Medical device companies should take heed of how Novation CEO Jody Hatcher sees the world.
The 45-year-old CEO of the Irving, Texas-based group purchasing organization doesn’t just know their biggest customers. Odds are, he is the biggest customer. Novation, which is owned by VHA Inc. and the University HealthSystem Consortium, represents more than 25,000 healthcare providers, including hospitals, non-acute care centers and academic medical centers.
MassDevice.com recently caught up to Hatcher to talk about a wide-range of issues, including what keeps hospital CEOs up at night, why comparative effectiveness is nothing to be scared of, how an amazon.com-style medical device sales world is better and how the healthcare world lags woefully behind in recalls and pricing.
MassDevice: If I’m running a hospital in 2012, what is it that keeps me up at night?
Jody Hatcher: The thing that keeps you up at night, first and foremost, is uncertainty centered around healthcare reform. There are a lot of new dimensions for the providers around healthcare reforms, but the biggest issue centers around cost. If you look at what healthcare reform means for the hospitals in this country, it’s $155 billion worth of product reimbursement over 10 years – and that’s minimum. That’s before you get to some of the schemes that the government is putting forth around paper performance, et cetera.
Then you layer that $155 billion against the current financial performance of hospitals. Just to give you some sense [of the scale], a strong operating margin for a hospital is somewhere between 2% to 4%.
There was a statistic I saw last fall that indicated about 40% of the hospitals in this country operate at a loss. And so if you think about that, 2% to 4% operating margin, reduced reimbursement at $155 billion and then increasing government regulation through healthcare reforms, mechanisms by which you’re going to get paid for performance. And your performance is typically centered around the ability to deliver quality patient care and the people who do that are your clinicians.
Within your cost structure, there are 2 key components: 1 is people, 2 is the supplies and services you purchase. You cannot cut people, otherwise you impact the quality of the service that you provide.
The 2nd area really centers around cost, so supplies and services are really the big issue. Today, if you talk to any hospital CEO, obviously they’re concerned about a variety of things, but the 1 common denominator that I consistently hear is that there is a burning platform for cost reduction.
Regardless of the direction that healthcare reforms moves in the political environment, I think you’re going to see a continued pathway within the provider community to reconcile its cost structure.
So the other thing that’s keeping hospitals up at night is reconciling cost structure. Historically, hospitals haven’t invested in the infrastructure to manage their back room or to manage their support services, like supplies. They rightfully invested in patient care, patient-centered activity. When you look at our healthcare supply chain, as a result of the lack of investment on the part of providers, and to some extent on the part of suppliers, you can arguably say that the healthcare supply chain is somewhere between 10 and 15 years behind most other supply chains.
MassDevice: Can you flesh that out a little bit? Are you speaking about the way in which they manage inventory, versus, say, the on-demand inventory management at Wal-Mart?
"Retailers and manufacturers have a better chance of managing a dog food recall than we would have managing the recall of a major medical device."
JH: Take, for example, that [enterprise resource planning] systems the providers have. If you look at the ERP capabilities that most providers have, and you compare that to the kind of ERP systems that are used by Wal-Mart, as an example, they’re not very sophisticated. If you look at the competencies and the investment in the people within the healthcare supply chain and the provider side, it’s been low.
But even more so, as you look at some of the fundamentals, short of the pharmaceutical world within healthcare, you have no universal product numbers. Compare that whole issue to other supply chains. In the consumer world, we take for granted the fact that every product has a UPC code on it that allows you to track and trace. So today, for example, retailers and manufacturers have a better chance of managing a dog food recall than we would have in managing a recall of a major medical device. If you think about the elements of our supply chain, fundamental to that, I believe, is just this whole notion around product numbering, categorization, the whole issue around standards.
Standards have become pervasive in every other industry but ours. So, again, those are just a couple of examples. And then the last 1 I would tell you, and I tell CEOs this as well, it’s a bit of an indictment of the hospital world, I say, "If you walk into any Fortune 100 company and you ask where the person in charge of their supply chain is, the likelihood is that that individual is somewhere in the carpeted offices near the CEO or that they’re in the top echelon of management within that organization.
If you ask the same question in a hospital, typically what you’ll get is a response that says, "Yeah, the purchasing people are down in the basement."
