Siemens CEO details hospitals' 'new normal' for purchasing capital equipment

Dr. Gregory Sorensen is CEO of Siemens Healthcare North America, a manufacturer of capital-intensive medical-imaging equipment, diagnostic testing and healthcare information-technology systems. Before joining the German conglomerate in 2011, Sorensen was a practicing neuroradiologist at Boston's Massachusetts General Hospital and a radiology professor at Harvard Medical School. Modern Healthcare reporter Jaimy Lee caught up with Sorensen in March at New York-Presbyterian Hospital to discuss changes in the hospital capital-equipment purchasing landscape. The following is an edited excerpt.

Modern Healthcare: Are financial pressures on hospitals affecting purchases of imaging equipment and other high-cost technologies?

Dr. Gregory Sorensen: There is no question that the Deficit Reduction Act and the other dozen or so cuts that Congress and the CMS have made to people who use imaging equipment have impacted sales. It is really a substantial drop since 2005 and 2006 (and) in Massachusetts, where Romneycare was enacted, it dropped even more. We expect that Obamacare will also put a lot of cost pressures, and therefore sales pressures, on our companies.

This is one of the reasons why we think the device tax is so wacky. There has been a lot of misinformation around the idea that Obamacare would lead to a windfall for companies like ours. What we are seeing is that is not the case. While it's true that more people are insured, there are also so many other features … that are pressing down utilization.

MH: Yet you chose not to pass the tax onto customers.

Sorensen: Correct. All taxes, and this one in particular, are political events. It was very clear that this was meant to be a tax on us and not something that we should pass along. We knew that if we were to try that, that it would not be in line with the spirit of what the legislators were going to do and it would only offend our customers. So it was just a lose-lose option that would make Congress mad and make our customers mad. We don't like making our customers mad.

In some companies that have tried to pass it along, the customers have refused to pay it. And so I think it hasn't worked well for those companies.

MH: Is there an alternative to the tax?

Sorensen: To the extent that there were increased sales that we could tie to the ACA, that would be something worth exploring. It would be a little bit like when Part D came to Medicare. There was an increase in spending on pharmaceuticals and so it makes sense for the pharmaceutical companies to … pay more tax because they were getting a sort of windfall.

MH: What is happening at hospitals with large capital purchases that are made every 10 years or so?

Sorensen: Capital expenditures that used to be routine are now getting more scrutiny higher up the food chain. Boards of directors and CEOs are now getting involved in approving capital purchases where before those spending decisions were delegated to departments. Even when they get access to capital now, the chief financial officer wants to sign off. From our perspective, it requires a different kind of explanation. In the past, when we created an innovation around a new scanning technology or a new blood-test technology the users of that technology were, and are, typically very sophisticated. They have been training for years and practicing for decades. They quickly understand why more slices on a CT scanner or a faster turn-around time in a diagnostic test or better reproducibility can help them.

CFOs don't get that. They specifically say, “I don't want to get any of that.” So we have to explain our benefits in much more straightforward and understandable terms: “This will help your bottom line in this way. This will shorten length of stay. This will speed the time through the emergency room.”

Many of the older buyers, the radiologists, the pathologists, are frustrated by that. They used to be in charge and their deep technical expertise was the deciding factor. They are being disempowered.

MH: Are clinical effectiveness data being required by the CFO?

Sorensen: You need a champion outside the technology group. If, for example, these new data suggest that you can reduce cancer mortality by 20% by doing CT scanning for lung cancer in smokers over 55 with over 30 pack years, we don't need just the radiologists making that argument. What we need are the oncologists or patient advocacy groups saying it—just like with the pink ribbons and breast cancer. If lung-cancer victims were saying, “We need access to this technology,” that is what CFOs and CEOs are starting to understand.

MH: Is this the new normal?

Sorensen: This is not only the new normal, it is going to accelerate. Right now we've moved the decisionmaking from a department chair to someone on the operational side. With the consolidation of hospitals, it is going to move even one layer up to the regional or national decider. They are going to look at interoperability and say, “I have a fleet of 40 CT scanners or 30 blood-test machines and I want reproducibility across all of them. I want efficiency across all of them.”

MH: Have consolidation pressures to cut supply costs impacted your business yet?

Sorensen: Many of the supply-chain guys don't yet realize that they are a small fraction of the true value-add. The supply-chain guys are incentivized to reduce their supply-chain costs. They wake up every morning thinking about how they can squeeze their suppliers to be more Wal-Mart-like and lower their costs. But what they are missing is that the biggest cost in any healthcare operation is the people. The most sophisticated chains are really focusing on the people. How do they get the most out of the people that they are hiring?

They are moving to more per diem shifts so they bring in only the people they need for the scans that they have scheduled. They optimize between high-cost delivery sites, like inpatient sites, and lower-cost delivery sites, like outpatient. Only the most forward-thinking of the buyers are doing that. Our equipment acquisition price is a small part of the overall cost of ownership and operation.

The supply-chain guys can't get that because they don't operate the equipment, they just acquire. Because the person buying it isn't the person using it, sometimes those links aren't made.

MH: This is the first year we will see reporting under the Physician Payment Sunshine Act. How has it affected your business?

Sorensen: It has cost us a lot to get ready for it. We realized that there is going to potentially be visibility on things that were never visible and unfortunately in a form that doesn't allow for explanation very easily. It is not always clear that payments to physicians we are flying to one of our factories overseas or consulting with are different. It has caused us to be more transparent with the people we work with and say, “Guess what, this is going to visible. You should know.”