What Manufacturers Need to Know about Managed Care

Medical Device & Diagnostic Industry Magazine
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An MD&DI July 1997 Column

To understand the economic pressures their clients are feeling, medical device manufacturers should familiarize themselves with the key issues of managed care.

I first learned about managed care in the early 1990s at a conference in Bermuda. I had been invited to address hospital CEOs from a well-known purchasing group. To prepare a relevant speech, I had faxed a list of about 30 possible topics to each CEO before the meeting. Each was to add any additional topics of interest and then circle the top five to seven and fax the list back to me. We would discuss the results at the meeting.

Little did I know that managed care would head the list. I didn't even know what it meant. At the meeting, I was surprised to hear a few CEOs brag about the number of beds they had emptied, not filled, all in the name of managed care.

Several CEOs were as amazed as I was. Most of them had switched from the fee-for-service system incentive, popular in the early 1980s and before--"Get as many patients as possible in the hospital and keep them as long as possible"--to the prospective payment or diagnosis-related group system incentive of the mid-1980s, "Bring in as many patients as possible, but get them out as soon as possible." Very few had yet needed to heed the call of managed care, "Keep patients out of the hospital."

Everything has now changed. Hospitals are competing for managed-care contracts with health maintenance organizations (HMOs) and preferred provider organizations (PPOs), which have wrested patients from fee-for-service, specialty-physician-dominated systems. Businesses are dropping fee-for-service and standard indemnity insurance plans because managed-care organizations cut costs and improve patient outcomes better than these older approaches do.

But managed care isn't new. Its popularity has grown recently because it has been able to achieve a lower cost per covered life. By employing primary-care physicians and other practitioners, managed care has reduced the number of services used.

To be successful, medical device manufacturers need to understand the incentives under which hospitals are operating. They need to know what drives their customers and then tailor their products and services accordingly.

The main concerns health-care providers face today are:

Through interaction with hundreds of hospital CEOs, clinicians, and materials managers during the last several years, I have developed a list of 10 truisms about managed care. Once manufacturers understand these truisms, they will be able effectively to meet the needs of their customers.

1. The majority of hospitals are still only in the early stages of evolution toward integrated systems. Most hospital executives can easily place their hospitals into one of four stages of evolution toward integrated systems. A hospital's stage of evolution is based on factors such as the degree of hospital and physician independence, percentage of patient load under capitated plans, enrollment of the patient population in HMOs and PPOs, and utilization reduction. These stages, originally devised by the Voluntary Hospitals of America (VHA) and a few consulting organizations, can be roughly described as follows.

In stage one, hospitals are independent, nonaligned organizations with little HMO or PPO enrollment among their patients, little or no capitation, and high utilization of services.

In stage two, hospitals have begun to have patients join networks, a third of the patient population have enrolled in HMOs and PPOs, capitation is about 25%, physicians have begun to organize, and service utilization is down.

In stage three, hospitals and HMOs and PPOs have begun consolidating, capitation is prevalent, patient enrollment in managed-care plans is approaching 50%, and utilization has fallen 20 to 30% from highest levels.

In stage four, hospitals are highly aligned and integrated, managed-care systems handle three-quarters of the patient population in capitated plans, and service utilization is down one-third or more from earlier highs.

From 70 to 80% of hospital executives currently classify their hospitals in stage one or stage two. About 5 to 10% are nearing full integration. Hospitals under the same ownership are often at different stages of integration, even within the same city.

2. The percentage of patient load under capitated plans determines a hospital's stage of evolution. There is no better indicator of a hospital's incentives, movement toward integration, and purchasing drivers than the proportion of its patients in capitated, or per-member-per-month, plans. Just as the average temperature of an area speaks volumes about its climate, the percentage of a hospital's patient load under capitation reveals the likely hot points of its product, pricing, and service needs.

For example, a hospital with 10% capitation (a stage one hospital) will have multiple suppliers for similar products, little or no coordination of purchasing among hospitals within the same system, little price pressure, and significant variation in delivery methods and structure. On the other hand, a hospital with 50% or more capitation (a stage three or higher system) will see little supplier duplication and significant numbers of supplier contracts, strict coordination of purchasing with access restrictions on suppliers without contracts, significant price pressure, and little variation in delivery methods and structure among hospitals in the same system.

