Hospitals Adopt New Strategies to Boost Profitability, but Still Face Deep Challenges: A New Imperative for MedTech

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Demand for healthcare services continues to rise due to an aging population, rising obesity, higher rates of chronic disease, and expansion of healthcare coverage. Yet for most hospitals, top-line growth is not keeping pace with strong industry headwinds. In the coming years already-low margins will be further squeezed by rising enrollments in Medicare and Medicaid, as well as significant investments in IT and facilities.

To remain viable hospitals are exploring new sources of added value, from integration of care and partnerships with payers, to outsourcing and competitive differentiation. MedTech companies will need to evolve too, working harder to understand their customers’ complex business challenges and adopting new models to serve them. The fourth annual L.E.K. Hospital Priorities Study explores major industry trends, and how MedTech companies can partner with hospitals to overcome the significant hurdles they face.

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Hospitals Adopt New Strategies to Boost Profitability, but Still Face Deep Challenges: A New Imperative for MedTech

  1. 1. EXECUTIVE INSIGHTS VOLUME XV, ISSUE 4 Hospitals Adopt New Strategies to Boost Profitability, but Still Face Deep Challenges: A New Imperative for MedTech Demand for healthcare services continues to rise due to an ag- Investment in IT continues to be the most significant category ing population, rising obesity, higher rates of chronic disease, of spending growth. “Due to the mandate of EMR, 50% of our and expansion of healthcare coverage. Yet for most hospitals, capital budget is being eaten up by the need for IT,” explains a top-line growth is not keeping pace with strong industry head- director of materials management from a Massachusetts hospi- winds. In the coming years already-low margins will be further tal. Yet EMR adoption is just one driver of IT spending. Hospitals squeezed by rising enrollments in Medicare and Medicaid, as are also relying more heavily on IT-intensive quality metrics for well as significant investments in IT and facilities. both reimbursement and competitive differentiation. To remain viable hospitals are exploring new sources of added As in previous years, hospitals continue to show interest in value, from integration of care and partnerships with payers, to becoming accountable care organizations (ACOs) due to legisla- outsourcing and competitive differentiation. MedTech com- tion that encourages bundling of payments, even in the face of panies will need to evolve too, working harder to understand uncertainty about implementation. In a sign of growing traction their customers’ complex business challenges and adopting new behind the integrated model, the number of ACOs jumped 35% models to serve them. from September 2011 to May 2012, and over 80% of surveyed hospitals plan to join or are already in an ACO. The fourth annual L.E.K. Hospital Priorities Study asked nearly 200 hospital CEOs and senior administrators about major trends Hospitals indicate the line between hospitals and payers will in their industry, and how MedTech companies can partner with continue to blur as many hospitals will adopt payer capabili- hospitals to overcome the significant hurdles they face (see ties—12% report they will likely do so over the next five years.1 Figure 1). Hospitals offering insurance plans hope to gain critical expertise in risk management, and payers are looking for ways to expand Hospital Budgets Continue to Expand; profits beyond the reform-mandated caps on administrative Driving Down Costs as Critical as Ever fees. This type of vertical integration will take place through partnerships, acquisitions (e.g. a hospital group acquires an Our survey shows hospitals expect relatively consistent spending insurer, or vice versa), or by hospitals launching their own payer growth over the next five years. More than 60% of hospital ad- plans. ministrators expect their budgets to increase in 2013, and fewer than five percent expect a significant decrease. 1 Defined by as a ‘6’ or ‘7’ response on a 7-point scale assessing “likelihood of hospital gaining payer capabilities in the next five years.” Hospitals Adopt New Strategies to Boost Profitability, but Still Face Deep Challenges: A New Imperative for MedTech was written by Bob Lavoie,Vice President and Head of the L.E.K. MedTech Practice, and Vice Presidents Lucas Pain and Jonas Funk. Please contact L.E.K. at medtech@lek.com for additional information.L.E.K. Consulting / Executive Insights LEK.COM
  2. 2. EXECUTIVE INSIGHTS Figure 1 Spending Priorities in 2013 and Beyond Spending on IT, drugs and pharmaceuticals, and facilities at top of spending priorities, and will continue to be an area of focus in the next five years. 100 Spending Priorities in 2013 100 Spending Priorities Over the Next 5 Years 80 80 60 60 40 40 Percent of Respondents Percent of Respondents 20 20 0 0 20 20 40 40 60 60 80 80 100 100 Information technology Large med devices Small med devices Disposables Human resources Information technology Large med devices Small med devices Disposables Human resources Drugs/ pharmaceuticals Facilities Drugs/ pharmaceuticals Facilities Definitely will increase spending Spending will remain unchanged Definitely will reduce spending May increase spending May reduce spending Mean Source: L.E.K. Hospital Priorities Study Hospitals also continue to acquire specialty and primary care trend, hospitals are actively limiting the access of MedTech sales physician practices; the move expands hospitals’ networks, reps to their physicians and administrators. (See sidebar, “Hospi- grows the referral base and shifts care to lower-cost settings. tals Continue to Restrict Access to Decision-Makers.”). MedTech As hospitals grow