Tuesday, July 28, 2009

Is a Storm Looming on the Horizon?

The Obama Administration is attempting to redefine the United States healthcare system. The escalating cost of medical care and emerging technologies is establishing a new paradigm in the medical device industry. Whether you are a member of the Spine Cartel or a fledgling early growth stage company, the question you must ask yourself is how do you protect your marketshare and continue to grow your revenue stream in a zero-sum market? Pricing constraints are being placed on companies witnessed by procedural caps that are being initiated by various hospital buying groups. Physicians are being pressured to make concessions everyday when it comes to personal preference for products. Reimbursement is a major concern whenever new technologies are introduced in the marketplace.

There will be a major shift in how medical device companies manage their relationships with physicians, providers and insurance companies. A conciliatory partnership will have to be developed with the provider (the hospital and physician) and the payor (the insurance industry or potentially a government sponsored program). Concession will not be an option. It will be a mandate. The relationship between the device industry, the insurance industry, and the provider has been adversarial at best.

Hospitals and physicians are now challenged with operating a profitable business at a time when reimbursements will be redefined. As new technologies emerge, hospitals and physicians will be confronted with making decisions whether or not to provide the patient with costly therapies. Financial barriers will have to be removed in order for both the physician and patient to have access to new technology. Unpredictable cash flow and poorly forecasted budgets have created a volatile environment in medicine. A reduction in implant cost will lift a potential barrier to quality healthcare. But, are we willing to do that? And what will physicians decide to do when medicine is no longer the cash cow that it once was. Surgeons still make an exceptional living unless obviously they think they would like to try their hand at plumbing.

The insurance industry has, and the government intends to control cost. The challenge that the medical device industry will have is educating both parties on product differentiation and outcomes. Up until this now we have done a reasonable job, yet not good enough. But reason alone is not enough to overcome controlling cost. By reaching across the aisle and offering an olive branch we have the opportunity to continue to be a viable and innovative industry. Unfortunately, many things will have to change. Companies will have to accept less profits meaning that we will have to manage our budgets with more efficiency than ever before. The companies will have to police themselves in identifying whether a potential new technology realistically will make a difference in patient outcomes. Witness the carnage in our industry that has resulted in over 500 different pedicle screws, nearly 300 cervical plates and countless TLIF, PLIF, ALIF and Cervical PEEK devices. Have all of these products really made a difference in outcomes? Our industry has come to resemble the early years of the automobile industry. Or, have these products saturated an already existing commodity market? As investors hold on to their hard earned capital there will be fewer opportunities for “me too” products to succeed. How will this shift affect the earning capabilities of the salesperson? There will be a shift in the commission structure resulting in less earnings for the distributor or direct salesperson. I know that many of you do not like reading this, but if the company’s bottom line suffers, so will your ability to sustain your earning capacity. Remember a company not only incurs cost of goods to manufacture the product, it incurs general and administrative costs and cost of sales. It all comes down to operating income and remember, any publicly traded company has to answer to the Street. Wall Street has become our own worst enemy.

Salespeople have done a poor job of being business people. Purchasing, materials management, and finance were always viewed as the enemy. But this is not the only looming problem. What happens when companies start believing that they could exist without sales people and start to model their distribution model by selling to the hospitals directly? If you don’t think that’s possible, it has already been piloted by various small companies and tabled by larger organizations. Yes, there is some liability issues involved but I am sure that a remedy could be found if it meant greater profit margins in a constrained market. So where do we go from here? I don't want to be perceived as the Dr. Doom of the Spine Industry but we will face an unpredictable future. This unpredictability will create some people to attempt to manipulate market forces that will not be able to be controlled. The companies that exhibit the wherewithal to change and think out of the box will survive and prosper and the companies that don't will wither away. The Spine Blogger wants to know what you think?

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