So You Want to Break Into the Medical Device Industry…

Amazon recently made news for its long-anticipated announcement of Amazon HQ2, its two new locations in New York City and Crystal City, VA. While the 14-month search process and bidding process was raising concern and buzz, there was another Amazon story that was taking place in the background.

In February 2018, Wall Street Journal reported that Amazon was looking to break into the world of medical devices. By upping the ante on their existing medical products business, Amazon hoped to evolve into a device supplier to both hospitals and outpatient clinics.

However, Amazon quickly realized that the process was going to be far more challenging than originally anticipated.

Supply & Demand Chain Executive writes, “Amazon’s attempt at entering the healthcare supply chain could have been a test in evaluating whether a marketplace approach could efficiently undercut costs associated with some of today’s healthcare middlemen, while addressing the challenges of the industry.”

Ultimately though, Amazon learned that there are inherent challenges within the purchasing and pricing markets. Supply & Demand Chain Executive highlighted the complexities that companies should keep in mind when attempting to break into the industry.

1) The healthcare industry is highly regulated.

Any harm caused by drugs or defective medical products can result in lawsuits and the eventual loss of reimbursement and/or loss of accreditation and licenses. As a result, the industry is highly regulated to mitigate risk and there is a slim margin of error. This proves to be challenging for companies who are looking to enter this space—does the benefit outweigh the risks?

2) Healthcare purchasing decisions are driven by a need for reliability, consistency and quality.

Time is of the essence when it comes to medical devices. Hospitals and clinics rely on a smooth and trusted supply chain in order to perform procedures on patients. If a shipment of medical devices is delayed, patients and hospital staff are inconvenienced and potentially put at risk.

Additionally, Supply & Demand Chain Executive writes, “though cost savings are important to hospitals that are feeling a constant squeeze on revenue, it will be quickly lost if they come at the expense of reliability, consistency and quality. Today, hospitals balance these concerns by purchasing through organized arrangements with product manufacturers, directly or through their group purchasing organization (GPO). Through a standing contractual arrangement, a healthcare provider and the product supplier can negotiate delivery expectations and guarantees, agree on product quality standards and associated risk allocations, and even set purchasing commitments that give the supplier adequate assurances to justify a discount.”

3) Healthcare providers and their suppliers have already developed a complex purchasing framework.

Similar to the previous point about the benefits of GPOs, many healthcare organizations have already entered strategic and mutually beneficial relationships with GPOs. Currently, “GPOs provide technology, analytics, subject matter expertise and other resources to evaluate products, negotiate pricing and other deal terms that are valuable to most buyers in the healthcare market. Major healthcare purchasers have come to rely on these benefits in operating their businesses because they cannot be easily replicated at a reasonable cost. As such, any new offering will need to supplant the value garnered through the technology and resources currently offered.”

4) Purchasing networks bring other intangible affiliation benefits.

This is also closely related to the previous points. GPOs and healthcare systems have deeply intertwined relationships that are not necessarily easy to disrupt. Amazon, and other organizations who are interested in breaking into the medical device purchasing industry will not be able to rely solely on cost-saving benefits, because GPOs already provide cost-savings plus so much more including reliable timelines, trust, consistency as well as quality.

Amazon’s recent challenges show the deep intricacies and complexities of the medical device industry. Want to hear more from GPOs? Join us at Q1’s Medical Device Strategic Pricing Workshop on February 5 to hear from Premier, Inc., Community Health Ventures, TPC, and Capstone Health Alliance in the “GPO Panel Discussion: Challenges & Opportunities In Medical Technology Pricing & Contracting.” Access the program agenda today!