L.E.K. Strategic Hospital Priorities Study: Hospitals Look to MedTech for New Services and Solutions


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U.S. hospital systems are navigating a challenging terrain; already tight margins are getting tighter as reimbursement levels fall and patient mix shifts toward more Medicare and Medicaid patients. In its fifth annual hospital priorities study, L.E.K. Consulting surveyed 150 hospital CEOs and other senior decision makers to find out what they believe are the major challenges to the industry and their institutions. In addition, respondents described their spending plans and the kinds of services they desire from MedTechs.

As they look to improve profitability and at least maintain patient quality, study respondents report that hospital systems are initiating four broad measures:

- Consolidating to improve leverage with payers and suppliers
- Integrating with alternative care facilities to offer a fuller continuum of care
- Becoming more accountable in order to take advantage of emerging reimbursement models
- Centralizing and coordinating supply chains

While the final measure may frighten some MedTech executives, it presents opportunities for companies that can reposition themselves to offer broader solutions to hospital systems. The fifth annual L.E.K. Hospital Priorities Study explores how MedTech companies can thrive in this new environment.

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L.E.K. Strategic Hospital Priorities Study: Hospitals Look to MedTech for New Services and Solutions

  1. 1. L E K . C O ML.E.K. Consulting / Executive Insights EXECUTIVE INSIGHTS VOLUME XVI, ISSUE 5 INSIGHTS @ WORKTM L.E.K. Strategic Hospital Priorities Study: Hospitals Look to MedTech for New Services and Solutions was written by Lucas Pain and Jonas Funk, Managing Directors in L.E.K. Consulting’s Chicago office. For more information, contact medtech@lek.com. U.S. hospital systems are going through a challenging period and, just as species must adapt to environmental changes, hospitals are evolving to survive. Already tight margins are get- ting tighter as reimbursement levels fall and patient mix shifts towards more Medicare and Medicaid patients. To improve profitability while at least maintaining patient quality, hospital systems are taking on four broad measures with varying levels of intensity. Hospitals are continuing to consolidate (in order to improve leverage with payers and suppliers) and integrate with alternate care facilities (in order to secure sources of referral traffic and to be able to offer and take advantage of a full continuum of care). At the same time, more progressive hos- pital systems are increasingly taking on new levels of account- ability (in order to take advantage of emerging reimbursement models that reward efficiency and improved outcomes). These measures – consolidation, integration, account- ability – individually and collectively are encouraging hospitals to take a fourth step that is having the greatest impact on suppliers: centralizing and coordinating their supply chains. While this may be frightening to some MedTech executives, it presents opportunities for companies that can reposition themselves to become broader solution partners to leading hospital systems. The L.E.K. Strategic Hospital Priorities Study is a benchmark study that has been conducted annually since 2009. For the L.E.K. Strategic Hospital Priorities Study: Hospitals Look to MedTech for New Services and Solutions 2014 edition, nearly 150 hospital CEOs and other senior decision makers were asked what they believe are the major challenges to the industry and their institutions. They were also asked about their spending plans and the kinds of services they want from MedTechs. This paper summarizes some of the study’s main findings. Figure 1 PercentofRespondents 69 Note: *What do you expect to do in order to respond to the shift as a result of the Affordable Care Act? Source: L.E.K. interviews and the L.E.K. Study Planned Response to Address Impact of the Affordable Care Act* (2014) 70 60 50 40 30 20 10 0 Increaseprocess efficiency Reducecostsby renegotiatingwith suppliers Reduceredundant proceduresincare Delaycapital expenditure Higherutilization Lowercost carecenters Cuttingspending onMedTech Delayacquisition Nothing 51 45 45 35 30 28 18 5
  2. 2. EXECUTIVE INSIGHTS L E K . C O MINSIGHTS @ WORKTM to be generally flat for large devices, small devices, and dispos- ables. In the short-term, hospitals will be concentrating on cost cutting and finding ways to improve efficiencies. Nearly 90% of survey respondents report that reducing costs is among their top five most pressing needs. Nearly 80% included improving hospital efficiency in their top five. Meanwhile, 74% of respondents indicate that they already have efforts in place in their hospitals to improve efficiency. Sixty nine percent indicate that their primary response to the ACA will be to try to improve process efficiency. As hospitals consolidate and more physicians become hospital employees, hospital administrators are taking a greater role in MedTech device purchasing. Sixty eight percent of respondents to the survey told us that the purchasing process has grown more complex and time-consuming over the last year. The director of materials management for one Massachusetts hospital said, “The purchasing process has become much more complicated and restrictive. All supplies and new tech-nol- Page 2 L.E.K. Consulting / Executive Insights Volume XVI, Issue 5 EXECUTIVE INSIGHTS Margin Pressure Mounts, Driving Continued Structural Changes L.E.K. estimates that a typical suburban hospital’s margins are currently approximately 4% but this is expected to decline to 0%, primarily due to payer-mix shifts. Similarly, respondents to our survey said they expect declining margins, with a majority expect- ing that the Affordable Care Act will have a net negative financial impact on their institutions despite an increase in insured patients. Hospitals are reacting to this by continuing to consolidate to improve leverage with payers and suppliers. While most hospitals still operate as standalone institutions, the majority will likely eventually move towards joining large, consolidated, and increas- ingly strategically integrated systems. By 2020, L.E.K. estimates, the top 100 hospital systems in the U.S. will account for more than 60% of hospital spending, up from 40% in 2008. Hospitals, meanwhile, are continuing to invest in alternate site facilities. Acquiring medical practices has been a very popular way for hospitals to secure sources of referral traffic. A senior executive with a Minnesota healthcare system reports, “Most hospitals have been on a shopping