Medical Device Makers Leverage SAP Cloud ERP for New Business Models

As with many other market segments, the Medical Device industry is being disrupted by two major macro trends: 1) the move to new offerings with recuring revenue models, and 2) the transformation of business operations with cloud-based ERP systems. This Insights post provides an overview of these new medical device product/service offerings and an exploration of how SAP Cloud ERP can help optimize and unify back-end systems for managing them.

New Medical Device Business Models

Subscription-Based Services: Subscription-based services involve offering products or services on a recurring basis rather than a one-time purchase. This business model allows medical device companies to generate a continuous stream of revenue, improve customer loyalty, and achieve more predictable cash flow.. Subscription-Based Services can include:

• Equipment as a Service (EaaS): Medical device companies can offer their equipment on a subscription model, allowing customers to pay a fixed monthly, quarterly, or yearly fee for using the device. This model reduces the upfront costs for healthcare providers and ensures a regular income for the manufacturer..
  • Use Case: A company providing medical imaging equipment, like MRI or CT scanners, may offer the machines on a subscription basis. Healthcare providers can pay monthly fees for the use of the equipment, which includes regular maintenance, software updates, and access to the latest technology without worrying about large upfront capital expenditures.
• Consumables Subscription: In addition to the equipment, companies can also offer consumables (e.g., test strips, surgical instruments, etc.) on a recurring subscription basis.
  • Use Case: A company manufacturing diagnostic test kits can offer subscription services for supplying testing kits regularly to clinics and hospitals, ensuring they never run out of stock and streamlining inventory management.
• Software as a Service (SaaS): Medical device manufacturers can provide software solutions that accompany their devices as a service. This could include cloud-based diagnostic software, data storage, and analytics services.
  • Use Case: A company selling cardiac monitoring devices can offer subscription access to the software that aggregates and analyzes the heart data, helping physicians provide better insights into patient health. This software would be updated regularly with new features, AI-driven insights, and security patches.

Outcome-Based Pricing: Outcome-based pricing links the cost of a product or service to the actual results or outcomes it delivers. This model aligns the interests of the medical device company with the healthcare provider or patient, ensuring that payment is based on the effectiveness or value provided rather than just the device itself. Outcome-Based Pricing use cases include:

• Pay-for-Performance: The price of a medical device is tied to specific performance metrics, such as improved patient outcomes, reduced hospital readmissions, or faster recovery times.
  • Use Case: A manufacturer of joint replacement devices may offer a pricing model where the payment for the device is partially contingent on the success of the surgery and the recovery outcomes. If the patient experiences a fast recovery and low complication rate, the price may be higher, while lower performance results in a reduced price.
• Risk Sharing Agreements: This model involves sharing the financial risk of treatment outcomes between the medical device company and the healthcare provider or insurer. For instance, the device maker may agree to refund part of the purchase price or offer additional services if the device fails to deliver the promised outcomes.
  • Use Case: A company selling a medical device used in chronic disease management might agree to offer a partial refund if a patient doesn’t experience the expected improvement in their condition. Alternatively, if the device leads to improved patient outcomes, the company receives a higher payment for the device.
• Bundled Payments: Devices, procedures, and post-operative care are offered under a single bundled payment, where the cost is determined by the overall patient outcome rather than individual item prices.
  • Use Case: A surgical implant company may work with hospitals to create bundled payment packages for specific surgeries (e.g., hip replacements). The package covers the device, the surgery, recovery, and follow-up care. If complications arise post-surgery, the company may assume part of the financial responsibility to improve outcomes.

Integrated Services Models: Integrated services refer to a holistic approach where a medical device company not only provides the product but also offers complementary services that enhance the overall value proposition. This model can help companies create deeper relationships with customers, improve patient care, and differentiate their offerings from competitors. Integrated Services Models include:

• Full-Service Maintenance & Support Contracts: Offering comprehensive service contracts that cover all aspects of equipment management, including preventive maintenance, repairs, software updates, and customer support.
  • Use Case: A company selling surgical robots can offer integrated services that include training for medical staff, preventive maintenance, software updates, and 24/7 customer support. This ensures that the robot operates efficiently, minimizing downtime and improving the hospital’s ability to perform surgeries.
• Managed Services & Data Analytics: Companies can bundle medical devices with data management and analytics services. This allows healthcare providers to not only have access to the device but also gain valuable insights from the data collected by the devices.
  • Use Case: A company selling wearable health trackers can provide an integrated service that includes cloud-based health data analysis, patient monitoring, and actionable insights delivered to healthcare providers. This service helps clinicians make real-time decisions based on the data, improving patient outcomes and enhancing healthcare delivery.
• Training and Consulting Services: Many medical devices require specialized knowledge and skills to operate effectively. Medical device companies can offer training, consulting, and certification programs alongside the sale of their equipment to ensure healthcare providers can fully utilize the technology.
  • Use Case: A company providing complex diagnostic imaging equipment (e.g., ultrasound or MRI machines) can offer on-site training sessions, certification programs for healthcare professionals, and ongoing consultation to ensure optimal use of the equipment.
• Outcome-Enhancing Services: Medical device companies can bundle services that enhance the performance of their devices and lead to better patient outcomes, such as remote monitoring, telehealth integration, or mobile app solutions.
  • Use Case: A manufacturer of diabetic devices might offer integrated services that include continuous glucose monitoring devices combined with a mobile app that tracks data and offers insights on insulin dosage adjustments. They might also offer virtual consultations with healthcare providers based on the data from the app, ensuring optimal disease management.

