A multitude of issues troubled OEM executives, device manufacturers, and suppliers 15 years ago.
Hospital pricing for medical devices: OEMs experienced increased hospital pricing pressure created by reimbursement changes (from fee-for-service to HMO/PPO) during the 1990s. While President Clinton’s healthcare initiative never really gained political traction, it helped influence the insurance programs offered at that time. The fee-for-service scheme was associated with less pricing pressure because the costs were passed on to insurance companies (which then transferred those charges to employers and consumers). Indeed, competitive pricing was a concern among hospital purchasing staffs, but this newer issue prompted heightened trepidation about product category pricing. This newfound anxiety drove the growth of hospital buying groups and purchasing organizations (Premier, VHA, etc.) formed to exert pricing pressure on OEM product categories. Consequently, OEMs passed on that cost pressure to their suppliers, which ultimately impacted medtech manufacturing.
2003 C-Suite Impact: How can companies stay cost competitive in the future?
Manufacturing: The drive to manufacture products “offshore” in Mexico began with the North American Free Trade Agreement and was well underway in medtech in 2003. To compensate for increased hospital pricing pressure, OEMs more closely scrutinized their manufacturing costs, which led, in many cases, to either directly manufacturing products in Mexico or manufacturing sub-assemblies in Mexico and sending them to the United States for finished assembly and/or configuration. China had also become a more normalized option in the late 1990s and early 2000s. OEMs typically would enter the Chinese market through component manufacturing and then later expand to full production there.
2003 C-Suite Impact: Where can companies manufacture products to stay competitive both today and in the future?
Sourcing: In 2003, one of the authors of this column was running a global business unit for an OEM medtech supplier whose major customers included companies like Philips, GE, Siemens, and regional OEMs. Fifteen years ago, it was nearly impossible to be competitive by manufacturing and sourcing in the United States. Even with competitive pricing, medtech sourcing executives were given metrics regarding emerging market sourcing (i.e., code for “Is your supply chain in China yet?”). Manufacturing in Mexico fell out of favor as China became the darling of long-term cost reductions.
2003 C-Suite Impact: Where should components be sourced for price competitiveness and product quality purposes?
(Authors’ note: China product quality is not as much of a concern today as it was in 2003.)
Innovation: Most medtech entrepreneurs would agree that innovation has never been “easy.” For a time, however, it was relatively easier to bring an innovative product to market. Device usage in hospitals traditionally depended heavily on the relationship between OEM sales folk and clinicians; the best rapports would result in clinicians trying out the sales person’s product in the operating room, ICU, or other area that best suited the device. Products that passed muster with clinicians were then assimilated into hospitals’ inventories. This age-old tradition started to change in 2003, however, as hospitals began favoring standardization. Nevertheless, many physicians still had the power to influence product choices.
2003 C-Suite Impact: How can companies maintain key opinion leader-physician relationships to keep their products in hospitals and gain market share for new offerings?
[Authors’ note: In 2003, companies developed and marketed new products in a reasonable timeframe, though it largely depended upon winning over key hospital customer “influencers” (usually physicians).]
The more things change, the more they stay the same: These same core issues are still impacting today’s medtech executives in slightly different ways.
Hospital pricing for medical devices: “Value pricing” is now the industry buzzword. Many hospitals have merged to create entities with increased purchasing powers, and these larger systems are more closely examining various procedures to better understand the related costs. This practice has resulted in “bundled” procedure pricing. To replace a product in one of these bundles, a competitive offering must have clinical proof that it will improve outcomes and lower the overall cost of care for a particular procedure.
2018 C-Suite Impact: How can a company demonstrate value for its product or group of products used in each procedure bundle? How can medtech firms partner with customers to create long-term benefits for both parties? The second question is particularly crucial for suppliers—partnering with customers is the best long-term success (and survival) strategy.
