Medtronic buys Cardiocom: Are medical product companies finally serious about business model evolution?

Creative Commons (CCO 2.0)

A Lifepak 12 Biphasic defibrillator produced by Medtronic.

Article Highlights

  • The great thing about medical product companies getting into the services business is that this will radically impact the way they view innovation

    Tweet This

  • A migration by medical products companies into services would almost certainly be associated by a far more serious dive into digital health

    Tweet This

  • It’s been very hard for pharmas to leave their comfort zone of selling products

    Tweet This

Today’s news of Medtronic's purchase of Cardiocom – described by the WSJ as a “closely held disease management and patient-monitoring firm” — seems unusually significant, and speaks to an important way medical product companies may be trying to respond to seismic shifts in the healthcare landscape.

The basic challenge faced by medical products companies is that they’re trying to sell expensive products into an environment that’s increasing concerned about the cost of care, and in which key stakeholders are aggressively looking for opportunities to bring the costs down, and avoid unnecessary expenditures.

Medical products companies in particular (and keep in mind, I work at one) are frequently attacked for being part of the problem, rather than part of the solution.  Medical products are typically cited as one of the few areas where innovation has driven costs up, rather than down; while this view isn’t universally shared (e.g. see this smart rebuttal by Scott Gottlieb and Josh Makower), few would disagree that medical product companies are feeling increasingly squeezed, and compelled to robustly demonstrate the value of their products – financial as well as humanistic.

One answer to this challenge is for medical product companies to move up the chain, so to speak, and into some kind of specialized healthcare services.  Medtronic, for example, seeks to focus initially on heart failure – a designated area of interest for Medicare, which penalizes hospitals with high readmission rates for this diagnosis.  Medtronic also apparently hopes to enter other areas such as diabetes as well.

In pursuing this path, Medtronic is following a handful of other companies, such as DaVita, which has deliberately evolved from a dialysis company to a broader integrated service provider, catalyzed by the 2012 purchase of (technically merger with) physician group Healthcare Partners.

The macro arguments for this can be found on page 54 of this recent Credit Suisse report from Michael Mauboussin et al., which highlights the declining economic return of pharmaceuticals from 2002 to 2012; during this period, returns from the providers and services sector have held relatively steady.  The authors observe, “A critical change appears to be the transition of profits from the innovation side in favor of generic manufacturers and downstream providers of services, care, and coverage.”

In my mind, the great thing about medical product companies contemplating getting into the services business – especially if they start owning some of the risk (initially for aspects of chronic disease management, say) – is that this will radically impact the way they view innovation.  Rather than asking themselves whether they can convince an external party of the monumental value the latest product, they’ll have to convince themselves – presumably early in a product’s development – that a particular idea truly makes economic sense.  I suspect that as the interests of medical products companies and other stakeholders become more aligned, we’ll start to see much more of the cost-reducing innovation we’ve seen in so many other areas.

It’s also likely that such a migration by medical products companies into services would almost certainly be associated by a far more serious dive into digital health, as companies would be increasingly concerned with outcomes, and the more granular assessment and optimization of patient response to therapy.

So why hasn’t this happened yet?  Because traditionally, it’s been very hard for pharmas to leave their comfort zone of selling products – even the idea of a pharma company selling a solution rather than a pill seems to be much-discussed but seldom-actualized.  At least one industry leader has told me that the root cause stems from the same reason companion diagnostics have struggled – at the end of the day, pharma companies don’t want to give up their margins.

The question is, at what point is selling expensive stand-alone products no longer tenable?  At least some executives are clearly beginning to worry that this time may be fast-approaching.
Also Visit
AEIdeas Blog The American Magazine
About the Author

 

David
Shaywitz

What's new on AEI

Love people, not pleasure
image Oval Office lacks resolve on Ukraine
image Middle East Morass: A public opinion rundown of Iraq, Iran, and more
image Verizon's Inspire Her Mind ad and the facts they didn't tell you
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Event Registration is Closed
Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.