Medtronic: Navigating a Shifting Healthcare Landscape
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R E V : J U N E 2 8 , XXXXXXXXXX
Professors Robert S. Kaplan and Michael E. Porter, Senior Fellow Thomas W. Feeley, and Senior Researcher Alee Hernandez prepared this case. It
was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard
Business School and not by the company. Professors Robert S. Kaplan and Michael E. Porter have been compensated for speaking at Medtronic
sponsored events. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of
primary data, or illustrations of effective or ineffective management.
Copyright © 2018 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call XXXXXXXXXX,
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R O B E R T S . K A P L A N
M I C H A E L E . P O R T E R
T H O M A S W . F E E L E Y
A L E E H E R N A N D E Z
Medtronic: Navigating a Shifting Healthcare Landscape
We want to help drive change in the healthcare system. To be successful at this, we need business models
where we benefit from taking on shared accountability to produce better outcomes.
— Omar Ishrak, CEO of Medtronic
Medtronic, the largest medical device producer in the world, had fiscal 2017 revenues of $29.7
illion (see Exhibit 1) and employed 91,000 people in 160 countries. Medtronic organized its product
and service offerings in four large business groups (see Table 1). Exhibit 2 lists representative products
offered by each of the four groups.
Table 1
Product Group 2017 Revenue Percentage
Cardiac and Vascular 35%
Minimally Invasive Therapies 33
Restorative Therapies 25
Diabetes 6
Source: Medtronic company documents
Medtronic conducted its global business through a regional structure; the Americas region had 60%
of revenues; Europe, Middle East, and Africa, 23%; Asia Pacific, 12%; and Greater China, 5%. The U.S.
accounted for 55% of total revenue.
Medtronic was experiencing increasing pressures on its prices and profitability. Omar Ishrak, CEO
since 2010, had to navigate the company through a rapidly challenging competitive environment of
slower growth in core products and markets, rapid technological change, increased concentration of
customers and competitors, and tighter regulation of its customer relationships.
This document is authorized for use only by Kristopher Durham in Stratgic Thnkng & Decis Making - Spring 2021 at Wake Forest University Medical School, 2021.
XXXXXXXXXXMedtronic: Navigating a Shifting Healthcare Landscape
2
History
Earl Bakken and his
other in law, Palmer Hermundslie, founded Medtronic, a medical equipment
epair and sales company, in Minneapolis, Minnesota in XXXXXXXXXXOperating from a 600- square foot
garage, they served local physicians, hospitals and researchers. The founders soon began to extend
their offering by modifying existing medical devices to incorporate new technologies.
The company’s first major product was a portable cardiac pacemaker. In 1952, Boston physician
Paul M. Zoll had demonstrated how electrical stimulation could restart the beating of a stopped heart,
ut the repeated shocks from Zoll’s crude device were painful and it was not a commercial success.
About the same time, University of Minnesota surgeon C. Walton Lillehei, a leader in the new field of
open heart surgery, was looking for a way to pace the heart following surgery. Lillehei asked Bakken
if he could develop an external portable pacemaker for post-surgical care that could be connected via
wires implanted directly into the cardiac muscle. Bakken developed a battery- powered pacemaker
that could be taped to a patient’s chest. By 1960, Medtronic had reduced the pacemaker’s size and
power so that it could be implanted subcutaneously for long-term use. While a clinical success, the new
device’s high price prevented widespread adoption. In 1965, the new Medicare legislation included
coverage for pacemakers, and sales of Medtronic’s device took off.
The company continued to grow during subsequent decades but financial performance was uneven.
Under Dale Olseth, who took over as CEO in the 1976, and Winn Wallin, who became CEO in 1985, the
company expanded globally and introduced new products, such as the first long-lasting lithium
attery for pacemakers, and the first implantable drug pump for cancer pain.
In 1989, Bill George was recruited from Honeywell to be the president and COO; he became CEO
in 1991, a year when Medtronic first reached $1 billion in annual revenues. In 1990, a favorable Supreme
Court ruling in a patent dispute with Eli Lily had opened the door for Medtronic to enter the market
for defi
illators and other implantable cardiac devices.
Medtronic used acquisitions to expand into devices for spine surgery,
ain surgery, coronary artery
stenting, cardiac surgery, and diabetes management (Exhibit 3 shows Medtronic acquisitions and
partnerships since XXXXXXXXXXMedtronic’s innovative products included implantable pumps for pain
management, insulin pumps for diabetes, and devices for cardiac catheterization and open-heart
surgeries. Medtronic sales hit $2 billion in 1993 and $5 billion in 2000. It market capitalization increased
from $1 billion in 1991 to more than $40 billion in 2001.
