IVD Companies Face Service-Offering Conundrum

Expertise and skill in managing the various aspects of the service mix can help medical device and diagnostics companies offer service programs that are just enough to differentiate them from the competition. But the balance that must be achieved is a delicate one. Service programs that offer too much may result in revenue loss for the manufacturer. Meanwhile, programs that are perceived to be inadequate place the company at a competitive disadvantage.

In May 2007, Kalorama Information ( New York City) conducted a survey of clinical lab managers and directors, chosen at random, at 13 hospitals of varying size (360 to 902 beds) from across the United States.¹ The goal was to establish a benchmark for the current status of instrumentation service contracts now held by clinical core laboratories.

Results of the research point to an overwhelming trend in favor of risk-sharing and partnership among IVD manufacturers and their client laboratories. Among interviewees surveyed for the Kalorama report, for instance, more than half reported that they had acquired their instrumentation through a cost-per-reportable-result (CPR) or reagent-rental (RR) program.

One respondent reported: "Cost-per-reportable was chosen as a way for us to control costs, and it makes the vendor take a shared risk because they have to guarantee quality instrumentation and testing of their platform, so we feel they pretty much put their money where their mouth is. All hospitals in our system use cost-per-reportable."

The risk-sharing trend is not surprising. Without a CPR or RR contract, an average-size hospital of 300–500 beds with an automation or core lab and backup instruments could spend as much as $140,000 per year on service contracts.

Lab executives responding to the survey also reported that their organizations negotiate contracts very aggressively in order to help them better manage instrument maintenance. The warranty period is often negotiated to last 3–5 years instead of the traditional one year. Such terms have a significant effect on the service component of contracts, because they becomes somewhat buried in the overall cost of doing business, for both the lab and the vendor.

As another cost-management strategy, survey respondents noted that the service component built into their CPR and RR contracts overwhelming covers business hours only. Labs cover their uptime with a backup instrument, generally of the same type as the main one.

Big Picture, Little Picture

On the macro scale, the key driver for the service imperative is healthcare economics. The healthcare industry is undergoing a rapid transformation to meet the ever-increasing needs and demands of its patient population. Employers and managed-care organizations are demanding better service and higher quality care, while providers are trying to tackle the challenges of streamlining their operations, serving a diverse population, and dealing with reimbursement cutbacks.

In turn, laboratories have begun to realize that to overcome these obstacles and meet the needs of their health plans and consumers, they must focus on the demands of their customers. Because clinical laboratory service is required 24 hours a day, 7 days a week, there is no room for instruments or reagents that might impede the delivery of lab services. According to the Kalorama survey and industry research, the most important criteria that laboratorians use to evaluate IVD systems are reliability, reagent quality, and service.

Further, laboratories are feeling the brunt of performing more tests with fewer financial and human resources. Thus, managing costs is one of the largest problems faced by clinical labs today. For most labs, instrument maintenance and personnel costs rank among the biggest budget items.

On the micro scale, choosing the right service program can be a daunting task. Lab managers seek the optimal balance of risk, quality, and costs. A poor choice can affect the quality and reliability of the service that the lab provides.

Cost control is also a preoccupation of IVD manufacturers. Most of the instruments and reagent kits used in the mature core lab test segments are supplied by the top IVD companies, including Abbott Diagnostics, Bayer Diagnostics (now Siemens Medical), Beckman Coulter, Dade Behring (soon to be part of Siemens Medical), Ortho Clinical Diagnostics (a Johnson & Johnson company), and Roche Diagnostics. Since most of these products are considered commodities, there is little product differentiation and fierce price competition. Profit margins are thin. The average annual revenue growth for these top-tier companies is 4–6%—considerably less than the 18–50% growth experienced by IVD companies that concentrate on specialized and esoteric assays.

A Trend in the Making?

The Kalorama study demonstrated that there is currently little or no differentiation among the service programs offered by the major core lab suppliers. All companies cover training costs and on-site system integration. They all offer 24/7/365 troubleshooting hotlines and service contracts to suit every type and size of lab.

It is also apparent that the remote equipment diagnostics feature is no longer a novelty. With continued improvements in communication technology, on-line communication via an intranet is becoming a standard product feature in thermal cyclers, as well as chemistry, hematology, immunoassay, and coagulation instruments.

The companies interviewed by Kalorama indicated that their service programs are tailored to meet their clients' needs. As a result, changes in the competitive landscape for lab suppliers may be on the way—and soon. For many years, hospitals have outsourced nonclinical services such as security, catering, laundry, and maintenance. Now, the rumor mill is hinting at a coming trend toward the outsourcing of managed clinical services.

Managed clinical service providers gain more than preferred vendor status. For a fee, the provider assumes the ownership and risk for the service and maintenance activities related to all laboratory instrumentation and equipment, regardless of the vendor. The provider guarantees service cost reductions, minimum equipment downtime, and maximum utilization.

The Kalorama research indicates that this type of program is already being offered to U.S. research and life sciences laboratories by a number of companies, including Beckman Coulter (SiteMAX), Thermo Fisher Scientific, and VWR. Also, the Siemens Medical imaging group offers an integrated service management plan that provides single-point multivendor solutions—essentially a single source for maintenance and repair on all key equipment, regardless of manufacturer.

These types of service agreements have already been adopted by hospital systems in the United Kingdom and several Northern European countries. There, a variety of service and procurement agreements have taken shape as asset management or managed service agreements.

However, adoption of such agreements in the United States may come slowly. The Kalorama survey asked interviewees whether they would be interested in a plan whereby one company would handle all their instrument service and maintenance activities, even for competitors' instruments. Overall, the interviewees voted for the status quo. One obstacle indicated by respondents was the concern that they might lose access to proprietary software and instrument information systems if they went with a one-stop service plan.

So for now, in spite of their seemingly generic nature, IVD service agreements remain a highly competitive area and a major component of product differentiation.

References

1. Diagnostic Equipment Service Conundrum: How Much Is Too Much?, How Little Is Too Little? ( New York City: Kalorama Information, 2007).

Shara Rosen is a senior analyst with Kalorama Information ( New York City).

© 2007 Canon Communications LLC

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