I think it’s important that hospitals begin to not only focus on their cost structure, but also to elevate the role of their supply chain leadership and their supply chain focus as an organization, much the way industry has. Every device manufacturer does that too. It’s not only under-staffing, but I think it’s also just how they view it and how supply is positioned within the organization.
There’s a myriad of things [that could move the needle]. Depending on the product category, you have distributors that play a critical role. Obviously we see our role as expanding, because we believe we can expand our functions and capabilities into hospital organizations, so that they don’t have to invest in certain things. Because, again, you have to layer the need to improve the sophistications into an environment that doesn’t want to increase its cost structure.
MassDevice: Years ago, hospitals used to wash their own sheets, they used to cook their own food, they used to do all these things in-house. Then they started outsourcing all of them to different vendors, but they’re still wrestling with the cost control question. Do you think the needle could move a great deal more here if they continue to outsource, or do you think it’s really a matter of investing more in their infrastructure?
JH: I think there are a variety of approaches that hospitals need to take in order to attack their cost structure. And so to some extent, I do believe it centers around investing in the infrastructure. I think it centers around finding creative ways to do things differently – in some cases, outsourcing them and finding unique and different partnerships, as it relates to the suppliers.
It’s interesting. One of the things that’s missing that we believe we can help push more is this whole notion around managing demand and partnering with the suppliers to manage that demand in different ways and to align the hospital’s incentives more closely with potentially the medical device supplier.
Again, it’s an interesting time, but if you look at other supply chains, even the automotive supply chains see much more integrated activity between the buyers and the sellers. In some cases you can’t distinguish between buyers and sellers within more sophisticated supply chains. You have things like more risk-share arrangements, you have complete transparency around profitability, you have a lot of different things. I just think that there are a variety of things that this market can do differently to attack the cost structure, but also to benefit all parties. Because I do think, whether it be the buyers’ side or the sellers’ side, I think when you begin to come closer together, you can create situations where both parties win. So we don’t believe that you have to have somebody lose in order for somebody else to win.
MassDevice: What’s your value proposition for innovation in the GPO industry in general?
JH: GPOs have been around for a long time, and I’ve been in this industry 20+ years, but we are ruthlessly focused on being an extension of provider organizations with the idea of driving costs down. That is, in my opinion, our primary focus.
I say cost because it’s not simply price. I tell people this all the time, that if all you’re focused on is price, that’s a very short-sighted viewpoint. Managing demand, managing utilization, driving efficiency into the use of the product, the inventory of the product – those are things we are focused on. So again, we view our role as being an extension of the provider organizations, providing services and tools that on their own they wouldn’t be able to invest in.
We are ruthlessly focused on being an extension of provider organizations with the idea of driving costs down."
MassDevice: How do you differentiate yourselves from some of your other colleagues and competitors in the industry?
JH: I love competition, because I think competition makes you better. And whether that’s in the medical device sector, or whether that be on our side of the equation, competition is good. Having said that, I think, as we reflect on the role we have in the marketplace, and the areas that we’ve invested and the things that we’re doing, I do think that there are elements of our business that have differentiated us. For example, as a result of our focus in the market, we’ve seen significant customers move our way.
The largest single movement of GPO business occurred this past year, a couple of months ago, when the Child Healthcare Corp. of America, all of the pediatric facilities, representing about $2.1 billion in number purchases, elected to move from another GPO to Novation. We saw a large system in Iowa move our way. We’ve seen just a variety of different customers move our way, and I think a lot of it centers really around the focus in the role we played in extending ourselves into the provider organizations in unique and different ways.
The other thing I would tell you is that we solely work for the providers. We don’t have investors. We don’t have shareholders. We’re not managing to quarterly earnings, so I think that provides the differentiation of the marketplace that has played well for us.
MassDevice: How do you see Novation’s role changing as the new ACO models come online? Does that have any impact on your day-to-day operations? Do they impact on how you perform your mission?
JH: This whole notion around the ACOs has gotten a huge amount of press, but the reality is that it hasn’t changed ,and I don’t believe it’s going to fundamentally change, the role that we play. It might tweak it to some extent.
