Keeping pace in the evolving medical device market

Bain partner Tamara Olsen explains why the medical device market has reached a true tipping point that will change the way it does business.

Much like the rest of the healthcare system, the medical device market is going through significant changes both in what’s important to their customers and how they buy, as well as the fact that the industry overall is maturing.

Hospitals are facing increasing pressures to improve financial performance. They are taking on new forms of payments, such as bundled payments, and risk for the total cost of care for the patients that they take care of. They’re becoming increasingly sophisticated buyers with the best among them negotiating rates that are 15 percent-plus better than their peers.

This has really affected the behavior of doctors as well. First of all, we’ve seen just a dramatic increase in the number of physician practices that are owned by hospitals, jumping from 26 percent in 2005 to 50 percent in 2008.

Bain has surveyed more than 500 physicians across the US, spanning a broad range of demographics, including all ages, experiences, specialties and size of institutions. And we’ve found a major shift. More than 80 percent of physicians today feel like it is part of their responsibility to help reduce the total cost of care delivered to their patients, while of course maintaining quality.

Innovation is slowing in the medical device market. New products are evolutionary, not revolutionary. Product categories are becoming more and more crowded and doctors, therefore, are willing to accept the device that’s offered at the lowest price. That’s particularly true in categories that are the largest part of the medical device market profit pool such as cardiac rhythm management devices, cardiology, spine-related devices as well as orthopedics. And, in fact, in some areas such as stents, we see price declining at eight to ten percent per year.

Bain believes that these changes in doctor behavior are so significant that we’re at a true tipping point, which is going to force medical device manufacturers to change the way they do business.

What does this mean for selling models?

In the past, a one-size-fits-all, clinically-focused selling model really worked, but successful medical device manufacturers need to develop new models that give them the capability to sell effectively to economic buyers.

In these segments, Bain is seeing companies taking an integrated approach across products lines, trying to leverage their portfolio as they enter discussions with hospital administrators. This enables two things: One they can have a lower price and bring some benefit to the hospitals and the administrations because their own costs are lower. Two, it enables them to sell more by focusing on the needs of the administrator and selling directly to a decision maker who had previously been ignored.

Bain is seeing successful medical device manufacturers start to take into account and develop products that will lower the total cost of care, such as cutting the [operating room] time in half, rather than focusing on marginal clinical innovation which really meets the needs of both the customers as well as our healthcare system overall.

What internal changes have leading manufacturers made?

When we work with our medical device clients on these major changes to their selling model, it involves four major steps:

Step one is segmenting your customers, grouping them into differentiated segments and understanding what’s important to them and who makes the buying decision ranging from a traditional physician-driven account that’s more clinically focused, to accounts that are more transactional—where the administrators have more of a purchasing decision, to accounts in-between where it’s a collaboration between both sides of the house.

The second step is redesigning and tailoring your sales model to meet the needs of each customer segment. On the more extreme transactional side, we’ve worked with our clients to pull the clinical reps out of accounts, replace them with key account managers that call on them less frequently, call on the administrators, but also provide them with clinical service support so that the doctors still get what they need.

The third critical step is building a customer-driven innovation portfolio which focuses not only on therapeutic advances but also on driving down the total cost of care for the patient and for the hospital.

For example, the feedback we heard from customers is, “I don’t need the next incremental therapeutic innovation. What I need you to do is help me figure out how to reduce the time of surgery—to cut the time in the OR in half.”

The fourth key step is zero-basing your cost to stay competitive, starting with a blank sheet of paper and rebuilding from the ground up, based on what you truly need today—your functions like quality, [information services] and [general and administrative].

This is not an overnight fix for medical device manufacturers. These changes require building new capabilities and redefining the business model. It’s a multi-year journey, which will take dedicated resources and time.