Business System and ERP Challenges

These new business models in the medical device sector present unique financial compliance and revenue reporting challenges including adjustments to traditional accounting practices to ensure accurate revenue recognition, proper tax treatment, and adherence to regulatory standards.

Revenue Recognition Challenges: Under new business models, revenue recognition is more complex due to the timing, structure, and conditions tied to payments. Accounting standards such as ASC 606 and IFRS 15  provide guidance, but medical device companies must navigate specific nuances for different models.

• Subscription-Based Services: Subscription-based models often involve recurring payments over a period of time (e.g., monthly, quarterly, annually). The challenge lies in determining when to recognize revenue, especially if the contract includes variable components or bundled services.
  • Example: A company offering equipment as a service (EaaS) must recognize revenue over the life of the subscription rather than at the point of sale. This requires careful allocation of revenue between equipment, services, and any other components such as software or maintenance.
  • Solution: Companies need to adopt a subscription revenue model that aligns with ASC 606’s guidelines, ensuring revenue is recognized over time (as the service is provided) and that costs (e.g., maintenance, customer support) are also amortized accordingly.
• Outcome-Based Pricing: With outcome-based pricing, the revenue is contingent on achieving specific outcomes, which makes the timing and certainty of recognition uncertain. If the device or service does not achieve the agreed-upon outcomes, partial or full refunds may be issued.
  • Example: A company offering pay-for-performance pricing for a surgical implant may face difficulty recognizing the full revenue upfront if it is contingent on the patient’s recovery or post-surgical outcomes.
  • Solution: Revenue may need to be recognized when the outcome is achieved or when the uncertainty around the outcome is resolved. This requires tracking performance milestones and aligning revenue recognition with the achievement of those milestones.
• Bundled Payments and Integrated Services: Bundled payments (where the price of the device and associated services are grouped together) create challenges in separating and allocating revenue between the device, services, and ongoing support. Similarly, for integrated service models, it can be difficult to determine how much of the payment relates to the device, and how much to the maintenance or software services.
  • Example: A medical device company providing both an implant and a post-surgery monitoring service might need to allocate revenue between the two components, especially if the customer is billed on a single invoice.
  • Solution: Companies must ensure they comply with ASC 606's allocation guidance for bundled contracts, splitting revenue across different performance obligations based on their standalone selling prices (SSP).

Taxation Issues: New business models can trigger different tax treatment than traditional sales models, depending on jurisdiction and the structure of the contract. The tax implications for subscription services, outcome-based pricing, and bundled services can vary, and medical device companies need to account for these complexities.

• Sales Tax on Subscriptions: For subscription-based models, the tax treatment can differ significantly based on whether the company is selling a product, service, or a combination. The company may also need to determine if it should apply sales tax at the time of billing, as opposed to recognizing tax over time.
  • Example: If a company provides a subscription service for access to diagnostic software, it may need to determine whether the service is taxable in each jurisdiction and how to handle tax on recurring payments.
  • Solution: Companies need to consult local tax rules and understand when tax is due and whether subscriptions are taxable as services or products. For Software as a Service (SaaS) or equipment leasing, the tax treatment may vary across regions.
• Tax on Outcome-Based Pricing: With outcome-based pricing, taxes must be calculated on the actual payments received. If part of the payment is contingent on the outcome (e.g., a refund for failure to meet certain outcomes), the tax impact can be difficult to manage.
  • Example: If a medical device company has a contract where part of the payment depends on the patient’s recovery, the company needs to determine how much tax to remit if the outcome is not achieved, and a refund or adjustment is made.
  • Solution: Proper systems must be in place to track outcome-related adjustments and ensure tax calculations are accurate when revenue is revised or refunded.

Contract and Lease Accounting (ASC 842 / IFRS 16): For companies offering equipment as a service (EaaS) or leasing models, the new accounting standards for leases—ASC 842 and IFRS 16—require changes in how leases are reported on financial statements. If a company offers equipment as part of a lease agreement under a subscription model, it must determine whether the arrangement qualifies as a lease under the new rules, which requires recognizing right-of-use assets and lease liabilities on the balance sheet.

• • Example: A medical device company leasing out MRI machines may need to account for the equipment’s right-of-use asset and liability, impacting both its balance sheet and income statement.
  • Solution: The company must assess the lease terms to determine if the contract includes a transfer of ownership, a right of use, or a substantial portion of the economic life of the asset. Proper classification and reporting must be in place to comply with ASC 842 or IFRS 16.

