Money Health

Strategies for the New Economic Season

December 23, 2009
by Kathy Mahdoubi, Senior Correspondent
This report originally appeared in the December 2009 issue of DOTmed Business News

American businesses are adjusting their priorities in the current economic climate. Broad trends are emerging, as companies increase productivity, reduce capital investments, undergo major restructuring and workforce changes, and consolidate through mergers and acquisitions. The U.S. health care industry is reportedly one-sixth of the economy and a $2.4 trillion business. Although it's one of the strongest industries (partly due to necessity of provided services) it still does not shield the segment from the challenges of today's economy. According to a recent American Hospital Association survey, 34 percent of hospitals expect to report losses in the first half of 2009, which indicates just how broad an impact current financial pressures will have on hospital and IDN budgets in the coming months, and possibly even years. Demands in the market are forcing health care organizations to look for alternative strategies for reducing expenditures, including those on capital equipment parts and service.

OEMs haven't escaped the financial fallout either. November 2008 AHA statistics showed a grim picture for manufacturers. "Pretty much all of [OEMs] were reporting, across the board, anywhere from a 10 to 25 percent reduction in their capital equipment sales," says Tom Spees, U.S. sales director for Dunlee, a major manufacturer of imaging parts and a division of Philips Healthcare. "It varies by modality, and it certainly varies geographically, but there is a significant impact."

In a recent webinar discussing the medical equipment service industry, DOTmed conducted live surveys asking a variety of professionals within the health care industry how their business was being affected by the economy. Of the 100 some attendees, 43 percent said their operating expenditures were being reduced as a result of the recession; 39 percent said there was a significant impact on their capital spending, and 28 percent said there were reductions in their workforce. Mike Kintner, TriMedx director of supply chain, says reduced operating expenditures is "present at all levels," with broad changes occurring in the areas of consumables, technical training and equipment service. "This is a really attractive option for health care systems," he says. "When you do the math at a five percent margin, a $100,000 expense reduction has an equivalent impact to the bottom line as $2 million in new revenue."

Health care organizations also need to balance the risk and costs of service associated with OEMs, multi-vendor and full-service providers, and ISOs in relation to the lifecycle of their equipment. In a recent independent market survey of 189 health systems by Sg2 Consulting, 67 percent of health care organizations reported that they planned to move their equipment service operation in-house in the next 18 months. Another 67 percent said they experienced significant challenges when undergoing technical and personnel training for their new operation, while 50 percent said they were more daunted by the issues of repair-cost volatility.

The Sg2 survey asked hospital decision makers what their main objectives were in moving equipment services in-house. For those who had already undergone the move, 89 percent said reducing repair costs was a main goal. Next up, 86 percent said improving equipment repair response was important, and 81 percent relayed how improving service management overall was key. Reducing parts sourcing costs and improving quality of repair came in at 61 and 56 percent, respectively. How hospitals and IDNs go about sourcing high quality, low cost parts also makes a big difference. There are a wide variety of exchange programs available.

The American Recovery and Reinvestment Act of 2009 should help fund health information technology, including electronic medical records and other systems, but capital spending will still be in "frost" mode going forward into 2010, says Kintner. "We can expect capital control to continue to be a focus moving through 2010 and into 2011."

(To watch the recent webinar, click here.)