Now that the health insurance exchanges are mostly working and the drumbeat of outrage over the medical device excise tax has dropped a few decibels, this might be a propitious moment to explore how the restructuring of the US healthcare system via the Affordable Care Act (ACA), aka Obamacare, will play out for manufacturers. Nicholas Donoghue, Associate Principal, McKinsey & Co., will speak to this during a session devoted to regulatory affairs at the upcoming Medical Design & Manufacturing East (MD&M East) event in New York, NY, in June. He shared some observations with PlasticsToday.

"There are several levers to how the ACA will change the landscape for medical device manufacturers and their suppliers," Donoghue told PlasticsToday. One fundamental aspect is reimbursement.

"The rallying cry for hospitals is, 'How do we break even on Medicare?'" says Donoghue. It used to be that money would be lost on those procedures but made up for in commercial endeavors, he says. "Going forward, that won't be possible." As hospitals seek cost efficiencies to offset the loss in revenue, medical device manufacturers will feel the squeeze. But this does not have to be a pure negative.

"When you know where [the business model] is headed, you can align your product development structure accordingly," says Donoghue. Companies should see this as an opportunity to differentiate their investments, he adds.

One unmistakable trend is medical device manufacturers partnering with hospitals in disease management, as evidenced by Medtronic managing cath labs. Medtronic CEO Omar Ishrak describes the initiative as contractual management that "gives us an ability to work with the customer directly to improve overall efficiency." This business model is illustrative of how medical device manufacturers can act based on a deeper understanding of hospital economics, says Donoghue.

Another example of the radical shift in healthcare delivery economics is unprecedented vertical integration, says Donoghue, who cites the $4.42-billion purchase of doctor group Healthcare Partners by kidney-care company DaVita in 2012 as a bellwether. "What is DaVita doing buying a physician group?" asks Donoghue. "Well, it knows about patient flow and cash management." Medical device companies need to be aware of this shift and act accordingly. Parallel to this development are hospital consolidation trends, adds Donoghue.

According to Donoghue, the customer group for medtech manufacturers is changing . . . dramatically. "There are not a lot of industries where you are seeing a double-digit shift in customer groups," he says, but it's happening in healthcare. "Sixty-seven percent of device spend will be happening in the top 150 networks. That's a small world," says Donoghue, "and it's very different from one in which 6000 hospitals and 300,000 physicians are making purchasing decisions." Medical device manufacturers need to pick a specialty and start planning for a much smaller customer group than they have in the past, he adds.

An important part of the new business paradigm is the changing role of doctors in making purchasing decisions. "We surveyed a couple hundred stakeholders at McKinsey," says Donoghue, "and there is an unmistakable shift from the surgeon-is-king model to committee-based rules." Hospital purchasing groups will justifiably ask, why are we using 14 different types of stents? "Don't get me wrong," he adds. "Doctors are still involved in purchasing decisions, but it's no longer just about the doctors." Companies increasingly will need to provide health economics evidence and provide a 360-degree view of how their products fit into the new healthcare paradigm.

Donoghue will open the MD&M East Conference track on regulatory developments on June 9 at 10:15 AM with a session titled, "Impact of the reform on future commercial models." The event continues through June 12 at the Jacob K. Javits Convention Center. Go to the MD&M East website for further information and to register to attend.

— Norbert Sparrow

Norbert Sparrow is Senior Editor at PlasticsToday. Follow him on twitter @norbertcsparrow and Google+.