7 min reading time

Too good not to share from my friend Gunter Wessels

His main point: “Appropriateness of care” will guide coverage, payment, and utilization of your devices from now on.

MYTH 1: Device tax repeal will happen.

We don’t see how the device tax will be dropped. The cost offsets required to fill a repeal gap are too large. Now the sustainable growth rate formula (SGR) is out and there’s a bigger hole to fill. The tax has pernicious effects but the overall impact on hospital prices has been small.

Innovation hasn’t ceased. Healthcare investments are back on the rise. Reform-era new devices like Trans-Catheter Aortic Valve Replacement (TAVR) are growing rapidly. Declines in R&D spending are modest and likely due to industry consolidation. Therefore, the device tax remains unpopular, like all other taxes.

MYTH 2: Providers are considering gain-sharing agreements with suppliers.

Providers are forced to take on more population, utilization, and financial risk under the Affordable Care Act (ACA). To spread this risk, long-term partnerships are being established, but these are between providers. Very few suppliers and providers are teaming up because it requires too much from parties with different business models. The contingent liabilities and hazards are almost impossible to overcome.

MYTH 3: Accountable Care Organizations (ACOs) and Patient Centered Medical Homes (PCMHs) are new sales targets.

There is a lot of confusion about ACOs and PCMHs. We don’t advise manufacturers to promote devices and services directly to them. ACOs and PCMHs are focused on clinical integration, process of care-based innovation, and population health management. Devices are not a primary resource in this effort; they are ancillary.

Monitor the actions of ACOs and PCMHs but position your devices in the care-delivery setting where the cases land.

FACT 1: Bundled payments are crimping margins because a good-enough device is just that.

There are thresholds in clinical effectiveness that, when reached, create a price competition and a substitution market. The major driver of this regression toward good-enough is the rise of bundled payments. In these payment schemes, device costs are the primary source of cost reductions, and gain sharing among providers.

Formulary decisions are being made with total costs in mind instead of physician preference. Payers are joining the fray, accelerating the commoditization of large sectors of the device business.

FACT 2: Providers are interested in novel technology IF it improves clinical outcomes, processes and financial returns.

Improving quality and reducing cost simultaneously are ACA imperatives. Innovation in healthcare technology is increasingly difficult for manufacturers because the dimensions of a solution are multiplying.

Clinical capabilities need to be improved, but compatibility with people, process, and technology is also required. And a high-enough reimbursement (to justify the change) is needed. In robotic surgery solutions, for example, we see slow growth because of difficulty in overcoming these obstacles.

FACT 3: Today is a good day to be in the medical device business.

Success is out there for suppliers that can re-orient toward a value-based marketplace. Demographics are driving a huge wave of new patients. Reform is funding healthcare spending. Technology is improving. It is up to this industry to rise and spur provider effectiveness, and efficiency. Doing so will have substantial rewards.

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Thanks, Gunter! Reach him at or meet him in person at 10x in San Diego in two weeks.

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An invitation: If you have educational content like today’s, email it to me at JHage@MedicalDevicesGroup.net and I’ll consider sharing it with the worldwide group.

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Make it a great week.

Joe Hage
Medical Devices Group Leader

P.S. Notified body webinar April 28: http://medgroup.biz/mdsap

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BILRAY SEWELL
Associate Director – Channel Sales at ConvaTec
You call it as it is in today’s environment! High end medical devices manufacturers need to set-up service models that can be subcontracted similar to the way a facility contracts housekeeping, food services or professional services as ER and Anesthesia. This way the medical device facilitating the service will be hindered from prompt price erosion and will become part of the positive outcome formula.

Howard Adamsky
Director of Talent Aquisition at Destination Weddings Travel Group
Hi Richard. I certainly understand and agree but (You knew there was a “but” coming, right?) that is really just the nature of capitalism is it exists today. The system is broken and that is why the 1% of the rich have 80% of the dough in America. (Might be off on the numbers but you understand the point.) Capitalism is assures many things but fairness and equity are not a part of that.

Anthony Zelinko
CEO/Owner Bonte’ Medical Supplies, Inventor, Polymath, Visionary
In regards to the comment about the medical device tax survivability.
“You can survive being out in extreme cold for sometime, but eventually you are going to freeze”.
Companies have prepared, consolidated, transferred assets and use tax deferral methods in some cases just to survive others are lucky to thrive. Those that are fortunate to work, design, or develop are involved with the companies that have weathered the storm. It is those other companies and businesses that slowly sink into the abyss from the storm that we will never see again.

Karl Schulmeisters
Principal and Founder at ExStreamVR
the numbers on the med device tax do not on first analysis justify the hand wringing. Regardless of the intent of the law there is nothing in it that prevents passing on the cost to the consumer and given the Price Elasticity of Demand for med devices. ….this should have zero effect on profits
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the greater pressure I suspect WILL come from the efficacy side. as CMS leads the charge in demanding efficacy data.
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but that does open a lot of opportunity since the data that a lot of medicine currently lacks such data opens the door to innovations that can show it.

