Posted in Health Reform Watch | Sept., 2016 – Carolyn LaWell is ORTHOWORLD’s Chief Content Officer
To thrive in the healthcare environment of tomorrow, orthopaedic device companies will need to operate within a greater portion of the supply chain, assisting upstream and downstream customers in finding operational value. This will require companies to forge stronger relationships, focus on internal efficiencies and launch services, not just devices. Ultimately, the business models of orthopaedic device companies must radically change if they want to maintain profitability, margins and independence in coming years. This was the message from OMTEC® 2016 keynote speaker Bill Tribe, Ph.D., Partner at A.T. Kearney’s Health Practice.
The message is bold, yet not surprising. One needs to look no further than the product—not device, but product—launches of the largest industry players in recent years. Observe a number of examples: DePuy Synthes’ focus on bundled payment services,Stryker’s purchase and subsequent launch of the Mako robot, Smith & Nephew’s development of Syncera. Additional players and offerings, like Cardinal Health’s expansion into the commercialization of orthopaedic implants and Millstone Medical Outsourcing’s direct-to-patient and hospital distribution model, are reaching new portions of the supply chain.
Tribe referred to these as pilot programs. While it can be assumed that a large amount of research and resources, both personnel and capital, went into the creation of these technologies and services to gain meaningful return on their investments, most on this list are too early in their lifecycles to deem successful long-term.
What these companies attempt to do with these models, though, is to solve a different problem for their customers while generating a new revenue stream for themselves. They move beyond legacy devices and distribution to target new price points and customers, and even create new audiences. Tribe argued that all orthopaedic companies, regardless of size or position in the supply chain, should introduce alternative business models that match the shifts in healthcare and their own company needs.
Here is why.
The Economic Case
Margins across the medical device sector have been falling for more than a decade, and will continue to erode by about 5% if unaddressed, according to Tribe’s research. Compounding that is the continued negative impact of price pressure, at nearly 3% per year. An average orthopaedic company would need to reduce its cost of goods by 12% or its Selling, General and Administrative expenses by 8%, or some combination of the two, to offset that 3% in price pressure, he says. That pressure is consistent; therefore, companies must get leaner each year.
On a positive note, orthopaedics is a $46 billion industry growing in the low-single-digits year over year, according to ORTHOWORLD’s THE ORTHOPAEDIC INDUSTRY ANNUAL REPORT®. Healthy procedural volumes due to a growing and aging population, and untapped and underserved markets, mean that the industry remains attractive.