L E K . C O ML.E.K. Consulting / Executive Insights

EXECUTIVE INSIGHTS VOLUME XVI, ISSUE 11

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Beyond the Product: Service Expansion Opportunities for MedTechs was written by Jonas Funk, Managing Director in L.E.K. Consulting’s Chicago off ice, Bob Lavoie, Managing Director in L.E.K. Consulting’s New York off ice, and Lucas Pain, Managing Director in L.E.K.'s Chicago off ice. 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

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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

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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

Serv

ices

an

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Pro

vid

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o H

osp

ital

s

1 2 3 4

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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:

•Productrelated:Directly related to managing or using

equipment and/or devices

•Operationsefficiency:Enabling reduced administrative

and operational costs

•Clinicalcaredelivery:Enabling outsourced data,

analytics and/or clinical support

•Hospitalstrategy: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

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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 servicesClinician 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

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*

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