Study: Medical device industry facing $34 billion revenue hit (Healthcare Daily)
The confluence of five forces could create a $34 billion hit to the medical device industry’s revenues over the next five years.
Until now, the medical device industry has enjoyed stability, strong growth, healthy margins and above average price-to-earnings ratios over the last 20 years. But disruptive changes are causing industry executives to focus on differentiated sources of value, customer productivity and total patient disease management, said Dave Powell, a partner with A.T. Kearney and a co-author of a study that delves into the industry’s challenges.
The study points to five disruptors that will negatively impact the economics of the industry if not addressed.
“Radical change is inevitable, and the companies who embrace it will both shape the industry and profit from it,” Powell said.
Kearney interviewed more than 30 global medical device industry executives from 20 of the world’s leading medical device manufacturers. Collectively these companies represent $80 billion in revenues.
According to the study, the five disruptive forces shaping the medical device industry are:
1) Power shift to payers and providers –Evidence-based decisions and the funding channels are increasingly challenging the traditional business model of clinician choice. Payers and providers are evaluating medical devices based on safety and procedural efficacy as well as cost and value.
2) Heightened regulatory scrutiny– In recent years there have been many high-profile and damaging recalls, while regulators have been tightening up existing regulations and adding new ones. FDA audits have increased by 40 percent in the past 12 months and the number of warning letters has risen by 24 percent over the past two years.
3) Unclear sources of innovation– Because of regulatory and reimbursement issues, medical device companies are focusing their research and development efforts on improving already approved devices rather than developing truly innovative new products. New products that affect the way standardized procedures are conducted are often reluctantly included on the list of reimbursable products.Plus, startups and small companies are finding it difficult to find capital to fund the increasing cost to bring new innovations to market.
4) New healthcare delivery models– As payers’ resource constraints intensify, and powerful analytical tools make it easier to evaluate large volumes of data, patient pathways are being modified to obtain better outcomes for less money. For example, care is shifting out of hospitals and into the community.
5) Need to serve lower socioeconomic classes– Medical device companies seeking growth will need to target less affluent segments that can offer significant absolute profit potential with the right solutions. Accessing growth segments, even in traditional markets, will require new business models, lower price points,and more value-based product offerings than those of today.
Joan Koerber-Walker, president and CEO of the Arizona BioIndustry Association, said change is the driving force in innovation and a way of life for today’s medical device industry.
“Developing and delivering life-changing innovations for patients extends across the organization and requires new ways of doing business from how we develop new products to the way we deliver them to the health care system and to patients,” she said. “These changes will be disruptive or even destructive for some companies. If, as an industry, we innovate as creatively on the operational side as we do on the product and services side, we will not only provide better service to patients but also will provide improvements in health care economics that will bend the health care cost curve. Partnerships are key on this journey as global leaders and nimble young companies work together with our regulatory partners, health care providers and payers.”
Eric Miller, principal at Tempe-based PADT Inc., said the government, medical device innovators, payers and clinicians need to work together to find a more efficient and timely way to bring new innovations to market.
“This study reinforces our view that the various players and systems are often at odds with each other rather than working towards common goal of delivering more efficient and effective medical treatment,” Miller said.