Circulating the Medical Devices Industry

Siobhan Richards, Diana Denke, Andreas Maertl

June 21, 2017

1         Introduction

The healthcare industry is arguably one of the most important and biggest industries in the world, often faccounting for a single- to lower double-digit percentage of a country’s GDP. Worldwide, the global healthcare spend is expected to reach USD 8.7 trillion by 2020, with growth especially coming from emerging and lower-income countries.[1]

Among others, good healthcare relies on the availability, accessibility, and affordability (3 As) of medical devices and equipment. These can range from simple aides, such as crutches, to highly advanced equipment, such as magnetic resonance imaging (MRI). Consequently, medical equipment manufacturers, such as Philips, Siemens, GE, Stryker, or Boston Scientific play an important role in this industry. The worldwide medical devices industry in 2016 accounted for USD 340 billion and is expected to grow to USD 436 billion until 2020.[2]

However, with aging demographics, growing populations, increasing chronic diseases, and an overall stronger focus on quality and value, costs for healthcare are constantly rising, which strongly challenges the feasibility of fulfilling the 3 As. The increasing pressure to either contain costs or to improve funding, in fact, is not only true for low-income, but also for hospitals and doctors in middle- and high-income countries, and especially for more sophisticated equipment.[3] For instance, up-front investment costs for MRIs start at around USD 100,000 and can go up to USD 400,000 and more.[4] Since these only include the equipment costs and exclude warranties and maintenance, total cost of ownership is even higher.

We argue, that medical equipment manufacturers must change their current business models in order to not only provide high-quality healthcare to a selected few in the developed world. Instead, they should focus on improving the availability, accessibility, and affordability of such diagnosing and treating equipment through business model innovation, and emphasize their contribution to improve the world’s minimum and average health and well-being levels. We believe that these goals can be achieved through following concepts laid out by the circular economy, such as committing to a more responsible planning, design, production, reuse, and extended use; reducing waste and toxic materials; and introducing a servicing model in place of the widespread investment model. Additionally, this could also create new opportunities for the industry.

In the following, the goals for such endeavor are outlined along the Sustainable Development Goals (SDG) of the United Nations (UN).[5] Then, the concept of circular economy is introduced and its potential within the medical equipment industry is described in more detail. This is followed by a discussion of companies’ on-going implementation efforts in this area. An outlook into other, additional future benefits concludes this post.

2         Implementing the Global Goals for Sustainable Development

2.1     Background

Following the Millennium Development Goals (MDG) of 2000 and after surveying over one million people worldwide,[6] the UN broadened their sustainable development goals and not only built on the successes of the MDGs, but also addressed some of their criticism. By integrating concerns from people all over the world, an inclusive process was followed that eventually resulted in 17 different goals and 169 concrete targets to be reached until 2030.[7]

2.2     Addressed SGD dimensions

Building on the priorities set by UN development agenda, five dimensions were identified to be primarily addressed through innovating the traditional business model of the medical devices industry.

SDG 3: Good health and well-being

• Investing in the development of modular, easy-to-operate, easy-to-maintain, low-cost medical equipment for middle- and lower-income countries
• Prolonging life cycle of medical equipment through refurbishing and reusing
• Making medical equipment and devices more available, accessible, and affordable

SGD 8: Decent work and economic growth

• Offering more and higher-quality opportunities in the healthcare sector and adjacent industries and sectors through wider availability of medical equipment
• Improving growth through wider adoption of more affordable medical equipment (access to new markets) and secondary effects of overall healthier workforce

SGD 12: Responsible consumption and production

• Applying concepts of circular economy by designing medical devices with end of product life cycle in mind, such as improvement of recycling process for waste, hazardous material, and packaging; or reusing or refurbishing of used machines
• Sharing (not frequently needed) medical equipment amongst medical practitioners and hospitals within region

SGD 9: Industry, innovation and infrastructure

• Building resilient, available, accessible, and affordable healthcare infrastructure
• Collaborating with government and other companies, in the healthcare sector and beyond, to unlock complementary investment in, e.g., transportation, logistics, electrical, and water infrastructure

SGD 17: Partnerships for goals

• Partnering of medical equipment manufacturers for, e.g., refurbishment and shipping of equipment to new markets, or making comprehensive joint proposals of reused/refurbished equipment
• Pooling maintenance and servicing personnel of different providers to drive down costs and increase coverage and responsiveness
• Gathering healthcare data from an even greater number of more diverse people for analysis and improvement of preventive care and treatment

3         Circular Economy

3.1     The concept of circular economy

Waste management is one of the big challenges of this century. Without drastic action, population growth and urbanization will outpace waste reduction. Rubbish is being generated faster than other environmental pollutants, including greenhouse gases. Together, the member countries of the Organisation for Economic Co-operation and Development (OECD) are the largest waste generators, producing around 1.75 million tonnes per day, and this volume is only expected to increase until 2050.[8] Given the Earth’s limited resources and planetary boundaries, we need to drastically rethink how the economy works and how we organise production cycles, so that we create a sustainable economy.

