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

EXECUTIVE INSIGHTS VOLUME XV, ISSUE 4

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

Investment in IT continues to be the most significant category

of spending growth. “Due to the mandate of EMR, 50% of our

capital budget is being eaten up by the need for IT,” explains a

director of materials management from a Massachusetts hospi-

tal. Yet EMR adoption is just one driver of IT spending. Hospitals

are also relying more heavily on IT-intensive quality metrics for

both reimbursement and competitive differentiation.

As in previous years, hospitals continue to show interest in

becoming accountable care organizations (ACOs) due to legisla-

tion that encourages bundling of payments, even in the face of

uncertainty about implementation. In a sign of growing traction

behind the integrated model, the number of ACOs jumped 35%

from September 2011 to May 2012, and over 80% of surveyed

hospitals plan to join or are already in an ACO.

Hospitals indicate the line between hospitals and payers will

continue to blur as many hospitals will adopt payer capabili-

ties—12% report they will likely do so over the next five years.1

Hospitals offering insurance plans hope to gain critical expertise

in risk management, and payers are looking for ways to expand

profits beyond the reform-mandated caps on administrative

fees. This type of vertical integration will take place through

partnerships, acquisitions (e.g. a hospital group acquires an

insurer, or vice versa), or by hospitals launching their own payer

plans.

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.

Demand for healthcare services continues to rise due to an ag-

ing 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 head-

winds. 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 com-

panies 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 asked nearly

200 hospital CEOs and senior administrators about major trends

in their industry, and how MedTech companies can partner with

hospitals to overcome the significant hurdles they face (see

Figure 1).

Hospital Budgets Continue to Expand; Driving Down Costs as Critical as Ever

Our survey shows hospitals expect relatively consistent spending

growth over the next five years. More than 60% of hospital ad-

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.”

EXECUTIVE INSIGHTS

L E K . C O MPage 2 L.E.K. Consulting / Executive Insights Volume XV, Issue 4

EXECUTIVE INSIGHTS

Hospitals also continue to acquire specialty and primary care

physician practices; the move expands hospitals’ networks,

grows the referral base and shifts care to lower-cost settings.

As hospitals grow through acquisitions, they also consolidate

purchasing power, which can counter-balance physicians’ influ-

ence in the purchasing decision. This development is having a

significant impact on MedTech companies; hospital administra-

tors and their purchasing departments use more complex cost/

benefit analyses to inform buy decisions, rely less upon referrals

and physician preferences, and are more likely to ask for clini-

cal and economic data supporting a product’s value and price

point.

In fact, as hospital administrators take on greater control of

purchasing decisions, MedTech representatives are losing influ-

ence to group purchasing organizations (GPOs) and distribu-

tors. Asked which external parties influence their purchasing

decisions, nearly 80% of administrators cited GPOs, 50% cited

distributors, and less than 45% named manufacturer’s sales

reps. Of those three groups, administrators report that MedTech

reps have lost the most influence since 2012. As proof of this

trend, hospitals are actively limiting the access of MedTech sales

reps to their physicians and administrators. (See sidebar, “Hospi-

tals Continue to Restrict Access to Decision-Makers.”). MedTech

companies must take pains to overcome these barriers, moving

away from a purely transactional relationship based on ne-

gotiating on price with procurement, and instead seek out a

broader, strategic relationship with the hospital system, C-level

administrators and physicians.

Beyond Cost Controls, Hospitals also Focus on Top-Line Growth and Differentiation

Hospitals increasingly realize that competitiveness—whether

through a differentiated offering, efficiency gains or by growing

higher-margin specialties—will be a key source of value going

forward. One Illinois hospital CEO explains, “Imaging equip-

ment and anything related to the operating room are a spend-

ing priority; we’re paid fee for service there. Until we get in a

situation where we are reimbursed to control value, the imaging

department and the operating room are very profitable places.”

Figure 1

Spending Priorities in 2013 and BeyondSpending 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.

Source: L.E.K. Hospital Priorities Study

Definitely will increase spending

May increase spending

Spending will remain unchanged

MeanMay reduce spending

Definitely will reduce spending

Spending Priorities in 2013

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Spending Priorities Over the Next 5 Years

EXECUTIVE INSIGHTS

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

With rising capabilities in technology and electronic records,

hospitals have become more adept at leveraging meaningful

use metrics, particularly those related to new reimbursement

rules (e.g., hospital-acquired infection rates, readmission rates

and patient satisfaction scores). Even so, hospitals must now

build more robust management metrics (i.e. insights about how

their hospitals operate), as well as outcomes and quality metrics

that can help them differentiate from their competitors.

Another key strategic imperative: integration of care. The

move to an integrated care model is based in part on boosting

outcomes and related reimbursements, but hospitals also realize

that integrated care drives positive customer experience and

hospital differentiation. Even so, an integrated care model is

exceedingly complex to develop and deploy, requiring data con-

nectivity across the spectrum of clinical care (e.g. smart devices

that support IT integration), better utilization of outcomes data

to support reimbursements and payment bundling, and greater

collaboration across internal stakeholders on standards of care.

For MedTech, an Opportunity to Partner with Hospitals

As their business model undergoes profound disruption, hospi-

tals expect MedTech companies to evolve with them. MedTech

companies should move away from the mindset of delivering

incremental product and cost improvements—those won’t sat-

isfy the new regime of hospital decision-makers—and instead

offer broader, more holistic solutions. Product innovation is still

critical, but alone will be insufficient for competitive differentia-

tion in the years ahead.