Manufacturing: With the growth of regional markets worldwide, there is now a tremendous advantage in focusing on what used to be called “emerging markets.” China, for example, is no longer considered an “emerging” player—it is the planet’s No. 2 market, and a lucrative one at that. “Think Globally and Act Locally” has become a key trend. OEMs and their suppliers now consider these former developing markets as key growth opportunities. To be successful in these various growth regions, it is becoming more important to manufacture close to the market. Multinationals, therefore, are creating manufacturing “footprints” that support regional growth (i.e., establishing an Asian manufacturing plant to produce goods for China, India, Japan; a North American facility geared for the U.S., Canadian, and Mexican markets; a European plant for EU market production).
2018 C-Suite Impact: Companies must strike a balance between focusing globally and executing locally. They also must ensure their manufacturing footprint is well-positioned in each region (Asia, North America, Latin America, European Union, Middle East, and Africa, etc.) both now and in the future. In addition, manufacturers should be cognizant of trade talks that may lead to agreements that provide “tailwinds” or to disputes that create “headwinds.”
Sourcing: Changing manufacturing footprint approaches has helped reduce “spaghetti string” sourcing of supply chains created during the early 21st-century rush to produce goods in China. To lower costs, many companies would make sub-components in the United States for “proprietary reasons,” send it to China for inclusion on the manufacturing process, then ship that part back to America for final assembly/inclusion in the finished product. While the bill of material (BOM) costs would be cheaper, the total price could sometimes be disastrous when factoring in shipping expenses. Fortunately, companies are now taking a more focused approach to sourcing and manufacturing, using the “think global, act local” tactic.
2018 C-Suite Impact: Companies must ensure their supply chains truly reflect the lowest total cost rather than a cheaper BOM.
Innovation: Clearly, innovation is the lifeblood of the medical technology sector, but there are quite a few challenges in developing and adopting new products. Some of the key issues include:
Medical device investment and funding:
- As adoption time has increased in the last 15 years, medtech venture capital funding for traditional types of medical devices has slowed; although it has only increased significantly in the digital health arena.
- Large companies are notoriously slower at innovation, as it can be difficult to “disrupt” oneself.
Smaller companies that overcome funding challenges often are impeded in channel adoption for several reasons:
- The strength of bundled pricing by larger firms.
- The challenge of entering a hospital via product trial. The trial and ensuing purchasing approval must be reviewed and approved by separate committees.
- The costs of developing and managing a sales force (especially daunting for small companies).
- The burden of proof necessary to demonstrate improved patient outcomes and lower overall costs requires large investments in clinical trials and the time to perform them.
- A activities have become a standard way to innovate and are conducted across disciplines. The essential ingredients for competition could change virtually overnight.
- Obtain the clinical evidence to demonstrate both improved patient outcomes and lower total solution costs, as well as the funding to achieve these objectives?
- Gain acceptance by key opinion leaders that influence clinical adoption?
- Find its regulatory pathway in an increasingly burdensome regulatory environment globally? In 2003, many countries outside the United States and Europe would often accept a U.S. Food and Drug Administration clearance and/or a CE mark for market entry. Today, many of these countries have established their own market registration criteria—increasing the global costs of going to market internationally. Additionally, the European Union (EU) was a relatively easier go-to-market than America, but new EU harmonization regulations are reversing that trend and making it more favorable to begin marketing in the United States than in Europe.
- Find the right channel to market in an environment that is often controlled by a few key large companies?
Obviously, the challenges confronting the medtech C-suite will continue to cause many sleepless nights over the next 15 years. If the past is any indication, however, these challenges will likely be resolved by inventive and creative solutions that both improve overall outcomes and help reduce skyrocketing healthcare costs. That should prompt much sweeter dreams in the future.
Florence Joffroy-Black, CM&AA is a marketing and M&A expert with significant experience in the medtech industry, including working for multinational corporations based in the United States, Germany and Israel. She can be reached at firstname.lastname@example.org.
Dave Sheppard, CM&AA, is a former medtech Fortune 500 executive and is now a principal at MedWorld Advisors. He can be reached at email@example.com.