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With medtech margins under pressure, is a push to solutions the answer?

In the early 1990s, competition among personal computer manufacturers intensified as pricing pressure from new entrants made the overall sector less profitable. The companies that thrived were those that positioned themselves as sellers of solutions – rather than merely computer vendors. For those companies, computers became one component in a broad technology solution that was sold to customers.

Many medical technology manufacturers are following a similar path where value is enhanced by combining medical devices with education, process enhancement, data and analytics, and other services. Through business-model innovation, products and services sold by medtech firms could become greater than the sum of their parts.  

Between 2005 and 2015, the average return on capital (ROC) for the medical technology sector declined from 17 percent to 7 percent, according to Deloitte’s research. (ROC is a ratio used to measure profitability and to determine a company’s potential to create value). While medtech companies often view themselves as innovators, the market often sees their product development as being focused on incremental change and improved functionality. New medical technologies that transform how procedures are performed, or how diagnoses are made, are typically seen as less common.

Consolidation is altering the sales model

Over the past decade, cost pressure and regulatory changes have helped push health systems, hospitals, and providers to consolidate, which has led to fewer and larger health systems dominating local markets. Many of these consolidating health systems have been professionalizing their management, improving efficiencies, and reducing costs – often by placing more pressure on their suppliers.

Medical technology sales tend to rely on relationships built with physicians and surgeons, where purchase decisions are based largely on experience and personal preference. That sales model, however, is under pressure as institutional value commonly becomes more important and as hospitals and health systems continue to target costs. 

Through recent mergers and acquisitions, many health systems have gained greater purchasing power and more influence when negotiating prices with medtech companies. As they look to reduce costs further, some health systems are hiring procurement experts from other industries to streamline supply costs more systematically. As a result, physicians and surgeons are often becoming less influential in purchase decisions. Under this model, medtech companies that deliver financial, operational, and strategic advantages to the health system – in addition to strong clinical outcomes – could be best positioned to succeed.  Last spring, in an effort to help the industry understand the value of medical technology, Deloitte and AdvaMed released a strategic “value framework.” The framework spans a broad range of value drivers and does not focus solely on costs or clinical impacts.

Health systems have a foot in two worlds

Despite mounting pressure to move away from a volume-based business, the transition to a value-based model has often been uneven among health systems. Many hospitals and health systems are operating with a foot in two different worlds – value-based care and fee-for service (FFS). But many medtech companies say value – meaning both price and outcomes – isn’t yet influencing purchase decisions. Hospital procurement managers, for example, are still generally rewarded by discounts they negotiate with medtech companies, rather than the impact a device has on outcomes and total costs of care (as opposed to the price of the technology). And often surgeons aren’t yet paying close attention to the value medical technology might offer. This can create a dilemma for medtech companies: Those that promote the value of their products will compete with companies that continue to use price as the primary differentiator. Price remains the motivation for many procurement managers.

At this point, shifting to a value-based model ahead of the competition could create challenges for medtech companies – particularly if customers aren’t quite there. Competitors that are slow to adopt a value-based model could find short-term success by winning business from health systems that continue to focus on FFS. This scenario encourages medtech companies to continue under the existing FFS model despite the longer-term negative impact on ROC for the industry.  

Medtech companies should try to set themselves apart

It is becoming increasingly difficult to differentiate products in medtech. Commonly, sutures and even knee replacements appear – from procurement’s viewpoint – to be virtually identical regardless of the manufacturer. Given the urgency reflected in the steady decline in industry ROC, now is likely the time for medtech companies to take a more active role in changing their business model through a push to solutions. Consider the following:

  • Solutions are not commoditized, so premium pricing remains an option.
  • The value of solutions should be inherently easier to demonstrate than products because solutions companies often have more control in delivering the outcome.
  • Customers often consider training support and other services to be part of a product’s price. Moving to solutions can change that mindset and allow for a different conversation around pricing. Moreover, risk-based pricing can become a more feasible and compelling option for customers.
  • Solutions tend to be less capital intensive and often involve partnerships instead of self-built capabilities.
  • Solutions also tend to lock in a channel for products too…often at a lower channel cost.

While the transition to value-based care has been slow, the transition is accelerating. Medtech companies should look beyond their products and consider a move toward solutions with an eye toward improving ROC. For medtech companies, I think the path forward is to explore potential cost-saving and outcome-improvement opportunities with innovative hospital partners that are willing to try new ideas. While this can require a bit of experimentation on both sides, demonstrating success could help tip the scales for medtech companies. Once a model is proven, medtech companies can see if it can be scaled to include other hospitals. This can help medtech companies expand their role by bringing value to the table.  Just as several computer manufacturers successfully reinvented themselves as solutions companies, a similar strategy could help medtech companies increase their ROC as well as their value to customers.

Author bio

Yakir Siegal is a principal in the Monitor Deloitte strategy practice based in the firm’s Boston office. He has worked in a variety of industries since originally joining Monitor Group in 1994, including life sciences, energy, manufacturing, construction, consumer products, telecommunications, high technology, and financial services.


Yakir’s 15 years experience in life sciences spans multiple therapeutic areas, and his work covers the full range of the product lifecycle, from early commercial input through brand revitalization and lifecycle management and includes all aspects of integrated commercial strategy.


Yakir is a co-author of Deloitte’s annual US Health Care Industry Profit Pool Analysis, which provides a comprehensive assessment of how profit gets distributed across the health care value chain and how changes in industry structure are impacting the margins and return on capital in the different subsectors within the health care industry. He has led discussions with senior executive audiences of companies across the health care ecosystem, focusing on the need to balance short-term performance improvement measures with the shift to more sustainable long-term business models in medtech.


Yakir received an A.B., A.M., and Ph.D. in Physics from Harvard University, where his research focused on ultrafast laser spectroscopy, semiconductor physics, and nonlinear optics.