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Executive insights                                                                                                        ...
Executive insights         Spending Priorities                                                                            ...
Executive insights                    In light of these changes, MedTech companies need to ensure                         ...
Executive insights         Elements of this new approach can range from adding services                                   ...
Executive insights            L.E.K. Consulting is a global management               For further information contact:     ...
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Hospitals Rethink MedTech Purchasing Strategies as Budgets Grow


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Many hospitals have weathered the economic downturn that forced dramatic spending cuts and are now refocusing on strategic initiatives. L.E.K.’s research also shows that although many hospital budgets are growing, health executives are still scrutinizing purchases and are using multiple channels to procure MedTech products at highly competitive prices.

Insights from our third annual L.E.K. Strategic Hospital Priorities Study include:
* Hospital budget forecasts for the next five years
* Key areas where hospitals plan to increase spending
* Healthcare reform’s impact on purchasing decisions
* The growing role that government purchasing organizations (GPOs) are playing in hospital procurement
* How MedTech companies need to respond to changing hospital purchasing priorities
* areas where MedTech providers can capitalize on new hospital needs

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Hospitals Rethink MedTech Purchasing Strategies as Budgets Grow

  1. 1. Executive insights Volume XIV, Issue 3 Hospitals Rethink MedTech Purchasing Strategies as Budgets Grow Many hospitals have weathered the economic downturn this year, and continued budget growth forecast during the that forced dramatic spending cuts and are now refocusing next five years. More than 60% of hospital executives expect on strategic initiatives. Although many hospital budgets are to see budget increases this year – a growth forecast that is growing, health executives are still scrutinizing purchases and nearly double our findings just two years ago (see Figure 1). At are using multiple channels to procure MedTech products at the other end of the budget spectrum, only 2% of respondents highly competitive prices. expect that their funding will decrease significantly in 2012, which is dramatically lower than in 2009 when nearly 14% of At the same time, federal healthcare insurance mandates respondents were bracing for steep cuts. and private payer emphasis on cost controls are placing Figure 1 added fiscal pressures on hospitals. Addressing quality care Expected Change in Total Spending in Next Year vs. Current requirements and reporting capabilities will be pivotal to ensure 100 that hospitals receive high reimbursement rates from insurers. 80 Adding complexity to this issue, hospitals are also being asked to transform their approach to patient care. Specifically, the 60 federal government is providing incentives beginning this year 40 for hospitals to partner with outside caregivers via Accountable Care Organizations (ACOs) to support patient health and % of Respondents 20 wellness beyond physical care facilities. 0 The L.E.K. Strategic Hospital Priorities Study shows that 20 these healthcare changes present opportunities for MedTech companies that can address the evolving requirements facing 40 hospital executives. 60 Healthy Outlook for Hospital Budgets 80 100 End of 2009 End of 2010 End of 2011 L.E.K.’s third annual survey of nearly 200 senior hospital decision makers shows a projected increase in overall spending Significantly Increased Minimally Decreased Moderately Increased Moderately Decreased Minimally Increased Significantly Decreased Hospitals Rethink MedTech Purchasing Strategies as Budgets Grow was No Change Net Change written by Bob Lavoie, Vice President and Head of L.E.K. Consulting’s global MedTech Practice and Lucas Pain, Vice President at L.E.K. Source:  L.E.K. Strategic Hospital Priorities Study Please contact us at for additional information.L.E.K. Consulting / Executive Insights
