Outsourced Medical Device Services: Market Update

From imaging equipment to examination tables, every piece of equipment used in a healthcare setting requires rigorous maintenance to perform its intended function safely and effectively. That critical job falls to a large and highly fragmented universe of outsourced medical device services companies.

In this Q&A, we explore the key opportunities and trends in this important sector and identify which types of providers show the most growth potential going forward.

How has the pandemic impacted this sector?

Will: The drop in elective procedure volumes during the depths of the early COVID-19 shutdowns certainly had an impact, and it highlights the value of recurring revenue not tied to procedure volumes. As a result, several players in the sector are structuring longer-term service agreements featuring flat monthly payments. For service providers, this is attractive from a cash flow and forecasting standpoint. The structure is also a compelling feature for their hospital customers because it enables them to smooth out and better forecast repair costs.

Bredrup: The drop in profitable elective procedures has put pressure on capital equipment purchases. Twenty-two large healthcare-related companies filed for bankruptcy in 2020, reflecting the financial challenges being felt throughout the healthcare system.1

As a result, more hospitals will likely emphasize maintaining their existing equipment than in the past, which will create opportunities for outsourced medical device services providers.

Where are you seeing the most growth within the outsourced medical device services segment?

Bradshaw: As medical procedure volumes stabilize post-pandemic, we expect the entire sector to experience solid growth due to well-established, long-term tailwinds: an aging population, greater incidence of chronic health conditions, and greater access to healthcare, to name a few. All of those will continue to drive patient volume, equipment utilization, and demand for related servicing.

Will: Within the outsourced medical device services sector, independent service providers (ISPs) are outgrowing the service arms of incumbent original equipment manufacturers (OEMs). That’s because the ISPs are typically faster, less expensive, and more able to provide hospitals with solutions across OEM brands, which enables hospital supply chains to rationalize vendors.

ISPs are also highly fragmented, providing plenty of opportunities to create platforms of scale and benefit from multiple arbitrage. Several recent high-profile transactions show the value-creation potential and will likely encourage additional companies to enter the market.

Which COVID-19 impacts are short term only, and which will persist?

Bradshaw: Providers of equipment used for COVID-19 treatment, such as patient monitoring tools and respirators, saw a meaningful increase in demand. While this was likely a short-term impact, the experience illustrates the value of using rental equipment as a stopgap during increased hospital capacity, such as the pandemic.

Conversely, we expect a structural change in the importance of sterilization processes in the post-COVID-19 world. Of course, hospitals have always been careful to sterilize surgical equipment and operating theaters. Now, however, there should be a more significant focus on sterilizing other high-touch areas, such as personal protective equipment, including gloves, face masks, air-purifying respirators, goggles, face shields, respirators, and gowns.

For more information, please contact our senior bankers.

Published February 2021
1. Crain’s Chicago Business: Mercy Hospital's bankruptcy exposes a bigger problem, February 16, 2021.
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