spree for PCPs. There are very few standalone care practices left.” In addition, some of the more progressive systems are vertically integrating with other alternate site facilities (e.g., ASCs, long-term care) to enable a full continuum of care, a pre-requisite to taking on broader accountability. Indeed, as the survey data suggests, there is a strong correlation between hospitals that expect to expand into alternate sites and those that expect to take on greater accountability. Spending Growth Will be Modest as Cost Cutting Remains a Priority Survey respondents expect slightly positive spending growth over the next five years, but most of this growth will be rep- resented by continued investment in IT. Spending is expected Re-evaluating systems and processes to address these needs Key Activities Aimed at Addressing Hospital Needs* 0 Percent of Respondents 30 60 90 Allocating budget to address these needs Allocating staff to address these needs Instituting employee training to address these needs Working with outside service providers to address these needs Note: *How are you addressing the most pressing needs that you identified for your hospital? Source: L.E.K. interviews and the L.E.K. Study Figure 2 10 20 40 50 70 80 79 77 80 77 62 71 70 58 58 63 60 51 63 52 50 48 35 39 43 45 2011 2012 2013 2014
  3. 3. EXECUTIVE INSIGHTS L E K . C O MINSIGHTS @ WORKTM L.E.K. Consulting / Executive Insights ogy that are proposed for use have to go through a value/cost analysis committee. The days of the clinician getting to use a product because of sheer preference are behind us.” As part of their cost cutting efforts, hospital administrators plan to increase rationalization of suppliers going forward, particularly in invasive and large medical devices. Implications for MedTech: Opportunities for Those Who Can Offer – and Charge For – ProvenValue The drive for improved efficiency is creating an opportunity for MedTech companies: hospitals are increasingly turning to exter- nal partners for help. Over the last four years of the L.E.K. study, we have seen a significant and steady increase in the percent- age of hospital executives who are looking to work with external partners to address their most pressing needs (i.e., 35% in 2011 to 45% in 2014) versus using or training internal resources to do so. Hospital Interest in Specific Potential MedTech Services* (2014) Figure 3 40 20 0 PercentofRespondents 20 40 Clinical IT and analytics Note: *How valuable are each of the following services that MedTech companies could provide in addition to their products? Source: L.E.K. Study Education, training and compliance Hospital manage- ment, growth strategy and service optimization Disease management services Equipment service, support and managed services Non-clinical analytics, services and IT Financial and capital services Outsourced non-clinical functions and departments Outsourced clinical/ medical services Marketing, branding and awareness Operations management and efficiency improvement Product acquisition and supply chain management 6 5 Mean7 – Very valuable 14 60 80 60 80 3 2 Smaller hospitals rate hospital management higher than larger hospitals Larger hospitals rate disease management services higher than smaller hospitals ~60% of c-suite respondents indi- cated they would be interested in additional services from MedTechs Despite the constraints on spending, about 60% of hospital c-suite executives are interested in purchasing additional services from MedTechs, particularly in clinical IT and analytics, operations management and efficiency, and education, training, and compliance. Hospitals are primarily interested in demonstrated solutions from MedTechs that can improve the quality of patient care, lower their overall costs, or increase the efficiency of their clinical staffs. As the CEO of one California hospital told us, “If a MedTech can come in and show cost-benefit, that is highly, highly important for us. We want to see that the product is beneficial to patients and helps reduce utilization. This area is a fertile ground especially with the new concept of ACOs, where you have physicians working more closely with patient care in hospitals.”
  4. 4. EXECUTIVE INSIGHTS L E K . C O MINSIGHTS @ WORKTM Page 4 L.E.K. Consulting / Executive Insights Volume XVI, Issue 5 The big unsolved challenge for MedTechs is to link value with pricing. Hospital executives told us they would like to see MedTechs offer outcome-based pricing for their products. Only 18% of respondents, however, say they are aware of good current examples of such arrangements. “What I would like to see, but is not yet in place,” the director of materi- als management of a New Hampshire hospital told us, “is a guarantee, particularly if a MedTech can claim that we will use less of a product or reduce length of stay. If a company tells me there is more savings if they work with us, that is going to capture some attention.” However, before MedTechs can offer performance guarantees or outcome-based pricing, most will first need to up their game in understanding the incremental economic value that their products and solutions deliver in the first place. L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respective owners. While L.E.K. advised the parties cited in a number of the examples, all data are sourced from publically available records. © 2014 L.E.K. Consulting LLC L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and analytical rigor to help clients solve their most critical business problems. Founded 30 years ago, L.E.K. employs more than 1,000 professionals in 22 offices across Europe, the Americas and Asia-Pacific. L.E.K. advises and supports global companies that are leaders in their industries – including the largest private and public sector organizations, private equity firms and emerging entrepreneurial businesses. L.E.K. helps business leaders consistently make better decisions, deliver improved business performance and create greater shareholder returns. For further information contact: Los Angeles 1100 Glendon Avenue 21st Floor Los Angeles, CA 90024 Telephone: 310.209.9800 Facsimile: 310.209.9125 Boston 75 State Street 19th Floor Boston, MA 02109 Telephone: 617.951.9500 Facsimile: 617.951.9392 Chicago One North Wacker Drive 39th Floor Chicago, IL 60606 Telephone: 312.913.6400 Facsimile: 312.782.4583 New York 1133 Sixth Avenue 29th Floor New York, NY 10036 Telephone: 646.652.1900 Facsimile: 212.582.8505 San Francisco 100 Pine Street Suite 2000 San Francisco, CA 94111 Telephone: 415.676.5500 Facsimile: 415.627.9071 International Offices: Bangkok Beijing Chennai London Melbourne Milan Mumbai Munich New Delhi Paris São Paulo Seoul Shanghai Singapore Sydney Tokyo Wroclaw INSIGHTS @ WORK TM