The medical device manufacturing industry produces equipment designed to diagnose and treat patients. Medical devices range from simple tongue depressors and bandages to complex programmable pacemakers and sophisticated imaging systems. Major product categories include surgical implants and instruments, medical supplies, electro-medical equipment, in-vitro diagnostic equipment and reagents, irradiation apparatuses, and dental goods.
The following outlines five structural factors and trends that influence demand and supply of medical devices and related procedures.
The aging population, driven by declining fertility rates and increasing life expectancy, represents a major demand driver for medical devices. The U.S. elderly population (persons aged 65 and above) totaled 60.0 million in 2023 (18% of the population). The U.S. Census Bureau estimates that the elderly will number 92.7 million by 2065, representing more than 25% of the total population.
The elderly account for nearly one third of total healthcare consumption in the U.S. Personal healthcare spending for the population segment was approximately $22,000 per person in 2020, 5.5 times the spending per child (about $4,000) and more than double the spending per working-age person (about $9,000).
According to United Nations projections, the global elderly population will rise from approximately 809.0 million (10% of world population) in 2023 to 1.9 billion (19.3% of world population) in 2065. Europe’s elderly made up 20.1% of the total population in 2023, and the proportion is projected to reach 29.7% by 2065, making it the world’s oldest region. Latin American and the Caribbean is currently one of the youngest regions in the world, with its elderly at 9.5% of the total population in 2023, but this region is expected to undergo drastic transformation over the next several decades, with the elderly population expected to expand to 24.6% of the total population by 2065. North America has an above-average elderly population as of 2023 (17.6%) and is projected to expand to 25.3% by 2065.
Demographic shifts underlie the expected growth in total U.S. healthcare expenditure from $4.9 trillion in 2023 to $7.7 trillion in 2032, an average annual growth rate of 5.6%. This projected average annual growth rate is slightly higher than the observed rate of 5.1% between 2013 and 2022, implying some acceleration in expected spending. Projected growth in annual spending for Medicare (average annual growth of 7.0%) and Medicaid (average annual growth of 5.2%) is expected to contribute substantially to the increase in national health expenditure over the coming decade. Growth in national healthcare spending, after significant growth in 2020 of 10.6%, slowed to 3.2% in 2021 and 4.1% in 2022 before increasing to 7.5% in 2023. Healthcare spending as a percentage of GDP is expected to increase from 17.6% in 2023 to 19.7% by 2032.
Since inception, Medicare has accounted for an increasing proportion of total U.S. healthcare expenditures. Medicare currently provides healthcare benefits for an estimated 65 million elderly and disabled people, constituting approximately 10% of the federal budget in 2021. Medicare spending growth is expected to average 7.1% from 2025 to 2026. Medicare represents the largest portion of total healthcare costs, constituting 21% of total health spending in 2021. Medicare accounts for 26% of spending on hospital care, 26% of physician and clinical services, and 32% of retail prescription drugs sales.
Due to the growing influence of Medicare in aggregate healthcare consumption, legislative developments can have a potentially outsized effect on the demand and pricing for medical products and services. In early 2025, there were indications of potential scrutiny of Medicare and Medicaid. Future updates of this outlook will incorporate any changes that may occur. Total Medicare spending totaled $1.0 trillion in 2023 and is expected to reach $1.9 trillion by 2032.
The Inflation Reduction Act (“IRA”) was signed into law in August 2022 by the Biden administration. Among other items, the IRA aims to lower prescription drug costs and improve access to prescription drugs for Medicare enrollees. Two healthcare spending-related items in the IRA include out-of-pocket caps for insulin products (capped at $35 for each monthly subscription under Part D and Part B) and a $2,000 out-of-pocket annual spending cap for drugs under Medicare Part D. These provisions could have significant effects on the growth rates for out-of-pocket spending for prescription drugs, which are projected to decline by 5.9% and 4.2% 2024 and 2025, respectively.
The primary customers of medical device companies are physicians (and/or product approval committees at their hospitals), who select the appropriate equipment for the consumers (patients). In most developed economies, the consumers themselves are one (or more) step removed from interactions with manufacturers, and therefore pricing of medical devices. Device manufacturers ultimately receive payments from insurers, who usually reimburse healthcare providers for routine procedures (rather than for specific components like the devices used). Accordingly, medical device purchasing decisions tend to be largely disconnected from price.
Third-party payors (both private and government programs) are keen to reevaluate their payment policies to constrain rising healthcare costs. Hospitals and other care settings form the largest market for medical devices. Lower reimbursement growth will likely persuade hospitals to scrutinize medical purchases by adopting i) higher standards to evaluate the benefits of new procedures and devices, and ii) a more disciplined price bargaining stance.