George retired as CEO in 2001, and Medtronic’s revenues continued to grow under his successors.
But in 2011, sales growth slowed to 1% and the stock price declined, and the board appointed Omar
Ishrak as CEO. Ishrak had been head of Healthcare Systems at General Electric (GE) where he built the
low-growth ultrasound business into an innovation and global leader. He had also led the development
of market-leading anesthesia and patient monitoring devices, and enhanced the performance of
diagnostic imaging modalities such as magnetic resonance (MR), computed tomography (CT), and
positron emission tomography (PET).
When Ishrak took over, sales of Medtronic’s core products of implantable pacemakers and
defi
illators were declining, and sales in its three biggest market segments, heart rhythm, coronary
artery, and spinal devices, had flat sales. Further, most of its sales (86%) were in developed markets,
all of whom were implementing programs to reduce health care spending growth. Medtronic’s 60-year
history of medical device innovation, product development, and sales growth were being challenged
y payers focused on containing health care spending. Ishrak believed, however, that Medtronic’s high
performance medical products and services, such as catheter-placed aortic valves and new systems for
This document is authorized for use only by Kristopher Durham in Stratgic Thnkng & Decis Making - Spring 2021 at Wake Forest University Medical School, 2021.
Medtronic: Navigating a Shifting Healthcare Landscape XXXXXXXXXX
3
managing patients with acute and chronic conditions, along with the company’s expertise in clinical
care and reimbursement services could be used to demonstrate clinical and economic value. Health
care, however, had traditionally been slow to adopt even proven technology innovations as clinical
standards of care.
A Changing Industry Landscape
Medtronic faced multiple strong competitors in 2017. Johnson & Johnson competed with all four of
its product groups. A
ott, Boston Scientific, and Edwards were major competitors in Cardiac and
Vascular; Stryker and Zimmer in Restorative Therapies; Boston Scientific, C.R. Bard, Cardinal Health,
and Baxter in Minimally Invasive Therapies; and Roche and Omnipod in Diabetes.
Medical device manufacturers had to obtain FDA approval for each device, which included labeling
as well as certification of the manufacturing process. Submitting a new device for approval started with
iocompatibility data and safety data to demonstrate that no harm or adverse biological response
would occur due to the materials used. Devices fell into three classes for further review. Class I
devices, typically basic devices like hand-held surgical instruments, were subject to minimal
equirements. Class II devices, including infusion pumps and motorized wheel chairs, had to
demonstrate compliance with performance standards and be subject to post-market surveillance. Class
III devices, which included implantable devices, were subject to the most intense evaluation, including
human clinical studies. Exceptions for Class II and III devices could be obtained if the manufacturer
could demonstrate that the new device was “substantially equivalent” to one already approved. Unlike
pharmaceuticals, substantially equivalent devices did not require randomized clinical trials to
demonstrate superior performance when compared to an existing, approved device.
Historically, medical device companies had negotiated prices directly with hospitals or other
provider organizations. Hospitals balanced the cost of the device with the Medicare DRG (diagnostic
elated group) payment or the fee-for-service payment from a private payer or Medicaid. Supplier
contracts with commercial payers often included discounts, rebates and volume incentives.
The medical device industry was subject to many regulations. Congress passed the Medicare Fraud
and Abuse Statute, commonly called the Anti-kickback Statute, as part of the 1972 Social Security
Amendments. The Statute prohibited “the offering, solicitation or acceptance of any type of gift or
emuneration in exchange for rewarding refe
als for businesses accepting federal healthcare
payments.” The 1987 Medicare and Medicaid Anti-Fraud and Abuse Amendments expanded the
statute and increased its violation from a misdemeanor to a felony. In 2009, the Departments of Health
and Human Services and Justice created the Health Care Fraud Prevention and Enforcement Action
Team (HEAT) to detect violations and prosecute offenders.
In 1989, U.S. Congressman Pete Stark introduced legislation on self-refe
als that eventually became
Section 6204 in the Omnibus Budget and Reconciliation Act of 1989. This section, usually called Stark
I, prohibited the refe
al of Medicare patients to clinical laboratories in which the physician or the
physician’s family members had financial interests. In 1993, Congress passed “Stark II,”1 which
extended the federal ban to ten additional health services, and also applied the extended ban to
Medicaid. The Physician Payment Sunshine Act of 2013 forced all suppliers to disclose transfers of
value of $10 or