Insights and Opportunities in the MedTech Industry

MedTech companies are struggling to pursue new opportunities and grow market share, sales, and profits while navigating through a sea of disruption. This disruption includes:

• Intensified competition from less regulated products that produce comparable benefits: MedTech companies must be proactive to the competition and address changing consumer expectations to not lose revenue opportunities.
• New regulations from the FDA, such as HFE and device traceability requirements: Such regulations may lead to new challenges in pricing compliance. The FDA is looking for data gathered from clinical trials to demonstrate the effectiveness of these new technologies, and AI is key to providing the evidence required by analyzing a vast amount of clinical trial data.
• The rising cost of healthcare insurance, high co-payments, and lower CMS payments: With increased pressures on hospitals and other customers, MedTech companies must take advantage of analytics that provide insight into drivers of the selling process to compete and cross-sell more effectively

This paper explores these and other challenges in more detail, as well as the changes that have been accelerated with COVID-19. It then discusses the new rules of digital commerce, and how these three rules enable MedTech companies to win on the new competitive front—customer buying experience. Finally, the paper discusses how PROS AI-powered solutions, founded on data science and over 35 years of deep industry insights, enable MedTech companies to increase growth in sales and profits.

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Opportunities & Disruption in MedTech

Medical Technology companies are facing significant disruptions to their businesses arising from a number of fronts. On the one hand, a growing and aging world population promises a larger market for cardiovascular, orthopedic, spinal, and neural technologies. On the other hand, this growing demographic is rapidly increasing healthcare costs, forcing public and private payers to cap their reimbursement rates.

The Center for Medicare and Medicaid (CMS) has continued to reduce reimbursement rates for many procedures and is now strongly embracing bundled payments that force hospitals, nursing homes, and their suppliers to share a single payment per episode of care. Private payers are also following this practice.

As a result, hospitals are becoming increasingly cost conscience and reducing waste, buying less equipment and supplies, and using GPOs and large health systems to increase their bargaining power for lower prices and better value. Many hospitals are unable to transition from fee-based to value-based reimbursement models and are closing their doors, which only concentrates the buying power of the remaining large hospital systems, further creating price pressures.

Furthermore, a McKinsey study shows that the vast majority of medical technology products are in the mid- to low-tech category where they are highly commoditized by GPOs and large health systems to force lower prices.

Adding to these challenges is the entry of digital health providers with new business models often from unregulated and related industries, providing health products directly to consumers rather than through traditional channels.

These digital health companies, many of which have traditionally sold consumer digital and electronics products, already possess significant knowledge of consumers, have established relationships with them, understand their buying preferences, and have already built digital selling tools to serve their needs.

Growth Opportunities Exist But Are Limited

The global medical devices market is expected to reach $605.1 billion by 2027, corresponding to an average 4.7% growth rate between 2020 and 20274. This is fairly remarkable considering the sector is under strong pressure to reduce prices, including in large categories such as orthopedics.

MedTech companies in highly-innovative markets, such as electrophysiology and neurovascular, are the most likely to sustain high growth, while many others will struggle to find profitable growth. Growth factors are attributed to an aging baby boomer population, increases in chronic diseases, and development in artificial intelligence. By 2030, global annual sales for medical technologies are predicted by KPMG to rise more than 5% a year, or at nearly $800 billion.

While the U.S. population is aging, thereby requiring a number of devices in the cardiovascular, orthopedic, and neural/spinal areas, cutting-edge devices are extremely expensive to develop and pass the Food & Drug Administration (FDA)’s regulatory hurdles.

Small, highly-innovative MedTech companies may have the right innovations, but struggle with finding the capital and regulatory savvy to bring their innovations to market, while larger MedTech companies with significant access to capital and the skills to navigate FDA regulations find their innovation portfolios limited. Mergers and acquisitions have helped fuel growth for some MedTech industries, but many continue to see limited growth prospects.

It is important to note that the vast majority of the medical technology market (88%) is in the low- to mid-tech category, with the remaining 12% representing the high-tech, high-growth opportunity. MedTech companies must become extremely efficient at marketing and selling products particularly in the low-to-mid-tech categories to maximize both revenue and profits. That means using data science and artificial intelligence to identify opportunities, analyze customer willingness-to-pay, understand demand trends, and beat competitive offerings.

Hospitals Under Great Pressure to Cut Costs

Changing CMS Reimbursement Models

The Affordable Care Act, in its effort to bend the cost curve of the skyrocketing U.S. healthcare costs, initiated the value-based reimbursement model where the Center for Medicare & Medicaid Services (CMS) would reimburse hospitals based on evidence that their services improved their patient’s health. This principle has since been adopted by private payers as well.

In the two largest revenue generators for hospitals—Cardiovascular and Orthopedics—the CMS are now pushing bundled payments where it pays a total amount for a given episode of care, including all medical devices, complications, post-acute care, and readmissions.

This combination of government regulations and emphasis on value-based care has led to significant cost and pricing pressures on medical devices and equipment manufacturers. With hospital execs employing new strategies to evaluate devices on their price and effectiveness, such as value analysis committees and third-party firms, MedTech manufacturers and distributors now find themselves in an increasingly competitive market where they must optimize selling prices in light of the industry’s growing criticism of the cost of this technology.

Group Purchasing Organizations

Health Care Providers often turn to Group Purchasing Organizations (GPO), intermediaries who negotiate contracts with MedTech Companies. This is done on behalf of the providers connected to the GPO to obtain lower and more desirable prices. GPOs are primarily concerned with conventional items over advanced equipment and devices, a category where there is large volume both in the SKUs represented as well as the total volumes purchased. This is precisely where MedTech companies need AI to help them configure their pricing so they win the business without excessive margin erosions.

Challenging New Regulatory Trends

A key trend revolves around device traceability and tracking. In fact, the FDA’s Center for Devices and Radiological Health (CDRH) is now reorganizing around product lines into teams responsible for device oversight throughout the product’s development and commercialization.

There are many similar initiatives internationally including Australia, Taiwan, Canada, South Korea, etc.

At the same time, the FDA is working to simplify regulatory processes for low-risk (Class I) medical devices. There are similar processes going on in Brazil and Ecuador, while Costa Rica has eliminated the requirement for Class I devices altogether.

While the regulatory hurdles are coming down in Class I, this is also a space where products are highly commoditized and compete on price and service rather than product differentiation.

There is a stronger move toward Human Factor Engineering (HFE) as the FDA emphasizes this by sending warning to device makers who fail to conduct post-market HFE study and testing.

All this comes at a time when the FDA has significant resource constraints. This means that Device Makers can expect delays in approval of their Class II and III devices.

Shift in MedTech Selling Models

The traditional MedTech selling model relies on one-to-one encounters with sales reps. However, recent trends have revealed a shift away from personal interactions toward a digital sales model, making the use of analytics valuable for understanding and influencing the drivers of the selling process.

Firms need data-driven insights to compete and cross-sell more effectively via bundled product and service offerings. Yet, many companies fail to capitalize on the promise of these analytics. A study conducted by ZS found that 70% of respondents rated analytics as “very” or “extremely” important to their competitive advantage; only 2% said they have generated a real impact from this analysis.

Companies may run basic customer analytics, but often overlook the opportunity to improve segmentation, deal profitability, and life-time value. One such gap is in pricing analytics, where significant revenue leakage occurs as a result of poor pricing and contract performance.

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