The transition of the healthcare delivery paradigm from fee-for-service (FFS) to value models is expected to lead to fewer hospital admissions and procedures, given the focus on cost-cutting and efficiency. In 2015, the Department of Health and Human Services (HHS) announced goals to have 85% and 90% of all Medicare payments tied to quality or value by 2016 and 2018, respectively, and 30% and 50% of total Medicare payments tied to alternative payment models (APM) by the end of 2016 and 2018, respectively. A report issued by the Health Care Payment Learning & Action Network (HCPLAN), a public-private partnership launched in March 2015 by HHS, found that 33.7% of (traditional) Medicare payments were tied to APMs categorized as 3B and above in 2023, compared to 30.2% in 2022. HCPLAN has set goals of reaching 50% in 2024, 60% in 2025 and 100% in 2030. These goals are aligned with the CMS Innovation Center (CMMI) goal of having 100% of traditional Medicare beneficiaries with Parts A and B in care relationships with accountability for quality and total cost of care.
In 2020, CMS released guidance for states on how to advance value-based care across their healthcare systems, emphasizing Medicaid populations, and to share pathways for adoption of such approaches. CMS states that value-based care advances health equity by putting focus on health outcomes of every person, encouraging health providers to screen for social needs, requiring health professionals to monitor and track outcomes across populations, and engaging with providers who have historically worked in underserved communities. Ultimately, lower reimbursement rates and reduced procedure volume will likely limit pricing gains for medical devices and equipment.
The medical device industry faces similar reimbursement issues globally, as the European Union (EU) and other jurisdictions face similar increasing healthcare costs. A number of countries have instituted price ceilings on certain medical procedures, which could deflate the reimbursement rates of third-party payors, forcing down product prices. Industry participants are required to report manufacturing costs, and medical device reimbursement rates are set potentially below those figures in certain major markets like Germany, France, Japan, Taiwan, Korea, China, and Brazil. Whether third-party payors consider certain devices medically reasonable or necessary for operations presents a hurdle that device makers and manufacturers must overcome in bringing their devices to market.
Historically, much of the growth of medical technology companies has been predicated on continual product innovations that make devices easier for doctors to use and improve health outcomes for the patients. Successful product development usually requires significant R&D outlays and a measure of luck. If viable, new devices can elevate average selling prices, market penetration, and market share.
Government regulations curb competition in two ways to foster an environment where firms may realize an acceptable level of returns on their R&D investments. First, firms that are first to the market with a new product can benefit from patents and intellectual property protection giving them a competitive advantage for a finite period. Second, regulations govern medical device design and development, preclinical and clinical testing, premarket clearance or approval, registration and listing, manufacturing, labeling, storage, advertising and promotions, sales and distribution, export and import, and post market surveillance.
Regulatory Overview in the U.S.
In the U.S., the FDA generally oversees the implementation of the second set of regulations. Some relatively simple devices deemed to pose low risk are exempt from the FDA’s clearance requirement and can be marketed in the U.S. without prior authorization. For the remaining devices, commercial distribution requires marketing authorization from the FDA, which comes in primarily two flavors.
1) The premarket notification (“510(k) clearance”) process requires the manufacturer to demonstrate that a device is “substantially equivalent” to an existing device (“predicate device”) that is legally marketed in the U.S. The 510(k) clearance process may occasionally require clinical data and generally takes between 90 days and one year for completion. In November 2018, the FDA announced plans to change elements of the 510(k) clearance process. Specifically, the FDA plan includes measures to encourage device manufacturers to use predicate devices that have been on the market for no more than 10 years. In early 2019, the FDA announced an alternative 510(k) program to allow medical devices an easier approval process for manufacturers of certain “well-understood device types” to demonstrate substantial equivalence through objective safety and performance criteria. In February 2020, the FDA launched its voluntary pilot program: electronic Submission Template and Resource (eSTAR) as an interactive submission template that may be used by the medical device submitters to prepare certain pre-market submissions for a device. Starting in October 2023, all 510(k) submissions were required to be submitted using eSTAR unless exempted.
2) The premarket approval (“PMA”) process is more stringent, time-consuming, and expensive. A PMA application must be supported by valid scientific evidence, which typically entails collection of extensive technical, preclinical, clinical, and manufacturing data. Once the PMA is submitted and found to be complete, the FDA begins an in-depth review, which is required by statute to take no longer than 180 days. However, the process typically takes significantly longer and may require several years to complete.
