rev1 engineering and filmecc- medical device design and manufacturing logo

When Uncertainty Becomes Certain – A Rev.1 Engineering White Paper

Table of Contents
Upcoming Events

While the recent vaccine news from Pfizer and Moderna is promising, we, as an industry, still have some turbulent waters ahead of us. Leveraging lessons learned from the spring and summer months may help medical device companies successfully navigate the next six to twelve months and beyond.

First, let’s assess where we are and how we got here…

The American Hospital Association reported U.S. hospitals collectively lost $50.7 billion, per month, from March 1st to June 30th of this year. This was in large part due to the suspension of “elective” surgeries combined with the sudden, incremental operating expenses necessary due to COVID-19.

Beyond just effecting the medical device industry, deferment of elective medical care has a broad impact on the national economy. Approximately half of the annualized 4.8% U.S. GDP decline in the first quarter of 2020 is attributed to health care services, especially delayed elective procedures.(1)

While the suspension of elective surgeries earlier this year impacted medical device companies to varying degrees, I think it’s important to understand how elective surgeries disproportionately impact the financial health of hospitals, and the implications this may have for medical device companies going forward.

Many hospitals, but in particular, safety-net hospitals, depend on the practice of cost shifting in order to maintain solvency. This is especially prevalent in rural areas. The patient population of a typical, safety-net hospital is comprised of ≈ 60% to 65% of government insured patients (Medicare and Medicaid, with many patients being “dual eligible”, meaning they’re of sufficient age and economically disadvantaged enough to qualify for both programs). Only 28% to 30% of patients in these healthcare delivery systems have private insurance.(2)

Currently, Federal and state programs only pay an average of 86.8% (Medicare) and 88.1% (Medicaid) of the cost of care, while private payers pay 144.8% of costs, on average.(3) And there’s the rub. Historically, one third of hospital patients, through their private payers, are subsidizing the other two thirds of patients covered by government programs.

Back in April of this year, McKinsey & Co. projected a decline in elective procedures of 60% to 80% in Q2, followed by a decline of 40% to 50% in elective procedures in Q3.(4) This projection was issued at a time when we had 2 million diagnosed COVID-19 infections in the U.S. (we’ve now crossed the 11.5 million cases diagnosed threshold).

Yet another study estimated that more than 5 million elective surgical procedures were deferred in the U.S. during the spring and summer surges of COVID-19.(5) Regardless of the exact figure, the medical device industry experienced unprecedented shock waves of disruption that may continue to resonate long after we get a handle on this pandemic.


Having been in the industry for three decades, I can report that whenever downward price pressures emerge in the healthcare delivery system, the medical device segment tends to bear a disproportionate burden to lower costs. The disproportionality is revealed when one considers expenditures on medical devices represent 3.5% of our nation’s overall spend on healthcare.

On a recent panel discussion on the DeviceTalk Weekly podcast, Justin Cassidy and Henry Soch, of Vizient (a hospital performance improvement company, focused on non-profit hospitals) and Kaila Krum, Managing Director of Truist Securities, discussed how the pandemic may have lasting effects on hospital procurement of medical devices. From their perspective, major capital equipment sales will likely need to morph into a subscription (per patient procedure) model. This is very similar to the reagent leases immunoassay OEMs went to in the late 1980s. This shouldn’t be too much of a stretch, operationally, but it may depress how OEMs realize sales revenues until cash flows even out or capital leasing companies get involved. On the positive side, under GAAP (Generally Accepted Accounting Principles), leasing a revenue generating asset allows for depreciation to be spread across the life cycle of the asset, which has a very positive impact on EBITDA and company valuation.

When it comes to consumable devices, the panel emphasized how important delivering a fully bundled, complete procedural solution will continue to be going forward. Closing the gaps in company product portfolios, for what were once considered non-strategic devices, will become strategically critical moving forward. Missing a couple of ancillary devices may marginalize medical device OEMs bidding on new business.

Perhaps even more disruptive is the limbo many OEM sales models (hundreds of feet on the street) find themselves in right now. The jury is still out as to how these traditional, high personal touchpoint sales teams will fare in the future. When you consider even deploying a small, 25 person field sales team costs at least $5 million per year, these business models are bound to come under scrutiny.


Developing contingencies for unforeseen events has historically been a critical part of the strategic planning process. That said, those of us in the medical device industry have been very fortunate prior to the pandemic.

Having developed numerous strategies for medical device companies over the past 25 years, here’s where I believe the industry will be focused as we continue to work our way through the current pandemic and deal with the ongoing fallout from our hospital systems:

  • Focus on core competencies, outsource the rest. This approach has proven to be invaluable over the years, even during times of growth and prosperity.
  • Evaluate the strategic deployment of your engineering and technical resourcing. This is really going to be critical as OEMs get their arms around the changing needs and demands of delivery systems. Where do we focus our best and brightest? How do we ramp up strategic products and strike a balance with concurrent, engineering demands?
  • Evaluate the strategic deployment of your sales and marketing resources. Will virtual sales calls be the future? How are procurement patterns changing under the pressure of the pandemic? How lasting will these changes be; hold pat or reorganize?
  • OEMs in the consumables business should look to aggressively close existing gaps in product portfolios. Failing to do so may lock companies out of future bids for new business.
  • Conserve capital. While there is ample dry powder within the private investor sector, the competition for capital will likely rise, placing investors into a buyer’s market.
  • Explore innovative partnerships that can expand opportunities while managing risk and capital. This echoes back to focusing on one’s core competencies. None of us can be all things to all people, yet for those in the consumable medical device arena, our clinical customers will require us to bring more to the table than we have in the past.

Thankfully, clinicians have learned a lot about COVID-19 over the past several months. Treatments have improved, and it looks like the vaccines are quickly moving into Emergency Use review with the FDA. The fundamental market drivers and the resulting demand for our devices has not disappeared. We’ll get past this, and the medical device companies that aggressively seek opportunities and are willing and capable of being nimble, will emerge from this period stronger financially while strengthening their competitive advantage.

From concept to commercialization, to delivering rapid operational improvements, Rev.1 Engineering provides our clients with expansive, expert capabilities that enhance their strategic positioning and sustainable profitability.


(1) “Crisis Management – Covid-19 Created an Elective Surgery Backlog. How Can Hospitals Get Back on Track?”, Amit Jain, et. al., Harvard Business Review, August 10, 2020.

(2) “Preserving Elective Surgeries in the COVID-19 Pandemic and the Future”, J. Wayne Meredith M.D., et. al., JAMA, Oct. 5, 2020.

(3) “TrendWatch Chartbook 2018, Chapter 4: Trends in hospital financing. American Hospital Association, Sept. 28, 2020.

(4) “Reimagining Medtech for a COVID-19 World”, Siddhartha Chadha, et. al., McKinsey & Co., April, 2020.

(5) “The Consequences of Delaying Elective Surgery: Surgical Perspective”, Fu SJ, et. al., Annals of Surgery. 2020;272(2):e79-e80.