Value-based care demands medtech companies transform the pathways, not just the products
Healthcare isn’t just changing. It’s changing in more disruptive ways than ever before. Value-based reimbursement is inverting service lines from profit centers to cost centers. Health systems — bigger than ever after a decade-long buying binge of hospitals and practices— are now aggressively standardizing products, processes and partners to achieve economies of scale and clinical integration.
This is a wake-up call for medtech companies that innovate incrementally. They’re now realizing that their business models can no longer sustain historical price margins. Recent win/loss market research interviews with selection teams that have recently made technology purchases reveal that more than 60% chose the lowest-price proposal. Many simply are not seeing differentiation or added value beyond “low price.”
That’s the definition of commoditization. And it’s a seismic force that’s driving medtech companies to completely rethink how they innovate, engage with customers, and articulate their value. The urgency for premium brands is greatest of all. Brands must decide whether to sacrifice margins to grow or maintain share, or sacrifice share to grow or maintain margins.
Here are our top three strategies for medtech companies to create greater value and ward off commoditization.
Vertical Integration by Leveraging a Deeper Portfolio
Forward-thinking companies are vertically integrating their portfolios within a service line (e.g., the clinical lab, imaging, orthopedics, operating room and the cath lab) and/or within a product category (e.g., knee/hip implants). Many of these products could be considered by customers to be commodity items. Yet, by leveraging a deeper portfolio, a greater hospital spend can be captured. And the greater the captured spend, the bigger the credit or rebate back to the hospital at the end of the year—a win-win for all.
For example, Medtronic plc sports the deepest vascular portfolio. With cardiovascular, peripheral vascular and neurovascular products, they can support the large majority of a cath lab’s product needs. If the cath lab standardizes with Medtronic’s portfolio, it could expect a sizable rebate at the end of the year as a percentage of overall spend.
Similarly, in orthopedics, companies like Stryker Corp. and Smith & Nephew PLC have deep portfolios of knee and hip implants, arthroscopy and sports medicine/trauma fixation. If a hospital or health system standardizes 80%-90% or more of their hips and knees with one of these companies, they could receive a credit at the end of the year to be used toward purchases of arthroscopy and or fixation systems. One health system administrator we interviewed was very proud of their orthopedic contract. They realized “free” arthroscopy systems at each of their hospitals by standardizing their hip and knee spend with one company.
Benefits of vertically integrating within a service line:
Challenges of vertically integrating within a service line:
Vertical Integration with Value-added Services
As healthcare systems move to centralized purchasing departments, the nature of the supplier partnership has become increasingly important. Companies that seek new ways to differentiate at the product or portfolio level are finding success with value-added services after the sale.
Royal Philips has packaged clinical workflow consultation with its traditional imaging and monitoring systems into a managed services model that optimizes the usage of its technology in verticals such as radiology, cardiology, oncology and neurology (i.e., the “ologies”). Expert consultants drive change management initiatives to realize unprecedented improvements in efficiency that health systems could not realize on their own.
By expanding from a “Big Iron” company to a clinical transformation company, Philips is beating larger competitors by creating added value (see Figure 1). In 2015, Philips signed a multi-year, $500 million contract with Westchester Medical Center Health Network. Since then, other health systems have followed.
Benefits of value-added
Challenges of value-added services:
Reimbursement is changing how health systems look to partner with medtech companies. Two of the biggest challenges are bundled payments and readmission penalties. A primary strategy to manage these challenges is to integrate care horizontally.
There are two types of horizontal integration: across an episode of care (e.g., knee replacement) and across an entire disease state (e.g., heart failure, diabetes, etc.).
Episode of care integration: Capitated episodes of care, like the Comprehensive Care for Joint Replacement (CJR) model for knee arthroplasty, require a broader focus. It goes beyond the implant cost or a physician’s surgical technique to all aspects that contribute to a successful outcome, up to 90 days post-op. For a medtech company to compete, it will require the integration of products, services, data analytics, education and expertise throughout the entire episode of care. Medtechs will have to help surgeons engage their patients and keep those patients engaged throughout their entire rehabilitation and recovery. They will have to expose themselves to financial risk—a true pay-for-performance model.