First and foremost, hospital administrators are in the midst of

massive data-driven changes and they expect the same from

MedTech companies. Hospitals want MedTech companies to

provide stronger data and analyses to support purchasing

decisions. (For example, approximately 10% of hospitals say

MedTech companies are “completely addressing” the need for

clinical data that demonstrates better patient outcomes, and

only nine percent are “completely addressing” the need for

ROI analysis supporting a purchase decision.) As one director of

purchasing described, “We want to know if a knee replacement

that costs two times as much as a competitor’s […] is actually

going to last double the time as the competitor’s model.” More

robust data can also be the basis of value-add offerings, such

as a profit-sharing agreement to split the risks and rewards of

specific purchases.

Hospitals will also look to MedTech to provide other add-

on solutions, such as helping to engage patients, providing

professional education and training, and offering best-practice

consulting. Satisfying these needs is no small task. MedTech

companies must rethink their sales force size and structure,

adding specialized roles in disease management, management

metrics, and health statistics and economics.

Figure 2

Importance of Initiatives to Hospital Strategic Plan

100

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Source: L.E.K. Hospital Priorities Study

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EXECUTIVE INSIGHTS

L E K . C O MPage 4 L.E.K. Consulting / Executive Insights Vol. XV, Issue 4

Hospitals also indicate they prefer a single point of contact to

simplify vendor relationships, and it must be a high-quality,

beneficial relationship. The MedTech rep must be well informed

about clinical and economic data, the full range of products in

the portfolio, and the hospital’s unique needs. As one hospital

CEO described, “It would be great if MedTech companies would

take a more coordinated approach and assess our needs before

providing their offering. So far, no one is doing this.”

Based on our research, MedTech companies have a unique op-

portunity to help solve hospitals’ most pressing problems—and

few are doing so effectively. Some have begun to make the

required changes to their commercial model, but according

to hospitals, MedTech companies still have work to do. Just

as technology companies did 20 years ago when they began

bundling technology with services, so too must MedTech think

more carefully about how to create new ‘product + service’

solutions that address critical hospital needs. These changes will

require investment in and reorganization of the sales force, yet

those MedTech companies willing to adapt and innovate will be

in a position to offer a highly differentiated approach.

Figure 3

Expected Change Over the Next 5 Years in Hospital Needs from MedTech Companies

Ability of the company to share risk

0

Source: L.E.K. Hospital Priorities Study

2 4 6 8 10 12 14 16 18 20

Help engaging patients (e.g., patient education)

Full “solution” partnership

Providing financing through a lender partner or directly

Reimbursement support

Clinical data / medical economics / analytics

Cost benefit value proposition

Portfolio breadth

Cutting-edge technology

Professional education and training

Ease of doing business

22

Sales rep relationship

Product quality

Service provided by the sales representative

Percent Change in Importance

Going forward, hospitals

are less interested in

incremental product

improvements without

significant clinical and/or

cost improvements or in

more sales rep visits

Hospitals are increas-

ingly looking for

MedTech partners that

can provide “full”

solutions (e.g., share

risk, help engage

patients, cost / benefit

value proposition)

EXECUTIVE INSIGHTS

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

As most in the industry know, the traditional model of

MedTech sales—in which a rep drops in on a physician,

unannounced—is on the way out.

• Fully 75% of hospitals now require representa-

tives to make an appointment instead of dropping

in. As one CFO described reps’ visits, “It is […] a

distraction – to our teams, physicians, and staff.”

• 53% of hospitals require reps to interact with

purchasing departments only, which effectively takes the

purchase decision away from physicians. “We want to

see what [MedTech reps are] selling before they get a

hold of a doctor who brings it in without our knowl-

edge,” said the CEO of Illinois Hospital.

• Just under half of respondents use a vendor monitoring

system (VMS) like Reptrax to vet vendors for reputation

and credentials.

These measures, plus added security and shortened win-

dows for visits, create an environment in which it’s exceed-

ingly difficult for reps to operate and succeed.

On the plus side, MedTech companies and sales representa-

tives have strong opportunities to increase their influence,

first through improved account management and client

services, and second, through a more coordinated approach

to selling. As one director of supply chain management at

an Arizona hospital described, reps should be “educated in

regards to where healthcare is going and how they can sup-

port and enhance it” rather than resist it and create barriers.

The most effective MedTechs will be those who offer broad-

er solutions to hospitals’ challenges, such as quantifying the

clinical and economic benefits of a product. Going forward,

MedTechs must cater to hospitals’ imperative to increase

efficiency, reduce costs and improve quality of care.

Hospitals Continue to Restrict Access to Decision Makers. Thoughtful Commercial Response Now Critical.

Steps to Reduce MedTech Sales Reps’ Access

80

40

30

20

10

0

Perc

ent

of

Res

po

nd

ents

Appointment required to gain access

Limited to interaction with the purchasing

department

Utilize a vendor monitoring system

such as Reptrax

No access to C-suite Limited time slots for sales rep visits

Only allow access to sales reps you have

established relationships with

Source: L.E.K. Hospital Priorities Study

60

50

75

5349

31 31

12

70

EXECUTIVE INSIGHTS

L E K . C O MPage 6 L.E.K. Consulting / Executive Insights Volume XV, Issue 4

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