In recent months, healthcare providers have faced increasing pressure to reduce costs. As a result, medtech supplier spend has plummeted. To counter this pricing pressure, medtech companies have changed their business models from offering products to providing solutions. Find out the key factors for managing this transition from two best practice examples.
Not only offering mere products, but rather holistic solutions: Medtech companies need to update their business model significantly if they want to combat increasing price pressure and stay profitable. So far, our series has provided insights on why medtech companies need to update their business models so drastically, which strategic basis they need, and what the first steps in this transition are. Now, it’s time to learn from some industry trailblazers: two medtech companies[1] that are already well underway to mastering the business model shift.
Case study #1: GE Healthcare and Adventist Health
Our first best practice example is a long-term partnership in which costs are tied to the achieved outcomes. GE Healthcare (the medical arm of General Electric Co.) specializes in imaging equipment for X-rays and CT scans and delivers these products to Adventist Health’s hospitals and clinics.
Challenge: Why did both GE Healthcare and Adventist Health decide to change their collaboration model? To tackle a variety of challenges:
- Improve service operations
- Boost alignment across institutions
- Optimize utilization of clinical assets
Most importantly, the solution they develop should ultimately support Adventist Health in delivering high-quality care cost-effectively.
Approach: How are GE Healthcare and Adventist Health addressing this task? They switched to an outcome-based contract, which ties payment to the medtech supplier to economic and clinical targets. They both agreed to use advanced analytics to reduce process variation and improve the quality and reliability of care. In addition, the partnership has the clear goal of helping Adventist Health comprehend its own challenges, particularly regarding its equipment needs.
Outcome: This approach promises benefits for GE Healthcare as well as Adventist Health. The latter is expected to reach its target of 100 million US dollars of incremental revenue growth and savings over five years. The continuous support from GE Healthcare increases the chances its imaging equipment is used appropriately and efficiently, and Adventist Health will be able to make use of a personalized service schedule that offers a higher operating efficiency and decreases potential downtime. What’s more, GE Healthcare will be able to access data on how Adventist Health (and probably healthcare providers in general) tend to use their equipment and how their devices perform, enabling GE Healthcare to gain valuable insights from the data.
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“We are looking forward to continuing our relationship with GE Healthcare, a company that brings access to market-leading resources, expertise, advanced analytics, and proprietary tools. This is an opportunity for us to improve service operations, provide more alignment across our service program, and increase utilization of clinical assets to provide higher quality care.”
John Beaman, Chief Business Officer Adventist Health
Case study #2: Medtronic Tyrx
Our second best practice example covers Medtronic, the world’s largest medical device maker, specializing in products such as implantable cardiac devices and insulin pumps. It created a simple-looking, infection-fighting solution, which it named the Tyrx Antibacterial Envelope. The product is an absorbable single-use sleeve that is wrapped around a pacemaker or defibrillator and implanted in a patient's chest along with the device. In 2018, the company moved toward an outcome-based payment model for its solution.
Challenge: There is a high cost and increased mortality rate associated with pacemaker related infections. The Tyrx Envelope is designed to stabilize the device after implantation, and data suggests that it reduces procedure infection rates by 70 to 100 percent. However, even though Tyrx is a high-value product in terms of its clinical and economic outcomes, it appears to be a relatively simple solution and may appear inexpensive to manufacture. This has made it difficult for Medtronic to gain a fair share of the value delivered.
Approach: To alleviate doubts regarding the effectiveness of Tyrx, Medtronic developed an outcome-based payment model, which provides customers a rebate if a patient develops a “qualifying infection” after receiving a Tyrx implant. Since Medtronic demonstrated it was willing to cover some of hospitals’ costs if its device fails to prevent infection, Tyrx contracts became increasingly attractive to healthcare providers, and the company obtained about 1,000 contracts for its product.
Outcome: An outcome-based model benefits both healthcare providers and Medtronic. Healthcare providers can mitigate reimbursement concerns and more easily enforce contracts. It is also simpler for them to identify failure cases and limit their financial exposure. Contract terms with Medtronic as a MedTech supplier have also become more transparent, were able to generate trust, and are easy to understand. As a result, Medtronic benefits from reduced concerns about the adoption of a new technology like the Tyrx Envelope.
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“The Medtronic rebate is substantial, and you can’t argue about the measurement because it’s binary. These patients are easy to identify, they are easy to track. In my opinion, it is one of the best examples. It worked. Many times the consequences aren’t severe enough or the ability to agree upon or measure results is cloudy, and no one believes they are getting any value from the value-based contract. Medtronic was a real success.”
National GPO
Key success factors for changing your business model
As the examples mentioned above show, transitioning from product supplier to solution provider typically reduces the risk for medtech companies when deploying state-of-the-art technology and enables them to have more long-term relationships with customers. The results are beneficial for everyone involved: medtech companies, healthcare providers, and patients. In practice, a number of key factors determine the success of such an endeavor:
- The consequences of moving to an innovative business models need to be significant enough to justify the switch from a traditional model, and the added value must be sufficient for both parties.
- The added value and terms of agreement have to be clear and easy to understand for everyone involved.
- It is vital that the transition phase is managed correctly to reduce implementation issues and help the involved stakeholders build trust in the new business model.
If you take these aspects into account and study our best practice examples carefully, nothing stands in the way of your transition from product supplier to medtech solution provider.
1 For full disclosure: These case studies highlight best practices that are in the public domain. To ensure client confidentiality, we did not feature insights from our consulting activities.
Read more from this series:
Part 1: From Product Supplier to Solution Provider: Why MedTech Companies Need to Act Now!
Part 2. From Product Supplier to Solution Provider: How MedTech Firms Can Master This Transition
Part 3: From Product Supplier to Solution Provider: How MedTech Firms Start Their Transformation Journey
