Consolidation, shift to value disrupting MedTech at market level
The U.S. healthcare ecosystem is responding to the challenges of aging and ailing populations, new legislation and regulation, and shifting market forces in unique ways. While these dynamics create opportunity for medical device makers, a number of hurdles stand in the way of gaining market share in the United States. Amplifying these challenges is the continued lack of clarity over the future of the Affordable Care Act and any potential replacement legislation.
For medical device makers hoping to bring a comprehensive product portfolio to market in these uncertain times, the mega-trends of provider consolidation, the shift to value-based care and vertical integration among providers and payers can be overwhelming. How MedTech companies navigate these disruptions will not only determine success, but also help shape their role in the future of healthcare delivery and payment.
Challenge #1: Provider Consolidation
Health systems across the country are buying or building hospitals, particularly in the growing outlying regions of major metropolitan areas. Some areas are inching toward consolidation, while others are sprinting. Medical device companies must employ nimble strategies to maneuver the complexities of individual markets.
A number of factors generate the pressure necessary for further consolidation. In the Washington, D.C., market, for example, consolidation of health systems and hospitals is relatively low, with about five major health systems competing in the acute-care space. Compare that to Raleigh, N.C., where acquisitions and a recent partnership between Duke Health and WakeMed Health & Hospitals are further reinforcing consolidation in a market where 80 percent of the hospital market is already controlled by two or three organizations. This has very real consequences for medical device utilization, average sales prices, and the ability of the market to absorb new competitors.
The amount of control that health systems or hospitals have over a local market directly impacts their negotiating strength with MedTech. By extension, health system size also determines the ability of health systems to choose winners and losers in the MedTech space. For instance, if a given healthcare provider controls 40 percent of the market in a metro area, a bundled payment arrangement for an orthopedic company’s entire device portfolio can lock out every other orthopedic competitor from a large share of the same market.
Challenge #2: Value-based Care
Value-based care initiatives attempt to create an alignment of financial interest between providers and payers, be they private or public. Initiatives such as the Centers for Medicare & Medicaid Services’ Bundled Payments for Care Improvement Initiative have shown early success in bringing down care costs through reduced hospital readmissions, nosocomial infections, and spending on medical procedures. When readmissions and infections are reduced, device utilization also declines because hospitals buy fewer medical devices for use in revision procedures.
Challenge #3: Vertical Integration
The structural shift to vertical integration is different from the CMS’ value-based care initiatives in that it is not just an alignment between insurer interests and provider interests, but a complete convergence where their interests are one and the same. For example, New York City’s Northwell Health, Mount Sinai Health System, Montefiore Health System, and Crystal Run Healthcare all have attempted, with mixed results, to launch their own insurance plans.
Providers that offer their own insurance plans have a strong incentive to drive patient volume with favorable premiums that direct patients to their own facilities. Vertically integrated providers will need to cut costs of care from the entire episode of care, including spending on medical devices and medical technology, to reduce the costs of their insurance plans. In this environment, medical device makers need to expect reduced reimbursement per device as payer-providers look to contain overall spending.
Providers that have gained experience with value-based care initiatives, such as bundled payments for episodes of care, are well-positioned to capitalize on this experience and extend it to controlling costs for other procedures. However, it is important to note that this development is not purely negative for device makers. While provider-led health plans will tend to reduce costs per procedure over time, these plans also will increase patient volume. For some medical device makers, loss of revenue from declining sales prices and declining device utilization per procedure can be made up for through increased patient volume.
Zaid Siddiqui is a senior analyst at DRG and a MedTech expert focusing on metro- and state-level markets in the United States. Follow him on Twitter @ZaidDRG.
For more DRG expertise on this topic, please join us for a complimentary webinar, “Medical Device Use in an Era of Provider Consolidation,” taking place on Tuesday, Nov. 14. Click here to register.