Medtronic's Quiet Innovation

How introducing value into the equation could save healthcare

Good Morning!

A couple quick updates:

  • Aneesh Chopra and Shafiq Rab, two men who know a lot about Health IT, wrote about how Apple’s PHR play has much more going on under the surface. Apple has embraced an open standard for EHR information exchange, which is a very good thing. Check out their words in WIRED for more detail.

  • We’ve progressed from hearing “Amazon is going to fix healthcare” to the second-day stories of unsolicited advice for Amazon: “How Amazon could/should fix healthcare.” The thought of Amazon taking on healthcare has become a canvas for healthcare analysts to paint pictures of the change they’d like to see. Amazon still hasn’t said much about their actual plans. Take most things you see on this topic with a grain of salt. For a big grain of salt, read Drew Altman’s take on it all.

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Now let’s talk about value.

In an interview with Peter Loftus of the Wall Street Journal this week, Medtronic CEO Omar Ishrak outlined a nascent variation on the revenue model of his multi-billion dollar medical devices company. This new model, which ties revenue to the actual per-use success of the device, is a bold step forward for this, or any, medical device vendor.

In broad strokes, these new arrangements work like this: if you have a Medtronic device implanted in you as part of your surgery and it fails, Medtronic will reimburse the hospital for the device and the entire cost of the original procedure. This means your hospital won’t bear the cost burden of repeating a procedure where their only mistake was in choosing a bad device to implant.

Intrinsically, this sounds like a good thing. It is! But to understand why it’s an especially good thing for providers you need to understand a bit more about how providers get paid.

For a very long time in American healthcare, providers have been paid on a fee-for-service basis. It’s exactly what it sounds like: if a provider performs a service, she gets reimbursed by a payer for that service. This model, while pretty straightforward and the standard mode in our system, is also pretty bad. It incentivizes more services, and even creates a perverse incentive for failure as providers can bill for more services if their initial services don’t remedy the problem.

As a result of everyone knowing this is a giant problem, alternative payment model experiments have been in-play for years. These models, broadly dubbed “value based healthcare,” try to force the risk of bad treatment down to the provider level. In essence, they’re trying to get providers to make decisions geared around achieving optimal health outcomes for the patient at the lowest possible cost; creating the most /value/. Some value based models call for capitation at the population level, meaning providers receive a fixed amount per patient per year and must meet all of the patient’s health needs for that year with that amount. Other, more promising models, tie value based payments to the specific outcomes of a care event, like a kidney transplant or a lower-back surgery. If a patient receives lower back surgery and is back in the doctor’s office within a month complaining of renewed pain, the provider would now bear the burden of re-doing the surgery.

While these value based models make a lot more sense than incentivizing pure healthcare activity like fee-for-service, they place a heavy burden on the provider. Providers have a lot of influence over outcomes, and shoddy providers will have worse outcomes across the board. But what if a surgeon implants a device that fails two-months post-surgery due to a manufacturing defect? Now the provider is on the hook to repeat the procedure and receive no reimbursement from the patient’s payer because it’s classified as a readmission related to surgery.

Enter Medtronic. If the implanted device that failed was a Medtronic device, the procedure would still need to be repeated, but now Medtronic will pay the bill. For a provider determining which device to implant, that’s a major selling point. More broadly, the provider now sees Medtronic as a partner - if they both do their jobs well, nobody loses. If Medtronic is at fault for a readmission, the provider is no longer on the hook for the cost. It’s not a revolutionary concept - most consumer products have some kind of warranty - but it’s a relatively big idea in healthcare.

I strongly believe the necessary fixes to our healthcare system will be innovations in business models, not technologies. Technologies can improve outcomes and make care itself more coordinated and simpler, but unless our incentive structure is realigned in the interest of providing good value for the patient, we’ll simply have better systems for billing patients too much and making providers work longer hours.

Medtronic’s value based revenue structure is in its infancy. According to the interview, they’ve selected a small number of devices and related procedures with simple enough outcome metrics to start with. That said, Ishrak claims he’s steering the company with a goal of eventually having all of their device revenue tied to patient outcomes. He argues value based payments for care are the way of the future, and he wants Medtronic to be a participant in this new model.

So while Apple is putting your health records on your watch, and Amazon is probably going to do something big in healthcare at some point in the future, Medtronic is making tangibly important moves right now in tying a large part of healthcare to value delivered to patients. Don’t sleep on this one.