through acquisitions, they also consolidate companies must take pains to overcome these barriers, moving purchasing power, which can counter-balance physicians’ influ- away from a purely transactional relationship based on ne- ence in the purchasing decision. This development is having a gotiating on price with procurement, and instead seek out a significant impact on MedTech companies; hospital administra- broader, strategic relationship with the hospital system, C-level tors and their purchasing departments use more complex cost/ administrators and physicians. benefit analyses to inform buy decisions, rely less upon referrals and physician preferences, and are more likely to ask for clini- Beyond Cost Controls, Hospitals also Focus cal and economic data supporting a product’s value and price on Top-Line Growth and Differentiation point. Hospitals increasingly realize that competitiveness—whether In fact, as hospital administrators take on greater control of through a differentiated offering, efficiency gains or by growing purchasing decisions, MedTech representatives are losing influ- higher-margin specialties—will be a key source of value going ence to group purchasing organizations (GPOs) and distribu- forward. One Illinois hospital CEO explains, “Imaging equip- tors. Asked which external parties influence their purchasing ment and anything related to the operating room are a spend- decisions, nearly 80% of administrators cited GPOs, 50% cited ing priority; we’re paid fee for service there. Until we get in a distributors, and less than 45% named manufacturer’s sales situation where we are reimbursed to control value, the imaging reps. Of those three groups, administrators report that MedTech department and the operating room are very profitable places.” reps have lost the most influence since 2012. As proof of thisPage 2 L.E.K. Consulting / Executive Insights Volume XV, Issue 4 LEK.COM
  3. 3. EXECUTIVE INSIGHTS Figure 2 Importance of Initiatives to Hospital Strategic Plan 100 Percent of Respondents 50 0 50 100 Utilization of outcomes data Invest in broader business solutions Develop center of excellence Cost management Data connectivity across the spectrum of clinical care M&A activity Separation of specialized services Outsourcing Move towards a system to reduce manual labeling Service line optimization Build community outreach through marketing & other programs Vertical integration of services Focus on complete personal health Acquisition of physician groups Aggressive adoption of new technologies New contracting arrangements Critically important Moderately important Not at all important Important Minimally important Mean Source: L.E.K. Hospital Priorities Study With rising capabilities in technology and electronic records, offer broader, more holistic solutions. Product innovation is still hospitals have become more adept at leveraging meaningful critical, but alone will be insufficient for competitive differentia- use metrics, particularly those related to new reimbursement tion in the years ahead. rules (e.g., hospital-acquired infection rates, readmission rates and patient satisfaction scores). Even so, hospitals must now First and foremost, hospital administrators are in the midst of build more robust management metrics (i.e. insights about how massive data-driven changes and they expect the same from their hospitals operate), as well as outcomes and quality metrics MedTech companies. Hospitals want MedTech companies to that can help them differentiate from their competitors. provide stronger data and analyses to support purchasing decisions. (For example, approximately 10% of hospitals say Another key strategic imperative: integration of care. The MedTech companies are “completely addressing” the need for move to an integrated care model is based in part on boosting clinical data that demonstrates better patient outcomes, and outcomes and related reimbursements, but hospitals also realize only nine percent are “completely addressing” the need for that integrated care drives positive customer experience and ROI analysis supporting a purchase decision.) As one director of hospital differentiation. Even so, an integrated care model is purchasing described, “We want to know if a knee replacement exceedingly complex to develop and deploy, requiring data con- that costs two times as much as a competitor’s […] is actually nectivity across the spectrum of clinical care (e.g. smart devices going to last double the time as the competitor’s model.” More that support IT integration), better utilization of outcomes data robust data can also be the basis of value-add offerings, such to support reimbursements and payment bundling, and greater as a profit-sharing agreement to split the risks and rewards of collaboration across internal stakeholders on standards of care. specific purchases. For MedTech, an Opportunity to Partner Hospitals will also look to MedTech to provide other add- with Hospitals on solutions, such as helping to engage patients, providing professional education and training, and offering best-practice As their business model undergoes profound disruption, hospi- consulting. Satisfying these needs is no small task. MedTech tals expect MedTech companies to evolve with them. MedTech companies must rethink their sales force size and structure, companies should move away from the mindset of delivering adding specialized roles in disease management, management incremental product and cost improvements—those won’t sat- metrics, and health statistics and economics. isfy the new regime of hospital decision-makers—and insteadL.E.K. Consulting / Executive Insights LEK.COM