Companies like Johnson & Johnson’s DePuy Synthes and Stryker are well-positioned to support the 90-day horizontal care journey with formal programs that integrate various portfolio items. Those may include data analytics, implants, robotics, navigation, sutures, dressings, patient education, coaching, and monitoring. Company representatives will be present for every case to ensure the proper use of their bundled solutions and are included in tracking the patient during recovery. The solution will be sold at reduced cost, with the ability to earn back margin for a successful outcome (see Figure 2). It may also cover the supply cost of a revision, if needed, within the 90-day window.
Figure 1 Service Line Optimization
Figure 2 Bundled Episodes of Care
Figure 3 Care Model Redesign
Disease-state integration: Thirty-day readmission penalties are expected to extend to 60 and 90 days. Health systems are largely shouldering these penalties rather than preventing them. However, this is beginning to change, as penalties and uncompensated care increase and clinical outcomes remain stagnant. Health systems are widening their focus beyond the hospital to the horizontal management of disease across all disease stages and all settings, including the home.
As patients transition across care settings, they often fall into care gaps where their disease worsens and they reappear in the emergency department with a costly exacerbation. Unless health systems integrate care to close the gaps, the cycle will continue. As health systems have limited ability to clinically integrate on their own, they need to partner with industry to fully achieve it.
Medtech companies that can help drive more clinically integrated care by integrating IT systems, best practice care pathways, therapies, telemonitoring and patient engagement will be in position for health systems to standardize with them for entire disease states. This reward is not just through the purchase of their solutions, but also in the sharing of financial gains. Furthermore, they can secure competitive lockouts and marketing opportunities.
For example, in cardiology, Company A is working to further improve patient outcomes and reduce the overall cost of care with an end-to-end heart failure management solution. It provides an analytics platform, evidence-based pathways, and therapies that are connected to a telemonitoring system that can strategically deploy resources to intervene prior to an exacerbation. Since this is essentially a new care model, Company A would help implement the solution and train care providers and staff (see Figure 3).
Benefits of horizontal integration:
Challenges of horizontal integration:
Which Strategy is Right for Your Company?
In many cases there are three determining factors:
Factor #1: Your portfolio. Medtech company portfolios reflect their strategy. Are you a best-of-breed innovator, a “one-of-everything” shop, or something else? Does your description of your portfolio and services mirror how a customer would describe it? Do your products integrate in meaningful ways?
Factor #2: Your customer. Do their needs require horizontal disease-state integration, or vertical integration with a primary company for a rebate? Are they comfortable with long-term, deeply integral relationships with industry? Do they need help changing, and are they willing to partner with someone to help them?
Factor #3: Capacity for change. Companies that have been successfully refining their strategy for the last 30 years may find it very difficult to move away from it and adopt a new formula. This most often requires cultural change, a staffing profile change, a shift in innovation methodology, and even decisions on whether to acquire complementary companies or be acquired. Others may agree they must change but lack the ability to execute it.
What Does This Mean for You?
To create ongoing value, medtech innovation must transcend products and features and embrace cutting-edge business, marketing, and sales models.
Companies that break the cycle of commoditization and orient themselves to the needs of a rapidly evolving customer base will be rewarded with market share gains, higher margins, and deeper and longer relationships. Those who fail to innovate and continue to orient themselves inwardly to their technology will see an erosion in margins, market share, relationships, and relevance.
There is an epidemic of low value/high volume company content bombarding customers across all imaginable touchpoints.
Instead of fostering stronger loyalty, it is turning customers away. To fix it, you have to redefine what good looks like from the customer’s perspective, not yours.
Create content that Is genuinely valuable
Turn your content strategy outside in. Customers want to know that companies care about their mission and end goals. Create content that proves this by educating customers on how best to achieve them. Make sure the content cannot be found anywhere else.
