Medical Technology: When You Are Through Changing, You Are Through

“When you are through changing, you are through.” —Bruce Barton

On Friday I attended the American Heart Association’s 21^st Annual Research Roundtable Luncheon, where I was the guest of Covidien Ventures (thanks guys!). The vast majority of people in the room were, like my Covidien compadres, somehow related to the medical device industry—as manufacturer, investor, advisor, etc. In past years this AHA event covered all sorts of medical device and related research issues but this year the focus was healthcare IT and healthcare services. Dr. Jay Rosan of Walgreens gave a keynote about how that company is working to change the consumer healthcare experience by delivering convenient and cost-effective services supported by digital health innovations.

I didn’t think that much about this interesting topical twist in the moment, but on my way from Burlingame to San Francisco, in a space of less than 10 miles, I saw not one, but TWO billboards from orthopedics medical device company Biomet promising a lifetime guarantee on their partial knee implant. In other words, get a knee implant that eventually wears out and they will replace the part for free, as if it were a Toyota brake pad or a Cuisinart cutting blade.   This is a pretty unusual promise, as many, if not most, medical device implants wear out and, by and large, and selling more of them is how medical device companies make more money.

Now granted, Biomet has had some issues with its implantable knee products that probably drove them here, but this was the first time I had seen direct-to-consumer advertising from a medical device company that emphasized value over volume and customer service over technology prowess. Most of the time the emphasis is the technological advantage of the product. In this case the selling proposition was the lifetime financial guarantee. In a world where consumers are paying a lot out of pocket for major medical procedures, I can imagine the consumer appeal of providing the type of guarantee that you get when you buy Ginzu knives. If they really wanted to go all the way, Biomet could offer a buy one, get one free sale. I’m sure that the guys who sell artificial hearts are glad they will never have to compete on this level.

I was reflecting on this phenomenon when I recalled that earlier in the same week I had the pleasure of hosting Rakesh Mehta and Dan Wilson from JP Morgan’s medical device investment banking team as guest speakers in my Changing Healthcare Economy class. I’ve taught this class at the Haas School of Business for several years and each year there is a guest speaker presenting about some aspect of medical technology (aka medical devices); this year was no different. But here’s what was different: Rak began his presentation with an extensive overview of the changing nature of financial risk and care management in the healthcare system and how the healthcare delivery system’s transformation is in many ways changing the face of the medical device industry.

Rak pointed out that, if they are going to grow, it is essential for medical device manufacturers to understand the intricacies of institutional purchasing, capitation and case rating, shifting patients down the continuum of care, consumer engagement and, especially, how medical device companies need to think about value-pricing. I can assure you that, in days past, these topics didn’t even make it to the bottom of the charts in prior medtech discussions (in my class or in medtech company board rooms), much less to the top of the important issue hit parade. Drawing a contrast to days past, Rak said, “The big innovation opportunity is technology that keeps people with chronic disease out of the hospital. This is a huge change from the old days of hoping people get sick so you can keep treating them in the hospital.”

And quite a contrast this is, as my week of medical device observations demonstrated to me. I have been kind of banging this drum for a while, but it is really interesting to see the medical device industry waking up to a very changed set of healthcare system circumstances. These dynamics have been evolving for several years, but most of the medtech people with whom I have spoken have had “good” explanations why their particular product or company would be ok and why they really didn’t have to understand what was happening in the payer world, as just one example. “We have the best technology,” is the most often-heard refrain. But just like in the information technology industry, the “best” technology is not always the winningest, as many more factors come in to play when the buyer’s decision-making process becomes more complicated.

In the “old” days the buyer of medical technology was always the physician. If a surgeon or other physician liked a device, the hospital bought it for them to use and the consumer had no idea what was going on. In the new paradigm, hospital system purchasing agents are trumping physicians’ product selections in the interests of cost containment, roomfuls of medtech executives are learning about apps and wearable tech, and consumers are seeing medical device billboards on their Friday afternoon drive. What next? Yankees and Red Sox players holding hands and singing kum-ba-ya?

But the transition of medtech players to multi-faceted healthcare players is definitely on. We have already seen Medtronic buy a population health/IT  & services company (Cardiocom) and start a services business in Europe to help better manage cardiac cath labs by applying six sigma techniques. GE Healthcare and Cancer Treatment Services have joined forces to open 25 cancer treatment clinics in India. Numerous diabetes device manufacturers are exploring ways to show and share data with patients and providers via health IT channels. Other large medtech firms are exploring interesting services and value-based pricing models that would lead to their sharing  financial risk. It’s an interesting world.

I asked my JP Morgan colleagues whether they thought we would soon see the traditional medical device players embark on significant digital health initiatives but they were more reticent, saying that the traditional players were still pretty leery of this new set of medtech aspirants. Taking on that level of information technology product risk is still somewhat anathema to the traditional medical device culture and, equally importantly, the hacker tech culture of IT-style engineers is vastly different than the meticulous scientific method engineer culture of traditional medtech teams, according to my JP Morgan friends.   And yet I have to believe that we will get there pretty soon. Digital health, in the form of real medical devices not fitness products, could be a real savior for the medtech firms that have seen major adoption headwinds and slow growth in their traditional markets.

For now it is interesting to watch the medtech world transition from tech-driven to market-driven (and maybe even to consumer-driven as the sector flirts with healthcare IT and services integration the way a little kid tastes a new food they have pre-determined will be yucky—with extreme ambivalence and a lot of audible groaning.