CASE STUDIES
5 Companies that Adapted
in Times of Change
We are all familiar with how Uber
flipped the taxi industry on its head
and how Netflix changed the way we
watch movies, but there are plenty
of other examples of organizations
that adjusted with—and sometimes
influenced—emerging trends. Here’s
a look at just a few.
CASE STUDIES
Value-Based Contracting:
Cigna’s New Approach to Pharmaceuticals
An emerging business model that rejects traditional fee-for-service pricing
has caught the eye of Cigna Health Insurance, hoping to incentivize quality
and accountability in pharma companies. Learn how this model might apply
to your industry.
Also known as pay for performance, value-based contracting structures pricing,
at least in part, on agreed-upon outcomes and overall effectiveness of goods
or services. This is a familiar approach in government-funded healthcare, where
providers are better-compensated if their patients stay healthy. Now Cigna is the
first health insurance company to apply value-based pricing commercially, testing
it in the pharmaceuticals market.
This model can be tricky and is not for every business, but a look at Cigna’s
approach might help you avoid some common pitfalls.
Î Î
START SMALL. Sweeping changes with any untested payment model can cause
significant losses and even ruin a company. Cigna is testing the value-based model
with makers of only two cholesterol-lowering drugs.
Î Î
BE SPECIFIC. Specifying desired outcomes in measurable terms—and avoiding
ambiguous words like “better” and “improved”—prevents disputes over how and
when the contract is paid. Cigna’s terms are clear: if outcomes for real-world
customers are as good or better than specific trial numbers, the pharma company
will be paid a higher price per unit.
Î Î
ASSE SS RISKS. Value-based payments are generated by future data, so the timing
of this model can be a problem for some businesses. Drug companies that work with
Cigna under value-based contracts must have the infrastructure and flexibility to
compensate for delayed payments.
Î Î
AVOID IMPROPRIETY. The pay-for-performance model is supposed to improve
accountability of contracts and efficacy of goods and services, but some companies
mistakenly incentivize misconduct. Consider the recent Wells Fargo debacle, where
employees illegally opened fake accounts to meet quotas. To avoid this problem,
Cigna gathers outcomes data from independent lab results and not from the drug
companies’ subjective reporting.
Î Î
WATCH TRENDS. Sometimes an industry will give indications of what is to come.
Recently, a coalition of private insurers announced its commitment to a 75% adop-
tion of pay-for-performance contracting by 2020. Leading the pack, Cigna stands to
control a market advantage for years.
> PHILIPS LIGHTING. Once considered
only a light bulb manufacturer, Philips
transformed its business approach
when LED technology interrupted
the bulb replacement model. Today,
Philips uses wireless technology
to deliver customized lighting
systems that are interconnected,
programmable, and adaptable to
changing preferences and needs.
> AMAZON. What began as an
online bookseller has erupted into a
merchandiser giant. Using an array
of digital technologies in logistics,
streaming, and cloud services, Amazon
has diversified its portfolio to include
1-click purchasing, marketplace
integration, drone delivery, fulfillment
robotics, and subscription services.
> U.S. DEPARTMENT OF DEFENSE.
For years, the Government purchased
aircraft with an agreement to pay the
contractor time and materials for future
maintenance. Realizing the arrangement
incentivized suppliers to skimp on quality
by underutilizing production technology,
the DOD adopted performance-
based contracting, which instead pays
contractors only for the time the aircraft
is in service.
> FORD MOTOR COMPANY. 3-D
technology is one of industry’s biggest
disruptors, already changing business
models in medicine, architecture, jewelry,
and automotive manufacturing. Earlier
this year, Ford announced it will test
3-D technology in several areas of parts
production, including interior parts and
exterior spoilers.
> MICROSOFT. Remember when
software like Microsoft Word and
Adobe Photoshop had to be manually
updated every year by purchasing
and installing a new CD? Cloud
technology changed all that, and
software companies reinvented their
business models to match. Today,
users enjoy more seamless and
reliable updates with a subscription-
based model.
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