There was some discussion on the Biomed listserv today about support contract pricing that vendors are charging. Comparisons were made between the percentage of the list price for annual support contracts for hardware (8% to 12%) and software (20% up to 35%). This is another area where IT and biomed are merging.

Buyer expectations for medical devices are warranty (hopefully an extended one) and the ability to repair broken devices themselves -- taking it so far as to consider second source parts availability. Installation and training is frequently negotiated "away" as part of the purchase price, i.e., bundled rather than priced separately.

IT regularly pays the percentages noted above, and they pay gladly. For that they get updated software releases and software service and support (bug fixes, cleaned up or fixed files, reconfigured systems, etc.). Interestingly, there is a "second source" market for health care IT, usually vendor refugees who provide customization, systems integration and other services on their previous employer's software for less than the OEM. Software installation and implementation are rarely negotiated "away" and priced separately.

Sadly (from the vendor perspective), no one's getting rich with either scheme. A typical medical device will have a factory margin around 70%, with gross margins (the factory margin minus the cost of marketing, sales, installation, support and company overhead) running in the thirties to fifties. Software is a very high margin product. If the vendor capitalizes their development (and most of them do), they have a "factory" margin of at least 98%. However, few vendors have the luxury of selling just the software. Hospitals want a "whole product solution" that includes everything (hardware, software, integration, installation, training, support) for a turnkey system. Once a vendor's done all that, they can be getting somewhere in the teens or low twenties at the bottom line.

The most uncomfortable position is the medical device vendor with a software product. Medical device software products include smart pump servers and telemetry central stations. Sold as a "medical device" the vendor's service contracting adoption rate is much lower than for software products. The service contract itself is priced like a medical device, usually not much more than 12% of the purchase price. It costs a vendor $500,000 to turn a software release with bug fixes and a few minor enhancements; annual R&D for an existing product is typically $1 million or $2 million. A major product release, either a new product or a rewrite of an existing one, runs $4 million to $6 million. The box business executive looks at a medical device that cost $5 million to develop and virtually nothing from a sustaining/support perspective vs. a software product that sucks up a substantial amount of his R&D budget every year -- with no direct incremental sales increase -- and wonders, "what's wrong with this picture.

One of the biggest differences between an embedded device product like a patient monitor and application software is that the software is never finished. There is a competitive "feature race" that is run in most software markets, where new features and performance/reliability enhancements are released once or twice each year. This continues until the underlying product architecture becomes outdated and too expensive to update; then it's time to rewrite the whole thing.

UPDATE: John Walsh reminds me, via the Biomed Listserv, that there are device vendors who oversell the free upgrade benefit of their software support contracts. Many devices include applications of such narrow scope and sufficient maturity that there are no reliability problems nor any real features to add to the product.