Medical capital equipment manufacturers are finally coming around to what other industries have long been convinced of: selling something repeatedly is far more profitable than selling something just one time. This idea led to what many modern business models revolve around today:
- Breaking products down into consumable parts which can be marketed for ongoing revenue as subscriptions or services
- Requiring purchase of premium-priced accessories that ultimately pay off much of the capital cost of the equipment in question.
Medical equipment financing for hospitals and healthcare organizations has traditionally been a mix of direct purchases, loans, and leasing, depending various factors – i.e., the cost of the equipment, the budget and financial status of the organization, and the estimated lifespan and depreciation schedule of the equipment. But that is changing – fast.
In this blog, we’ll look at some of the new pricing models being used by medical equipment makers to make acquiring their products more affordable to healthcare provider customers, and why the time is right for alternative financing options.
Modern alternative financing options for medical capital equipment
Frost & Sullivan recently projected that the medical technology market will reach over $529 billion by 2024. Traditional product offerings, which are defined as hardware or device-focused products to treat a specific condition, still dominate the market. Growth in that sector will be a sluggish 2% through 2024. However, new value-added products, based on patient-centric medicine, remote patient monitoring capabilities, and connected care, are estimated to grow at a compound annual growth rate (CAGR) of 14.3%, and will make up an increasingly larger proportion of product mix in the future.
This wholesale shift in medical equipment priorities is aligned with an equally large shift on the part of manufacturers, who are turning to alternate pricing models as a way of coping with the changes. A survey by Simon Kucher found that identifying innovative new revenue models was a top three priority for medical device manufacturers over the next year.
Here are some alternate models being used today by medical equipment manufacturers.
- Managed equipment services: Under this model, a vendor provides and manages the medical equipment needs of a hospital or healthcare facility for a fixed annual fee. This includes everything from procurement, installation, and maintenance to technology updates
– even in the form of completely new models – and training. This model helps healthcare institutions keep their equipment up to date without having to pay large sums in capital outlays. - Equipment-as-a-service (EaaS): Similar to how software-as-a-service (SaaS) operates, EaaS involves paying for medical equipment based on usage or on a subscription basis. The healthcare provider pays a monthly subscription for the equipment, and the manufacturer is responsible for its upkeep.
- “Print-and-cartridge” model: This also is known as the razor blade model. Here, the primary device is sold for a low, zero, or even negative profit, but to use the device, premium-priced consumables are required. This model benefits healthcare facilities as they do not need invest large amounts of capital costs upfront. For example, a diagnostic machine used in a lab might be priced competitively, but it requires specific test kits or reagents sold by the same manufacturer to function. The test kits or reagents are consumables that need to be purchased regularly, creating a steady revenue stream for the manufacturer. Because they are sold at a premium, part of each purchase is used to pay off the machine, making it ultimately a much lower-priced – or even free – device.
- Outcome-based contracts: Some hospitals and medical device manufacturers are experimenting with outcome-based contracts. Under this arrangement, payment for the equipment is tied to the health outcomes achieved with its use. If the equipment doesn’t deliver the promised outcomes, the hospital might pay less or nothing at all. This model is good for solutions that perform well-defined discrete tasks.
- Risk- or savings-sharing agreements: This is a variant of an outcome-based model. Under this arrangement, both the healthcare provider and the equipment supplier share the financial risks and benefits of the medical equipment. For example, a supplier might offer the equipment at a lower initial cost, but with the agreement that they will receive additional payments if the equipment achieves certain performance or outcome metrics.
- Pay-per-procedure: Under this model, hospitals pay the equipment supplier each time a procedure is performed using the equipment. This can be advantageous for hospitals with fluctuating patient volumes or those that want to tie equipment costs directly to patient revenues.
- Shared savings programs: In a shared savings program, the equipment provider and the healthcare provider agree to share any cost savings realized from the use of a particular piece of equipment. Good pricing starts with an understanding of the amount of value the customer can generate from the use of the equipment. This isn’t always easy, since customers may not want to share sensitive operational data.
Why alternate pricing models look attractive
According to Deloitte, hospitals in the United States—which are the major purchasers of medical technologies—are under financial pressure as more patients are dependent on government programs such as Medicare and Medicaid. But these programs tend to pay less than other payers and only increase rates slowly, even while costs continue to increase at a fast clip.
Here are some other reasons that alternative payment methods look attractive:
- Budgets are under mounting pressure. This makes it harder for medical equipment manufacturers to sell using traditional means. Healthcare provider executives increasingly want proof that the added economic and clinical value of a machine is worth the investment.
- Reimbursement rates often don’t cover new generations of devices. Traditional business models are problematic as the low reimbursement rates can’t cover the costs of the latest version of an innovative device. This is particularly true when large capital investments are required.
- The post-COVID-19 era is proving difficult. Medtech businesses are still feeling the impacts of COVID-19 and are looking for ways to respond. Our research suggests that many have identified business model innovation as a solution to their challenges and a potential engine for growth in the sector. A recent survey of 60 major medtech players across the United States and Europe shows that four out of every five companies have identified business model innovation as crucial to securing their medium to long-term business objectives, and almost all are beginning to experiment in the field.
- The high inflation rate is disrupting the best-laid sales strategies. Inflation is another factor putting price pressure on manufacturers. The U.S. inflation rate as of January 2023 was 6.4, but it dropped to 4.9 by April 2023. It’s still significantly above average inflation rates, however. And inflationary times are notoriously bad times for large capital outlays – leading to interest in these alternative financing models on the part of healthcare providers.
- The rapid pace of innovation is difficult for healthcare providers to keep up with. Many are reluctant to invest in a piece of equipment knowing the next best thing is right around the corner. This makes pricing schemes like MES especially attractive.
- The move to value-based healthcare is forcing a different vision on providers and manufacturers. Value-based care is when healthcare providers, including hospitals and doctors, are paid based on patient outcomes rather than the number of procedures performed or services provided. This change is dramatically impacting purchasing and pricing models for capital equipment in healthcare, especially in outcome-based models, risk-sharing agreements, pay-per-use, and equipment-as-a-service.
- Entrepreneurial physicians want less-capital-intensive financing options. The rise of entrepreneurial ventures on the part of healthcare providers is also driving new pricing models. For example, ambulatory surgical centers (ASCs) founded and managed by owners- physicians are dramatically on the rise. Physicians say ASCs give them the ability to better control expenses and the patient experience, while keeping costs lower than they would be in a hospital. By owning the equipment and focusing on one specialty, it’s easier to schedule procedures and run an operating room more efficiently, and they add, is professionally more fulfilling. But because such facilities tend not to be cash rich, they welcome alternatives that turn high capital expenditure (CAPEX) into predictable and manageable operational expenditure (OPEX).
Focus on the value and the pricing model will follow
The Simon Kucher study found that 85% of equipment manufacturers already have been trying new business models. In fact, 80% of respondents consider such changes essential to achieve mid or long-term goals.
But it’s not easy to convince healthcare providers to adopt these models. They probably don’t have the right internal systems and processes or buy-in at top organizational levels. And on the manufacturers’ side, according to Ernst & Young, often they are too focused on the products themselves rather than understanding the bottom-line value they bring to customers.
According to Bain & Co., for any of these alternative models to work, manufacturers and healthcare providers have to A) understand the value the equipment brings to the business and B) agree on how to share both the risks and the rewards.
By adopting these innovative pricing and purchasing models for medical equipment, manufacturers can ensure continuing payments over the products lifetime, and healthcare providers can better align their costs with their revenues and improve patient outcomes. Seems like a win-win.