Customers want to know that companies care about their
mission and end goals.
Make it short.
The second people see longer-form content, they choose to not engage. The reason you see so much of it is that short form is more challenging to create. Build strong relationships by committing to short-form content that is punchy, unexpected, easy to read, and entertaining.
Never violate Steps 1 & 2.
Companies are asking very busy customers for the one thing in shortest supply: their time. They give it based on the quality of their past experiences. When content quality wavers, customers spend their time elsewhere.
What is HealthTech transformation?
The biggest story that is not being told is that medtech companies are transforming themselves in ways that more closely resemble wholesale reinvention. From product development, to sales and organizational models, more internally focused disruption is taking place than ever before.
These changes are helping to drive new go-to-market strategies. Widget companies are becoming software companies. Diagnostics companies are becoming analytics companies. Many are figuring out how to sell value-added services and even become consultants. Others are looking to own every step of a disease-state care pathway. The traditional company swim lanes are going away—causing uncertainty, chaos, and opportunity.
What is causing companies to transform?
Their customers are reinventing themselves! Providers are becoming entrepreneurial. They are letting go of the status quo. They are scrutinizing every aspect of their clinical practice. They are looking for aggressive change. They have to produce better outcomes at a lower cost, fast!
In this environment, the traditional HealthTech business model, which is largely vertical, incrementally innovative, product-centric, and safe, no longer works. The days of adding a new feature to a widget, charging 5% more for it, hitting revenue targets, and doing it all over again are over. In fact, it’s creating commoditization. Our win/loss interviews with providers show that over 70% of sales now go to the lowest bidder.
How must marketing strategies adapt?
Start by recognizing that inwardly focused, product-centric medical device marketing is part of the problem. Instead, turn your marketing strategy outward. Focus it 100% on providers and administrators. Acknowledge their challenges. Show them how you uniquely solve them. Stop the feature dump. Market your portfolio less like a bunch of widgets and more like a cohesive, integrated solution. Demonstrate how your solution can work to enable a better outcome.
Remember, healthcare providers are in triage mode. Their hair is on fire. They are overwhelmed with transforming their clinical practice. If you’ve been transforming your company to better address their challenges, congratulations! But you are only halfway there. Now, your marketing needs to transform, too.
Manufacturers should work to fill gaps in their portfolios to master disease management rather than focusing solely on one particular device category.
There’s a massive shift taking place in U.S. healthcare, and too few medical device manufacturers are using it to their advantage. With health system costs ballooning more than $100 billion over the last five years while inpatient admissions remain flat1, health system executives are concluding that their inpatient-centric, treatment-centric business models are the wrong strategy. The inpatient setting is simply too expensive, with too few patients utilizing it to effectively distribute the costs. This is shrinking profit margins at the same time that readmission penalties are harming providers that fail to keep patients out of the hospital.
Recognizing the dire nature of the situation, former President and CEO at the Geisinger Health System David T. Feinberg M.D. (now CEO of Google Health) articulated his strategy in a Fixing Healthcare Podcast: “I run a health system and we have about 13 or so hospitals, and I think my job is to close every one of them.”2
The United States spends $3 trillion on healthcare each year, and 86 percent of these costs are due to chronic disease. If chronic disease could be managed at lower-cost, lower-acuity settings, or be prevented altogether, the impact to health spending could be significant.
There is no lower-acuity, lower-cost setting than the home. Its potential benefits are clear:
The shift to outpatient care is gaining momentum as high-deductible health plans continue to blunt elective procedures and Accountable Care Organizations (ACOs) improve on their population health mandate. Urgent care clinics and mini-ERs now permeate nearly every community. But until care can be effectively delivered in the home, the benefits of home-based care will fail to be realized.
This is where medical device manufacturers come in.
