Monday, July 17, 2017

Frost Perspectives/Healthcare
Transformation of Medical Device Industry

By Brahadeesh Chandrasekaran
Industry Analyst, Transformational Health
Frost & Sullivan


The pressure to reduce healthcare expenditure, intensifying competition, and consolidation of hospitals and health systems has brought unprecedented changes in the way medical device companies do business. The dynamic marketplace is transforming the traditional way of doing business and requires the medical device manufacturers to rethink their existing business models and create value proposition for customers through innovative products and solutions. This transformation of medical device industry is fueled by an ageing population, proliferation of chronic diseases, increasing emphasis on quality of care and treatment, stringent regulatory landscape focusing on patient safety and cost-containment, empowered and informed customers, and emerging technologies.

The Market – Global Medical Devices Market

While medical device manufacturers are striving hard to address the challenges, the dynamic marketplace also presents huge opportunities for the companies.

Exhibit 1: Global Medical Devices Market, 2015-2016

Source: Frost & Sullivan

Note: In-Vitro Diagnostics is not included in medical devices market

The global medical devices market is estimated to be $330 billion in 2016, an increase of 4 percent growth from 2015. Orthopedics is the largest segment in the medical devices market and it is estimated to remain so for the next 5 years, contributing approximately 14 percent of the global market. Minimally invasive devices and cardiovascular devices complete the top three segments of the medical devices market with approximately 12 percent and 10 percent respectively.

In terms of region, United States led the market with approximately 39 percent of the global market followed by Japan, Germany and China. The top 10 countries contributed to almost 80 percent of the global market.

The Big Picture – Changes in Medical Device Industry

The transformation of existing business models in the medical device industry is primarily attributed to the four factors:
  1. Cost and Pricing Pressure: The declining R&D productivity coupled with increasing pricing pressure has resulted in eroding profit margins for medical device manufacturers. Hence medical device companies need to optimize their R&D investment to have right product mix and high manufacturing efficiency. One of the key strategies of medicaldevice companies is the focus on high growth markets and high growth segments to increase the profit margin and minimize the risk of pricing pressure in developed countries such as the US and countries in Europe.
  2. Power Shifting to Payers and Providers: Payers and providers are gaining more importance in the selection of medical devices. The move towards value-based care is allowing payers and providers to reap benefits with improved quality, patient outcomes and better profitability. Though medical device companies are facing uphill challenges in adjusting to the new value-based payment models, it provides opportunities for the companies by working closely with payers and providers and provides a holistic approach for patient care, which is essential for long-term sustainability. The new models include risk-based revenue sharing models where companies share the risks and profitability with the providers on an individual patient basis.
  3. Digital Transformation: Similar to other industries, medical device industry is undergoing digital transformation to control costs, enhance patient care and improve utilization of providers. The wearable devices are already starting to deliver their value-proposition by providing continuous monitoring of patients that has high significance in patient management. Digital technology provides opportunity not just to enhance the patient care but also provide data to make informed business decisions. For example, data from the connected devices can help manufacturers better understand the patient behavior, and performance of the devices. Such data provide valuable insights for the medical device companies to develop more effective products and solutions. For example, according to the medicaldevice recall report FY2003 to FY2012 by FDA, the number of medical device recalls increased 97 percent during this period. Digital technology such as predictive analytics or patient monitoring features in devices can help companies to proactively identify the quality issues and improve the device performance. In addition, digital technology allows companies to provide a holistic approach in care delivery and expand in to new service areas of patient management.
  4. Healthcare Consumerism: Consumerism in healthcare is playing a significant role in transforming the traditional way of care delivery. The increasing awareness among patients increases their choice of choosing healthcare services and enables them to actively participate in the management of their health and wellness that led to new concept known as Do it Yourself (DIY) health concepts. The consumerism in healthcare has allowed device companies to focus on new initiatives in reaching out directly to them.
Exhibit 2: The need for Transformation in the Medical Device Industry

Source: Frost & Sullivan

These factors are leading to an integrated approach by the medical device companies in providing a holistic approach to the patient care from a pure play medical device manufacturer.