  2. 2. Executive insights Spending Priorities Figure 2 Anticipated Usage by Hospital Size (Next Five Years) The types of patient admissions and medical procedures that 100 hospitals conduct ultimately shape their MedTech needs. In 90 2011, hospitals continued to see an increase in uninsured 80 70 admissions, emergency room visits, outpatient surgeries and 60 outpatient visits. And many hospital executives attribute the 50 % of Respondents decline in elective procedures to the weak economy and patient 40 decisions to delay select care due to costs. 30 20 10 Looking ahead, IT spending is projected to continue its high- 0 growth trajectory through 2016 as care providers continue their -10 implementations for electronic health records (EHR) capabilities. -20 -30 And although many hospitals have extended the life cycle of -40 <100 1-299 300-499 >500 capital equipment in recent years due to financial constraints, Number of Beds one-third of executives plan to increase their budgets for large Smaller hospitals anticipate higher GPO usage in the future in compar- medical devices during the next five years. ison with larger hospitals, as smaller hospitals see more value in GPOs Increase Stays the Same Decrease Infection prevention and reduced medical errors continue to Source:  L.E.K. Strategic Hospital Priorities Study be top-of-mind for care providers, and hospital executives are willing to pay premiums for disposable products that demonstrate an ability to address these issues. L.E.K.’s survey than 50% last year. L.E.K. research also shows that smaller results also reveal moderate purchasing increases in small hospitals anticipate greater GPO adoption compared to larger medical devices, disposables and facilities supplies during the hospitals (see Figure 2). The variety of products that hospitals next five years. More broadly, there is an overarching concern are purchasing from GPOs is also expanding from low-cost, that MedTech equipment manufacturers will raise their prices high-volume product categories with minimal perceived product and that health providers will also face increased costs due to differentiation to high-cost, low-volume equipment. MedTech regulatory and reimbursement changes (such as the medical companies should foster strong relationships with GPOs and device tax). develop strategies to work with this growing market channel. GPOs Gain Breadth and Depth Hospitals are also trying to increase efficiency by beginning to centralize purchasing of disposables and other categories Despite the recovery of hospital budgets, 80% of administrators with commodity-like properties – and away from physicians are continuing their aggressive supplier negotiations in an effort who have traditionally been the sales targets for MedTech to manage costs. To help with continued fiscal discipline, Group companies. That said, physicians will continue to play an Purchasing Organizations (GPOs) are playing an ever-expanding influential role in product selection. One reason driving this role in MedTech procurement. As one Midwest hospital CFO change is that a growing number of doctors are trading noted, “Because of the poor economy we’re pushing more to private practice for salaried hospital staff positions. Hospitals buying on GPO contracts….because right now every purchase is are embracing this strategy to control costs, build out the heavily scrutinized.” continuum of care and establish the operational structure required to remain profitable as insurers begin to transition To that point, more than 60% of survey respondents are in- from performance-based reimbursements to a bundled creasing their current GPO use in 2012, which is up from more payment structure.Page 2 L.E.K. Consulting / Executive Insights Vol. XIV, Issue 3
  3. 3. Executive insights In light of these changes, MedTech companies need to ensure importance for hospitals, along with the continued adoption of that their commercial sales models reach beyond physician innovative products (see Figure 3). audiences and communicate their value effectively to multiple constituents. This requires dedicated sales teams with tailored MedTech companies that can package additional services to help programs that resonate with specific audiences (e.g., hospital hospitals address central pain points and demonstrate added CFOs, etc.). value with patient care, reporting needs for reimbursement and other requirements will be well positioned to succeed in this evolving healthcare landscape. Prescription for Addressing Unmet Hospital Needs Embrace Customer Excellence Hospital operational priorities include controlling costs, increasing efficiency and improving the profitability of their Hospitals are emerging from a fiscal lock-down to revisit patient mix. Similarly, patient focus is centered around many initiatives that were previously tabled or curtailed due enhancing care and outcomes (including reduced medical errors to budgetary constraints. Although many strategic initiatives and improved infection control). To achieve these goals, an remain consistent with past surveys – such as measuring patient overwhelming majority of hospital executives are reevaluating outcomes – fiscal realities and federal mandates are changing their systems and processes, and 71% are allocating budgets to how they deliver care. Hospitals are also increasingly centralizing address these needs. operations to address new reimbursement guidelines and ACO- like models. Hospital leaders continue to look toward the medical device industry for help. They believe that MedTech companies can MedTech providers need to respond to new market dynamics support their goals by clearly articulating product cost-benefit by evolving from a product-centric mindset to a customer value propositions, providing clinical data, sharing risk