According to a recent ATKearney Report, the Medical Device industry has been enjoying a 5 percent average annual growth rate and margins in the 23 to 25 percent range. However, because of fundamental changes in the medical purchasing environment, it is likely that between 2015 and 2020, revenue will remain stagnant and margins will drop by as much as 8 percent unless the device manufacturers change their business models.
One change that will have a major impact on both the financial results and customer loyalty is to provide value-adding solutions to hospitals, labs, and practitioner’s offices. This approach must include becoming very creative with the services provided (both existing and new) to differentiate themselves from every other competitor trying to achieve the same objectives.
The causes of the projected margin decline
As a result of the Affordable Care Act (ACA) and changes in Medicare reimbursement, the way major medical organizations purchase capital equipment have been changing and this trend will continue. In the past, department heads or important members of the medical staff had a strong influence on what equipment to buy. Today this practice is becoming obsolete. A committee or a GPO (group purchasing organization) will probably make the equipment purchase decisions. If it is a committee, then the head is usually someone from Materials Management (Purchasing) with other representatives from the Medical and Nursing departments, Biomedical engineering, and certainly Finance. They do their own research and develop a shortlist of potential suppliers before asking for quotes. They have specific objectives in their evaluation including patient outcome, total value obtained from the purchase, and lifetime cost of ownership.
If they are part of a GPO, the shortlist is provided to the committee and includes feedback from other members of the GPO who share their evaluation analyses and compare actual results to expectations.
So, you can see that the relationships made between your business and individual Medical professional are rapidly being downgraded. They are being replaced by objective analyses based strongly on the balance between monetized value added and cost.
How do you add value?
Value added services – One of the most progressive segments of the medical device industry is the imaging segment. The equipment is very expensive, has some components that have a high failure rate (because of the physics of the parts) and have a high impact of how the patients feel about their treatment.
Acertara Acoustic Laboratories just announced a patented way to monitor multi-element ultrasonic sensors. G. Wayne Moore, president and CEO of Acertara, said “the new Aureon ultrasound probe testing device allows the user to visualize the ultrasound energy emanating from the aperture of the probe, enabling detection of dead elements and other probe failures in even complicated ultrasound probes, including 2D matrix arrays.”
The device is installed on the clinical tester. A set of parameter measures is taken at the instrument and transmitted to a maintenance computer. An image is derived from the received data and analyzed in comparison with the set of operational characteristics stored in the maintenance computer to identify a predicted malfunction of a component of the device. The maintenance system is thus able to initiate a repair of the medical imaging device by generating an alert in response to identification of the predicted malfunction.
Upgrade products – GE Healthcare recently announced that it has upgraded two models of its ultrasound systems in an effort to improve upon the comfort and convenience of patients undergoing medical imaging. “We asked clinicians who use these technologies every day to tell us what they need, and we designed upgrades that are cost-effective and that give them more time, productivity and confidence,” said Brian McEathron, general manager of General Imaging Ultrasound for GE Healthcare. “These upgrades put GEʼs latest imaging technology in their hands without requiring a system replacement.” This strategy may push out some new sales but it will ensure that the existing equipment stays in use, and under support, for a longer time. Also, the upgrades make the equipment more competitive for new sales.
While this post is about the Medical Device industry and the specific causes of the change going on is also specific, other capital equipment industries are also in the same situation. Capital equipment purchases are all about value added and extending the useful life of existing equipment. No message is better received in the C-suite than “We have XYZ equipment that is fully depreciated and I found a way to extend its’ useful live for another 5 years at an cost of less than 10 percent the cost of a new purchase.”
All capital equipment supplies had better internalize this message now or they may be left in the commercial dust called progress.