Schafer: Innovation isn't just about technology at Medtronic

Perhaps it's another sign of how much the global health care market is undergoing fundamental change that a conversation about innovation with Medtronic CEO Omar Ishrak rarely touches on technical inventions.

Instead he talked about how new Medtronic products must generate adequate economic value to all of the stakeholders in a health care system.

"We are saying that one of the main issues in health care is to understand very clearly where cost is incurred and where benefit is realized," Ishrak said. "They may happen at different stakeholders and entities, or at different points in time. We need to ... articulate that for every innovation offering we have in the marketplace."

If that seems obvious -- making sure a product delivers some monetary value -- remember this is an industry in which even identifying the customer is not always that easy.

Is the patient the customer? A patient is almost certainly not paying the invoice on Medtronic's product, and besides, can a patient feel qualified to pick among competing options? No one in my family ever has.

The physician? It is the physician who would champion the new technology and try to get it adopted. But perhaps a physician just liked a more costly competing device better, on grounds of familiarity with an older model. And a physician almost certainly isn't paying a Medtronic invoice, either.

Is the hospital the customer? How about the insurance company -- or Medicare?

Ishrak doesn't believe a physician's opinion needs to go overboard, but that it needs to be augmented. Indeed, without Medtronic's clinical expertise, relationship with physicians, and a strong clinical case for its products, "none of the rest of this is possible," Ishrak said.

Ishrak's thoughts on economic value come from his strategy of optimizing innovation. Along with building revenue in emerging markets and day-to-day execution, that's been his agenda since he came to Medtronic in June 2011.

Optimizing does not mean taking steps out of a product development process. Instead, Ishrak described steps that have been added. It does not mean taking out cost. The total number of projects in development at Medtronic has declined 9 percent since Ishrak joined the company, but spending on product development has stayed at just under $1.5 billion for the fiscal year that ended in April.

What's been added to ongoing projects is an overlay of economic analysis. Ishrak said "the organization essentially has to invent the science, because that doesn't exist today. We know how to make products, we know what clinical problem we are trying to solve, but we do not know the financial impact to every stakeholder along the chain. We have to do this systematically, comprehensively, and with data. This is not flicking a switch and knowing how to do it."

For Ishrak, the challenge facing all of health care, providers like doctors as well as Medtronic, is well-known and the same in China as it is here.

What's different from other device makers "is that Medtronic is gearing its whole organization to think systematically about those three needs," Ishrak said.

Ishrak is best known since he came to Medtronic for his focus on growing sales in emerging markets such as India and China, and that, too, is about economic value. He said Medtronic's current products could sell much better among people who could afford them in countries such as India, but the best opportunity is in creating cheaper and simpler devices that deliver practical economic value to folks a long way from the Mayo Clinic.

And here, too, it's going to take a broader approach. He said he could drop a box of Medtronic pacemakers in a rural village in Asia today, and even if Medtronic charged nothing, there would still be no value delivered. None of the villagers would know how a pacemaker could help them live longer, and no one in local health care could implant it if they did.

"You would like to think that health care is not about economics," said portfolio manager Andrew Adams of Mairs and Power Inc., a Medtronic shareholder. "But you have to make sure the economics make sense. That is going to determine success."

Adams said that on recent visits to other companies in Medtronic's industry he heard much more about economic studies running in parallel with traditional clinical research, but that Medtronic appears further along in its thinking.

There may be a temptation to lament bygone days. Or grumble about how Medtronic, with its enviable record of inventing life-saving devices, is being reduced to justifying its products with a financial spreadsheet at every turn.

That certainly isn't Ishrak's view. Rather than matured, he said the industry is more "sophisticated," and that "the opportunity for innovation in health care is today as big as it has ever been."

And he tied his views on optimizing innovation directly with Medtronic's historic mission of making products that alleviate pain, restore health and extend life. "What we have got to find are ways of actually doing that, and making it true for everybody around the world," he said. "In the health care environment we are in, to fulfill the mission we need to think differently."