and excellence focus that provides solutions-based services that offering full solutions. These criteria will continue to grow in address hospital pain points more holistically. Figure 3 Current and Future Hospital Needs from MedTech Companies 10 2011 5 years 8 7.6 7.9 7.5 from now 7.2 7.2 6.8 6.7 6.6 6.4 6.3 6.2 6.4 6.4 6.4 6.1 5.9 6.1 5.8 Average Score 6 5.5 5.5 5.5 5.5 5.2 5.2 5.1 5.0 4.7 4.1 4 2 0 Full “solution” partnership Providing financing through a lender partner or directly Clinical data Sales rep relationship Ability of the company to share risk Portfolio breadth Cost-benefit value proposition Professional education and training Ease of doing business Helping to engage with the patient Product quality Reimbursement support Cutting-edge technology Service provided by the sales representative Cost benefit value proposition, sharing risk and providing a full solution will grow in importance for hospitals over the next few years L.E.K. Strategic Hospital Priorities StudyL.E.K. Consulting / Executive Insights
  4. 4. Executive insights Elements of this new approach can range from adding services As part of this effort, medical device companies that can clearly to existing product offerings to developing more cohesive and differentiate how they enhance care quality, measure patient targeted sales programs that are attuned to C-level hospital outcomes and play an active role in controlling costs have a requirements, individual physicians and other stakeholders. clear opportunity to grow share. Hospitals Use ACOs as a Vehicle to Expand Care Figure 4 Concerns Regarding ACO Formation 60 55 55 53 51 50 45 41 41 39 40 36 35 30 25 24 % of Respondents 20 15 10 5 0 Reducing costs and Engaging Managing risk Required financial Meeting quality Allocating shares Managing care Loss of competitive demonstrating physicians outlay targets between positioning due to efficiencies constituents ACO formation Source:  L.E.K. Strategic Hospital Priorities Study ACOs are designed to provide patients with a greater Still, many of the fundamental tenets of this healthcare model continuity of care throughout the healthcare ecosystem while need to be addressed. More than half of hospital executives controlling costs. In this approach, ACOs would be forged by surveyed are concerned about how participating hospitals partnerships among hospitals, other providers and payers to would reduce costs, engage physicians and manage risk (see deliver holistic patient care. Because hospitals and integrated Figure 4). delivery networks (IDNs) have the financial resources and operational infrastructure to establish and control ACOs, they MedTech companies should continue to monitor ACO will have the greatest opportunity to shape their success. developments, as they could create additional spheres of However, running an ACO effectively will require hospitals centralized purchasing as they align hospitals and other care to shift to a more outpatient-focused, coordinated health providers more closely. Additional opportunities may emerge framework and take on population risk. for MedTech providers that can provide products and solutions that can quantify improvements in care and superior economic Despite the current ambiguity in ACO guidelines from the value through the patient care cycle across hospitals, other care Centers for Medicare & Medicaid Services (CMS), hospital providers and home settings. executives are preparing to adopt some form of an ACO- like structure in the coming years. Currently, less than 20% (Note: for an additional perspective on ACOs, please read of hospitals surveyed are pursuing some form of this new L.E.K.’s Executive Insights report titled, Will ACOs Keep model, while 61% believe that there is a likelihood of ACO Hospitals and Insurers out of Critical Care?) participation within the next three years.Page 4 L.E.K. Consulting / Executive Insights Vol. XIV, Issue 3
  5. 5. 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 nearly 30 years ago, Telephone: 617.951.9500 Telephone: 646.652.1900 London L.E.K. employs more than 900 profes- Facsimile: 617.951.9392 Facsimile: 212.582.8505 Melbourne sionals in 20 offices across Europe, the Chicago San Francisco Milan Americas and Asia-Pacific. L.E.K. advises One North Wacker Drive 100 Pine Street Mumbai and supports global companies that 39th Floor Suite 2000 Munich are leaders in their industries – includ- Chicago, IL 60606 San Francisco, CA 94111 New Delhi ing the largest private and public sector Telephone: 312.913.6400 Telephone: 415.676.5500 Paris Facsimile: 312.782.4583 Facsimile: 415.627.9071 organizations, private equity firms and Shanghai emerging entrepreneurial businesses. Los Angeles Singapore L.E.K. helps business leaders consistently 1100 Glendon Avenue Sydney 21st Floor Tokyo make better decisions, deliver improved Los Angeles, CA 90024 Wroclaw business performance and create greater Telephone: 310.209.9800 shareholder returns. Facsimile: 310.209.9125 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. © 2012 L.E.K. Consulting LLCL.E.K. Consulting / Executive Insights