Medtronic strengthens its services business by launching pilot programs to manage hospital operating rooms and make them more efficient.
Medtronic is now firmly entrenched on its path to shed its image of being just a medical device maker.
In its fiscal fourth-quarter earnings call Tuesday, the Irish company's CEO, Omar Ishrak, articulated his vision of how Medtronic can add value to patients and the overall health system by looking at ways to do business differently.
Ishrak said that in the fourth quarter Medtronic "initiated its first pilot of our operating room managed services, which combines the capabilities we have developed in the cath lab together with Covidien's breadth of operating room technology and expertise to provide a full service OR offering to hospitals."
He added that the company's cath lab management business that launched in Europe in 2013 is now being expanded globally.
"At the end of Q4 we had 50 long-term agreements with hospital systems representing $1.5 billion in revenue over the life of these contracts which have an average span of five to six years," he said.
Medtronic's services business has one overarching goal - to help hospitals become more cost efficient, improve patient outcomes and thereby enjoy the shared savings with them. Medtronic bears some skin in the game as well because these are risk-sharing agreements.
Aside from the cath lab business and the new OR-management business, Medtronic is also seeking to own certain disease states across the continuum of care. In the fourth quarter, the company announced that it had acquired Diabeter, a Netherlands-based clinic, research center and integrated care network for diabetes patients, for an undisclosed amount. In 2013, the company also acquired Cardiocom, a remote monitoring company whose technology can allow doctors to be aware of worsening heart failure symptoms of patients from afar.
"All of these efforts revolve around the evolving needs of our customers regarding delivery system efficiency and more integrated, connected care models for patients around the world," Ishrak said in the earnings call.
Ishrak explained at length the opportunity the change in the healthcare industry has presented to Medtronic, according to an archived webcast of the call.
As we observe and interact with healthcare systems around the world, we continue to see a push for experimentation with new models of delivery system operations, new payments schemes and integrated patient care as the critical mechanism to balance the cost and access challenges. Each of these efforts [by Medtronic] seek to drive higher levels of patient and systems value. The move to these value-based healthcare models around the world presents a unique opportunity for Medtronic because we believe that medical technology can play an increasingly larger role in delivering higher levels of value in healthcare. The proper application of medical technology and the adept use of data and information associated with these technologies can be paired to help bend the cost curve of healthcare and produce better clinical results at the same time. This is pushing our organization to develop technology offerings, services and business models that bring new forms of value across a given patient care continuum and within the delivery system itself. This continues to drive our organization to move beyond medical devices to create integrated health solutions that complement and enhance our devices value, traditional wraparound services and solutions.
All of that is well and good, but the focus on services is also having a meaningful impact on the company's revenue - Ishrak said that Medtronic's services and solutions revenue doubled in the fourth quarter.
This focus on services and owning a disease state by buying the Dutch diabetes research center and clinic is a smart move, observed a veteran life sciences venture capitalist recently.
"I think it's a technology company getting into the services model," said Paul LaViolette, a managing partner and chief operating officer of SV Life Sciences Advisers, a prominent life sciences venture capital firm, in an interview in late May in Minneapolis. "And I think the lines of demarcation are lessening and ... the strategics are looking at it and saying if a $100 billion is going into a [disease] category and $1 billion of that is medical technology and $99 billion is the delivery of care, my job as CEO is to grow the company. If I grow the company and I tell my shareholders I have got a disease management story, they will be like that’s fine, whatever."
But LaViolette cautioned about one aspect of the Diabeter transaction and what it means now that Medtronic in effects owns a clinic with doctors.
"There may be conflicts because you sell a diabetes pump and you own a prescriber, so how do you deal with that?" he said. "Well, that's tactical and you can figure that out."
Medtronic plans to allow clinical decision making to remain autonomous so that patient choice is not limited, according to news reports of the deal.
Meanwhile, the move to help hospitals become more efficient and patients more connected to their physicians and care, is further evidence of a fundamental transformation occurring at one of the foremost medtech companies.
Arundhati Parmar is senior editor at MD+DI. Reach her at [email protected] and on Twitter @aparmarbb
[Photo Credit: iStockphoto.com user Squaredpixels]
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