Medical Device Industry: Total cost of content

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CIDM

December 2011


Medical Device Industry: Total cost of content


CIDMIconNewsletterMarc Miller, Crimson Life Sciences

There are a number of wide-ranging trends that affect nearly every device manufacturer. Perhaps none is more important than the rapid aging of worldwide populations. According to an official UN report, worldwide aging is

  • Unprecedented in human history and accelerating
  • Pervasive, part of a global phenomenon
  • Enduring, once older, countries will not “grow young” again
  • Profound in its serious structural implications for both society and industry

Aging populations are important for the medical device industry for one simple reason: Older populations spend more on healthcare of all types—including medical devices. In fact, according to a report from Harvard University, healthcare spending increases over 500 percent as we approach life expectancy. Especially over the past decade, the growth and globalization of the device industry has been fueled, in large part, by this graying of worldwide populations.

Some 15 years ago, some experts in the device industry doubted the relative attractiveness of international markets—noting that the overhead of logistics, overseas operations, and regulatory compliance made them substantively less attractive than the domestic US market. However, economic development in overseas economies has combined with aging populations to dispel this perspective. Now, international sales account for over 50 percent of total revenue at most large manufacturers … with developing economies representing their fastest-growing markets.

Red Sky at Morning

Even before the financial crisis of 2008-09 and Europe’s current sovereign debt crisis, there was an acute awareness of rising national healthcare costs. Now, governments worldwide are more focused than ever on healthcare cost containment as an important means to tame runaway deficits. This is equally true, for instance, for EU countries, where healthcare costs constitute eight to nine percent of total GDP, as it is in the US, where healthcare costs constitute a whopping 16 percent of total GDP.

With worldwide healthcare budgets under scrutiny, reimbursement rates are generally declining and approvals are more challenging, increasingly based on data-driven proof of increased effectiveness and/or demonstrable cost-savings…so-called “Global Comparative Effectiveness Research,” or “Global CER.”

In an era of healthcare austerity, manufacturers have renewed their focus on cost savings as a means to increase bottom line profitability—recognizing that, dollar-for-dollar, cost savings have a larger impact on profitability than comparable revenue increases. And, in the current economic environment, they are often easier to achieve.

However, cost consciousness has also revealed a particularly unwelcome consequence of rapid globalization: an explosion in the volume of written content and information necessary to develop, test, register, train, and sell medical devices worldwide. Because, of course, along with an increased volume of content, has come a similar increase in the cost necessary to manage it.

Thus far, due to legacy processes and the sheer number of affected activities, tasks, and functions, most manufacturers have demonstrated a fragmented approach to controlling content costs. However, research is now prompting manufacturers to reexamine their assumptions—this time with an appreciation for the cost-saving benefits of new strategies and technologies.

Total Cost of Content: A conservative estimate

For this article, primary research and client interviews were used to estimate the “Total Cost of Content” for a typical, large device maker. These manufacturer estimates were verified by a device industry analyst at a major US brokerage firm with direct industry experience. Secondary verification was provided by sample size. Manufacturer estimates took into account the cost to create, verify, approve, update, manage, translate, and format content in the core functional areas of regulatory, marketing, and training.

The method used to calculate the Total Cost of Content roughly follows the method laid out in a 2011 article by Michael Porter, noted professor of competitive strategy at Harvard Business School. In the Harvard Business Review article, How to Solve the Cost Crisis in Health Care, Porter observes, “Accurate cost measurement in health care is challenging, first because of the complexity of health care delivery itself.” The very same can be said of content creation and management within the typical medical device manufacturer. In fact, by some measures, content complexity has increased 300-400 percent over the past 15 years due to an increase in the number of contributors, markets, and output options.

Porter’s method for managing this complexity is a “time-driven activity-based costing (TDABC) system to assign costs accurately and relatively easily to each process step along the path.” Crimson used this same approach to identify device makers’ staff involved in the various stages of content development, review, management, and approval, estimating the percentage of time that they were dedicated to content management activities, and multiplying that percentage by average salaries for specific roles.

Example:

Content Contributor1; Avg. salary x Percentage of time dedicated to content responsibilities +

Content Contributor2; Avg. salary x Percentage of time dedicated to content responsibilities +

Content Contributor3; Avg. Salary x Percentage of time dedicated to content responsibilities +

(…)

It is important to note that, due to differences in overhead allocations per manufacturer, only unallocated “straight salaries” were used to produce this estimate. This has the net effect of understating actual totals. Following Porter’s example, a fully costed per-hour rate (salary + benefits + allocated overhead) will yield a significantly higher, though more accurate, total.

