By John Strong, Co-founder and Chief Consulting Officer, Access Strategy Partners Inc
October 2024 – The Journal of Healthcare Contracting
Penny wise or pound foolish?
In a recent Premier survey of 102 hospitals, 90% of respondents indicated that domestic manufacturing is a key element of shoring up the supply of goods. Yet if you speak to representatives from domestic manufacturing sources, they see a tendency to keep purchasing products from long-supply chain sources such as China to save a few dollars in the process. This became especially apparent after the pandemic eased. The same Premier survey demonstrated that more than half of respondents reported that a lack of supplies caused patient care delays.1
With 80% of respondents expecting shortages to remain the same or worsen in the next year or so it may be time to consider partnering with domestic manufacturers for certain high demand supplies. Consider some of the real economic costs that are incurred when shortages occur:
- Reduction of revenue. The Premier survey indicated that about $350,000 in lost revenue was incurred by mid-sized health systems – defined as five hospitals or 650 beds;
- Safety stock. The survey indicated that shortages can perpetually tie up $1 million of excess inventory;
- Delivery costs. Shortages inflate care delivery costs by $3.5 million from disruptions in care plans and the costs associated with mitigating shortages.
It’s probably time to look beyond the acquisition cost of high volume, low cost products and consider domestic alternatives when considering all the hidden costs.
Top concerns of CEOs, CFOs show mixed reality
According to an American College of Healthcare Executives survey in 2023 of 241 CEOs, their top four concerns were2:
- Increasing costs for staff and supplies 94%
- Managed care and commercial insurance payments 66%
- Medicaid reimbursement 61%
- Reducing operating costs 58%
A new Deloitte survey of 60 financial leaders from healthcare providers indicated that cost reduction (a top priority in 2022 and the third largest priority in 2023) fell to number 17 on their list of concerns3. About 25% of respondents indicated that operating margins fell below their goal over the past three years.
Effective control of who can authorize and order supplies and equipment, along with effective purchasing and value analysis practices, can often have a greater impact on a provider’s bottom line than anything else – including staff reductions and other dramatic cuts.
That’s a lot of medical supplies!
As Steward Health Care System teetered on the brink of bankruptcy, the Wall Street Journal reported on Aug. 19, 2024, that administrators were scrounging for cash and supplies to keep their facilities running. Yet Steward paid its CEO, Dr. Ralph de la Torre, and his affiliated companies more than $250 million over four years.
In 2021, Steward distributed $111 million in dividends to shareholders, even as it was struggling like many hospitals were post-COVID. Last year, Steward made a $3 million donation, part of a $10 million pledge, to the Addison School in Greenhill, Texas, where de la Torre’s twin teenage sons attend4. The school’s new Science Center will be named for his mother. A few of de la Torre’s (or Steward or Steward subsidiaries) other assets include:
- 190-foot yacht $40 million
- Sportfishing boat $15 million
- Dallas mansion $7 million
- Two private jets (owned by Steward affiliate) $95 million
For those struggling to keep their hospitals afloat, this sort of excess must be especially troubling.
MedTech firms have cut thousands of jobs
Quietly but steadily MedTech companies have been cutting more than 14,000 jobs over the past 18 months in a bid to lower costs5. This has included shuttering facilities as well as the restructuring of businesses. Diagnostics have been the hardest hit – with more than 5,000 jobs affected.
Small startups have been hard hit by a difficult investor economy in the past few years, but these layoffs also extend to giants in the industry including Baxter, Abbott Diagnostics, Cardinal Health, Johnson & Johnson, and BD.
Innovation pipeline opening
At the same time companies are laying off staff and having difficulty with staffing, the number of novel product FDA approvals has soared from 62 in 2022 to an estimated 113 in 2023.6
“Based on our conversations with MedTech executives, we expect the pace of innovation in 2024 to exceed 2020 to 2022 levels, with cardiovascular, digital-health-device, and neuromodulation segments gaining momentum.7”
Large provider consolidation during past 30 years8
If it feels to you like there has been significant healthcare provider consolidation – you’re right! There has been tremendous consolidation, and it is continuing.
1998-2017 1,573 hospital mergers
2018-2023 428 hospital and health system mergers
Ten largest health systems account for 22% of non-federal general acute care beds
Community hospitals part of 68% a larger system
The federal government continues to scrutinize (and in some cases deny) mergers due to market concentration, and studies that show that consolidation leads to higher prices. This is true even in cross-market mergers, where the entities operate in different markets. In a limited number of studies, cross-market mergers have resulted in 6% to 17% price increases.9
Device sterilizers seek alternatives to EtO
Now that the EPA has finalized regulations aimed at reducing the use of ethylene oxide by more than 90%, some device sterilizers are seeking alternatives.
EtO has been a go-to for more than five decades and is useful to sterilize materials that are not compatible with radiation, steam, or other heat sources. It is also useful when devices have a wide number of geometric shapes and designs10.
Baxter sells Vantive kidney care business
Baxter Healthcare Corporation has sold their Vantive kidney care business to Carlyle Group for $3.8 billion. Vantive will become part of Carlyle’s Atmas Health, which was formed in 2022 and is headquartered in Park City, Utah. According to their website, Atmas is focused on acquiring assets in medical technology, life science tools and diagnostics.11
1 Kacik, Alex, “Shortages inflate care delivery costs by $3.5 million per health system.”
2 Adapted from Becker’s Hospital Review, accessed August 24, 2024 at www.beckershospitalreview.com/hospital-management-administration/hospital-ceos-top-financial-worries.html.
3 Adapted from Beckers Hospital Review, accessed August 21, 2024 at www.beckershospitalreview.conm/finance/the-biggest-issue-for-cfos-in-2024.html.
4 Weil, Jonathan, “CEO Accrued a Fortune As Hospital Chain Failed”, The Wall Street Journal, August 19, 2024 at pp. A1, A2.
5 Ye Han, J., Zipp, R., and Reuter, E., “Medtech firms have cut more than 14,000 jobs in the past 18 months”, MedTech Dive, July 17, 2024.
6 Dalgaard, K., Pellumbi, G., et. Al, “What to expect from medtech in 2024”, McKinsey and Company, February 7, 2024.
7 Ibid., Exhibit 3.
8 © 2024 by KFF, San Francisco, CA
9 Ibid. p.5.
10 Reuter, E., “EtO causes cancer. Device sterilizers are scrambling to find alternatives”, MedTech Dive May 6, 2024.
11 Kelly, S., “Baxter agrees to sell kidney care unit to Carlyle for $3.8B”, MedTech Dive, August 19, 2024; Company website at www.atmashealth.com