Efficient and effective engineering and new device development have always been central to the success of medical device companies. Under the traditional, Fee-For-Service reimbursement landscape, companies could identify costly or marginally effective procedures and develop products that improved patient outcomes while lowering the current cost of care. As medical device companies evolved, many developed a particular rhythm to the development and commercialization process. In the past, I’ve worked with device companies that actually held off commercializing market-ready devices to avoid cannibalizing current product revenue. In an innovation rich environment, new products could be commercially staged to meet the company’s strategic and competitive objectives.
The Shifting Landscape
Unfortunately, the U.S. Fee-For-Service reimbursement model is not economically sustainable. With annual healthcare expenditures running north of 18% of GDP, and healthcare costs rising at twice the growth rate of GDP, it doesn’t require a mathematician to see where this is going. The fact is, when the current reimbursement model took root we were not presented with caring for an aging population saddled with multiple, chronic conditions. Chronic conditions that consume 87% of all U.S. healthcare expenditures. Add to this the explosion of scientific and medical knowledge (and subsequent technologies, products and procedures) that have emerged over the past 30 years, and one can see how a volume-incentivized system found itself marching towards the economic precipice. Value-based reimbursement is coming, and it’s going to disrupt the traditional rhythm of device development. In many respects, it’s already here, with consortiums like the Berkshire Hathaway, Amazon and JP Morgan model taking shape, the Blue Cross/Blue Shield Association’s driving of patient-centered medical homes and accountable care organizations and CMS’ Hospital Readmission Reduction Program.
A Dearth of Investment in Early-Stage Medical Device
Adding to the challenges of developing new technologies that align with Value-Base reimbursement is the fact that the source of innovation for many large, multi-national device companies has, to a certain degree, dried up. While Angel Investors are slowly coming back to medical device startups (visions of sugar plums, in the form of Digital Health, sucked all the oxygen out of the room several years ago), Venture Capitalist are still shying away. In 2017, it was reported that only 3% of all VC money invested in Series A rounds found its way to medical device companies. Even if the VCs turn this trend around, there will be an absence of available, innovation-driven M&A opportunities for the foreseeable future. Where will the source of innovation, and subsequent revenue streams, come from moving forward?
Strategic Innovation looks to accelerate the engineering and development of new, aligned devices capable of delivering strategic differentiation, and driving future revenue streams, within the emerging market and reimbursement landscape. With change comes opportunity. Opportunity for those nimble enough to get out in front of the shifting and accelerating dynamics that will eventually shape healthcare in the United States. Traditional approaches will wane as competitors that master high throughput device development emerge and capture new modalities of value-based, and value-driven, care.
In my next blog, I’ll discuss how REV.1 Engineering has embraced Strategic Innovation, resulting in 2X Faster developmental throughput than traditional, in-house engineering endeavors and what the economic and strategic implications are for medical device companies that embrace this approach.
Terry Murray, Vice President of Strategic Development
© 2018, REV.1 Engineering.