Medtronic moves into growing health-services industry

(Bloomberg) -- Medtronic Inc. is looking beyond medical devices, seeking to expand within hospitals and connect directly with patients as it moves into a health-services industry projected to grow as Obamacare expands coverage.

The world’s biggest maker of devices to regulate the heart’s rhythm signaled its move last week with its $200 million acquisition of Cardiocom, which provides monitoring services to patients with chronic diseases. It is pursuing contracts with about a dozen large European medical centers to run their cardiac catheterization laboratories, where hearts are examined and stents are implanted to prop open arteries.

The new business model for the Minneapolis-based company coincides with growth in the aging population and projections that the U.S. health law will add more patients to the system. Providing services to help manage care, and proving that Medtronic’s devices offer cost-saving benefits, will gain more patients, CEO Omar Ishrak says.

“It’s a very much intentional strategy to build out a solutions company,” he says. “In this transformation, it’s not that we are leaving stuff behind and going somewhere else. It’s that we are expanding what we have, beyond the episode of therapy itself. That way we can get full value for the benefits and make sure they are optimized.”

Health care spending is under intense scrutiny as costs rise amid weak economic growth. Medtronic has focused on quantifying the value of the company’s products since Ishrak took the helm of the medical device company in June 2011.

“Disease and patient management is definitely a way to go in the new era of health care reform,” says Jason McGorman, an analyst at Bloomberg Industries in Princeton, N.J. “Health care reform is a shift to value-based care, rather than quantity of care. Any way Medtronic can help improve outcomes is generally the way health care is moving. The trick for them is to capitalize on that in the right areas.”

Questions about quality and overuse of products where Medtronic has a leading position, including stents, heart rhythm devices like defibrillators and spinal products, led to price cuts and other pressure. Ishrak’s goal has been to prove the company’s technology can save money and improve health, for example by showing a device that synchronizes electrical activity may keep heart failure patients out of the hospital.

With the Cardiocom acquisition, Medtronic plans to focus first on heart failure patients. Ensuring those patients get the care they need and improve their health will expand Medtronic’s reach beyond the 10% of patients who already have their products, he says.

“We can reach a broader set of patients who may or may not have had our devices,” Ishrak says. “We have no intention of forcing them to use our devices. We want to manage the entire disease state, and provide customers with the care they need to be as healthy as possible.”

Additional announcements on Medtronic’s strategy and a deeper move into patient services are planned, Ishrak said.

The move has the potential to reduce the company’s profit margins, particularly because devices are known for their high margins, says McGorman, the Bloomberg Industries analyst. Medtronic has recognized that the change in focus for health care is coming, “and it’s here to stay,” he says.