Today’s linear ‘take, make, dispose’ economic model relies on large quantities of cheap, easily accessible materials and energy, and is a model that is reaching its physical limits. The circular economy offer an alternative solution. It relies on system-wide innovation, where it aims to redefine products and services to design waste out, while minimising negative impacts. The concept of circular economy distinguishes between biological and technical cycles. It envisions a continuous positive development cycle that preserves and enhances natural capital, optimises resource yields, and minimises system risks by managing finite stocks and renewable flows.[9] It promotes using materials that can decompose in the natural cycle or ones that can be re-used again in the manufacturing process. Within a world in which valuable resources are harder to come by, ecosystems are under pressure and the world population is increasing, ‘closing the loop’ of products become increasingly more important.

3.2     Circular economy in the healthcare industry

In the United States, the typical operating room contributes 5.4 tons of medical waste to landfills each year, translating to costs of $5,234 per operating room, according to Practice Greenhealth’s 2015 Sustainability Benchmark Report.[10] The medical waste stream is also an opportunity for the entire industry to rethink the technical nutrients, which are used to produce a medical device, and to re-manufacture these devices so they can continuously be recycled in the industry as a quality, sterile product of equal or better utility than the original device. Making medical devices so that they are as productive for as long as possible lowers costs to patients without compromising quality and service to clinical adoption.

Moreover, it is important to take into account that customers are also increasingly demanding sustainable products. According to a recent global Harris Poll survey of health care professionals across six countries, 54 percent said their hospitals incorporate sustainability into purchasing decisions, and 80 percent expect that to be the case by 2016. These global findings mirror the actions and intents of U.S. health care professionals, as 52 percent say their hospitals currently incorporate sustainability into purchasing decisions, with an increase to 81 percent expected in two years.[11]

We see the entire industry being mobilised to introduce changes. In the US, Intermountain Health and Ethicon (a Johnson & Johnson company) have deployed a comprehensive reprocessing program (the Performance Certified Harmonic Program) that addresses key clinician and supply chain resistance points that ensure device performance, reliable device supply and predictable financial savings[12]. The FDA is also taking steps to reduce the risk from reprocessed reusable devices by reviewing pre-market and post-market information from all manufacturers and reprocessed devices types and to communicate clear regulatory requirements,[13]

3.3     Philips’ medical device refurbishment program

Philips, a Dutch technology company headquartered in Amsterdam decided to embed circular-economy thinking in their strategic vision and mission, as both a competitive necessity and with the conviction that companies solving the problem of resource constraints will have an advantage. They believe that customers will increasingly consider natural resources in their buying decisions and will give preference to companies that show responsible behavior. Moreover, designing products and services for a circular economy can also bring savings to a company.[14]

The current pressure on managing healthcare spending provide many opportunities for private initiatives. One of the key challenges of setting up an economically sound business is a low total cost of ownership. Philips’ developed the Diamond Select program to provide access to high quality reliable refurbished imaging systems at an attractive price.[15] It also enables Philips Healthcare to reuse vital components, driving circular economy value creation. As part of Philip’s Diamond Select Advance program, pre-owned components are given a second life. The department’s system includes a fully refurbished 3000 kilo magnet certified for serviceability of at least 10 years. It is also fully upgradeable and can  deliver a 50% reduction in energy consumptions vs. comparable systems. The repurposed system design makes it possible to offer a high performance system at an affordable price. Philips also ensured Reverse Logistics so that the loop is fully closed, which includes the de-installation of systems and transportation to a factory by third party logistics.[16]

The Philips refurbishment process[17]:

Step 1 – Stringent selection 

Philips identifies and selects prime systems by evaluating the equipment’s age, condition, and service history.

Step 2 – Skilled de-installation and transport

Proper de-installation and specialized transport by experienced Philips technicians so that the system arrives in one of the Philips facilities in good condition.

Step 3 – Expert refurbishing

The system is fully inspected by highly qualifed engineers, components are registered and inventoried, and the refurbishment process begins:

• All components are tested
• Obsolete or defective parts are replaced
• Latest software releases and eld updates are installed
• System is con gured to the customer’s speci cations
• System is cleaned and painted to look like new
• Full performance and image quality checks are performed according to original specifications

Step 4 – Effective installation

The system is installed, calibrated, and tested by Philips technicians to the same high standards as any new piece of equipment.

Step 5 – Full warranty and support

As with all new systems, Diamond Select refurbished systems come with Philips warranty, applications training, attractive  nancing options, and the support of Philips’ worldwide customer service.

Philips refurbishes equipment from across its broad portfolio of imaging systems, the refurbished portfolio includes the following modalities: MRI, CT, X-ray, PET/CT, Mobile surgery and ultrasound. This new model allows for more facilities across developed and developing regions to access high quality devices at an affordable cost, while also minimising negative impact on the environment.

