Spotlight on Medical Device Manufacturing: Part 2 – Responding to Pricing Pressures and Increased Costs

Responding to Pricing Pressures and Increased Costs

As medical device manufacturers adjust to new pricing pressures and higher costs, they are working to justify the value—and hence the prices—of new devices as well as working to reduce costs throughout their operations by adopting new sales models, outsourcing operations, and adopting lean manufacturing principles.

Documenting device effectiveness

To stem rising costs, reimbursement authorities of national health systems in Europe are taking measures to evaluate and reimburse new products at higher price levels only where they show increased efficacy over existing products on the market. In the U.S., legislation is being considered to undertake federal research into the comparative effectiveness of new vs. existing products. As a result, medical device manufacturers must justify their prices by testing and fully documenting the effectiveness of their products compared with existing products.

Rethinking sales and marketing

With sales and marketing investments among the industry’s largest expenditures, medical device manufacturers are asking whether it makes sense to support massive field sales organizations when governments in Europe and managed care in the U.S. are increasingly responsible for reimbursement decisions. The Deloitte survey found that, “Executives foresee adopting sales strategies that have been successful in other industries, including value-added services that use technology to drive relationships and partnering with customers and end users/consumers.”

Outsourcing operations

Medical device manufacturers are increasingly interested in outsourcing to reduce costs, allocate internal resources more strategically, and take advantage of different competencies of other firms to speed new product development.

A Knowledge@Wharton report found that most medical device companies see great potential in outsourcing with nearly all companies surveyed in this space planning to outsource over the next few years. Medical device manufacturers have outsourced manufacturing for more than a decade and those that do have been able to reduce product development costs by 10-30 percent. Many are also outsourcing R&D, often to Asian countries were costs are significantly lower.

Implementing lean manufacturing

Finally, lean manufacturing initiatives are growing in popularity as medical device manufacturers strive to reduce costs by eliminating waste throughout the product lifecycle. An article on key trends for 2010 in Medical Design Technology8 quotes Kay Phillips, president of ATEK Medical Manufacturing as saying, “We see many more companies focused on lean manufacturing and lean/six sigma practices. This trend will continue as the industry is challenged with maintaining and improving margins and improving the quality of its products.”

Lean manufacturing is an adaptation of the highly successful and often copied Toyota Production System (TPS), which many view as a model of efficiency and productivity. Lean principles require manufacturers to strive to identify the “value” of processes to the customer and eliminate “waste” or processes that the customer would not perceive as something for which they would be willing to pay. This waste elimination is a continuous pursuit. While people most commonly associate manufacturing processes with lean initiatives, Lean can and should extend beyond the plant to indirect activities such as logistics, administration, engineering, and warehousing, as well as non-manufacturing activities such as accounting or marketing.

From an Epicor White Paper

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