Selling hospitals, not doctors

Hospital CEO David Hefner came up with the idea about a decade ago for a partnership between an academic medical center and a medical device manufacturer that could enhance access to the latest technology, improve outcomes for patients and lower the hospital's overall costs.

The biggest problem that Hefner, head of Georgia Regents Medical Center in Augusta, Ga., found was that the medical device industry wasn't ready. Device firms traditionally have used a highly profitable sales model that aligns corporate sales representatives with surgeons and other physicians who make the final decisions about what kind of knee implant or pacemaker the hospital should buy, often regardless of price.

Now manufacturers are facing pushback to that model as hospitals, facing declining reimbursement rates, pressure them to reduce prices on medical supplies and devices while cutting back on pricey technologies that don't produce better clinical outcomes for their patients.

Those dynamics, along with the rising number of physicians employed by hospitals, are pushing devicemakers to alter their sales, marketing and, in some cases, product development strategies to target cost-conscious hospital executives rather than physicians. They also are selling the value behind their devices—for instance, whether a particular product can help reduce hospitalizations—and touting themselves as partners to healthcare providers.

“We've got to look at the continuum of care and see where we (can) deliver some efficiencies and value in a way that helps the provider,” said Jim Mayberry, Boston Scientific Corp.'s vice president of marketing and corporate sales operations.

Hefner said that kind of approach is overdue. “We're entering an era in America medicine that is going to require us to think and act differently—we would say better, faster, cheaper—or else we will be extinct,” he said. “We need partners who can help us rethink our way forward.”

In June, Georgia Regents and Royal Philips announced an agreement in which the 503-bed public teaching hospital committed $300 million in spending over the next 15 years to Royal Philips, which in turn will provide the hospital and associated providers—Children's Hospital of Georgia, Georgia Regents University Cancer Center and other outpatient clinics—with new technology, maintenance and other services. Philips Healthcare is one of the largest manufacturers of imaging systems and patient monitoring technologies.

Hefner's earlier attempts in the 2000s to set up similar partnerships with a number of companies failed, partly because there was not an urgent need at that time for the device industry to operate differently, he said. Even now it's a tough sell. “Could we get other industry leaders to operate that way right now?” Hefner said. “I don't think so. They're interested in talking about it and doing some things around the edges, but not as robustly as (what) Philips and Georgia Regents have crafted.”

But devicemakers say their model is changing and that they are improving surgical procedures that use their devices, developing technologies that reduce hospital visits and complications, and finding new ways to cut out costs that can then lead to lower prices.

Diana Lee, an analyst for Moody's Investors Service, said manufacturers are starting to respond to the greater involvement of hospitals in making buying decisions for medical devices. “All of these things lead to a more competitive situation for the medical devicemakers.”

Some device manufacturers have even started sending their executives, rather than sales representatives, to meet with supply-chain staff before sales reps engage the hospital's physicians. That's happening at Broward Health hospital system in South Florida. “The manufacturers are coming in with new ways to partner not just with the physicians, but the financial folks and the supply chain,” said Brian Bravo, Broward Health's director of corporate materials management and procurement officer.

For example, Arlington, Tenn.-based Wright Medical Technology in 2010 formed a subsidiary called Wright Direct that sells primary hip and knee implants at a flat rate 50% to 70% less than the average cost of an implant, said Patrick McCarthy, vice president at Wright Direct. The implants are the same models as ones sold in the company's traditional sales model.

Manufacturers' sales reps traditionally provide hospitals with devices before an operation and are present during procedures. Traditional services such as marketing, supply-chain costs, and sales overhead are usually rolled into the price of a device. But Wright Direct is able to offer lower prices because it uses a “rep-less” model that takes sales reps out of the OR, provides color-coded and standardized operating instruments, and trains OR staff to assist the surgeon. McCarthy said Wright Direct's delivery system “can reduce a lot of costs that are otherwise inherent to the traditional implant model.”

Wright Direct is expected to be sold to MicroPort Scientific Corp., which is acquiring Wright's hip and knee implant business for $290 million.

Other examples of manufacturers responding to the new market pressure are Stryker's recent $1.65 billion acquisition of robotic surgery firm Mako Surgical, and Medtronic's acquisition of CardioCom, a telehealth and patient remote-monitoring services provider. Stryker, one of the largest orthopedic implant makers, says the Mako technology will help surgeons simplify orthopedic procedures and reduce variability in the operating room. Because there is little clinical difference between most hip and knee implants, manufacturers are increasingly focused on finding ways to improve procedural outcomes.

But Louis Fierens, senior vice president of supply chain and capital projects management at Trinity Health, said he has yet to see evidence that manufacturers are making big changes in their business models. Still, he expects that ongoing cuts in reimbursement rates as well as increased utilization of shared-risk reimbursement models will drive future changes.

“They've got to find ways to take costs out, just like we all do,” he said. “But the future isn't here yet.”

Follow Jaimy Lee on Twitter: @MHjlee