4         Conclusion and Outlook

Ultimately, we can see that adopting the concept of circular economy in the medical devices industry has tremendous potential in generating financial, social and economic benefits. By lowering the cost of the product, it makes essential medical equipment more widely accessible, by closing the production loop, it reduces waste, thus the toll on the environment, and by forcing companies to re-think their production, it fosters longer-term thinking, where strategic collaborations actors sectors will become essential. While some companies, like Philips have decided to champion this cause, a circular economy on a worldwide scale will require a lot of players to change simultaneously. The Sustainable Development Goals can serve as a frame of reference for all stakeholders (businesses, governments, regulators) in designing their action plans. According to Philips CEO Frans Van Houten, ‘it would help tremendously if governments took the lead and changed their procurement policies so that a certain proportion of what they buy—be it 50 percent, 25 percent, or some other figure—represented products manufactured according to circular-economy principles. We hope that we can play the role of catalyst and help to reach a much bigger tipping point by putting our weight on the entire value chain, as well as by educating customers and suppliers. We hope that by setting the right example, we can help encourage the right behavior. This is just the beginning’.[18]

The transformation to circular economy shall start with a wider and wider adoption of the refurbishing practices we saw at Philips.  In order to truly reach its full potential, it needs to be the standard for all major players and across all markets, not just the developing world.  As a further step, it might lead to a completely new model of business, where medical devices are no longer sold, but leased on a pay-per-use basis. The servicing model might offer additional opportunities to address the SDGs, perhaps with a tiered pricing model to enable better distribution and access to high medical devices across regions with different levels of economic development.

Moreover, the wider use of medical equipment could also offer the opportunity to create an even broader healthcare data base and to include a great range of people from different backgrounds that were affected by different factors, such as the environment, genetics, and other influences. This could be an invaluable addition to on-going worldwide efforts to analyze big healthcare data to recognize patterns (e.g., Google’s Project Baseline[19]) and would address concerns about whether the currently used data for such studies really is representative for a global population.[20] Should this endeavor prove successful, the parties expect breakthroughs in prevention and treatment of all kind of sicknesses, diseases, and disabilities.

References:

[1] Deloitte: 2017 global health care sector outlook (https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Life-Sciences-Health-Care/gx-lshc-2017-health-care-outlook-infographic.pdf; accessed on June 20, 2017)

[2] US Department of Commerce: 2016 Top Markets Report Medical Devices (www.trade.gov/topmarkets/pdf/Medical_Devices_Executive_Summary.pdf; accessed on June 20, 2017)

[3] Deloitte: Battling costs while improving care (https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/life-sciences-health-care/deloitte-uk-lshc-2016-health-care-outlook.pdf; accessed on June 20, 2017)

[4] Block Imaging: MRI Machine Cost and Price Guide [2017 Update] (https://info.blockimaging.com/bid/92623/mri-machine-cost-and-price-guide; accessed on June 20, 2017)

[5] United Nations: Transforming our world: the 2030 Agenda for Sustainable Development (http://www.un.org/ga/search/view_doc.asp?symbol=A/RES/70/1&Lang=E; accessed on June 20, 2017)

[6] United Nations Development Programme: A Million Voices: The World We Want (http://www.undp.org/content/undp/en/home/librarypage/mdg/a-million-voices–the-world-we-want.html; accessed on June 20, 2017)

[7] United Nations: Transforming our world: the 2030 Agenda for Sustainable Development (http://www.un.org/ga/search/view_doc.asp?symbol=A/RES/70/1&Lang=E; accessed on June 20, 2017)

[8] https://www.nature.com/news/environment-waste-production-must-peak-this-century-1.14032

[9] https://www.ellenmacarthurfoundation.org/circular-economy/overview/characteristics

[10] https://practicegreenhealth.org/tools-resources/sustainability-benchmark-report-0

[11] http://greenhealthmagazine.org/passion-innovation/

[12] http://www.triplepundit.com/2016/05/circular-economy-means-healthcare/

[13] https://www.fda.gov/MedicalDevices/DeviceRegulationandGuidance/ReprocessingofReusableMedicalDevices/

[14] http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/toward-a-circular-economy-philips-ceo-frans-van-houten

[15] http://www.usa.philips.com/c-dam/b2bhc/us/topics/refurbished-diamond/diamond-select-program-brochure.pdf

[16] http://www.philips.com/a-w/about/sustainability/sustainable-planet/circular-economy/refurbished-medical-products.html

[17] http://www.usa.philips.com/c-dam/b2bhc/us/topics/refurbished-diamond/diamond-select-program-brochure.pdf

[18] http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/toward-a-circular-economy-philips-ceo-frans-van-houten

[19] Project Baseline (https://www.projectbaseline.com/; accessed on June 20, 2017)

[20] Wired: That Google Spinoff’s Scary, Important, Invasive, Deep New Health Study (https://www.wired.com/2017/04/wholl-really-benefit-verilys-exhaustive-health-study/; accessed on June 20, 2017)