The increasing clout of hospital General Purchasing Organizations (GPOs), insurers and other large payers in US medical device purchasing and reimbursement may be hindering innovation, R&D and quality issues in the relentless effort to drive down healthcare costs.
Comments by small- and mid-sized US medical device firms in industry reflect recent US market dynamics whereby more physicians working for hospitals and other large healthcare providers has resulted in these organizations having a much larger influence on decisions as to which and what kinds of devices are purchased.
Fewer private practices
According to data from the US Medical Group Management Association published here, shifts in physician employment over the past 15 years from private to hospital-owned practices has been seismic: In 2002, more than 70% of physicians in the US ran their own practices, compared to about 25% of physicians who worked for hospitals; by 2011, those percentages had completely reversed themselves.
With a majority of doctors practicing within large healthcare institutions, those institutions have taken on more responsibility for procurement decisions, including for medical devices. This shift in device buying decision making from practitioners to administrators, in turn, has made cost and value considerations much bigger factors in purchasing decisions—as well as tilted the reimbursement playing field toward larger-tier medical device manufacturers able to leverage value proposition and product differentiation to these larger, more cost-conscious purchasing organizations and insurers.
Effects on smaller manufacturers
As a highly competitive and saturated medical device market, the US is generally challenging for start-up and smaller-tier manufacturers to navigate. But now that hospital GPOs have displaced private physician practices as predominant device purchasing decision makers, hurdles to successful US market entry have become even more challenging for such firms.
In the latest industry survey, several North American-based participants with fewer than 250 employees indicated that pricing pressures, competition from larger manufacturers and reimbursement were major challenges for them in 2015. Most of these respondents also took a “somewhat positive” or “neutral” outlook for the medical device industry overall as well as for their own prospects in 2016.
These firms voiced the following concerns and observations regarding the effects of GPOs and large payers on their industry:
- Larger manufacturers continue acquiring smaller competitors to expand market share and improve their negotiating power for reimbursement rates with insurers
- US hospital systems are undergoing corporate realignments that hinders the ability of smaller manufacturers to introduce new or cutting-edge devices into the marketplace
- US hospitals are focusing more on cost savings, and may be more interested in least expensive rather than most effective devices and technologies
- Pricing and reimbursement pressures from Medicare and large private payers is negatively impacting innovation and investment in the medical device sector
- Start-up and smaller manufacturers are having to focus on reimbursement strategies much earlier in their product development cycles
Compared to responses from larger survey respondents, who more often cited regulatory issues as their key business challenge, it is clear that smaller firms face significant business challenges in the US due to pricing and reimbursement issues.
Implications for development of innovative devices
Along with downward pressure on pricing and reimbursement, GPO buying models may also have slowed down development of innovative or cutting-edge devices and technologies by both start-up and larger-tier manufacturers, according to some industry experts.
The US market environment has not only made it harder for start-up firms with innovative devices to get off the ground, but also driven larger firms to focus less on R&D for new products and more on contracting strategies.
In order to improve their chances of success in the US market, start-up and small-tier manufacturers do not necessarily need to engage in a “race to the bottom” in terms of pricing. Given the realities of a marketplace dominated by large, highly cost-conscious payers, however, medical device companies must consider pricing and payor issues much earlier in their development lifecycles.