product innovation in many other technology industries, especially when the market place is crowded with competitors.
This erosion can be explained in a number of ways. As risk gets shifted to provider systems, the need to show cost-effectiveness of products becomes a core requirement in order to get paid for and adopted. As risks get shifted to consumers, that also will drive more cost-effective purchasing decisions.
Another and perhaps even larger change is the trend for physicians to become salaried employees. More than 50 percent of U.S. doctors are now salaried, compared with roughly 20 percent in 2002 . What does this mean? Most importantly, it means the people who decide how to acquire and pay for new technology is changing. Classically, the pharma and medical device industry employed direct-to-physician sales forces to distribute innovation, and cost was rarely a factor when the doctor was the buyer. However, purchasing decisions are now getting pushed up to the enterprise level, and in a world of new payment models and changing reimbursement values, cost and quality of innovation are becoming paramount.
It seems possible that true innovation might still command premium pricing, but marginal improvements will suffer.
How should the life sciences industry respond? We still need to innovate. Most importantly, we need to innovate in business models. When the end customer and their criteria for purchasing are changing, evolution is required. True innovation will always be rewarded but the question is whether marginal improvements will still be valued.
Specific strategies to evolve include:
1. Bundling services around products in order to sell more complete solutions
2. Creating sales forces directed at enterprises
3. Going at payment risk based on achieving a certain outcome
4. Diversifying by entering emerging markets that also require low-cost innovation
5. Building capabilities to highlight cost effectiveness early in product development
This is exactly what some of the forward-thinking players are doing. Take Medtronic as an example. They have focused on global growth and formed a new services division to provide more end-to-end solutions. Johnson and Johnson via their Janssen labs division also are experimenting and building additional service lines in themes like those listed above.
Perhaps the best example, though, was by Davita, a dialysis company that acquired Healthcare Partners, a healthcare system known to excel in coordinated care. The $4.4 billion deal earlier this year represents one of the biggest bets so far that the healthcare system is moving toward large, integrated medical providers that can manage patients under a budget.
While the debates continue, one thing is clear. We need to move to a more cost-effective, transparent, and consumer-centric healthcare system. Brave decisions by the private sector will define how the healthcare system will look, and we are just at the beginning of this exciting change.
