Editor’s note: Innovative flexible business models are emerging for medical equipment manufacturers that are a win-win for the manufacturers (more profitability) and their customers such as hospitals and medical imaging centers (allowing leasing rather than buying the equipment). I talked with Yana Persky, strategic analysis manager at Gemalto, about what’s driving these models, how they work, how they are implemented and their impact on medical device design.
What is driving the emerging flexible business models in the medical equipment manufacturing space?
Yana Persky: The manufacturers face many challenges. First, they are under pressure due to customers’ needs. Customers such as hospital, imaging centers and independent physicians are dealing with budget constraints and the shift from CAPEX to OPEX at the same time as medical equipment costs are escalating. Also the life cycle of medical equipment is getting shorter. It’s not justified from a hospital or medical center perspective to invest so much money up front to buy medical equipment.
The second driver for the new business models is the manufacturers’ need to differentiate themselves in a commodity market and to lock out the new kinds of competitors emerging in the market.
Third is the manufacturers’ desire to have a predictive revenue stream, which is enabled by subscription pricing models.
Why is there a shorter product life cycle?
Yana Persky: The technology is moving and is never stopping. The manufacturers come up with new equipment models that have more features, more functions and more advanced software. And it changes almost every year. So the equipment the hospitals or medical centers bought three or four years ago, for example, is getting outdated. To keep abreast of new technologies and utilize new critical features, the hospitals need to replace the equipment quite often.
But don’t they sometimes lease the equipment?
Yana Persky: It depends. In the US, around 30 percent of medical equipment is leased, while in Europe the numbers approach up to 40 percent. There is always a question of whether to lease or buy the equipment. If they lease the equipment, they can get a new model after three years. A medical machine such as an MRI or CT scanner including installation can cost between one and three million dollars. Although physicians or clinicians decide what medical equipment is required, the financial controller is the one that justifies the decision in terms of leasing it or buying it (a CAPEX vs OPEX decision).
How long has the shift to flexible business models been happening in the medical equipment manufacturing space?
Yana Persky: The shift to emerging flexible models is fairly recent. The subscription-based models have been around for a while in the software world; but it’s still in its infancy in the world of medical equipment, particularly for expensive equipment. Because it’s so new in this space, it’s implemented on the idea level at the moment.
Please explain what you mean by the idea level.
Yana Persky: In the last couple of years, Gemalto has engaged with a lot more manufacturers because of the challenges I already explained. Several companies have launched flexible pay-per-use models for their medical equipment. But it’s still on the idea level because they don’t have an automated mechanism or software monetization to do the licensing in the right way. Basically, they are using some sort of trust-based reporting on the usage volume. It’s a very manual process. On the idea level, they are realizing that there is a need to shift from selling just a product to selling a service. But they still lack the technology behind that to offer new business models in the right way.
You mentioned that more manufacturers have engaged with Gemalto about business model challenges over the last two years. What are they asking for?
Yana Persky: Primarily, they want to come up with a different way to sell products. For example, they may need to sell equipment that is less feature rich for certain markets, or more rich features that they can add later. They want different ways to price their products and also ways to simplify their manufacturing.
Before, they would ship an MRI machine, and that was the end of the sale. But now they’re trying to add additional features and benefits that people can download from the software. And instead of just being able to sell to big hospitals, they want to be able to sell to smaller hospitals and clinics. So they need to configure that equipment differently.
Software embedded in the hardware gives them a lot more flexibility in what kind of markets they can go into, how they package and how they charge. With hardware, customers basically pay for a box, and there’s no recurring revenue. Today the manufacturers want to be able to keep upgrading and sending them new features. And they want to offer different ways that they can pay for the machine. A customer might, for instance, pay for a mammogram scanner based on the number of mammogram scans they do.
Medical equipment manufacturers are just starting to realize that they need to shift from selling the product to selling a service. The service might include not only the pay-per-user or pay-per-procedure model, but also after-sales service including maintenance and parts replacement. In the medical equipment space, this is just happening now.