In my opinion, there’s been too much focus in the market around the "O" associated with ACOs. What I mean by that is it’s really not about the organization – it’s really about the provider community delivering accountable care across a variety of different settings. But the model has yet to play itself out, and we’ve seen recent examples where it’s been tested. I think there’s a lot of work to do to play out the ideal approach around Accountable Care Organizations.
To me, the take-away is that we need to be considering the cost of supplies and the implications, not only in the acute care setting, but in all of the different settings within an ACO that a patient may move through.
MassDevice: How does Novation get paid?
JH: We get paid by the hospitals for providing a service. Often the cash flow associated with that flows through administrative fees, but in our model the administrative fees paid by the suppliers, in our view, those are dollars that go back to the provider and then our cost structure is then netted against that to pay for our costs. And so, across almost all of our customers, that’s essentially how we get paid.
MassDevice: Where do the suppliers fit in?
JH: We partner with a variety of suppliers. I think we have more than 800 supplier relationships across all sectors. And, obviously, how we interact with the suppliers is critically important. They play key roles. Suppliers are exceedingly valuable and, in particular, if you look at the device sector, they play a critical role in providing life-saving technology. We believe it’s important that we understand more closely when we partner with the suppliers to help the providers.
MassDevice: To pllay the devil’s advocate, aren’t you adding costs on both ends here? Suppliers pay you and providers pay you. Couldn’t a medical device company just say, "Wouldn’t it take costs out of our system if we just have people dealing directly with the providers?"
“We play a critical role in managing and moving market share. I think the device sector has not necessarily acknowledged the role of the GPOs, but I think increasingly, as products mature in particular, GPOs play a vital role in helping to drive market share up on behalf of a supplier.”
JH: Those who have been and will continue to be critical of GPOs, I think, have taken that position. Obviously I have a little bit of a different position, and in fact I think if you look at the model, the financial model that currently exists for GPOs, the government has acknowledged that on multiple occasions over the course of last 10 to 15 years that GPOs play a vital role in filling a void that providers cannot fill.
And so, on 1 hand, you could make the argument that you just made. But on the other hand, we feel that we play a critical role to both parties. So on the provider’s side, we reduce the cost of managing those 800-plus suppliers.
We reduce the cost associated with managing and producing contracts and terms and conditions that, if we did not do that, hospitals would have to invest to that on their own. Just to give you a statistic, last year we managed, on behalf of the membership, over 14 million product pricing and packaging changes and pushed that information into the hospitals’ systems, which drives incredible efficiency.
There have also been a lot of studies on the role of GPOs, so if you look at some of the work that was done by Arizona State University, they actually did a fairly in-depth study several years ago to look at the impact on the cost of the services and what hospitals would have to invest if GPOs went away.
And it’s pretty sizable. And then, I flip that over right on to the medical device sector side or the medical/surgical side, and, candidly, we believe we reduced the SG&A costs for suppliers. If I’m a supplier, do I want to produce 1 contract that provides consistent terms and conditions with a GPO, or do I want my attorneys and staff replicating that across 1,500 different entities?
Another thing I think is important is that we play a critical role in managing and moving market share. I think the device sector has not necessarily acknowledged the role of the GPOs, but I think, increasingly as products mature in particular, GPOs play a vital role in helping to drive market share up on behalf of a supplier. We believe we can get to the point where we can reduce costs for the providers, drive efficiency into the providers’ processes, and then also help streamline and attain market share for the suppliers. And so we think that’s a win-win on both sides. We’ll always have critics, I think that just comes with the territory.
MassDevice: What is the med-tech indusry’s biggest misperception avbout GPOs?
JH: I think one of the biggest issues you’ve seen in terms of, I guess, debate within the med-tech industry as it relates to GPOs is the issue of transparency. Our view of transparency is really a function of my earlier comments. To me it’s not about transparency solely, it’s about driving efficiency into the healthcare supply chain. And I think if you look at our marketplace, I believe creating better standards around buyers, sellers, along with transparency in the marketplace, drives efficiency for all parties.
But it think that’s the 1 area where there’s been a lot of debate, but I think it’s been misplaced. I think the debate is too much focused around this notion of transparency. Transparency is just 1 element of driving a more efficient supply chain and our objective is to invest in a much more efficient supply chain. One component of that is transparency.