Richard Wall
Territory Manager at IntersectENT
Howard, I certainly agree that there is room for devices to be less expensive without sacrificing quality. The challenge here is that a lot of innovation in the device world comes from smaller start-ups (unlike pharmaceuticals, or as your example TV’s). Now you have to take this idea and make it a reality. Start with capital investors to buy in, then creation, then trial, then FDA approval. Batter this, hire sales force, clinical support and launch product. Hard to do that on a budget.

What I can agree with is, after years of successful sales, products have room to be discounted as production is improved. We don’t typically see this which keeps the cost of devices escalating.

Howard Adamsky
Director of Talent Aquisition at Destination Weddings Travel Group
Rick, you make some very good points. Med Device tax might be survivable but we must define what survivable means to us and measure it., Usually a tax is not a good thing because when the government wants to stop or slow something down, they tax it. When they want to create more activity, they incentivize it. It is a simple rule of government and it is the physics of money.

Rick Stockton
Product Designer (Medical, Scientific, Consumer)
Did we overlook something? Many comments had the feel of: “Well, the Med Device Tax happened and we survived it.”

Though I fully intend to prosper through the decade, I think the Med Device Tax may have much more to show us than in these initial 2 years.

By way of reminder, a letter from my wife’s Ob-Gyn, received today, closing her practice, citing, “Evolving trends in the finances of medical care have unfortunately made it impossible for me to maintain a private solo practice…” One less doctor. I think that’s not over, either.

And another trend, of course. Larger practices, larger clinics, and an evolving marketing audience. And much more change to come, creating challenges, which create opportunity.

Michelle A. Wilder
Owner & Operator at CHECK IT Home Inspections, LLC
Thank you for this article. Very informative.

Howard Adamsky
Director of Talent Aquisition at Destination Weddings Travel Group
I think you make a good point Rick.

Rick Stockton
Product Designer (Medical, Scientific, Consumer)
Howard, I agree with you. Let’s privatize medicine so that it may also may be cheap and good.

Howard Adamsky
Director of Talent Aquisition at Destination Weddings Travel Group
Richard, your point is well taken but I believe that the economic incentive to create drugs, cures and treatments will prevent the evolution of medicine from being stifled. It is easy to attack cheaper but at times, it can be a strong driver of innovation as well as quality. Have you seen the price of wide screen TV’s lately? Cheap AND good.

Richard Wall
Territory Manager at IntersectENT
Essentially you are saying that companies need to build a cheaper mousetrap rather than a better mousetrap. This may have some negative effect on the introduction of new innovations that could have better long-term outcomes resulting in reduced cost due to less hospitalizations. I wonder what might have happened if drug eluting stents were introduced in our current environment. Would they have become so widely used and accepted, or would hospitals and insurance companies been happy with the more cost effective bare metal stents. At some point the evolution of medicine will be stifled.

Howard Adamsky
Director of Talent Aquisition at Destination Weddings Travel Group
Very interesting article. Thanks

Denham Lansdell
Executive Director Product and Portfolio Management
Great article Gunter! FACT 1 is a difficult one to to overcome even for mid-size companies as the big guys can effectively “out-bundle” you with a broad portfolio of “good enough” products. It’s a much easier target to hit than FACT 2 and one of the drivers behind the current M&A rush. Hope to meet you in San Diego and have a chance to discuss further.

Shem Richards
Biomedical Engineer | Entrepreneur | Medical Device Expert
Thanks Joe, great article! I especially love FACT 3
‘Today is a good day to be in the medical device business’
couldn’t agree more.

Rick Stockton
Product Designer (Medical, Scientific, Consumer)
I appreciate articles like this. Better visibility into the healthcare environment helps me to prepare the best possible design solutions for the med device companies I serve.

Gunter Wessels,Ph.D.,M.B.A.
Practice General Manager at LiquidSMARTS
@Keith – Pernicious effects include layoffs and budget cuts. But the big effects have been mitigated. The industry is vibrant and resilient. Thanks for commenting.
@Marc – Risk-sharing is often proposed during purchasing discussions but we see so few happen that we made the point. Joint ventures are more likely and we wish you good luck. Thanks for commenting.

Marc Alderding
Pricing Specialist
Thanks for sharing Joe, I particularly like the facts and I also hope that myth no. 2 can become a fact into the future (we will continue to strive for it)

Keith Collyer
QA Engineer at IBM
While nobody really like paying taxes (or “membership fees to a civilized society” as I like to think of them), to call the effects “pernicious” is hype of the highest order, and the rest of the posting is far from showing any really serious effects at all.

Wilfred Caraballo
Business Development Manager at Lions Eye Institute for Transplant & Research, Inc.
Good read!