Supply chain executive
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.
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:
Here’s a closer look at these three challenges—and one proven approach for dealing with them all.
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, with the aim to improve the health of both patients and the economics of health systems.
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:
Manufacturers who create differentiated products and services will best be able to provide value to their customers.
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—exactly at the time that the new law is making it more difficult for manufacturers to provide either one, let alone both.
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.
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.
At Cardinal Health Integrated Logistics Services, we see three important ways that manufacturers can address the cost and efficiency challenges of today:
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.
Selectusa.commerce.gov. “The Medical Device Industry in the United States.”
The Wall Street Journal. “With Merger Deal, Aetna, Humana Get Ahead of the Pack.” July 6, 2015.
Becker’s Hospital Review. “Will bundled payments hurt healthcare innovation?” October 25, 2014.
Med Device Online. “How the ACA, Regulations, And Other Trends Are Reshaping The Medtech Industry.” June 16, 2014.
PM360. “The ACA’s Impact on the Medical Device Industry.” May 13, 2014.
MassDevice. “AdvaMed Claims 195,000 Jobs Lost to Medical Device Tax.” January 28, 2015.