Hospital Managements Leaping Forward with Medtech

Over the last 50 years, the style of hospital management has evolved from coasting, through economizing and now to strategically evaluating medtech. Over the past month, several medtech executives have shared how their interactions with their hospital counterparts have evolved to a remarkably interesting point. How did this situation evolve?

Flashing back, my first exposure to hospitals was as a teenage volunteer at a Worcester, Massachusetts hospital in the charity stage. The hospital embodied a spirit of caring with broad community support through a variety of programs. This mindset could have been the result of a generous payment system of cost-plus reimbursement, in which Medicare paid hospitals based on their cost plus 3-4 percentage points. If it cost a hospital $1000 to treat an admitted patient, Medicare paid that amount with the addition of the ‘plus factor’ or ‘Return on Investment’ (ROI) of $30-40 extra dollars.

This can’t-lose payment methodology effectively rewarded inflated costs. The more the hospital CEO allowed expenses to grow, the more the institution received in plus factor or ROI payments! In this golden age it was impossible for a hospital executive to do a poor job and lose money.

One visible result of this payment largesse influencing care was longer stays in the hospital. For routine surgical procedures to correct the injuries from my skateboard misadventures, I was routinely admitted to the hospital the night before surgery and sometimes kept the following night as well. Today, these orthopedic fixes are purely outpatient procedures.

A seismic change affected hospital payments in the late 1980’s when the reimbursement system changed  to the Prospective Payment System based on DRG’s (Diagnostic Related Groups.) This novel approach paid hospitals for the procedures they performed at set rates. An appendectomy might be reimbursed at $600, and an artificial heart valve implant might earn $4000. This single all-inclusive payment covered all the hospital’s costs. The DRG payments were still healthy as they were initially based on the past generous payment history. But, with fixed fees, hospitals adapted to reduce costs to maximize profitability. The payment was fixed, so the profit was the remainder after deducting the costs of providing the service.

Around the same time tightly run private hospital chains such as Humana and American Medicorp rose to visibility. These for-profit entities set a new trend in hospital management as they began aggressively tracking the performed services to maximize revenue. If a hernia operation was complicated or involved two sites, they made sure that the billing department used the correct procedure code so that they received the appropriate (and higher) payment. They also closely tracked inventories and product usage.

The concept of hospitals as a business continued to evolve. Hospital CEOs began developing a greater awareness of the drivers of their revenues. They would know what medical specialties generated activity, but only a general idea of their respective financials. For example, cardiac surgery was known as an important revenue stream. As long as the hospital’s overall profitability remained good, there was not a strong motive to dig into the cost accounting issues of individual departments.

Over time the reimbursement for procedures did not increase so fast and at times decreased. The lower payments generated margin pressure and two 1990’s medtech innovations catalyzed further changes in strategic thinking. These technical breakthroughs were US Surgical’s commercialization of the minimally invasive gall bladder removal (or lap choli) and the balloon catheter for opening blocked arteries in the heart.

Entrepreneurial companies developed these advances and sold them to hospitals through physician champions. The company would identify a forward-thinking clinician in the institution and educate him on the technology’s advantages. That physician became the internal advocate working to bring the new treatment paradigm into the hospital.

The lap choli and catheter based cardiac treatment improved patient care, shifted market share, increased hospital revenues, and boosted hospital profitability. The hospitals who were first movers in adopting these technologies attracted significantly more patients. The patients had learned that these were better approaches and sought them out. And, most importantly, these were high volume procedures that generated noticeably large revenue streams. Hospital executives began thinking of their service offerings in the context of market share and later when surgical robots became available they would be open to adopting them to differentiate their institutions. The surgical robot became a tool to attract a greater share of the region’s patients and associated surgical volume.

In the past month, three medtech CEOs spoke of a new type of interaction with hospital management. Those conversations have taken on a new strategic element. Without the involvement of a physician champion, the discussion delved into the impact of their companies’ respective technologies on the hospital’s business. The conversation included strategic questions about the prevalence of a relevant condition, the difficulty of implementation, the reimbursement situation and how adopting it could impact the institution’s financial performance. The administrators are asking sharp questions. Physicians are still playing a role in the discussion, but administration is now starting to lead the process.

This new hospital mindset is good for patients, physicians, and medtech companies as well as the hospital. Patients will get faster access to new, life improving technologies, thought-leading physicians will spend less time working to bring advances into the hospitals and medtech companies that have a solid value proposition can accelerate market entry. Today is the dawn  of a new era with hospital management taking the lead and driving innovation.