Reporting on Multiple Performance Obligations: When offering bundled services (such as equipment plus support or software), medical device companies must allocate revenue between the various performance obligations within the contract. For bundled contracts, revenue recognition must be aligned with the delivery of each distinct good or service. For example, a subscription that includes both a device and software maintenance requires allocating revenue for each component.

• • Example: A company selling a surgical instrument along with ongoing training services needs to allocate the total revenue between the two based on their standalone selling prices.
  • Solution: Companies must ensure they have reliable methods for calculating and allocating revenue to each distinct performance obligation within the bundle, following ASC 606’s guidance on allocation.

Impairment and Returns Management: The introduction of outcome-based pricing models can complicate the impairment of revenue due to refund provisions, return rights, and contingencies. If a medical device fails to achieve the desired outcome and a refund is required, the company may need to adjust recognized revenue. Under outcome-based pricing, revenue recognized at the point of sale may need to be reversed if the agreed-upon outcomes (such as patient recovery) are not met.

• • Example: If a company’s cardiac stent fails to improve heart health as expected, and a refund is issued to the hospital, the company must manage the reversal of previously recognized revenue.
  • Solution: The company should have provisions in place to track revenue reversals and document the reasons for any returns or refunds. This ensures proper financial reporting and avoids discrepancies in recognized revenue.

Leveraging SAP Cloud ERP and Finance Solutions

Transitioning to comprehensive cloud-based business software such as SAP S/4HANA Cloud ERP (Public or Private Edition) can significantly help medical device companies streamline and integrate their various business activities within a unified, scalable and maintainable, end-to-end system. The combination of SAP cloud ERP applications, SAP Business AI, SAP Business Suite, and SAP Business Data Cloud come together to deliver exceptional business value—all powered by SAP Business Technology Platform.
Key advantages include:

• Scalability and Flexibility: SAP Cloud ERP allows medical device companies to scale their operations efficiently. Whether expanding into new markets or handling increased demand, cloud ERP provides the flexibility to adapt quickly.
• Streamlined Operations: By centralizing data and processes, SAP Cloud ERP enhances operational efficiency. It integrates various functions such as manufacturing, supply chain management, and financials, reducing redundancy and improving overall productivity.
• Regulatory Compliance: Medical device companies must adhere to stringent regulatory requirements. SAP Cloud ERP helps by automating compliance processes, ensuring that products meet regulatory standards across different regions.
• Advanced Analytics: Access to real-time data analytics is crucial for decision-making in the medical device industry. SAP Cloud ERP provides powerful analytics tools that enable companies to gain insights into performance metrics, customer trends, and operational efficiencies.
• Innovation and R&D: Cloud ERP supports innovation by facilitating collaboration across teams and providing a platform for R&D initiatives. It streamlines the product development lifecycle, from ideation to commercialization, fostering innovation in medical device technologies.
• Customer Engagement: With SAP Cloud ERP, companies can improve customer engagement through better order management, service delivery, and support. Enhanced customer satisfaction leads to repeat business and long-term loyalty.
• Cost Efficiency: Cloud ERP reduces upfront IT infrastructure costs by shifting to a subscription-based model. It also lowers maintenance expenses and allows for predictable operational costs, optimizing financial management.
• Adaptability to New Business Models: The flexibility of SAP Cloud ERP supports the adoption of new business models such as subscription-based services, outcome-based pricing, and integrated service offerings. This agility helps medical device companies respond to market changes and customer demands swiftly.

SAP Business Data Cloud is a fully managed software-as-a-service (SaaS) solution that unifies and governs all SAP data and seamlessly connects with third-party data. SAP Business AI enables Joule AI agents to seamlessly access business data across the enterprise, so decision makers have both the visibility and insights to manage all aspects of their heterogeneous medical device market landscape. SAP Business Technology Platform (BTP) enables companies and SAP partners to quickly create, integrate and launch business applications, with accelerated time to value with prebuilt workflows and integrations.

In working with several mid-to-large sized medical device companies, Bramasol expert teams for SAP S/4HANACloud, Subscription Billing, Revenue Recognition, Lease Accounting, and more have seen excellent traction for leveraging the overall SAP S/4HANA Cloud ecosystem and SAP Cloud Business Suite to optimize and integrate these key line of business solutions.

Also, Bramasol has taken the proactive step of creating a Qualified Partner Packaged Solution (QPPS) to provide a rapid-deployment, turnkey, end-to-end methodology to implement subscriptions and bundled offerings in less than 90 days, along with seamless revenue compliance in SAP S/4HANA Cloud. 

Summary

For medical device companies, adopting cloud-based SAP S/4HANA ERP software can help break down silos between different business functions, improve transparency, and enable better decision-making. By providing a centralized, integrated platform, these systems boost productivity, improve financial compliance, and create a more seamless and satisfying experience for both healthcare customers and patients.

This integration not only unifies current operations but also enables medical device companies to adapt more easily to new business models and emerging technologies, driving long-term success in a rapidly evolving and highly competitive industry.