Supply chain innovation in an ACA world


Rob Doone

Supply chain executive

The U.S. medical device market is the largest in the world, currently near $110 billion, and is expected to reach $133 billion by 2016.

American medical manufacturers are the envy of the world in not only market share, but also product innovation—the result of a strong research and development (R&D) culture in years past. For example, R&D more than doubled during the 1990s. To this day, U.S. medical device companies continue to be highly regarded for breakthrough ideas and technology.[1]

But, times are changing—and manufacturer innovation is under more pressure than ever before. At the heart of the issue is the Affordable Care Act (ACA), which is driving unprecedented change for manufacturers and providers alike:

  1. More cost pressures: as the ACA mandates that manufacturers be more efficient and lower costs, without sacrificing quality. One of the latest cost challenges posed by the ACA is bundled payments: will they help or hurt manufacturer innovation?
  2. More competition: as the ACA leads to more consolidation among manufacturers, providers and payers. For example, two major insurance companies have already announced a merger deal in 2015, and others are holding discussions.[2] Everyone is striving to “get leaner” and be more efficient in the new healthcare world.
  3. More taxes: as the 2.3% excise tax on medical devices creates new uncertainties. No one knows what the ultimate impact of the tax will be on the medical manufacturing industry’s ability to innovate and thrive. But one thing is certain: every manufacturer needs a strategy to deal with it.

Here’s a closer look at these three challenges—and one proven approach for dealing with them all.

Bundled payments: helping or hurting innovation?

Will bundled payments and other ACA cost-cutting measures hurt or help medical device innovation? The argument that bundled payments hurt innovation is strong, as the focus on lowering costs forces manufacturers to protect margins by decreasing research budgets. According to a recent study conducted by the Advanced Medical Technology Association (AdvaMed), more than 30% of respondents have reduced their R&D budgets.

The traditionally higher cost of newly launched product innovations is a detriment as well. Hospitals are less inclined to try them, because they are concerned that that they may not be reimbursed. And then there is the challenge of the bundled payment structure itself: by their very nature, bundled payments obscure the cost of the focal points of innovation: the individual devices and products used for an episode of care. This makes it difficult for a payer to see the value of (and therefore generate reimbursements for) a new innovation within that care episode.

For all the arguments against bundled payments, there are some positives that support a culture of constructive innovation. For example, bundling discourages “low-value” innovations that result in minor improvements at disproportionately higher cost. Instead, bundling will channel innovation towards efficiency and quality improvement (in other words, market-driven innovation).

Also, providers disciplined in evaluating cost and quality will choose innovative products that deliver both,[3] with the aim to improve the health of both patients and the economics of health systems.

Consolidation: time for innovation and opportunity

For medical device manufacturers

It’s not just about delivering a broad product line anymore. Manufacturers must be innovative in delivering hospital efficiency, prevention diagnostics and connectivity/data sharing. The ACA is accelerating consolidation in the industry, favoring companies that have a proven track record in decreasing hospital stays, reducing readmissions, lowering hospital-acquired infections (HAIs), screening and preventing chronic diseases and facilitating less-invasive procedures. 

High-tech companies will lead the way, with new innovations in:

  • Personal diagnostics and monitoring
  • Preventative healthcare
  • Medication maintenance
  • Infection control
  • High-end therapeutic devices
  • Software and devices that increase connectivity and teamwork among providers, payers and patients—as well as enable remote care.

Manufacturers who create differentiated products and services will best be able to provide value to their customers.[4]

For healthcare providers

Mass consolidation is impacting not only manufacturers, but also healthcare providers as well. Hospitals are continuing to consolidate into larger integrated delivery networks (IDNs) to share resources, build best practices and reach more patients. The result: fewer, yet larger, opportunities for manufacturers to demonstrate value and innovation.

To compete, manufacturers must offer more value against the ACA headwind—including more cost-effective solutions and product innovation[5]—exactly at the time that the new law is making it more difficult for manufacturers to provide either one, let alone both.

More taxes: the new normal

Medical device manufacturers are feeling the full impact of the 2.3% excise tax. According to an AdvaMed survey of medical device companies, the tax is reducing R&D budgets. “The passage of time has only added to the negative effects of this burdensome tax,” said Stephen Ubi, CEO of AdvaMed.[6]

How will device manufacturers make up for this hit to their innovation and bottom line? A sure place to start is the medical device supply chain, where improving efficiency and cutting needless costs will make more dollars available for research and development.

Creating a “smarter” supply chain

At Cardinal Health Integrated Logistics Services, we see three important ways that manufacturers can address the cost and efficiency challenges of today:

  1. Consolidating freight with other manufacturers that are shipping products to the same destinations. This empowers manufacturers to lower transportation costs, reduce freight claims and deliver products faster to where they’re needed.
  2. Using multi-tenant warehouses to improve efficiency even more, while sharing resources, expenses and regulatory expertise. Manufacturers can better utilize their working capital on product innovation, instead of brick-and-mortar they don’t need. For example: why invest in redundant IT systems, when you can share the cost with other companies?
  3. Eliminating excess inventory to reduce waste and improve inventory turns. The key: improving visibility, tracking and utilization, from one end of the supply chain to the other. Building a smarter supply chain requires the latest technology and data analytics to better connect the manufacturer with the point-of-care. Our solution is WaveMark, which uses RFID (radio-frequency identification) technology and a robust mobile and cloud data platform to help manufacturers and providers eliminate manual processes, streamline workflows, reduce costs and ensure patient safety.

In order to provide sustained value within the healthcare supply chain, medical manufacturers must do more than rely on the successes of the past. They need more flexibility to protect—and grow—their margins in a new era of relentless cost pressures. There may be no silver bullet, but the supply chain is a sure-fire strategy for improvement.

[1] “The Medical Device Industry in the United States.”
[2]The Wall Street Journal. “With Merger Deal, Aetna, Humana Get Ahead of the Pack.” July 6, 2015.
[3]Becker’s Hospital Review. “Will bundled payments hurt healthcare innovation?” October 25, 2014.
[4]Med Device Online. “How the ACA, Regulations, And Other Trends Are Reshaping The Medtech Industry.” June 16, 2014.
[5]PM360. “The ACA’s Impact on the Medical Device Industry.” May 13, 2014.
[6]MassDevice. “AdvaMed Claims 195,000 Jobs Lost to Medical Device Tax.” January 28, 2015.