The Nonclinical Customer Is Always RightThe Nonclinical Customer Is Always Right

PRODUCT DEVELOPMENT INSIGHT

Market success of medical devices depends on manufacturers' ability to rapidly develop, iterate, and commercialize new and differentiated technologies. Medical device product introductions averaged more than 3800 per year in the United States for the last five years.¹ Medtronic estimates that two-thirds of its total annual revenue comes from products introduced in the last 24 months.²

Yet the mere introduction of new products in no way guarantees adoption or revenue growth. Products must be both clinically differentiated and financially viable to drive sales through hospitals and other healthcare providers. This is an important consideration, given that more than 85% of product launches are incremental or translational innovations of existing technology.¹ Such items are often sold at a premium, and place budgetary stress on nonclinical buyers that are being asked to contain supply costs. Nonclinical buyers are hospital personnel with buying power. They can include operating room directors, supply-chain vice presidents, and chief operating officers, to name a few.

This article explores the cost pressures facing U.S. hospitals and the cost-containment measures they are implementing. It also outlines a three-step framework to improve OEMs' hospital marketing efforts. OEMs must navigate hospitals' cost-containment measures to achieve new-product introduction and revenue capture.
Hospital Financial Trends
Healthcare provider systems, specifically acute-care hospitals, are under tremendous financial pressure. From 1991 to 2005, operating margins for hospitals ranged between 2 and 4%. In 2006, they sat just below 2.5%.³ In 2005, more than 25% of hospitals had negative total margins.⁴ The forecast for hospital performance remains tepid, due to the following factors:⁵
•Weak growth in patient volume.•Increasing levels of charity care and bad debt expenses.•Weakening reimbursement for managed care.•Lower Medicare reimbursement.
Expense increases overtook revenue growth for hospital systems in 2006.⁴ The trend continues to restrict already-tight operating margins and cash reserves for capital investment. The authors predict that hospitals will systematically examine high-dollar opportunities to improve margins. Supply expenses are historically high at 18% of revenue. That is the second-largest line-item cost on the income statement, surpassed only by labor costs.⁵ At current growth rates, medical supply expenses could rival labor expenses in the next three to five years.
Cost-Containment Strategies
In the past, hospitals tackled supply costs using group purchasing organizations (GPOs). GPOs managed spending for clinically substitutable items and implemented procurement processes, systems, and controls. These initiatives, which represent low-hanging fruit for supply-cost management, were driven by materials management and had limited clinical interaction. Today, materials management groups are transforming into strategic procurement organizations.⁶ Providers are changing their measure of supply-chain success from reducing cost per unit to generating effective patient outcomes at the lowest-possible cost.^7,8
Three cost-containment strategies are particularly noteworthy. These are vendor access restrictions, data-driven supply chains, and value analysis teams. The approaches are frequently implemented together.
Vendor Access Restrictions. Regulatory guidelines and oversight of vendor-physician relationships drive increased use of vendor conduct policies that limit sales reps' physical access to hospitals and physicians. Such policies reduce opportunities to introduce or expand the use of medical device products.
For example, the University of Pittsburgh Medical Center and the Memorial Hermann in Houston restrict vendor access to operating and emergency rooms. The hospitals manage medical device sampling and trial, mandate sales representative credentialing, and prohibit promotion of nonapproved or formulary products. They also require preapproval of all purchases to secure payment.^9,10
The growth of such policies could disrupt introduction of new products through existing sales channels and reduce physician interaction unless nonclinical stakeholder requirements are met.
Data-Driven Supply Chains. Improvements in data accuracy and availability enable more sophistication in hospitals' use of technology and data across the supply chain. The integration of hospital systems through the use of enterprise resource planning software and other technologies has increased hospitals' access to data needed to reduce supply-chain costs. Accuracy has improved through cleansing efforts (e.g., removing duplicate, erroneous, or old SKUs) on master data and other manual input data areas.¹¹ Increased use of radio-frequency identification and bar coding has reduced manual input errors and increased data availability.
The University of Massachusetts Memorial Medical Center recently leveraged increases in data accuracy and real-time data availability to improve the supply chain. One catheterization laboratory was able to reduce inventory levels by 75% and reduce inventory stock outs and expirations.¹²
Value Analysis Teams. Increased data sophistication and policies to enforce decisions have empowered value analysis teams. They are effective gatekeepers that can slow or stop product penetration. Value analysis is not a new concept. More than 90% of hospitals have specific staff tasked with planning for, evaluating, and managing the introduction of new health technology.¹³
What is new is the level of cross-functional integration and power that these teams enjoy. Recent data show that integration levels are improving for value analysis teams, with more than 65% of hospitals using a committee-based approach to technology management.¹⁴ More importantly, the committees have representation in physician, administration, finance, nursing, and materials management groups.
Such integration changes the dialogue of product purchasing. Traditional silos of interest are being dismantled in favor of systematic, value-based approaches to decision making. The approach is evolving in step with the growth of evidence-based medicine and quality improvement in the healthcare system. Hospitals are leveraging independent data from health technology assessment organizations as well as from their own improved clinical and financial data to evaluate new products.
Implications for Industry
Trends in hospital economics and supply cost-management approaches have short-term potential to slow new product adoption and revenue realization and to disrupt market forecasts. In the long-term, they could severely disrupt traditional sales relationships, channels, and tactics.
As hospitals increase the sophistication of technology management processes, device OEMs must plan for more-stringent sales requirements. The complex and fragmented healthcare landscape, coupled with widely variant device product positioning, mean there is no magic bullet for improving sales and marketing effectiveness.
Instead, a systematic approach is needed to balance resource allocation between physicians and emerging hospital customers. This approach calls for a strategic commitment to nonclinical customers, an understanding of evolving needs, and targeted development of capabilities to mitigate business risk.

