From Spectacular to Sensible: How Cost Control is Driving Innovation in the Medical Device Industry

Value-based reimbursement requires 
a new innovation paradigm.

 In the old world, small incremental improvements to medical products could mean big profits if you could get them to market first. In other words, the business drivers in the medical device industry typically included evolutionary innovations in product performance and speed to market. Cost savings rarely, if ever, came into play. However, in today’s brave new health care world, payers are increasingly scrutinizing the precise gains in the outcomes from an improved product. 

Rather than paying an exorbitant amount for a marginally better product, as they have in the past, they may reimburse that product a bit more. So, these evolutionary improvements are no longer the road to riches that they once were. Instead, a lot of the value provided by today’s medical devices is created not by enhanced performance, but rather by how the device helps to control the overall costs of care. For example, while devices that enable telemedicine may not be much better for the patient (although they can be), they can create huge savings for health care payers in the overall cost of care. In fact, anything that moves care from the hospital setting to the home/mobile setting is getting tremendous attention (and investment) right now.

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Fastest Growing On-Demand Sector, Says Forbes

A recent Forbes magazine article names health care the fastest growing on-demand sector, aside from transportation. Citing a report published by the global consulting firm Accenture, the article notes that the number of on-demand health care companies has exploded in recent years, up from four in 2010 to more than 40 in 2014. The report predicts that the on-demand health care investment will reach more than $1 billion by next year. Telemedicine firms Teladoc (TDOC) and American Well are two of the top 10 venture-backed on-demand companies responding to consumers’ desire for quick, convenient access to affordable health care. Both companies link care providers and patients via video for consultations.1

If you compare the cost of a video consultation, $50.00 on average, to a trip to the emergency room, $1,233.00 on average, you can see why patients and insurers are embracing telemedicine.2 In 2014, UnitedHealth Group, the largest commercial insurance carrier, expanded telehealth access to 20 million health plan customers.

Mobile health, or mHealth, is a rapidly evolving component of telemedicine in which smartphones and portable monitoring sensors transmit information to providers through dedicated application software (apps). Mobile health is particularly attractive to medical device start-ups thanks to the FDA’s relaxed mHealth regulations. Wellness apps, for example, do not require 510(k) clearance. However, with more than 50,000 free and nearly-free app products available, and smartphone real estate relatively sparse, experts warn that the health app market may be reaching its saturation point.

Non-regulated apps will enter the market faster and at a lower price point, but they may get lost in the endless stream of new software that floods the App Store daily. Apps that add real value are those that provide diagnostic and treatment capabilities, features that will require regulatory approval. Although these apps will take longer to bring to market, they may offer their developers a competitive advantage. Studies indicate that both consumers and physicians consider FDA approval to be a determining factor when deciding whether to purchase or prescribe an mHealth app.3

The Health Care Quadrilemma

Regardless of whether the device in question is traditional or digital, rest assured, moving forward, it will be subject to tougher scrutiny from investors, as well as insurers and policymakers. Manufacturers must be ready to demonstrate the uniqueness of their product, as well as how they plan to attract a large number of users and secure reimbursement success.This is new territory for the industry, but how did we get here?

For decades, medical device innovation has been driven by the assumption that insured patients value efficacy and convenience and are relatively insensitive to cost. Operating under this assumption,  manufacturers have favored allocating investment dollars to spectacular technologies like surgical robots, even though studies have questioned whether the benefits of robotic surgery warrant the increased cost, typically one-third more than traditional surgery. Thinking they are not harming patients financially, physicians have been deploying these more expensive treatment options, reinforcing manufacturers’ capital allocation patterns. It’s a vicious cycle: the combination of comprehensive health coverage and fee-for-service payment begets escalating costs and the need for more coverage. Value gets lost in the shuffle. American economist Burton Weisbrod termed this self-reinforcing cycle “the health care quadrilemma.”


The Shift Toward Value-based Reimbursement


Today, however, health care reform efforts such as The Affordable Care Act (ACA) are forcing the industry to abandon fee-for-service for a value-based care model, which links reimbursement to quality, better care and cost containment. This shift will have a profound impact on the health care system and require a new innovation paradigm—one that prioritizes the sensible over the spectacular. As patients and providers become more exposed to the cost of care through high-deductible health plans and value-based payments, manufacturers must be ready to satisfy their demands for more affordable, “good enough” products. That is not to say there won’t be a market for sophisticated, high-priced devices, provided they lower the overall cost of care.

One direct consequence of the transition to value-based care is that control over business decisions is shifting from physicians to purchasing managers and payers. Whereas physicians base buying decisions on features, clinical efficacy, and convenience, managers and payers look at the overall cost of care per episode. Consequently, device makers will have to reorient their clinical development programs to meet the needs of multiple stakeholders, which may mean conducting more clinical trials and addressing tough reimbursement questions, such as “who will pay for this new device?” and “how much?,” earlier in the development process. To prevent reimbursement issues from impacting financing goals or stalling innovation, device makers must develop a well-planned reimbursement strategy in parallel with their regulatory and clinical strategies. In the current risk-averse investor climate, reimbursement approval will become just as important as regulatory approval as a business goal.

Moving Forward

Health care reform is changing the way we practice, purchase and evaluate health care. Medical device companies must change, too, by reorienting our approach to innovation from the spectacular to sensible. Although there is still tons of potential in revolutionary medical technologies, these tend to be much harder to find. Instead, there seems to be much more potential to “lean-out” our bloated health care cost structure, and devices that help make that happen stand a lot to gain.

Does cost control drive innovation in your company?  Tell us about it!

Mickey Garcia is a quality systems expert with more than twenty years of experience in the life science and software industries. Garcia began his career working in manufacturing operations and systems engineering at Johnson & Johnson, where he was responsible for designing and validating automated production systems and leading Six Sigma Black Belt quality improvement projects. More recently, he led the product strategy efforts for a range of QMS, ECM, MES and PLM software companies serving the life sciences. Since joining MasterControl in 2014, Garcia’s focus has been to develop solutions that offer medical device customers the fastest path to success. Garcia has a bachelor’s degree in mechanical engineering from the University of Florida and a Master of Business Administration from Stanford University.


(1) Japsen, Bruce, “Health On-Demand Atteracts $1B in Investments,” Forbes, Feb. 2, 2016, accessed June 22, 2016,

(2) Barron, Natania, “5 Emergency Room Myths Busted,” BCBS of North Carolina blog, accessed June 23, 2016,
(3) Weeks, Lisa, “Top 5 Medical Device Trends That Will Dominate 2015,” GxP Lifeline blog, Apr. 29, 2015, accessed June 23, 2016,