Episode #7 Transcript: Benjamin Gray joins to talk about disposable devices
Q: Today, we’re going to dig in deeper to disposable devices and what are the benefits of that, and get a little bit of a more clear visual of why it's becoming a large trend in this space and why it's so important for manufacturers or companies developing devices to take this into consideration.
A: Sure, yes. Well, there's really two major categories. One is more cost-related and the other is more use related. We had discussed on a previous podcast very briefly about these two different ones. The simpler one to address is the cost equation, the cost side of things. If a disposable or a single-use device economically doesn't make sense, it likely won't get developed, at least not as a single-use device. One of the challenges obviously is using material once and then discarding it. Cost of the device itself becomes very important, which maybe is less so important in a device that gets reused over and over.
Q: What kind of things play into that as you start looking at the benefits of something that's disposable?
A: One of the upfront advantages is that you eliminate your reprocessing costs due to cleaning, sterilization and just the logistics of it. A reusable device, once it's used in, let's say, an operating room, it has to be physically carried back down to a central reprocessing area. In some cases, it even gets boxed up, put on a vehicle and shipped somewhere. It then goes through a process where somebody is manually washing and scrubbing with soap, and then they will typically rinse it and clean it and do maybe a disinfection. Then it has to be sterilized, and then it has to be packaged in sterile packaging and put on a shelf, ready for use.
There's oftentimes not only a pretty significant cost associated with that, but also time. Now a device that can be used maybe once a day or twice a day, because of the timeline of that reprocessing, if a doctor wants to do five or six cases a day using the same style of equipment, they now have to own several pieces of that equipment. As we discussed previously, reusable equipment can oftentimes be quite expensive.
Q: One of the things that comes to mind for me is how companies or how developers of these devices can actually play this into their marketing. This comes to me because I'm always worried about how we tell our story, how we position not just Lighthouse but when we're working with other clients, how they are able to position it. Is there anything that says that there is marketing value to saying disposable-- Is there a connotation for disposable versus, I don't know, something, say, like single-use?
A: For the general public, I don't know that there is really significant education on the difference or even what gets used when they're going in for a procedure. Now, obviously, doctors do have some understanding of it, but they're even oftentimes a step removed when maybe a hospital or a group of hospitals that are purchasing equipment and making use based decisions. As we have said many times, one of the primary drivers here is cost. One of the things that we often will ask very upfront when we're talking to a new client or even a prospect client is talking about what the requirements for a transfer cost is. In other words, how much would they pay Lighthouse for each product or each device that we give to them.
What we find is that there are a lot of medical device companies that are looking to get a certain cost per procedure business model in place. This can be very hard to calculate, as you can imagine. With a reusable device, the cost per use is not only the device divided by how many times it's used, but also the cost of cleaning, reprocessing, storing and repairing. There's really just a whole host of things that go into the cost, so that's a pretty hard thing to nail down. With the single-use device, it's much simpler to calculate what it costs per use, because it's effectively the cost that the hospital has paid for the device.
Something that really plays into this, we talked about the reprocessing cost, but there's also the repair cost. If a reusable device gets used over and over and over, eventually it's going to degrade or fail and it's going to have to be either repaired or replaced. There are certainly costs and logistics associated with that that even make it a little more difficult to compute the cost per use scenario.
Q: I would think that another cost consideration, as they're evaluating things, would be litigious too. You have a single-use, you're not worried about that cross-contamination being used in a medical setting. I feel like that might be more difficult to quantify, but being able to spend a little bit more on that, on the device development, but then reduce your cost of potential legal fees or anything that allows you to be open to that, to anything litigious, I think is a consideration, too.
A: Yes, absolutely. What we've found, though, is that when you start talking about liability to hospitals, they basically go deaf and turn the other direction. They don't even really want to talk about it. It is important to them, don't get me wrong, but they typically don't want to make huge decisions. It's hard sometimes when they have to acknowledge certain challenges that they have and risks that they have. It's very well understood, the risk of cross-contamination and cross-infection, and every hospital desires to reduce that, but it's really hard to put a cost on what that is. Whether it's for litigious reasons or insurance reasons.
