Beyond the Product: Service Expansion Opportunities for MedTechs

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Historically, an evolution toward high-value services has been a natural part of the development of hardware tech companies. Hospital systems in the U.S. and other developed markets are looking to centralize and coordinate supply chains more effectively. This increasing demand from customers—as well as competitive pressure from low-cost Asian device companies—will force established MedTechs to introduce ancillary service offerings around their core hardware products.

Several MedTechs are already developing broader solutions, but the shift doesn’t come naturally to many companies that traditionally put “product excellence” above “customer excellence.”

This Executive Insights discusses the need for innovation in a shifting healthcare landscape. Like hospital systems, consolidation among MedTechs will almost certainly happen, and survivorship in this area will be determined by innovative services and solutions.

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Beyond the Product: Service Expansion Opportunities for MedTechs

  1. 1. L E K . C O ML.E.K. Consulting / Executive Insights EXECUTIVE INSIGHTS VOLUME XVI, ISSUE 11 INSIGHTS @ WORK® Beyond the Product:Service Expansion Opportunities for MedTechs was written by Jonas Funk, Managing Director in L.E.K. Consulting’s Chicago office, Bob Lavoie, Managing Director in L.E.K. Consulting’s New York office, and Lucas Pain, Managing Director in L.E.K.'s Chicago office. For more information, contact medtech@lek.com. Hospital systems in the U.S. and other developed markets are increasingly looking to centralize and coordinate their supply chains. To help achieve this strategic goal, they are looking to work with fewer suppliers but to deepen their relationship with these select vendors, seeing them as trusted partners in helping them address their key challenges. These challenges include achieving improved IT systems, improved workflow efficiency, fewer hospital-acquired infections and fewer readmissions. In L.E.K.’s most recent annual hospital study, which surveys nearly 200 senior decision makers at U.S. hospitals, respondents reported that they are increasingly turning toward external suppliers to address their challenges rather than trying to hire or train internal resources to do so. Beyond the Product:Service Expansion Opportunities for MedTechs This shift presents opportunities for different types of suppli- ers, including GPOs, distributors, manufacturers and various other service providers, all of whom are rushing to offer broader solutions. L.E.K. believes that even in a crowded market place, MedTech manufacturers are well positioned to expand into broader services as part of an overall transition to a “customer excellence” value proposition for hospitals as opposed to MedTechs’ traditional focus on “product excellence” (see Figure 1). From a historical perspective, an evolution toward high-value services is a natural part of the maturation of hardware tech Increasing Importance of "Customer Excellence" High quality/ differentiated products Identification of attractive new technologies Scale economies in R&D and production Product Excellence Customer Excellence Deep understanding of customer needs Presentation to right audience by right team Clear articulation of value proposition Integrated portfolio with value-added services Most attractive solutions for customers Source: L.E.K. analysis Figure 1
  2. 2. EXECUTIVE INSIGHTS L E K . C O MINSIGHTS @ WORK® has a more important service element than most disposable or implantable devices). Other tech companies are rushing to catch up. In late 2013, Medtronic announced the formation of its “Hospital Solu- tions Business,” a unit that is managing cath labs for European hospitals. The Minnesota-based company similarly completed an acquisition of Cardiocom, a telehealth and remote moni- toring firm. As described in Medtronic’s press release, the acquisition reflected “Medtronic's transition toward expanding the company's medical device product offerings to broader healthcare services and solutions, providing meaningful clinical and economic value for hospitals.” In a similar vein, Medtronic is also introducing its “Rethinking Blood Conservation” service program to help hospitals reduce their blood usage and related- costs. Given that Medtronic’s current CEO, Omar Ishrak, previ- ously led GE Healthcare, this expanding service capability should not be surprising, but it should send a warning to MedTechs that have been slow to pursue this direction: Inaction may lead to obsolescence. Page 2 L.E.K. Consulting / Executive Insights Volume XVI, Issue 11 EXECUTIVE INSIGHTS companies. Just ask IBM, which once was a computer hardware company but has successfully transformed itself into a pre- dominantly service-orientated giant. For established MedTechs, increasing demand from customers – as well as competitive pressure from low-cost Asian device companies – will eventually force the development of ancillary service offerings around core hardware products – or even standalone services. It’s the future of the industry. The question is who will arrive first and with the most compelling offerings. The competition is already heating up. In recent years, many MedTech companies have worked to “go beyond the product” in the pursuit of broader solutions and general customer excel- lence. So far, GE Healthcare, which already offers broad services and solutions to support its product portfolios, has gained a reputation among industry experts as a leader in services (see summary of its services in Figure 3). In our hospital study, hospital administrators affirmed GE’s leading service position, ranking it well above other MedTech companies, including above its capital-equipment peers (capital equipment naturally GE Healthcare Scoring on Services Versus Other Large MedTechs GE Healthcare 0 Note: *How do these particular MedTech companies perform on the following dimensions? Source: L.E.K. Strategic Hospital Priorities Study Seimens J&J Philips Medtronic Stryker Baxter Becton Dickinson (BD) Abbott Labs Boston Scientific Synthes Carefusion Covidien St. Jude Number of Respondents Figure 2 KCI Hospira C.R. Bard Smith & Nephew Edwards Life Sciences 272625242322212018 191716151413121110987654321 Illustrative 302928
