By Eva Marchese and Lorenzo D’Angelo, ARC
The global medical devices market is expected to grow at a CAGR of 4.4% through 2025.1 But large medical devices with high initial purchase costs are struggling to grow. Customers are now scrutinizing prices as transparency in the procurement process increases and hospital consolidation weakens manufacturers’ negotiating positions. Faced with these challenges, manufacturers have offered financing options to allow customers to spread the cost over several years. However, it is becoming increasingly difficult for device manufacturers to justify overpricing. It is even more difficult to convince customers who already own a large medical device to switch and upgrade if there is no savings advantage in doing so.
The challenge of selling large innovative medical devices
In recent years, buyers have taken a more careful look at their annual budgets and device costs, largely leaving it to manufacturers to help buyers find sources of funding. Manufacturers of large devices must ensure that procedures using a new device are adequately reimbursed and provide a rationale to buyers why the intended use of a device is worth the initial investment. They can defend against premiums, but usually only if a device lowers the other costs borne by the purchaser per patient, per use. More importantly, buyers, including hospitals, are often motivated to acquire a new device if they anticipate a high expected rate of use. The speed at which a device will help its purchaser to recover the costs of the purchase and begin to generate profits will depend on the frequency of use and the level of reimbursement of the associated procedures. A high reimbursement rate will ensure that the procedures will help cover the costs of purchasing and maintaining the device in addition to the costs incurred in performing the procedures. As device makers strive to meet all the challenges of selling their bulky and expensive products, three innovative business models are emerging to capture the interest of buyers.
Innovative business models
Expansion to new indications
One approach that manufacturers can take to ease the budget pressure on buyers is to look for additional indications and multiple purposes for a device. In one example, by redesigning a surgical robot to have additional robotic arms with different levels of precision to suit different parts of the body, doctors could use the device in more types of surgeries.2 In another example, cancer radiation therapy machines have grown to be able to treat several types of cancer, such as cancer of the lung, liver, pancreas, and head and neck, to name a few. .3 By adopting a business strategy in which a device is positioned to expand into new indications and therefore be used more frequently, manufacturers can help make a device more attractive to budget-pressured buyers seeking to recoup purchasing costs. initials as quickly as possible. Manufacturers of expensive and often large devices will need to plan lifecycle strategies early in development to unlock the full potential of their products.
Alternative forms of financing
Providing alternative financing options for devices, such as leasing, is another widely used method of dealing with budget pressure from buyers. In one example, Siemens Healthineers developed custom leases with individual hospitals in the United States to offer flexible contractual terms based on factors such as contract length, monthly payments, depreciation, maintenance, l ‘maintenance and frequency of upgrading.4 In emerging markets such as China, where most hospitals have limited budgets to purchase expensive, potentially $ 1 million, devices, Siemens has cooperated with specialist distributors to open diagnostic imaging centers. The company also offers supplier financing solutions to potential distributors.5 Some distributors buy devices in advance, which allows Siemens to collect revenue immediately, and then provide flexible financing options to hospitals while signing deals for Siemens to continue to provide value-added services to hospitals through through spare parts and technological services. Some distributors even operate imaging centers inside hospitals and take full responsibility for profit and loss.6
Compared to one-off payments, financing and equipment leasing options will ensure a longer-term source of revenue for manufacturers. This approach also allows manufacturers to sell to buyers who cannot afford one-time payments, which could help those with innovative devices enter a market controlled by more established manufacturers. However, manufacturers must be prepared to take on the challenges of contract administration and help buyers justify contract renewals.
Many manufacturers are also implementing innovative pricing models to reduce pressure from the buyer side. Some have developed shared savings contracts with hospitals, where they provide low-cost devices in return for a percentage of the income from using the devices. For example, GE Healthcare has entered into an agreement with Temple University Health System (TUHS) to provide X-ray imaging equipment and services over a seven-year period. Under the agreement, GE is responsible for using new technologies to optimize TUHS ‘operating processes and is entitled to receive a portion of the shared savings if performance targets are met.seven With this structure, the seller and the buyer are aligned with objectives of lowering costs, improving patient care and increasing the overall quality of service.
Some manufacturers have also offered buyers risk-sharing managed equipment service contracts. With these agreements, hospitals pay an annual fee so that the service provider can handle all of the device needs, allowing hospitals to shift all equipment purchase concerns to the contracted service provider and the service provider. services to receive payment based on device performance improvements.
But manufacturers could face difficulties in reaching agreement with buyers on innovative pricing parameters and the resulting implications for payment, potentially increasing the costs of serving customers.
Recommendations for manufacturers
Figure 1: Benefits and risks of innovative business models
Each business model has advantages and risks (see Figure 1) that device manufacturers will need to consider when developing research and development, commercialization, and market access strategies. In addition, these models could be combined. In a single example, an existing device may require the use of an added component in a new indication. This new component could be sold by combining a monthly fee and a usage supplement. The ability to combine these approaches adds complexity but can also open up access to additional funding budgets. For example, a payment tied to the use of the product is more likely to be funded by the reimbursement that a clinic receives, while a one-time payment is more likely to be funded by a capital expenditure fund, according to the specific country and region.
It is essential that manufacturers develop a go-to-market strategy early on, including a business model that reflects both the value of a device in the eyes of potential users and buyers considering alternatives in the market and the willingness of consumers. decision makers to buy to pay for each potential repayment route and agree on innovative pricing models. These considerations will vary from country to country and from hospital to hospital, depending on the procedures performed, in what volume and in what indications. Manufacturers will have to be able to adapt and offer different economic models depending on the market and the account or account archetype.
They will also need a comprehensive understanding of the clinical landscape, current purchasing models and reimbursement pathways, which should be informed by research and discussions with stakeholders, including physicians, hospital managers. and local and national payers to understand their needs, expectations and willingness. and the ability to pay for innovative, high-cost devices.
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About the authors:
Eva Marchese ([email protected]) is Vice President of Life Sciences Practice at CRA, based in London. She specializes in competitive strategy, pricing, market access and research in the pharmaceutical, biotechnology and life sciences sectors. Marchese has extensive consulting experience, with a focus on advising pharmaceutical, medical device and medical technology (medical technology) companies on global pricing and market access.
Lorenzo D’Angelo ([email protected]) is a Director of Life Sciences Practice at CRA, based in Munich. D’Angelo is an experienced life science consultant who assists global pharmaceutical, medical device and medical technology (medtech) companies with their business strategy.
The views expressed herein are those of the authors and not those of Charles River Associates (CRA) or any of the organizations with which the authors are affiliated.