We basically have to validate the economics of a single-use system, and then the benefits of reduction of cross-contamination come along for the ride. Now, it is a big selling point, but with it being hard to put numbers on it, it's hard to justify a certain return on investment. What we find are that medical device manufacturers are trying to make the case for the single-use devices be able to make economic sense. Then the improvement in outcome and the reduction in cross-contamination risk really is just an added benefit on top of that.
Q: You mentioned the repair and efficiency as well. If you're a doctor or even a nurse that's performing some type of procedure, you want to make sure that you're going to get the same result every single time, too, right? Everybody is different, but the tools that you're working with, you want to have the utmost confidence in to be able to perform whatever procedure or a fall-through on any particular function every single time. I would imagine one of the benefits of a single-use device would also be consistency versus something that's renewable or reusable?
A: Yes, definitely, that's a very important point. When a reusable or capital type device is released from the factory, there's generally very high confidence that it meets certain performance standards, it's gone through a rigorous quality control system. When it's brand new, you could take 10 brand new systems and they would all perform equally well. The challenge is that once those devices start being reused and reprocessed, they change over time, and they don't have the same level of quality control in a reprocessing center that they would in a production environment where they're making the devices new.
What you find is, over time, devices degrade, and if a hospital has, let's say, 10 of the same endoscope to cover their reprocessing time, and new units that may be out for repair, the ones that are being used may vary from device to device. It's not uncommon, actually, for a surgeon to take a look at an image, be very unsatisfied, disconnect the whole thing and say, "Get me another one." Now you increase the cost of reprocessing, as well as probably having to send that device out to repair. You can see that not only does it have to do with efficacy, but again, there's other cost elements involved with it. You're right, surgeons and doctors are very used to what they see, and when it's not up to snuff, it becomes a sticking point for them.
With a single-use device, while you are using a different device every time, or a new device every time, that device has not been used or manipulated since it went through this quality control process, and it would have come off the production line in pristine condition and will be in the surgeon's hand in that same pristine condition. Yet, for whatever reason, there might be some issue that the surgeon decides they don't like that particular device, there's several more sitting there ready to be unpackaged and used at relatively low cost, so rapid deployment becomes a benefit as well.
Q: One of the connotations is that when you've got single-use devices, it is just more expensive. Tell me a little bit about, when you decide to go this route, how does a company scale to help reduce those costs?
A: One of the challenging parts of the single-use market is you really have to have high volume for it to make sense, because that way you're able to purchase material that you can get economies of scale, you're able to manufacture at more automated levels of processes, which reduces labor and cost. Generally, when we talk about single-use or disposable devices, where the connotation is high volume, now, that can scale based upon the actual procedure. One of the other intricacies that gets involved here is insurance reimbursement.
As we all know, it's an incredibly complex world of insurance, and everything that's done by a doctor or a hospital has a certain code associated with it, and those codes have reimbursement factors. We are typically looking at, and our clients are looking at cases where there's either good reimbursement or there's very high usage, or maybe a combination of both. There's value there for the manufacturer, and there's also value for the hospital that's using it, they feel like they can get adequately reimbursed from insurance for using that device.
Q: Talking about disposable devices. In the marketing world, we call those single-use devices. Not only do they reduce repair costs and make your logistics more efficient, they ensure consistent performance every single time for doctors and surgeons, so they have the utmost confidence when they're working on a procedure. Tell me about how they can be deployed as well, and some of the differences when you don't have to worry about getting them cleaned or fixed in situations of high alert or emergency.
A: A lot of times when we think of surgery, we think of maybe a pre-planned surgery where everything is organized and coordinated ahead of time, but there's a lot of emergency medicine that occurs remotely. Let's say like emergency medical services, like an ambulance, or even in a hospital, the emergency room, or anesthesiology. Typically you'll have what's called a crash cart during most surgeries and operations.