Table I in our online calculator highlights items that OEMs should address before developing processes and capabilities. Figure 1 describes four states that medical device companies could be in, relative to meeting hospital needs. It suggests high-level actions for improvement. The sidebar, “Calculating Hospital Needs Integration,” explains how to use the tools.
Step 1: Make a Commitment. The first and most critical question a device firm should ask when building a hospital marketing strategy is, “Does our organization have a strategic commitment to the hospital customer?”
Shifting a company's activities from physician-centric to a balanced view of clinical and nonclinical customers is no small task. A defining characteristic of the device business model is heavy resource allocation to support clinicians. Any significant change to the business model requires top-down commitment by the OEM's commercial organization. A strategic commitment requires consistent communication of hospital-related business risk and opportunity areas; the redeployment of resources toward nonclinical customers; and business objectives with proper incentive systems.
Step 2: Understand the Customer. The second question that must be asked when developing a marketing strategy is, “Does our organization understand the changing requirements of the hospital customer?”
Effective commercial strategies are built on deep insights into hospital organizations, markets, motivations, needs, and behaviors. Such insights are critical to segmenting products and accounts by level of risk, allocating scarce resources, and building strategies that promote effective sales and marketing. To understand the nonclinical customer, device companies must systematically collect data and market feedback from hospitals. These data include hospital economic trends, account satisfaction, nonclinical call activity, and value analysis team throughput.
Step 3: Build Capabilities to Meet Hospital Needs. The final question to ask regarding hospital marketing strategy development is, “Does our firm have the capabilities necessary to meet the needs of the hospital customer?”
Given a strategic commitment and a deep understanding of the customer, it is possible to develop new capabilities in a targeted fashion—addressing the organization's most pressing business risks and opportunities.
In the authors' experiences, many device companies have significant capability gaps across product development, marketing, and sales. Although companies have pockets of hospital intelligence and commercialization support, their form, function, objectives, and influence can vary widely. Further, the degree to which these functions are integrated into the fabric of commercialization processes is typically low.
Too often, product development does not explicitly examine hospital requirements and risks, resulting in product value propositions and claims that do not resonate with a nonclinician. Similarly, sales and marketing staff can lack customer awareness, education, and ownership. These deficiencies can translate into low effectiveness in product positioning and messaging with hospitals. Also, physician-focused sales tactics and account management can create conflict with nonclinical customers.
Next Steps
The design and integration of hospital-focused commercialization and marketing functions are becoming increasingly critical to medical device market success. Companies should, therefore, make changes to meet the growing demands of hospitals. OEMs must identify gaps in their capabilities and create an action plan.
For hospital marketing efforts to be effective and sustainable, device OEMs must make a strategic commitment to their nonclinical customers. Otherwise, any quick fix will be little more than an operational Band-Aid.
Also, companies need to establish a sustainable infrastructure that can help them gather data to better understand this emerging customer. Then—and only then—should a firm concentrate on building service capabilities. Proper execution of the process to integrate the hospital customer's needs should help support continued market success for new medical device products.

Tom Hodson is a principal in Deloitte Consulting's Life Sciences practice (Cincinnati), and Shaun Inman is a senior consultant with the company. Reach them at [email protected] and [email protected].

References

1.Medical Device Approvals Database, Sum of PMA and 510(k) monthly approvals 2003–2007, www.fda.gov.
2.Medtronic 2007 Annual Report.
3.“Trends Affecting Hospitals and Health Systems,” American Hospital Association, Trendwatch Chartbook 2007.
4.“Not-for-Profit Hospital Medians for Fiscal Year 2006,” Moody's Investor Service Special Comment, 2007.
5.Standard & Poor's Industry Surveys: Healthcare: Facilities, September 27, 2007.
6.Eugene Schneller, Larry Smeltzer, and Lawton Burns, Strategic Management of the Health Care Supply Chain (San Francisco: Wiley, 2006).
7.Ed Stark, “Top Issues Facing the Hospital Supply Chain Today,” Healthcare Purchasing News, 2004.
8.“What's Left to Fix in the Hospital Supply Chain? Plenty!” Healthcare Financial Management, January 1, 2006.
9.“UPMC, Pitt's Schools of the Health Sciences Adopt New Industry Relations Policy to Benefit Patients,” UPMC Media Relations, November 12, 2007.
10.Memorial Hermann Healthcare System Vendor Management Policies, www.memorialhermann.org/services/vendorBecomeApproved.html.
11.“Escape from the Data Dump,” Healthcare Purchasing News, October 2007.
12.“Who Moved My Stent? RFID Technology Helps Hospitals Keep Track of Medical Devices, and Could Even Save Lives,” Boston Globe, June 9, 2008.
13.Alan Rossenstein et al., “Assessing New Technology: How Are Other Hospitals Facing the Challenge?” Healthcare Financial Management, October 2003.
14.Ateret Haselkorn et al., “New Technology Planning and Approval: Critical Factors for Success,” American Journal of Medical Quality, May/June 2007.

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