Last week, Moody’s Investors Service announced that the outlook for not-for-profit U.S. hospitals remains negative. Moody’s mentions that the hospital industry is facing $300 million in Medicare reimbursement reductions as part of healthcare reform through 2019. In addition, any long-term solution to the Nation’s debt crisis will likely involve further cut backs in payments to providers.
In face of the continued financial pressure, it’s no surprise that hospital administrators are turning to their suppliers for cost savings. In a survey of hospital administrators, Becker’s Hospital Review reported that the number one financial concern of hospital leadership was reducing costs. Attacking supplier costs was specifically mentioned as one of the strategies to driving cost savings. This shouldn’t be a surprise. Supply costs typical represent 30-40% of total operating costs, and is growing at a rate much faster than other costs. In fact, some predict that hospital supply costs will exceed labor costs by 2020.
For Med Tech suppliers, this only means one thing. You should expect increasing pricing and value pressure from your customers. The hospital leaders and materials management executives that I’ve spoken with over the past few months clearly agree that hospitals are looking to drive substantial supply chain savings by better managing and negotiating with their suppliers. According to academic research out of Arizona State University, the hospital supply chain function is far behind other industries in terms of maturity. As hospitals start to recognize the value that can be created by better managing the supply chain, suppliers should expect much great pressure.
Unprepared MedTech companies are likely to face pricing pressure in many forms. First, pricing pressure will come through direct sales negotiations. My experience is that many sales teams are unprepared to deal with professional buyers These buyers have a range of sourcing strategies, and are excellent negotiators. Next, part of the pricing pressure that will face suppliers is through the “good enough” supply selection process. This means that, increasingly, providers will be faced with choosing “good enough” supply items and technologies that represent a substantial price reduction. Suppliers of superior technologies or solutions will need to be able to translate those features into quantified economic value, and explain what financial benefits their solutions provide. Otherwise, they will surely face pricing pressure. Any time the financial outlook for your customer is negative, it’s a time to be prepared to proactively deal with increasing pricing and value pressure.