Business research planning and methodology

Business Research

Sources of funding/payment for these products

Sources of funding and payment for in-home medical products, specifically the sleep/rest support systems discussed in this case, is defined through a mix of public and private funding. A prime determinant of the total available amount of funding will be private health insurance. The use of government funding programs including Medicare and Medicaid would require the management of Stryker Corporation to coordinate with the Food & Drug Administration to get their products qualified for funding for in-home use. The majority of manufacturers in the medical products industry who produce in-home use equipment and diagnostics rely on government-related funding for the majority of their revenues. The reliance on Medicare and Medicaid is a significant source of revenue and the relationship with the Food & Drug Administration is critical.

Private health insurance provides insured patients with a greater choice of manufacturers yet the premiums these insured pay often have the restriction of each individual private health insurance provider having to approve each specific purchase. Government-based financing is also available at reduced interested rates, and is another catalyst for many in-home medical products manufacturers seeing out a close partnership with the Food & Drug Administration. Despite the more lengthy process of obtaining a loan from the government for in-home medical equipment, many senior citizens and Baby Boomers now entering retirement opt for this approach to funding on order to get the latest technologies available.

Typically hospitals and nursing homes also purchase sleep/rest support systems yet their percentage of the market hovers in the 35% - 40% range due to the continual pressure to reduce budgets and increase efficiency of operations. Typically this segment of customers purchases low-end, mass produced products that are specifically developed for institutional use. As a result, public hospitals are often not early adopters of new technologies and also are often the first to reduce costs as they are constrained by shared government budgets with other healthcare providers. All of these factors contribute to healthcare facilities typically having direct relationships with manufacturers, purchasing only those products that are at the lowest-end of the product line and often trimmed down of features to make them more affordable. Adding to all these factors with regard to institutional purchasing is the Deficit Reduction Act which was passed in 2006. This Act is aimed at saving $40 billion over five years by slowing the growth rate of expenditure for Medicare and Medicaid, and it immediately slowed down sales of institutional medial products and forced budget constraints on healthcare providers funded either partially or completely by the government. As a result, manufacturers are creating their own financing companies and extending credit to elderly customers if they do not qualify for government-based loans. This has turned into a significant revenue stream both in finance charges and the sales of additional meds. The growth of private funding is one of the primary catalysts driving the growth of this market, and with new product introductions driven by high Research & Development (R&D) spending; the market expects to grow at a compound annual growth of 3.6%.

Current relevant technologies and innovations

On average 12% of sales in the medical equipment industry is reinvested into R&D every year, indicating that new product innovation and new product development is the greatest competitive priority of this industry. It is in fact the greater source of new sales growth, as first mover advantage is attained by those companies who are able to leapfrog one product generation to the next. The speed of new product introductions and their distance in terms of technological differentiation from previous products is one of the key catalysts leading to the growth in revenues of this industry. The recent technological innovations in this industry are the intensive integration of Internet technologies into all forms of medical equipment products, from monitoring and patient care to preventative care systems and products. Internet-based integration has made it possible to remotely monitor patients at home and also create an enterprise-wide assessment of a healthcare providers' performance. In the context of the sleep/rest support systems the integration of patient monitoring systems is a major market opportunity. A second key technological development is the adoption of lean manufacturing techniques in this industry. The use of Kanban manufacturing, demand-driven manufacturing, and distributed order management and supply chain optimization systems are all fueling the level of innovation occurring in this market. In addition to all these factors, the medical products industry is experimenting with Six Sigma manufacturing practices with offshore manufacturing partners to further reduce costs. These cost reductions are significantly impacting the industry's ability to invest even more into R&D and speed up the product lifecycles that set the pace of the entire global medical products industry. A third factor of technological innovation is the investment manufacturers are making in virtual instrumentation and its use to create combined monitoring and preventative assessment analysis. For medical products manufacturers of sleep/rest support systems this translates into developing and integrating the necessary electronics to allow their beds to be used in a broader network where patients can be continually monitored and their status reported to a central system. The integration of electronics into sleep/rest support systems is critical for their continued adoption into Internet-based home networks that provide for 24/7 monitoring of patients. Beds and sleep systems are often used as the platform for integration of these systems as it is where the majority of the elderly spend the majority of their time.

Additional factors related to technological innovation in this industry include the high barriers to entry due to the exceptionally high capital costs required to manufacture medical appliances and the need for sustain high spending levels on R&D once a firm has entered this industry in order to stay competitive. Lastly, the compliance processes in this industry also impact R&D, as the Federal Food Drug & Cosmetic (FD&C) Act which are contained in the final procedural regulations in Title 21 Code of Federal Regulations Part 800-1200 (21 CFR Parts 800-1299) require all manufacturers to gain compliance of their designs and system integration plans prior to production. These controls are the baseline requirements that apply to all medical devices necessary for marketing, proper labeling and monitoring its performance.