The medical device industry is at a crossroads. Indeed if AT Kearney’s recent report is any indication, the medical device industry is extremely vulnerable to disruption, with changing market conditions and constraints on several fronts at once. From the fundamental shift in device buying power to the changing healthcare payment landscape to an increasingly difficult pathway to innovation, success in the device industry is more challenging than ever before. A cursory examination of these three challenges reveal the critical need for medical device manufacturers to innovate quickly, and respond to these changing market conditions.
Shifting Purchasing Power
Traditionally, the purchasing relationship for surgical implants has been that of the surgeon and the device rep. Tradition is changing fast! The rise of the healthcare provider purchasing committee fundamentally changes the criteria by which devices are evaluated. Evidence-based evaluation coupled with stringent business model assessment have replaced physicians’ personal partiality as the driving force in purchasing. Per AT Kearney’s report: “Physicians’ preferences still matter, [but] their freedom to choose can no longer be taken for granted.”
Evolving Healthcare Economics
As more and more treatment falls under the purview of new payment models, cost reduction has come to the forefront. In bundled payments for instance, the fixed cost of a procedure puts a direct pressure on providers to lower the cost of care; demanding lower cost devices is one means toward that end. In turn, device companies must figure out ways to satisfy that demand for lower cost. ACOs provide similar incentives to maximize value per dollar spent, including those spent on the device. If a newer, more expensive device does not provide a compelling improvement in outcomes, it’s a hard sell.
The Challenge of R&D…and Commercialization
Compounding existing challenges requiring lower-cost devices in the marketplace, R&D is becoming more challenging and expensive. Per AT Kearney, FDA auditing has increased sharply in recent months. Coupled with new regulations, this increased regulatory oversight has pushed much of the R&D focus to improving existing devices, rather than creating novel ones. On the other side of the coin, smaller companies (and innovative divisions within large companies) are struggling to commercialize novel products. Training new experts to go into the field to demonstrate, sell, and train new products is a costly and expensive process, and slows the spread of very novel devices.
Of course, there are already early disruptors within the industry. Smith & Nephew’s Syncera division is the oft-mentioned standout on that front, offering the parent company’s hip and knee implants “rep-less” for a dramatically lower cost. In the case of Syncera (as well as similar efforts from other device companies) an iPad replaces the rep, and offers the OR team the ability to communicate with the device company’s central support staff. Naturally, technologies like Google Glass fit well into this model; the first-person “surgeon’s eye view” of the device in the field provides (quite literally) an unmatched perspective, leading to better support. And because Glass is hands-free, it’s avoids the intrusiveness of a tablet or smartphone in the OR.
So it seems that for device companies, the decision is not whether to innovate, but when…and how. Will they self-disrupt? Will they fund/acquire their disruptors? So far, even the self-disruptors are keeping their efforts somewhat contained. Syncera and programs like it are designed to increase addressable market for devices (e.g. those hospitals that cannot afford the full-price, with-rep implants). At the same time, it’s easy to foresee a future where this model is the predominant delivery method for many devices. Either way, we’re keeping a close eye on the market, it’s going to be an interesting ride.