Managing Financial Outcomes in Today’s Medical Device Marketplace
Posted on: December 3, 2020 | By: Guy Logan | QAD Manufacturing, QAD Business Process, QAD Distribution, Professional Services, QAD Financials
Recent decades have witnessed major advances in medical technologies that have been responsible for earlier and more accurate diagnoses, more effective treatments, and the ability of people to live longer, healthier lives. But because new technology is the primary driver of rapidly rising health care expenditures, these advances do not come without risks and costs.
To minimize risk and control costs, health care facilities are now being more selective in how they evaluate, manufacture, and purchase medical devices. In the past, safety was the primary concern, but now there is a growing demand for risk management, cost effectiveness and data on efficacy to enable this selectivity.
Therefore, a careful evaluation of the controls for risk and cost to deliver new drugs, supplies, equipment, and even discharge criteria is increasingly necessary in today’s medical device environment.
First, let us examine the components of Proactive Risk Management.
Proactive Risk Management
Companies that use program risk management effectively can transform the capital efficiency of product development.
To harness its benefits, program risk management should be practiced early and often in new product development. Using risk-based product development often means products get to market sooner, with less development cost and higher product quality.
The proactive risk management strategy largely consists of four major components, which we discuss below.
1. Diversification
One way that large companies can manage their investment risk is by leveraging their size in a way that diversifies their core offerings. To do this, companies can integrate their products with new services and knowledge bases, allowing healthcare networks to connect seamlessly.
For example, the medical device industry, and the medical industry at large, is responsible for large amounts of data. To communicate, secure, organize, and analyze this data, there is a growing interest in wireless technology, decision-making algorithms, and intelligent design of user interfaces which will greatly facilitate these data-related tasks. Therefore, companies can benefit from integrating with such technological services.
One company that has implemented diversification is medical device company Medtronic, which has created a medical device application that analyzes diabetes data, including how blood glucose levels respond to factors like food intake and physical activity to give the user personalized insights to manage his or her glucose levels.
There is also great potential benefit from global diversification. This is because companies must drastically reduce the average device cost for it to be palatable globally. Therefore, companies are challenged by this fact to innovate so that devices will be sufficient for global use. Not only that, but global diversification will also spark an opportunity for drastic growth, because diversification requires companies to understand the cultures, economics, and governments of emerging markets.
2. Partnering
Similar to how companies will need to integrate with new services, companies will also increasingly rely on industry partners to foster innovation, allowing for better clinical outcomes, innovative and valuable products, and lower risk at the cost of requiring successful partnership.
We see this happening in the industry today. For example, KPMG notes that 82% of medical device companies are adopting more collaborative business models, and 80% believe that partnerships, as opposed to in-house efforts, will characterize the future of innovation. This is also happening in the biotech and pharmaceutical industries, as noted here, where we see that acquisitions have been on the decline in 2020, and collaboration is on the rise.
Additionally, partnership with external firms can be beneficial, no matter the size of the organization. While small companies can leverage external firms to supplement or drive product development, larger organizations can utilize their ability to de-risk development programs and provide niche expertise to get products to market sooner.
3. Streamlining Research and Development
In order to establish a robust yet streamlined approach to maximize innovation, companies will have to clearly define their clinical, commercial, and program goals prior to beginning the development program. Companies must define their product requirements early in the process, including clinical and technical specifications, and user and commercial requirements.
In addition, the medical device industry’s innovation engine needs reigniting because of changing market demands. Structured creativity sessions (including staff from functions such as marketing, sales, engineering, regulatory, clinical, and manufacturing departments) can be implemented to ensure that clinical, commercial, and user needs are met, and they can ensure that innovation still adheres to the pre-defined requirements.
4. Redefining Innovation
Not only does industry innovation need reigniting, it needs redefining. Innovation in the medical device industry will no longer be measured only by metrics such as 510(k) submissions or revenue growth but also by value provided to the healthcare ecosystem. Defining healthcare value is difficult because its definition depends on stakeholder perspective, but to adapt to this new perspective on innovation, the entire industry needs to collaborate in formalizing and delivering healthcare value that meets stakeholders’ needs. Undoubtedly, however, innovation will require new product development strategies and business models—and rethinking healthcare economics.
In summary, proactive risk management is composed of four key components: diversification, partnering, streamlining research and development, and redefining innovation.
- Diversification requires that companies expand their core offerings and integrate with new technology. Global diversification pushes companies to innovate even further.
- Partnering is critical because the medical device industry is headed in a direction that fosters collaboration, and partnerships are allowing for increased innovation and better outcomes.
- Streamlining research and development is vital for maximizing innovation, but in order to streamline R&D, companies have to define their goals and requirements early on in development.
- Although defining value in the healthcare environment is difficult, healthcare value is the new criterion for measuring innovation in the industry.
Now let us examine the choice between innovation and cost that medical device manufacturers must make in today’s environment.
Cost and Effectiveness
Innovation vs Cost
A vital aspect of the current challenges facing the medical device industry is that selling costs of devices are now evaluated on efficacy, efficiency, cost, and effectiveness, as opposed to only safety—the common standard in the past. Thus, the expense of products is more thoroughly evaluated.
Medical device companies often depend on insurance reimbursement to sell their products. However, the reimbursement policies that Medicare sets forth to add new medical devices to the program—the widespread policies which act as a benchmark to private payers—are now evaluating based on efficacy, efficiency, cost, and effectiveness instead of merely safety. Furthermore, they are often delayed between 15 months to over five years, while most medical devices only have a lifespan of about 12-18 months.
Additionally, reimbursement for new technologies also depends on assignment of codes such as the Category 1 Current Procedural Terminology (CPT) codes which require the existence of published peer-reviewed clinical studies and widespread use of the new technology or procedure, therefore increasing the required time to establish a new code.
Another example is the Healthcare Common Procedure Coding System (HCPCS) code which requires that the device already has three months of market experience to apply for this code. Therefore, a device needs to be sold without having the necessary code for billing purposes, in turn lowering the chances of the device being reimbursed.
Furthermore, healthcare practitioners are discouraged from using technology that has not been assigned a code and an appropriate reimbursement amount, and new codes also lead to insurer skepticism as to whether the procedure should be covered.
On the other hand, most new medical devices simply fit within pre-established coding and payment categories or are similar to existing items so that coverage determinations already exist.
Therefore, the crux of the matter is this: when new devices or procedures do not fall within existing insurance categories, are used in new ways, or attract attention because of their cost, reimbursement of these devices or procedures is critical. But reimbursement depends on processes that are either extremely difficult to achieve or take longer than the average medical device lifespan—so that the device may already be phased out by the time it would be ready for reimbursement. As a result, medical device manufacturers must choose between innovating to create a new medical device, thereby going through the lengthy and complex process of securing codes needed for reimbursement, or producing a medical device similar enough to predecessors so that it adheres to the preordained requirements needed for the necessary codes. The former option could bring greater value to the healthcare ecosystem, and with high profit margins, while the latter brings much less risk and cost, but with much less potential growth in profit margins.
Next Steps
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