Integrated Approach towards Patient and Disease Management: A Holistic Approach

Historically medical devices have been narrowly focused on singular aspect of a disease or condition. As the complexity of the diseases and the financial burden increasing day by day, there is a need for a multi-level approach to disease treatment. Thus medical device manufacturers are focusing on developing new technologies and services that work with an integrated approach of care continuum, a shift from silos approach. Integrated care reduces the costs and improves the patient outcomes. The integrated approach aims to provide end-to-end solution not just for patients but also for providers in improving their efficiency, infrastructure and treatment efficacy.

Exhibit 3: Evolving Medical Device Business Model towards an Integrated Approach

Source: Frost & Sullivan

For example; in 2013, Medtronic, a leader in the medical device industry, announced the formation of Medtronic Integrated Health Solutions, a new business focused on developing novel partnerships with hospitals, physicians, payers and health systems to deliver high quality care in a cost effective way. The solutions aimed at managing, modernizing, optimizing and developing cath-lab facilities and bring sustainable efficiencies and patient recruitment programs to hospital cardiology department. Medtronic’s Integrated Health Solutions goes beyond the management of cath labs and focuses on creating efficiencies along the entire care continuum, supported by system components such as telehealth. The main goal is to deliver value, optimize outcomes and cost of care delivery, through vendor-independent solutions and long-term partnerships. Similar types of services are offered by many other companies such as Boston Scientific, Philips, St. Jude Medical, etc.

Established medical device companies are embracing this new paradigm and are finding a way to expand the traditional way of doing business and are changing their business models not just from a product perspective but also from a process, service, and relationship with stakeholders’ perspective.

Role of Connected Health Solutions

Connected health solutions enables patients, care providers and payers to access data effectively and make informed decisions on the quality and outcomes of treatment. At a time where the demand for healthcare services continues to rise because of aging population, constrained budgets for hospitals, lack of access to healthcare in many countries, and increasing costs for advanced treatment, the role of connected health is highly significant as it is capable of delivering cost-effective solutions and can significantly improve the patient outcomes. The connected health solutions have allowed medical device companies and digital technology companies to bring out solutions that provide comprehensive care.

For example; Propeller health, a digital health technology company, develops sensors and digital platforms that are used to collect patient medication data and turn it into actionable insights for patients and care providers for the treatment of COPD and Asthma. The company has already partnered with leading inhaler manufacturers such as GSK, BoehringerIngelheim, etc. to integrate their digital technology with the inhalers for improving patient outcomes. In addition, Propeller health partnered with the Institute for Healthy Air, Water, and Soil, the Louisville Metro Public Health and Wellness Department, and the Robert Wood Johnson Foundation officially launched an initiative called AIR Louisville, a first-of-its-kind collaboration using digital technology to improve asthma. The initiative aims to track the asthma patients in Louisville and leverage the data from the Propeller health’s inhaler sensors and asthma management system to make informed decisions on management of patients and environment in Louisville.

The role of connected health solutions is expected to have a huge impact in the transforming healthcare system towards personalized medicine and allow companies to develop technologies, products and solutions towards patient or consumer-centric approach.

The Future

The inevitable radical change in the medical device industry will redefine the traditional way of doing business. Medicaldevice companies that embrace and align their business strategy according to these changes will sustain and can remain profitable. Digital health solutions will play a significant role in the medical device industry and the customers will not only include physicians and GPO’s but also C-Suit, Consumers and Payers. Scalability beyond traditional product offering and competing beyond a company‘s traditional industry will be important, as more companies will begin to converge products and services. Companies like Apple, Google, and IBM will continue to compete outside their domain, pushing traditional healthcare companies to break their dominant business model. Medical device manufacturers must incorporate a socially beneficial aspect to their business models. The preference of payers and consumers will incline toward companies that help them improve their lives and treatment outcomes in a cost-effective way.