Medical device makers are retooling the way they develop products, placing a much sharper focus on cost containment and affordability to meet growing demands from their customers including hospitals and physicians.
The strategy is part of a nationwide effort to rein in health care spending, which many industry executives admit is not sustainable at its current pace and poses a significant threat to the U.S. economy. The Affordable Care Act also demands hospitals and physicians to cut costs, so the provider community is looking to its suppliers — including medical device makers — to help them rein in spending.
Medical device maker Covidien, which has a major Connecticut presence, plans to launch 50 new products over the next two years. In previous research and development, the company’s focus always has been on speed to market and product quality, said Bryan Hanson, Covidien group president of surgical solutions.
Now, however, affordability will play a key role in how the company develops its products which range from needles and threads to surgical staplers.
“We’ve got this new dimension that says we’ve got to bring the cost of care down,” Hanson said.
Hanson wouldn’t say exactly how Covidien will make its products more cost friendly to hospitals and physicians, but he said affordability will now be a key metric measured in the company’s R&D process, joining demand, speed and quality.
The shift in mindset demonstrates how all industries involved in healthcare are retooling the way they do business.
Currently, 17.8 percent of the national gross domestic product is spent on healthcare. With such an unwieldy number, forward-thinking companies need to figure out ways to bend that cost curve, Hanson said.
“The part of the GDP spent today on healthcare is not sustainable,” Hanson said. “If you look at the demographics of healthcare, it is looking at a different form of innovation to bring the cost of healthcare down.”
Under the ACA, quality and cost of care are playing a bigger role in how providers are paid and judged by consumers and payers, particularly Medicare. This is forcing providers to be more cost conscious, even when buying devices from manufacturers like Covidien, said Angela Mattie, associate professor at Quinnipiac University and department chair of healthcare management.
By thinking more about affordability during product development, Covidien will be well-positioned once the ACA tenants start being implemented, Mattie said. It could give the company a competitive edge, she said.
“Providers are going to be part of a continuum of care, and they are going to have to prove value for the care they provide,” Mattie said. “Our device manufacturers — the suppliers to the healthcare industry — are beginning to think about costs.”
The larger problem with the health care industry, Mattie says, is that patients aren’t getting increased value despite the significant rise in spending over the last decade. People’s longevity and infant mortality rates, for example, have not changed significantly.
Additionally, the previous lack of a value system in healthcare has also led to out-of-control costs, Mattie said. Because it is one of the few industries where a third-party (insurance companies including government and commercial payers) picks up the bill, patients aren’t paying close attention to what they are spending, giving the industry more license to run up expenses.
“Patients pay more attention to their Wal-Mart bill than their healthcare bill,” Mattie said.
As medical device makers like Covidien look to reduce the costs of their products, they will have the duel challenge of protecting their revenue streams.
The industry is also feeling the pinch from a new 2.5 excise tax on medical device sales, enacted as part of Obamacare.
Covidien, whose largest facility is in North Haven, sells its products in 140 countries and has annual revenue of $10 billion. Hanson said the company will continue to grow even in the face of a constantly changing and challenging environment.
“We are happy with the performance of the company,” Hanson said.