For an inpatient-centric medical device company looking to expand or break into the outpatient and home setting, creating anything beyond a hospital-based widget can seem daunting. It helps to remember that hospitals will pay according to the value they provide. If they enable outpatient and home-based care, their value will increase. If they enable the optimal management of disease, they will be valued even more. If they enable the prevention of disease, they will be valued the most. So where does a device company begin its expansion into the outpatient and home space?
Bring hospital-based technology into the community and into the home, for example, through:
Develop these solutions to support evidence-based care pathways:
Fill the gaps in your portfolio to provide an integrated disease management solution by:
Start looking at yourself not as a medical device manufacturer, but as a service provider. With Step Three accomplished, you can remotely monitor or even manage patients in their home for a monthly fee.
Extend your technologies and services to prevent disease and change behaviors by:
Instead of owning share in a device category, forward-thinking manufacturers are filling gaps in their portfolios to own share of a disease management category (e.g., heart failure, chronic kidney disease, obesity, COPD). If they can demonstrate superior management of a disease, payers will directly contract with them to provide it. Imagine these scenarios:
Health systems are weighed down by business models that are more focused on treating disease than managing and preventing it. They’re struggling to adopt strategies that bend the cost curve. They resemble today’s cable companies, whose business models continue to inflate prices, ignore innovation, and lose customers.
Agile, forward-thinking medical device marketers can take a page from the Netflix playbook by implementing steps toward entirely new business models that connect care all the way into the home. Several device companies are seizing the opportunity and have progressed along many of the steps listed here while many others cling to the status quo, destined to learn the hard way.
1. American Hospital Association Annual Survey, 2019, https://www.aha.org/statistics/fast-facts-us-hospitals.
2. Fixing Healthcare Podcast, “Episode 3: Dr. David T. Feinberg says fixing healthcare is ‘the simplest thing we can do’,” October 2018, https://fixinghealthcarepodcast.com/2018/10/09/episode-3/.
3. M Smith, 2013. “Best Care at Lower Cost: The Path to Continuously Learning Health Care in America.” https://www.ncbi.nlm.nih.gov/books/NBK207234/.
Healthcare providers have resisted the call to lead the value-based care movement. In 2019, the energy they are expending to resist change gets replaced by the energy to lead it. Why? They realize that the medical disciplines and business models that support them are no longer financially viable. The result?
Full-Scale Panic Mode
The clinical lab is panicking over phased Medicare reimbursement cuts over the next seven years. They can weather the first two cuts, but after that, all bets are off.
Pathologists and radiologists are panicking
With AI-driven algorithms that don’t sleep or take vacations, the days of needing people to interpret images with the naked eye are looking numbered.
Orthopedic surgeons are panicking
Their knee replacement reimbursement is now capitated and does not include the cost of infections, ER visits, revisions, and readmissions. A single occurrence during the 90-day post-op period is paid by the surgeon and their facility.
The post-acute care space is panicking
Reimbursement cuts of 47% and higher are driving closures and consolidation of the exact home medical equipment companies required to care for patients in the least cost-intensive environment: the home.
Primary care physicians are panicking
They spend more time documenting care than providing it. And the patients they serve are panicking when at their sickest, as they struggle to get timely access to a professional.
Fanning the flames of panic is the rise of internet ratings, high-deductible health plans, and pricing transparency, as patients compare prices, research reviews, and shop for care. The upside of all this panic?
Providers see that silo-based care is history. In order to survive, they must reinvent their clinical practices and their roles within them. New skills and behaviors like cross-departmental teamwork, communication, innovation, and entrepreneurism are now minimum requirements. New roles such as data scientists, care coordinators, genetic counselors, and disease navigators are now in great demand.
Providers have now opened themselves to new technology-enabled care models, such as telemedicine, telemonitoring, cloud-based AI, connected therapies, consumer-driven services, disease prevention, and genetic screening.
2019 is the year providers fully commit to reinventing healthcare. It is the year they recognize that they must radically redesign American healthcare in order to save it. If they don’t, their roles and their futures will be reinvented for them.