest threat to IVD companies is other IVD companies and their pricing practices". Frank Smith of Liston Scientific agrees: "If you look at the profit picture of the industry, even for the major manufacturers, it seems that they are lowering prices unnecessarily — one company lowered its prices under "customer pressure", and other companies just followed suit. Buyers have gone beyond getting a good price; they are spoiled."

Expanding on their survey response, several readers noted that other pricing pressures can be attributed to the growth of both managed care and large group purchasers, such as national hospital chains. Lower levels of reimbursement, such as the pending 25% reduction of Medicare laboratory fees and the proposed 7 year rate freeze, exacerbate the pressure on clinical laboratories, and in turn, on IVD suppliers. It is interesting to see, that while Medicare reform is addressing laboratory fees, specifically, most readers feel that the impact of the Medicare reductions will be hardest on IVD manufacturers whose products represent only a small portion of laboratory costs. Smith of Liston Scientific says that "ultimately anything that takes away lab reimbursement hurts us."

Hey! It's not my fault.

Readers often see their competitors as bigger contributors to the price war than themselves. Fifty-three per cent feel their competitors were more culpable in the price war.

One reader termed the industry "reactionary" right now, because of pressure coming from the customer side. "The immediate reaction is just to drop prices. It's forcing price drops, which are reducing margins, which in turn are reducing investments." One prominent laboratory buyer in a large metropolitan hospital countered, "the manufacturers are easy... put up a little resistance and they drop price... it amazes me". His comments "for obvious reasons" were on the condition of anonymity. Some buyers are adding to the current confusion of the IVD industry, because of con fusion stemming from their own evolving organizations. "Buyers themselves have difficulty figuring out who is responsible for purchasing decisions, and there are obviously conflicting opinions about what products to buy and which are necessary for the institution," says one reader, who works for a large manufacturer. "We have seen hospitals fusing together, although these are divergent entities — for instance, some hospitals may be in affluent areas, merging with very large, metropolitan hospitals that have totally different patient profiles, needs, and reimbursement procedures. " While immunoassays have been a little more protected from price spirals, one reader says, the larger clinical chemistry companies get into the business and immediately go into a price cutting mode. "I don't think that benefits the industry," he says. A Hycor Biomedical reader noted that "chemistry has seen some of the worst self-destructive pricing behavior."

Winning the IVD pricing battle but losing the war?

Cutting product costs won't significantly cut overall health care costs, readers say. "The operating expense problems for laboratories are not a materials cost issue," says Larry Worden of CaseBauer and Associates, "the real issue is overutilization of tests by physicians and laboratory labor inefficiencies. If, as an industry, we get too caught up in the belief that laboratory materials costs are the central issue, we will hasten the "commoditization" of IVDs and radically shift the basis of competition in a direction most manufacturers are trying to avoid". Many new arrangements have arisen in order to cope with the changing market place—consolidation among firms as well as partnerships within the industry, which have helped many companies to gain footholds where a single firm might otherwise fail. A trend toward volume selling arrangements has arisen, also. However, Tim Montgomery of Boehringer Mannheim Diagnostics says, "A company that offers a bulk package of several different tests or products can be confusing. On the heavy-use products, the company might offer extremely competitive prices, but on less frequently used tests, these might be more the 'bread and butter.' The precise tests chosen vary according to each institution".

Loss leader pricing strategies are becoming the rage. "IVD manufacturers may be over focusing on price and driving the commoditization of their own products," an impression shaped by several readers. One manufacturing executive described a situation in which one manufacturer cut prices on specific products way below costs to "drive another manufacturer out", with the anticipation of profiting on other products. "The simple fact is that laboratorians want a whole lot more from IVD manufacturers than price concessions," says Worden "since they don't see a trade-off they have come to expect it all. Laboratorians generally have the perception that the industry is very profitable and could do more".

One reader, who works for a large manufacturer, says that he has heard that the actual contribution to costs of all laboratory instruments, reagents, and supplies is something like 1-2%. "Even if we gave it all away for free, it would not significantly reduce national health care expenditures," he says. Defensive medicine is a problem, because physicians cover themselves for fear of malpractice suits, which in turn brings the laboratory industry under fire for overutilization; labor is also a consideration when looking for substantial cost savings, he adds. "Material costs have very little to do with the laboratory," Smith says. "In my opinion, the problem with health care costs is primarily administrative and also due to fraud and abuse in the system [commercial laboratories]; it's non-medical factors that need to be brought under control."

Added-value services are also aggravating the situation. Currently, IVD customers expect the industry to sell instruments and reagents at low cost, supply someone to install it and run crossover studies. "All of these value-added services have significantly eroded any profits that used to be there," Smith says, "No one manufacturer can take a stand and say, 'Look, Mr. Customer, you have to reassume some responsibility for the things you used to do when you bought the product. "

Are we communicating?

More than one reader suggested that Biomedical Marketing Association could play a role in an initiative to slow the price war, as a collective voice for the industry. A couple of diagnostics industry representatives said that their firms are trying not to cave into pricing pressures, and have made a real effort to hold prices steady. Another said that his company, recently purchased, had struggled to maintain price, but says he expects that could change under new ownership. The fundamental question is whether the industry believes laboratory tests and technology have any value and are communicating it. "It amazes me to continue to hear how many laboratorians feel there are high profits in the IVD business," Worden says. "Laboratorians anticipate a continued stream of new products and technologies with little understanding of the financial structure of their suppliers... and manufacturers are doing little to change this perception."

And the winners are?

One employee at a Big Three lab says that if the Medicare cuts are enacted the way they are now, this represents a "disproportionate hit" on the laboratory industry, but says that the target of Medicare savings may yet be lowered, yielding some relief to labs. "Providers may stand to gain from a lowering of that ($270 billion target), because the administration continues to say that providers are being hit too hard and too fast, which could impair the quality of services."

Diagnostic Insight readers (81%) were not "very familiar" with pending federal budget projections for the Medicare program, provisions that could severely limit reimbursement to clinical laboratories, and ultimately hurt IVD manufacturers. A House-Senate conference committee recently rejected policies that would provide some relief to the laboratory industry. The biggest loss: some $6 billion in lab fees will be saved by the government in the form of a freeze on lab fees from 1996 to 2002 and a reduction on fee caps to 65% of the national median lab fees, beginning in 1997. Labs were also disappointed by the failure of Congress to include national all payer direct billing rules and uniform lab coverage and payment policies in the budget package. These provisions had been promised in return for the deep Medicare cuts, which could amount to a total of $270 billion over seven years. Readers feel that the impact of the cuts will be harder on IVD manufacturers than on clinical laboratories. "When ever there is confusion in the industry, it hurts the manufacturer. " Frank Fallin of DuPont Diagnostics says his buyers are already using the proposed Medicare cuts as a negotiating point on which to gain still lower prices. If, in the end, however, manufacturers drive commoditization and laboratories end up with reduced materials expense but significantly reduce their new product and service stream—who will have won?

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