Tuesday, December 15, 2009

Revamping the Revenue Generation Model in the Medical Device Industry

My fourth posting on this blog on 29 September 2009 was part of a multi-part examination of Medtronic's remote programming patent (US Patent # 7,565,197 that was granted in 21 July 2009).  I suggested that the patent patent implied two directions in the development of medical devices:
  1. The development of a single, common hardware platform based on a generalized processor, similar to TI's low power processor. (Add urls).
  2. Medtronic device capabilities would be defined primarily by software.  Furthermore, the patent defines a capability for software to be downloaded to a device, thus defining the capability for updating the software on the device.
We've learned that there are technologies in development that could significantly increase the battery life of devices: maybe at some point eliminating the need for battery replacement all together.

Today, physicians, hospitals and device manufacturers receive the bulk of their payment when a device is implanted or replaced.  Thus, the current business model of device manufacturers relies on primarily on product such as an ICD or CRT and leads.

However, the Medtronic patent suggests the possibility, maybe even the likelihood of strategic shift from a product to a licensing business model. This would suggest a business similar to software companies who charge a flat or yearly fee for the use of software.  Instead of a replacement, the patient receives a software upgrade and the device company receives payment for the software upgrade.  This is one step removed from a pure product to a service-oriented model, but it still treats the software as a product.  Nevertheless, it provides flexibility to the medical device company in that revenue comes less tied to the sale of objects, and more tied to the services provided to the customer.

An even more innovative approach and more in-line with a service-oriented business model would be to have the software redefine the capabilities of the device itself while implanted in the patient.  For example, upgrade an ICD to a CRT-D by changing software.  I do not know the technical, implantation or leads-related issues of doing this, however, from a software standpoint, there should be nothing stopping a device manufacturer who has taken the common hardware design approach.

A pure service-oriented model would change on the basis for the services provided.  Since I'm a technologist and not an MBA who has worked in the device industry for decades, I cannot define all the possible revenue-producing services medical devices with remote monitoring and remote programming could provide device companies.  I can say that the services that medical device companies can provide medical care providers and their patients is becoming less and less tied to the devices themselves. So a more service-oriented perspective in the medical device industry seems warranted.  

It seems apparent that for medical device companies to expand their services and patient-care and management capabilities with information-based services over the communications infrastructure, they are going to have to change the way they receive revenue.  The current business model and means of generating revenue does not provide incentives to companies to expand into information based services given the current product-based revenue model currently in use.  I suspect that in a relatively short time, Medtronic will propose a new revenue model.  I shall be watching for the signs.

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