They can differentiate themselves by offering innovative business models for acquiring very expensive devices such as CT or MRI scanners or ultrasound machines. They can basically give them to hospitals, physicians and other customers for free and price them per procedure.
Many equipment manufacturers don’t realize that the embedded software that resides in their medical equipment presents a massive revenue opportunity for them.
How can they use the embedded software and move the new models beyond the idea stage? What does Gemalto or other providers do to implement the necessary technology?
Yana Persky: To come up with the flexible business models and offer various licensing business models (pay per use, pay per day or pay per fixed number of procedures), medical equipment manufacturers need Gemalto’s embedded software monetization solution that opens up an entirely new world of licensing and pricing possibilities.
Is the embedded software something that’s already in the equipment, or is it something that Gemalto adds?
Yana Persky: Most medical equipment has some sort of embedded software that is responsible for controlling various device functions. The more functions the device has, the more intelligent it becomes; and thus it is more expensive. To have these new business models up and running we would need to interface with the embedded software by getting to its code at the development stage. We also educate medical equipment manufacturers on determining which features they need to use and how to charge – these are key elements of the emerging service-oriented business model.
How are the market trends and challenges affecting trends in equipment design engineering?
Yana Persky: Large medical equipment manufacturers have design-to-value departments or design-to-value engineers that are responsible for assessing the value proposition of a particular product during the development stage. They have to identify the product features or functionality that a customer really wants. Examples: How much value does each feature represent to the customer? Or how do these features affect product pricing? Or how well do manufacturers understand what customers consider to be valuable in their product offering? What are the needs and buying behavior?
The top design-to-value trend that we are seeing is replacing manual mechanisms with automated ones to understand the voice of the customer. Today, the design engineers often lack automated product usage insight, so they use manual mechanisms such as focus groups or interviews and consumer research to understand the voice of the customer.
To design a product that will suit the customer, manufacturers have to take into consideration the real user needs. This will enable an equipment manufacturer to define the appropriate combination of features, performance and cost for a given product.
This seems like a no-brainer in the digital age. I’m surprised so many manual mechanisms are still used.
Yana Persky: Actually, many medical equipment manufacturers don’t realize that they can do that by utilizing their embedded software that resides in their machines. By interfacing their embedded software, they can basically implement usage collection capabilities into their embedded software in order to generate automated input for the design-to-value process stage. I mentioned before that our solution includes educating our customers. We provide an out-of-the-box solution.
You mentioned there are new types of competitors in the medical equipment manufacturing space. Please share your insights about this.
Yana Persky: The new competitors are medical service operators, not medical equipment manufacturers. For example, a company in Germany is the first company to recognize the need to offer diagnostic imaging on a pay-per-use basis. They introduced an innovative radiology-as-a-service model. The medical equipment manufacturers approach physicians, clinicians, end users, and offer them the use of their premises and medical equipment without requiring them to invest in or maintain the technology.
Another medical operator in India buys refurbished medical equipment from a Japanese equipment manufacturer and establishes diagnostic imaging centers. Their model includes delivery, installation, parts replacement and maintenance cost. And the rental pricing structure that they offer is pay per use. The more the usage is, the less the customer pays.
The above examples are an indication of a trend that is likely to disrupt the existing one-time-fee business model in the medical equipment field. The medical equipment manufacturers have to react and come up with innovative business models; otherwise, they might be stuck with their machine inventory.
Yana Persky is strategic analysis manager at Gemalto. She has over 15 years of experience in the hi-tech and software industry. Prior to Gemalto, she served as the business intelligence manager for Credorax, VeriFone, IXI Mobile and Magic Software Enterprises. She is an expert in leading in-depth strategic market analysis, evaluating worldwide technology trends and understanding the competitive market to support new strategic leads and business opportunities. Yana can be contacted at yana.persky@gemalto.com.