3. Most hospitals consider themselves part of an integrated system, but only a few are truly integrated. Most hospital systems are still struggling to establish a true continuum of care from acute-care hospitals and home- health-care agencies to skilled nursing facilities, hospices, and ambulatory surgery centers. Most hospital systems have integrated hospitals and physician group practices, but few have integrated these alternate sites. They are also having difficulty dealing with simple HMO incentive arrangements while coordinating health-care delivery in hospitals and physician group practices.

4. Most materials managers focus on cost, not overall profitability. Managed care is supposed to encourage the acquisition of products that reduce overall cost of care, regardless of whether the specific products they replace are less expensive. But materials managers and purchasing agents don't easily believe the promise of overall profit improvement or cost reduction if the replacement product is more expensive. Although some hospital systems applaud materials managers for the profit contribution of the products they purchase, most materials managers still focus on cost. Hospital CEOs and CFOs, clinicians, and materials managers all seek products that reduce the cost of a procedure or reduce overall hospital operating costs.

Economic and clinical outcomes data can justify the purchase of one product over another if the data are sufficiently positive and gathered by a respected third party rather than the manufacturer. If manufacturers want physicians to have more influence on product selection, they should provide clinical as well as economic outcomes.

5. The new decision makers in hospitals are teams of individuals rather than single executives. Because the importance of purchasing decisions has grown and their results affect so many hospitals and departments, sole purchasing power is rarely given to just one or two individuals. Instead, product standardization committees are turning into value analysis committees with representation from nursing, finance, materials management, and other disciplines. The committees ensure that purchases meet the goals of the hospital system. Manufacturer representatives should familiarize themselves with the members of these committees and regularly touch bases with them to ensure that their products are reviewed favorably.

6. Health-care systems are reducing the number of suppliers and direct manufacturer relationships. Not only is it becoming difficult for manufacturers that do not have a contract to sell to a hospital, a significant number of hospital systems are introducing minimum qualification requirements for vendors to restrict access even further. Vendors without broad product lines are being pressured to increase their lines or be squeezed out by suppliers that offer one-stop shopping for a number of products.

7. Materials managers want a single account representative from multidivision companies. In line with their desire to reduce the number of separate supplier and manufacturer relationships, materials managers are pressuring manufacturers to reduce the number of salesmen calling on them from various divisions of the same company. They want to deal with a single contact.

Clinicians, however, still want to deal with specialized division representatives who have technical product information. Clinicians know that no single individual can fully understand and represent all the product lines of a multidivision company as well as a representative who specializes in just one.

8. Hospitals want sales representatives to have a technical education orientation as opposed to a sales orientation. Physicians and nurses value the services of knowledgeable sales representatives. Such representatives are considered to be the leading sources of information on products that clinicians use daily. If sales representatives can develop a collaborative, consultative approach instead of one focused strictly on selling, they will be seen as value-added resources not easily dismissed when costs are being cut.

Some materials managers are trying to ban sales representatives who work on commission because their objectives are not aligned with those of the hospital system. A few managers have set performance goals for sales reps that tie their efforts to the objectives of the provider. Only a few hospital systems use this kind of program, so manufacturers should address this issue case by case.

9. Product contracts are essential to representatives' maintaining access to integrated health-care-delivery systems. If sales representatives think it's hard selling to hospitals with which they have no contracts now, in a few years it will be virtually impossible. Only those products that have unique benefits and few competitors will be bought by a system without a contract. And for those few products that are initially sold without contracts, it will not be long before hospitals seek contracts with their manufacturers.

10. Manufacturers can add value to their products by designing them to reduce the total cost of a procedure. Understandably, manufacturers would rather come up with a hundred ways to maintain or increase prices and margins through value-added services, rather than reduce prices. But hospital CEOs, clinicians, and materials managers demand products that reduce the overall cost of medical procedures.

Managers should examine all these truisms from a cost/benefit standpoint and think about changing their operations accordingly. Before a new product idea goes into development, marketing and R&D management should compare how current and proposed products and services meet the requirements and expectations of health providers. Products and services that fulfill their expectations are likely to be well received.

Robert R. Dunford is principal consultant with Gloucester Crescent International (Snellville, GA).

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