I would argue that the market, including buyers and sellers, needs to invest in standards that drive efficiency for both suppliers and buyers. When you think about some of the things that have been criticized about GPOs, such as their analytical tools, what I’ve experienced in this market is that those analytical tools are just as powerful and important and helpful to the supplier community as they are to the provider community.
There’s a huge void on the supplier side in understanding things like market share and what it’s going to take to build pricing schemes in the marketplace based on market share or product mix. Absent a lot of information on business intelligence, suppliers are also flying blind.
I always look back to consumer markets – if I went out to buy a flat-screen television, I’d probably say, "OK, I want the 55-inch Sony TV," and then the first thing I’ll want to understand is whether the price I was quoted at Best Buy is a good price.
So this whole notion of transparency, I think, has been vilified in the marketplace, when in fact transparency is abundant in virtually every consumer market and every other market. And it actually has positive benefits for both buyers and sellers.
Another thing that’s occurred for the medical device sector is the customer for the device manufacturer was the physician or the surgeon. But, as those physicians under healthcare reform have been basically running for cover and trying to align themselves with the providers, many have become employed by the providers. So the focus of control and influence is more centered around new acute care organizations and the network of physicians that they now employ. That dynamic has an effect on the market. I think it presents an opportunity for GPOs and device manufacturers to work differently into the future under healthcare reform.
"Transparency has been vilified in the marketplace, when in fact transparency is abundant in virtually every market."
MassDevice: The influence of medical device salespeople has waned over the past few years. We’ve done surveys of physicians that show that their salesperson’s impact on their decision to purchase a specific product is significantly diminished.
JH: Yeah, it is declining. We’ve also seen a lot of the device manufacturers that have accountability to their shareholders managing their SG&A. We’ve seen significant reductions in force in terms of sales organizations.
MassDevice: Is that good or bad, ultimately?
JH: I don’t know if it’s good or bad, but I think it’s indicative of the market shifting. And, I guess in terms of the positive, my view is that it’s going to force us to think differently about creative ways of attaining value for both buyers and sellers.
I think manufacturers are interested in selling their products and attaining market share. Buyers are interested in reducing their costs and, if we eliminate a lot of the sales influence and activity, I think buyers and sellers (with the help of GPOs) can have more sophisticated discussions around what are the most effective products in terms of patient care.
The ideal state is that, by using this particular implantable device, we have empirical evidence to suggest that we have a better clinical outcome consistently and we also have a better cost structure and an alternative therapy. And, to me, that is the ideal state between buyers and sellers.
MassDevice: That’s a very high-level discussion.
JH: Absolutely. And I think that’s a good thing. One of the things I think the device sector needs to think about, as it relates to accountable care, is 1-on-1 with the customer. And the question then is, "Does this therapy afford the best outcome for patients at the lowest possible cost," because that’s what the customers looking for.
One of the things that’s interesting is you have to have systems in place to begin to measure that. Hospitals are putting in place, on the clinical side, systems to begin to measure how they perform clinically – because they’re going to get paid that way.
And then bringing forward the cost data to say, "This particular procedure delivered this type of outcome for the patient population and here’s the distribution of cost, both labor and supplies, including the device." Then you can begin to compare the effectiveness of the device, in terms of the patient outcome, as well as the cost. And that is a much more sophisticated discussion than whether or not I influence this decision to buy more of my product.
MassDevice: So in essence, you’re already doing comparative effectiveness on the ground.
JH: That’s exactly right. And I think comparative effectiveness is the big take-away for medical device companies.
MassDevice: But the device industry is terrified of comparative effectiveness!
JH: Oh, I know they are. And I don’t think they need to be. I really don’t. I think most of these manufacturers make outstanding therapies. They don’t wake up wanting to manufacture therapies to hurt patients. They just don’t do that. Now, will there be a potential in comparative effectiveness, would there be a potential reduction in some of the products they sell? Possibly. And that’s where the fear is.
MassDevice: Do you ever see something as radical as Amazon.com mode for medical device sales, in which there’s a menu of treatments that have been proven clinically effective and hospitals just go and pick, without dealing with salespeople at all?
JH: I can very well see that, especially as the data becomes more sophisticated for the providers, where their measuring their cost in quality. I think you’ll get to the point where the products will naturally become more commoditized, or some of the products will.