Unless they change, devicemakers may see shrinking profits

A leading consulting firm is warning medical-device companies that they either embrace the changes taking place in the global healthcare system or they will face sharply declining operating margins in the years ahead.

The study (PDF), released Monday by management consulting firm A.T. Kearney, estimates that the device industry faces a $34 billion decline in profits due to disruptive changes in healthcare. The report looks at the companies that market physician preference items, which refers to high-cost devices such as implantable hips and knees and pacemakers.

The firm cites five reasons behind the escalating financial pressure on devicemakers: payers and hospital administrators replacing doctors and other clinicians as purchasers; heightened regulatory scrutiny; the industry's shift from innovating new products to making small improvements in already approved technologies; providers shifting patients from in-patient to out-patient settings for non-acute care; and the need for new technologies that can serve less affluent patient populations.

“Accessing growth segments, even in traditional markets, will require new business models, lower price points, and more value-based product offerings than those of today,” the study's authors said.

The industry has traditionally reported operating margins of about 25% and an average of 5% annual growth. But operating margins may decline by as much as 8% over the next six years due in part to price erosion and greater discrimination by purchasers.

If devicemakers embrace new business models that prove the medical and financial return on new technology, they will be able to maintain their margins and still report annual revenue growth of at least 2% through 2020.

“It's a tipping point in the industry,” said Bill Tribe, a co-author and principal at A.T. Kearney. “Some are addressing it. Others are not. The ones who are (addressing the changes) are in a position to shape the industry, rather than react to it.”

Both payers and providers are adopting new payment models that only reward new technologies if they achieve better outcomes than older technologies. They are demanding data about new technologies before they move forward with purchases.

A few companies in the industry are moving to implement research and development strategies to address those demands. But Tribe said those companies are the exception, and not the rule.

Others are looking to innovate by developing and deploying mobile apps and sensors that can connect to existing devices. The idea there is to generate actionable information that patients with chronic diseases and providers can use to improve outcomes and lower spending.

Follow Jaimy Lee on Twitter: @MHjlee