  3. 3. EXECUTIVE INSIGHTS L E K . C O MINSIGHTS @ WORK® L.E.K. Consulting / Executive Insights Examples of GE's Service Offerings Product-related services • Comprehensive Services Solutions/CompreCare manages equipment maintenance and contracting • Performance Solutions provides capacity management to improve operational and clinical performance • Clinical Product Education course offers e-learning courses and user training sessions to clinicians using GE products Operations efficiency services • The Centricity RCM (revenue cycle management) solution offers an advanced billing system that automates patients access, billing, collections, and business reporting Clinical care delivery services • GE’s EMR system is designed to interface with multiple practice management systems (e.g., Centricity Cardio Enterprise) • The Anesthesia Information Management System (AIMS) streamlines anesthesia documentation • Omnyx is a fully integrated and scalable digital pathology solution Hospital strategy services • GE offers financing programs for corporate (e.g., purchasing a business), real estate (e.g., senior housing, nursing facilities), and life science (e.g., pharma companies) • Leadership Systems help healthcare organizations develop talent, including recruitment-specific content • GE also looks externally to bolster its credentials, as shown by last year’s acquisition of the consulting firm Finnamore Example Service Offerings from GE Healthcare Source: L.E.K. analysis Figure 3 Leadership Systems Source: L.E.K. Consulting Framework for Hospital Services Figure 4 Categories of Service Needed By Hospitals Product related Operations efficiency Clinical care delivery Hospital Strategy • Directly related to managing or using equipment and devices • Enabling reduced administrative and operational costs • Enabling outsourced data, analytics and/or clinical support • Supporting revenue, expansion or strategic initiatives Product acquisition and supply chain management Product service, support and managed services Operations management and efficiency improvement Outsourced non-clinical functions and departments Non-clinical analytics and services Clinical IT and analytics Care coordination services Outsourced clinical services Clinician and patient education Financial and capital services Marketing, branding and awareness Hospital management, growth strategy and service optimization Research and academic support ServicesandSolutionsProvidedtoHospitals 1 2 3 4
  4. 4. EXECUTIVE INSIGHTS L E K . C O MINSIGHTS @ WORK® Page 4 L.E.K. Consulting / Executive Insights Volume XVI, Issue 11 As another prominent example, Michigan-based Stryker has been beefing up its service line up. Its acquisitions of Ascent, a leading device reprocessor, and Marshall Steele, a hospital performance improvement consulting firm, complement what it calls its “Stryker Solutions” business. However, despite these examples, most MedTechs are struggling when it comes to introducing services alongside their products, particularly with respect to how to monetize new offerings. The traditional MedTech focus on product excellence historically meant that any service offering (for example, product training or assistance during surgical procedures) was given away for free as a way to support product pull-through, rather than be- ing seen as a stand-alone, profitable business line. As a result, many MedTech companies are only recently thinking about ancillary service opportunities and how to incorporate them into broad offerings that expand the top line as well as the bottom line. An obvious, key ingredient to enabling monetization of a service is to provide clear evidence of the incremental economic value that the service actually provides; many MedTechs have not thought to do this or have failed to do so in a compelling way or with compelling evidence. L.E.K. has developed a framework to define the relevant universe of service areas that are applicable to hospitals and into which MedTechs could expand. We have also mapped service companies within this framework that could be targeted for potential partnerships and/or acquisition. The framework includes 13 segments with four broader categories of potential services: • Product related: Directly related to managing or using equipment and/or devices • Operations efficiency: Enabling reduced administrative and operational costs • Clinical care delivery: Enabling outsourced data, analytics and/or clinical support • Hospital strategy: Supporting revenue expansion or strategic initiatives Source: L.E.K. research and analysis Example Services to Hospitals within Operations Efficiency Figure 5 Operations Efficiency2 Operations management and efficiency improvement Outsourced non-clinical functions and departments Non-clinical analytics, services and IT • Lean consulting, training and implementation † Workflow and patient flow process design † Health information exchange (HIE) consulting † Department workflow solutions (e.g., lab workflow) † Reimbursement processes (e.g., new/stacked HCPC codes) † Process implementation † Benchmarking and cost analysis † Staff rationalization/CBA consulting • Compliance process design and implementation † EMR system design, integration and training † Procedural coding (non-clinical staff) • IT-enabled solution implementation † Patient / asset tracking systems (e.g., patient flow software) † Reporting systems (e.g., billing, census data tracking) † Workflow management (e.g., scheduling software) † Documentation (e.g., interaction recording) • Outsourced administrative functions † Inventory management services (e.g., order automation, efficiency benchmarking) † Patient billing and collection services † Accounting/back-office services † IT/help desk services • Utilization benefit management (e.g., radiology benefit management) • Waste management services † Red bag waste management (hazardous materials handling and disposal) † Device and instruments disposal † Sharps/other medical waste management • In-house administrative functions † Revenue cycle management † Coding † Patient billing and collection services † Accounting/back-office services † IT/help desk services • IT-enabled analytics † Key performance indicators † Quality metrics
  5. 5. EXECUTIVE INSIGHTS L E K . C O MINSIGHTS @ WORK® L.E.K. Consulting / Executive Insights Within each of these segments, an additional hierarchy of sub-segments exists. For example, within clinical care delivery, we have identified several more specific service areas in which outsourced service providers currently exist (or could exist). When asked whether hospitals would be interested in ad- ditional services from MedTech companies, 60% of c-suite respondents answered affirmatively. As Figure 7 shows, interest varies by the type of service offered, with high interest levels in clinical IT and analytics and operations management/efficiency improvement, and lower interest in outsourced clinical/medical services and marketing/branding services. Importantly, service expansion does not necessarily require MedTechs to develop or acquire capabilities in all instances; instead, innovative partner- ships with service companies can offer a more cost-effective and lower-risk path. For example, in order to help hospitals with physician or patient-training programs such as the use of new products or disease-management programs, MedTech suppliers could form partnerships with start-up companies like Syandus, an intelligent simulation learning technology focused on health- care applications. Particularly with respect to IT integration, connectivity and “big data,” MedTech suppliers likely would be better served to find good partners than trying to learn entirely new competencies. As large MedTechs such as GE, Medtronic and Stryker continue to migrate toward a broader portfolio and solutions with more services, it will become more difficult for smaller MedTechs with fewer resources and scale to keep up. Similar to the consoli- dation that we are seeing with the hospital landscape itself, consolidation among MedTech suppliers will almost certainly happen. Survivorship in this new era will largely be determined by innovative services and solutions. The landscape after the dust of this new competition has settled will likely include a smaller number of suppliers who have earned deeper trust and partnerships with senior hospital administrators through the sale of a broader arsenal of relevant and valued products – and services. Source: L.E.K. research and analysis Example Services to Hospitals within Clinical Care Delivery Figure 6 Clinical Care Delivery3 Clinical IT and analytics Care coordination services Outsourced clinical services Clinician and patient education • Outcomes monitoring † Patient data tracking and benchmarking † Monitoring of readmission rates • Clinical decision support † Clinical diagnostic tools † Discharge decision support tools • Health economics and outcome modeling † Clinical risk assessment tools † Health economics and treatment outcome analysis tools • Telehealthcare services † Remote connectivity † Patient portals/interaction tools • Integrated/high-touch care model development † Patient touchpoints • Disease management services (e.g. compliance, discharge follow-up) • Population health management services • Data aggregation and analytics • Outsourced functions/depart- ments, including: † Pharmacy (e.g. drug compounding) † Imaging † Infusion (e.g. home infusion) † Dialysis † Catheterization labs • Clinician staffing services, including: † Emergency room staff † Anesthesiologists † Radiologists † Nurses/surgical scrub staff † Device technicians • Sub-specialty care management, including: † Rehab/PT/OT † Pain management † Dialysis † ASCs administration • Patient education services † Medication education † Online patient education † Usage of home care medical supplies • Clinicial training and education † Clinical procedure training † Continuing education for physicians and nurses † Clinical coding and reimbursement administration (e.g. new CPT codes) † Intelligent simulation learning technology
  6. 6. EXECUTIVE INSIGHTS L E K . C O MINSIGHTS @ WORK® Page 6 L.E.K. Consulting / Executive Insights Volume XVI, Issue 11 Note: *How valuable are each of the following services that MedTech companies could provide in addition to their products? Source: L.E.K. study Prioritized Services Desired by Hospital Administrators Hospital Interest in Specific Potential MedTech Services* 80 40 20 0 PercentofRespondents 60 20 40 60 80 Figure 7 ClinicalIT andanalytics Operations management andefficiency improvement Education,training andcompliance Disease management services Hospital management, growthstrategy andservice optimization Productacquisition andsupplychain management Equipmentservice, supportand managedservices Non-clinical analytics, servicesandIT Financialand capitalservices Outsourced non-clinical functionsand departments Outsourced clinical/medical services Marketing, branding andawareness 7 – Very valuable 6 5 Mean1 – Not at all valuable4 3 2 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. © 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 ®

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