Opportunities abound for medtech firms willing to rethink and redefine how they operate in this new healthcare marketplace, according to experts from PricewaterhouseCoopers.
Healthcare is in a state of flux and undergoing more change than at any time since employers began paying for workers’ healthcare in the 1930s.
More transparent pricing, a focus on wellness, empowered consumers and rapid technological change has given rise to a “New Health Economy.” This new economic framework is forcing medical device companies to evolve business models and innovation strategies to determine where and how they will succeed.
|James Varelis, principal. PwC Health Industries|
Medtech leaders who are unwilling to change their ways will likely face a range of difficulties. At the same time, those that are willing to rethink and redefine how they operate will find tremendous opportunities. Some companies belonging to this latter category are Philips, Medtronic and Atherotech Diagnostics Lab. But before describing their actions, it's important to note how the medtech world is shifting.
Consider just the way the basic selling proposition for devices is changing. Historically, physician preference was the key determining factor in a medical device’s success or failure. Under this traditional model, sales reps called on individual doctors, one doctor at a time. Dr. Smith might have preferred Company A’s products while Dr. Jones preferred products from Company B. Personal preference guided their buying decision and framed how Medtech companies addressed the marketplace.
This single fact drove many of the foundational elements of a device company – from R&D investments to marketing budgets to sales force design.
Under the New Health Economy, the pendulum is swinging away from the individual physician toward the “business” of healthcare providers. Those providers – hospitals, physician groups, integrated delivery networks (IDNs) – are focused on managing costs, minimizing readmission risk and growing through integration. Having everyone within their organization using the same products can help achieve all three of those goals. For providers, device sourcing is now viewed as a way to manage costs.
As PwC’s Health Research Institute showed in its study “Medical Cost Trend: Behind the Numbers 2015,” when hospitals and doctors work together to cut costs and share in savings, they are able to reduce supply costs due to greater standardization and improve the ability to negotiate prices. Health systems that work closely with doctors can more easily limit the range of implants they must stock to get bulk pricing discounts. Two examples cited in the report: the average price paid for femoral knee implants, an implant choice that was traditionally determined by physician preference, decreased 6.6% between 2013 and 2014; and Scottsdale Healthcare saved $24 million by reducing its number of suppliers.
Facing those kinds of numbers, provider CFOs and central purchasing teams are driven to make product decisions based on price. As IDNs expand geographically, their business gains larger scale and more volume, which also ties back to managing costs. When the larger “customer” is focused on taking cost out of the system and standardizing the practice of medicine, the Medtech seller’s go-to-market strategy needs to shift. That includes everything from product design and marketing messaging to whom sales reps need to educate and call upon.
But while providers are now focused on standardization and central purchasing, an exclusive, narrow focus on holding down costs to improve the bottom line can only get them so far because it is a strategy built on “how not to lose” instead of “how to win”.
|Brian Williams, director, PwC Health Industries|
Eventually, hospital networks and IDNs will need to compete in an open marketplace for every consumer’s dollar. Informed consumers will make their own healthcare purchase decisions based on the value they receive. And just as we are seeing in the pharmaceutical side of the life sciences business, where direct-to-consumer “educational” campaigns are a thriving element of the marketing mix, go to market strategies for Medtech companies should be adjusted to include these end-user consumers in their calculations.
Consumers have their own take on economics and healthcare value as the large California administrator of health and retirement benefits for state employees CalPERS demonstrated back in 2011, according to “Behind the Numbers”. CalPERS found that consumers shop differently when given cost and quality information and a financial incentive to select wisely. When CalPERS set its reimbursement rate for hip and knee replacements at $30,000, its members switched to lower-cost providers. In response, other providers dropped their prices to compete, and CalPERS saved $5.5 million in the first two years.
This introduces yet another set of strategic shifts for the Medtech industry.
Traditional device companies have focused on the product sale. Whether it was a defibrillator, an MRI, or a surgical staple, little attention has been paid to non-product revenue streams beyond the occasional service and maintenance contract. With providers and, ultimately, consumers focused on outcomes, device companies must ensure their products are truly delivering value all through the value chain.
One approach to capturing value is to provide product support and services to healthcare systems to ensure they are maximizing the value of their device assets. The PwC Health Research Institute report “Medtech Companies Prepare for an Innovation Makeover” highlighted Medtronic’s establishment of a hospital solutions group to develop programs that increase efficiencies and improve the patient experience. This approach creates a service revenue stream where one did not previously exist, and ensures providers are deriving the maximum value from their device purchases. This approach can define and capture value beyond the product and be a win for all parties, including the customer or patient.
A second example noted in “Innovation Makeover” is the partnership of Philips and Georgia Regents Health System that began with a 15-year $300 million contract to design a new operating suite. Philips will supply the health system with everything from medical equipment and training, to maintenance and light bulbs. A dozen Philips employees will work in-house at Georgia Regents to develop systems, offer ideas, and promote patient health. According to David S. Hefner, executive vice president of Georgia Regents Health System, “We were looking for a partner to welcome as part of our enterprise-wide family and help us craft better methods to care for our patients at a lower cost while improving their experience. So we no longer relate to Philips as simply vendors selling their wares. Philips is now sitting with our executive and physician teams devising new strategies, and we are also sitting with their executive team helping to craft the future of health care.”
And with digitization permeating the evolving healthcare space, novel technologies are leaving their stamp on the New Health Economy, helping Medtech companies expand data sources and data sharing relationships, while owning the insights. One example of a company building a broader picture of customers and patients, with a focus on consumer value, is Atherotech Diagnostics Lab, a specialty lab and disease management company and provider of proprietary, comprehensive cholesterol testing, as noted in the HRI study “Digital Accelerators for a New Innovation Era.” Atherotech has built a large lipid data library and is enhancing this data set by using advanced patient matching technology and algorithms to link patients’ history and records. Using its Our Healthy Heart program, Atherotech can also tie other important clinical information to the record–such as the patient’s risk factors–for a more robust view of the patient.
Faced with the new horizons of this New Health Economy, the Medtech companies that blaze new trails to define value beyond just the product, that focus on services across the full value chain, and that take into account the growing importance and purchasing influence of healthcare consumers, will likely succeed and sell more product in a healthcare ecosystem that values definable outcomes – not just the individual sale.
[Featured Image Credit: iStockphoto.com user donskarpo]
-- By James S. Varelis, Principal, PwC Health Industries, Pharmaceutical & Life Sciences sector and
Brian S. Williams, Director, PwC Health Industries, Pharmaceutical & Life Sciences sector