Pursuant to the Medical Device User Fee Modernization Act (MDUFA), the FDA collects user fees for the review of devices for marketing clearance or approval. The current iteration of the Medical Device User Fee Act (MDUFA V) came into effect in October 2022. Under MDUFA V, the FDA is authorized to collect $1.8 billion in user fee revenue for the five-year cycle, an increase from the approximately $1 billion in user fees under MDUFA IV, between 2017 and 2022. A significant change from MDUFA IV to MDUFA V relates to performance goals for De Novo Classification requests (requests for novel medical devices for which general controls alone provide reasonable assurance of safety and effectiveness for the intended use). There has also been updated PMA guidance, with the FDA conducting substantive reviews within 90 calendar days for all original PMAs, panel-track supplements, and 180-Day supplements.
Regulatory Overview Outside the U.S.
The European Union (EU), along with countries such as Japan, Canada, and Australia all operate strict regulatory regimes similar to that of the FDA, and international consensus is moving towards more stringent regulations. Stricter regulations for new devices may slow-release dates and may negatively affect companies within the industry.
Medical device manufacturers face a single regulatory body across the EU: Regulation (EU 2017/745), also known as the European Union Medical Device Regulation (EU MDR). The regulation was published in 2017, replacing the medical device directives regulation that was in place since the 1990s. The requirements of the MDR became applicable to all medical devices sold in the EU in May 2021. The EU is the second largest market for medical devices in the world with total medical device sales expected to exceed approximately €170 billion by 2027, behind only the United States. The EU MDR has introduced stricter requirements for medical device manufacturers, including increased clinical evidence and post-market surveillance. Consequently, there is increased risk for longer approval processes and delays in manufacturing of these devices.
Emerging economies are claiming a growing share of global healthcare consumption, including medical devices and related procedures, owing to relative economic prosperity, growing medical awareness, and increasing (and increasingly aging) populations. According to the WHO, middle income countries, such as China, Turkey, and Peru, among others, are rapidly converging towards outsized levels of spending as their income scales. When countries grow richer, the demand for health care increases along with people’s expectation for government-funded healthcare. Upper-middle income countries accounted for 17.5% of total global healthcare spending in 2021, up from 10.5% in 2000.
As global health expenditure continues to increase, sales to countries outside the U.S. represent a potential avenue for growth for domestic medical device companies. According to the World Bank, all regions (except Sub-Saharan Africa and South Asia) have seen an increase in healthcare spending as a percentage of total output over the last two decades.
Global medical device sales are estimated to increase 6.3% annually from 2024 to 2032, reaching nearly $887 billion according to data from Fortune Business Insights. While the Americas are projected to remain the world’s largest medical device market, the Asia Pacific market is expected to expand at a relatively quicker pace over the next several years.
Demographic shifts underlie the long-term market opportunity for medical device manufacturers. While efforts to control costs on the part of the government insurer in the U.S. (and elsewhere) may limit future pricing growth for incumbent products, a growing global market provides domestic device manufacturers with an opportunity to broaden and diversify their geographic revenue base. Developing new products and procedures is risky and usually more resource intensive compared to some other growth sectors of the economy. However, barriers to entry in the form of existing regulations provide a measure of relief from competition, especially for newly developed products.
The medical device industry, if not the broader body politic, looked to have put the COVID-19 pandemic firmly behind it by 2024. COVID-era convulsions specific to the industry on the demand and supply sides included deferrals of many elective procedures in the early part of the pandemic and disruptions to the (global) supply chains involved in the manufacture of devices and equipment. Procedure volumes were largely caught up by a couple of years after the pandemic and most manufacturers appeared to have worked through their supply chain and inventory issues by 2024. Back to focusing on the more routine longer-term demographic and other trends?
Well, maybe not quite so fast. As we were updating this note in mid-April, a few new items came to light that many observers may not have been adequately attuned to even at the advent of the new year. First, the U.S. has embarked on a deliberate push to alter the global trade landscape. While the specifics of the new regime remain uncertain and in flux, it is fair to assume a higher degree of trade friction will affect device manufacturers that rely on global supply chains. And such friction will surely introduce costs, including welfare losses, that will be borne to varying degrees by everyone involved – component suppliers, manufacturers, caregivers, end-user patients, and entire nations.
Second, changes in the payor landscape in the U.S. could potentially materialize as the government appears ready to scrutinize Medicaid and Medicare programs. Again, the specifics of these changes (if any) are unknown and uncertain. However, following our discussion of the second trend in an earlier section of this article, it bears considering that any changes to these programs will percolate to care settings, potentially affecting everyone involved.
Finally, in this space we are fond of mentioning likely technological changes ahead of us. Last year, we highlighted GLP-1 drugs, and deservedly so even after the benefit of hindsight. At the current moment, artificial intelligence has come to dominate the zeitgeist. For medtech companies, AI has the potential to bring about technological change across a wide range of functions from product design/testing, to incorporation of large datasets (and analysis) to enhance procedure outcomes, to business process improvements. We will remain highly curious observers over both the short term and long term.