  4. 4. EXECUTIVE INSIGHTS Hospitals also indicate they prefer a single point of contact to few are doing so effectively. Some have begun to make the simplify vendor relationships, and it must be a high-quality, required changes to their commercial model, but according beneficial relationship. The MedTech rep must be well informed to hospitals, MedTech companies still have work to do. Just about clinical and economic data, the full range of products in as technology companies did 20 years ago when they began the portfolio, and the hospital’s unique needs. As one hospital bundling technology with services, so too must MedTech think CEO described, “It would be great if MedTech companies would more carefully about how to create new ‘product + service’ take a more coordinated approach and assess our needs before solutions that address critical hospital needs. These changes will providing their offering. So far, no one is doing this.” require investment in and reorganization of the sales force, yet those MedTech companies willing to adapt and innovate will be Based on our research, MedTech companies have a unique op- in a position to offer a highly differentiated approach. portunity to help solve hospitals’ most pressing problems—and Figure 3 Expected Change Over the Next 5 Years in Hospital Needs from MedTech Companies Ability of the company to share risk Hospitals are increas- Help engaging patients (e.g., patient education) ingly looking for MedTech partners that Full “solution” partnership can provide “full” solutions (e.g., share Providing financing through risk, help engage a lender partner or directly patients, cost / benefit value proposition) Reimbursement support Clinical data / medical economics / analytics Cost benefit value proposition Portfolio breadth Cutting-edge technology Professional education and training Going forward, hospitals are less interested in Ease of doing business incremental product improvements without Product quality significant clinical and/or cost improvements or in Sales rep relationship more sales rep visits Service provided by the sales representative 0 2 4 6 8 10 12 14 16 18 20 22 Percent Change in Importance Source: L.E.K. Hospital Priorities StudyPage 4 L.E.K. Consulting / Executive Insights Vol. XV, Issue 4 LEK.COM
  5. 5. EXECUTIVE INSIGHTS Hospitals Continue to Restrict Access to Decision Makers. Thoughtful Commercial Response Now Critical. Steps to Reduce MedTech Sales Reps’ Access 80 75 70 60 53 Percent of Respondents 49 50 40 31 31 30 20 12 10 0 Appointment required Limited to interaction Utilize a vendor No access to C-suite Limited time slots Only allow access to to gain access with the purchasing monitoring system for sales rep visits sales reps you have department such as Reptrax established relationships with Source: L.E.K. Hospital Priorities Study As most in the industry know, the traditional model of These measures, plus added security and shortened win- MedTech sales—in which a rep drops in on a physician, dows for visits, create an environment in which it’s exceed- unannounced—is on the way out. ingly difficult for reps to operate and succeed. • Fully 75% of hospitals now require representa- On the plus side, MedTech companies and sales representa- tives to make an appointment instead of dropping tives have strong opportunities to increase their influence, in. As one CFO described reps’ visits, “It is […] a first through improved account management and client distraction – to our teams, physicians, and staff.” services, and second, through a more coordinated approach to selling. As one director of supply chain management at • 53% of hospitals require reps to interact with an Arizona hospital described, reps should be “educated in purchasing departments only, which effectively takes the regards to where healthcare is going and how they can sup- purchase decision away from physicians. “We want to port and enhance it” rather than resist it and create barriers. see what [MedTech reps are] selling before they get a hold of a doctor who brings it in without our knowl- The most effective MedTechs will be those who offer broad- edge,” said the CEO of Illinois Hospital. er solutions to hospitals’ challenges, such as quantifying the clinical and economic benefits of a product. Going forward, • Just under half of respondents use a vendor monitoring MedTechs must cater to hospitals’ imperative to increase system (VMS) like Reptrax to vet vendors for reputation efficiency, reduce costs and improve quality of care. and credentials.L.E.K. Consulting / Executive Insights LEK.COM
  6. 6. EXECUTIVE INSIGHTS L.E.K. Consulting is a global management For further information contact: International consulting firm that uses deep industry Boston New York Offices: expertise and analytical rigor to help 75 State Street 1133 Sixth Avenue Auckland clients solve their most critical business 19th Floor 29th Floor Bangkok Boston, MA 02109 New York, NY 10036 Beijing problems. Founded 30 years ago, L.E.K. Telephone: 617.951.9500 Telephone: 646.652.1900 Chennai employs more than 1,000 professionals Facsimile: 617.951.9392 Facsimile: 212.582.8505 London in 22 offices across Europe, the Americas Chicago San Francisco Melbourne and Asia-Pacific. L.E.K. advises and sup- One North Wacker Drive 100 Pine Street Milan ports global companies that are leaders 39th Floor Suite 2000 Mumbai in their industries – including the larg- Chicago, IL 60606 San Francisco, CA 94111 Munich est private and public sector organiza- Telephone: 312.913.6400 Telephone: 415.676.5500 New Delhi Facsimile: 312.782.4583 Facsimile: 415.627.9071 tions, private equity firms and emerging Paris entrepreneurial businesses. L.E.K. helps Los Angeles Seoul business leaders consistently make better 1100 Glendon Avenue Shanghai 21st Floor Singapore decisions, deliver improved business per- Los Angeles, CA 90024 Sydney formance and create greater shareholder Telephone: 310.209.9800 Tokyo returns. Facsimile: 310.209.9125 Wroclaw 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. © 2013 L.E.K. Consulting LLCPage 6 L.E.K. Consulting / Executive Insights Volume XV, Issue 4 LEK.COM

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