It's in case things go wrong, you're able to very quickly have access to life-saving devices. These are typically items that are not used very often, but when they need to be used, they need to be ready to go in a hurry, and there's no room for finding a bad device and then trying to get another one. There is absolutely applications in scenarios where you need to do remote work or very rapid deployment of devices.
Q: Not only is it rapid deployment or can it be there, on the other side of things, this is something that I feel like we've left off. When you make a capital investment in something that's going to be reusable, you're committing that the technology isn't going to improve dramatically over the next X number of years, or as long as you have that order there. Then you're committing to repairs and those types of things, whereas if it's single-use or certainly low usage, then the ability to integrate developments and improvements just comes in the next round of orders.
A lot of times, as you upgrade it or you change, I think of it really in layman's terms, like your cell phone. You have a cell phone or a mobile device, and you commit to having it for a year or two years, but then the new one comes out and you don't feel bad leaving it behind. You have the opportunity to continue to upgrade those technologies when they come out, and that allows you to offer even better care and higher customer service to the folks that you're working with.
A: You can almost think of it as the difference between purchasing something outright, versus having a subscription type model, which we see all the time in software now. The software industry has largely gotten away from purchasing a specific license to now a subscription and continual updates. Well, the same is true with a single-use device. As you indicated, you can make updates and changes without affecting a purchasing group or hospital's capital investment.
We talked on a previous podcast about the back end side of a lot of endoscopy units can be tens, hundreds of thousands of dollars, and once that's in place, it's really hard to then upgrade or update that and expect that the hospital will spend another couple hundred thousand dollars on changing the system out. There's really a lifespan associated with that. What we see with a lot of single-use devices, a model that has been quite effective is if there is capital or at least durable goods associated with a single-use device, we've referred to this as a hybrid system previously.
Oftentimes, the medical device company can lease out or loan out the capital side of things, and then sell the single-use. This is the classic razor blade model. It's beneficial, obviously, for manufacturers because they have a steady, continuous revenue stream, and it can also be very beneficial to the end user because they now have lower capital overhead costs. It's more of a just an ongoing use case cost and they have that ability to make product upgrades midstream, if you will, without losing out on money that they've already spent.
Q: Well, to your point, which is a much better example than the cell phone by the way, razors and razor blades, is that you think about the pioneering companies, who would have thought that you would have innovation in razor and razor blades, and yet here we are with multiple companies competing on subscription-based ways in which to capture those audiences and capture those clients. It's applicable in a whole host of places and certainly, Lighthouse has positioned well to assist clients in those transitions to find great solutions and help them capitalize on market shares as customers become more savvy in terms of investments and being able to capitalize on technology improvements.
A: It's an obvious trend in our economy in general that we're transitioning away from a commodity and physical goods driven-economy to more of a service-based economy. Of course, we have to have those commodities and the physical goods to exchange to create the value, but really the value add comes now in the service that's provided and making things easy to use and lower cost on a per-use basis.
Q: Absolutely. Well, do you have anything else that you would like to add to the case for a single-use devices?
A: We've focused largely on the benefits to the end user and some of the economics there. I just very briefly alluded to the advantage to the medical device manufacturer. Oftentimes we can see single-use devices economically beneficial to us as well because of that steady stream of usage rather than making tens or hundreds of devices that may have some unpredictable cycles for purchasing. When you're signing your customers up for single-use products, you can know that there is a certain demand that will always be there in a continuous demand, so you're able to have a more well-defined revenue stream based upon these products that you're selling. There's certainly an attractive element to the producers, as well as the consumers of these single-use products.
As technology continues to improve and opportunities to shed light within the different scopes of the devices and their use cases, it will continue to make more sense for both manufacturers and consumers to make those decisions to work with companies like Lighthouse.