$158 Billion Worth of Toenail Clippers

I think a lot about economics. Like A LOT. It’s pretty much the vast majority of my recreational thought. Which is not a particularly insightful statement since humans are basically decision-making machines (practical economics). I, however, am very interested in the process of how others make decisions. Typically in large groups. Some people call this a market.

Earlier in my career, I participated in a particularly fascinating market, that of medical devices. Bear with me. What makes it interesting are three dynamics; the government is the largest purchaser of devices, the government approves which devices can be sold and the need is clinical; meaning it has a significant impact one a person’s health.

This is interesting because it slows down the process quite a bit. It takes longer and more money to get a product through the FDA. You couldn’t justify bringing the product to market unless the government will pay you enough to produce it and you’ll know if that’s the case if the clinical need is high enough.

As you might guess, many medical devices are seen as being quite necessary. So, the price the government is willing to pay is pretty high. This isn’t true for every disease. Some diseases aren’t really worth solving with a regulated medical device. Take, for example, long fingernails. We wouldn’t REALLY consider overgrown fingernails to be a medical problem, but in a way, it is. Your body has done an undesirable thing and you want to fix it. And, for example, you could employ a number of solutions; biting, scissors or the classic nail clipper. In this context, the nail clipper is a fairly sophisticated machine (relative to scissors or your teeth) and has one specific ‘Clinical’ purpose. Now, nail clippers cost about $2 dollars at Walgreens. And outside of the EBT program, you probably couldn’t get the government to pay for one. Additionally. since the risk of you hurting yourself is SO LOW that there is no reason to involve the FDA in approving it.

SOOOO, all that to say that medical technology exists on a spectrum and I’m particularly concerned with high-value devices for high-value clinical problems.

A while back I had the honor of founding a medical device company and the fundamental unit of innovation for such a company is to optimize a high-value device, for a significant clinical need that the government will approve and pay for. Sounds simple?

It’s not. It’s actually really hard, but that’s beside the point.

What is interesting is that typically in this market a firm can price their good proportional to the clinical value it provides. For example, if a typical dialysis treatment is $100 dollars and I invented a device that has a drastically lower cost to build and I can do the same treatment for $10, I don’t charge $12 or $14 dollars. Instead, I start around $99. Why? The buyer isn’t evaluating on my costs, it’s evaluating on a known clinical value and will pay the same payout. Thus, my pricing only needs to be low enough to attract the attention for the intermediary who controls the purchase; hospitals.

Am I losing you? I know, it’s boring. But that’s part of what makes it so lucrative.

Anyway, these hospitals are filled with humans. Those humans are prone to the same old influence tactics that all humans are known to fall for. Never mind that many have MDs and other advanced degrees. They're human. So, as a medical device firm, I can increase the perceived value of my product by using humans I hire (Sales Reps) to go influence the other humans (the doctors and hospital administrators) who spend the government’s money for the government-approved devices.

Great, so what.

Well, it’s interesting because we’re spending a lot of money on it. And here’s the thing. I don’t necessarily think it’s a bad idea. Why? Because those sometimes better technology gets to patients sooner than it would otherwise and with better training to the clinicians that would provide it.