Added to the salary percentage total was a cost for translation/localization and formatting (not printing). The translation/localization cost was based on actual corporate spending and reflects the current industry standard practice of translating/formatting individual documents and files, using qualified resources, appropriate processes, and with the assistance of translation memory (TM) software (for leverage/cost savings).

Time-to-market expense was not considered for this exercise. However, in many cases, this is a key consideration for manufacturers. For example, by implementing certain content management strategies and technologies, the average translation/formatting turnaround for large documents may be reduced by over 30 percent. The value of this reduction is most appropriately determined on a per-company basis.

Other opportunity costs are also most appropriately determined on a per-company basis. For manufacturers operating with a traditional, document-based system, the opportunity costs of maintaining this approach can be significant, especially when considered in the context of labeling and translation risk management as well as upcoming eLabeling opportunities.

Based on the use of straight salaries and exclusion of time-to-market and other opportunity costs, we believe that the following estimated Total Cost of Content is generally understated and therefore conservatively accurate.

A Potential $400 Million Bottom-Line Boost

The vast majority of device manufacturers manage their content at a document level—creating, updating, and translating their content on an item-by-item basis. It is estimated that the cost associated with these activities amounts to one percent of manufacturers’ revenue. For the US industry as a whole, this amounts to over $1 billion in annual Total Cost of Content.

Based on content management lessons learned in the aerospace, consumer, and high-tech industries, it is further estimated that the US medical device industry could reduce this annual total by 40 percent ($400 million). Through a combination of Globalization Management System (GMS) software, content management strategies and techniques, and Component Content Management System (CCMS) software, manufacturers can restructure authoring processes for maximum efficiency, risk management, and reuse. Increasingly, web-based, software-as-a-service (SaaS) models are favored due to their low total cost of ownership, rapid implementation, reduced impact on IT, and continuous product improvement.

Of the potential $400 million total savings, 25 percent is due to GMS implementation and 75 percent is due to implementation of CCMS. Examples of leading SaaS-based systems include Translations.com’s GlobalLink software suite (GMS) and Astoria Software (CCMS).

Risk Management

Based on internal and third-party audits conducted by Crimson, it is estimated that 35 percent of Serious Errors in translated labeling (possibly resulting in patient harm) are due to increased content complexity and inadequate publishing practices. According to a review of FDA data contained in Packaging Postponement: Solving the Medical Device Ever-Changing Requirements (unpublished Master’s thesis by Harold Reisman), labeling-related recalls have constituted the majority of all recalls since 2006.

Through a planned implementation of GMS and CCMS systems, the root cause of many of these recalls (inadequate systems/processes to manage increasing content complexity) can be addressed. Also, by reinvesting a portion of the savings realized through GMS/CCMS in upstream quality enhancements, system risk can be further reduced, leading to fewer Serious Errors in areas such as translated labeling.

Conclusions

The effort to convert from a traditional, document-based content management system to a GMS/CCMS-based system is non-trivial and requires senior management leadership and commitment. For this reason, many manufacturers have opted to preserve existing processes. However, the increase in content complexity due to a 300-400 percent increase in contributors, document types, and markets served has significantly elevated the Total Cost of Content for the medical device industry. New research estimates the Total Cost of Content for US manufacturers at 1 percent of revenue ($1 billion). Potential savings from conversion to GMS/CCMS is estimated at $400 million. Given the current economic environment, this significant bottom-line benefit is driving manufacturers to reexamine their traditional labeling and documentation processes. Risk management benefits provide further impetus to content management reconsideration. CIDMIconNewsletter

Marc Miller

Crimson Life Sciences

mmiller@crimsonlanguage.com

Marc Miller is President of the Crimson Life Sciences Division of TransPerfect. Originally founded in 1992, Crimson became part of the TransPerfect family of companies in 2005 and is the first translation organization in the world to be certified to ISO 9001, ISO 13485, and ISO 14971. Prior to founding Crimson, Miller worked as a Senior Research Associate for the strategy consulting firm, S.I.A.R, where he authored assessments for US and European medical technology companies. Miller earned his MBA degree in Marketing from the Scottish Business School at Stirling University, Scotland, and his BA degree in Celtic Languages and Literature from Harvard University.

 

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