Hospital/Device Company Partnership Trends to Consider

Hospitals face a host of complex challenges as they navigate out of the pandemic. Among the constraints are staffing shortages, procedure backlogs, supply chain costs and new technology integration. Each stressor allows orthopedic companies to respond to and strengthen their relationships with hospital and surgeon customers.

As orthopedic executives think about 2023 and beyond, we wanted to provide perspective and advice about the extensive issues that current and potential hospital customers face.

For that, we turned to L.E.K. Consulting and the findings of the firm’s annual U.S. study that surveyed ~250 hospital executives and decision-makers. Monish Rajpal, Managing Director and Global MedTech Practice Lead at L.E.K., has broad experience in the orthopedic space, leading strategic, commercial and transactional engagements with medtech and private equity firms, as well as engaging with investors in physician practice groups and ASCs. Here, he provides insights about the study and what orthopedic companies should take away from its findings.

Returning to Operational Excellence

Hospitals’ main priorities are focusing on operational needs like staffing levels, supply chain disruptions, and the repercussions of inflation, according to the study. Hospitals nationwide have felt the crunch of patient capacity and staffing constraints since the early days of the pandemic. Attracting and retaining nurses is their top focus, as employee shortages influence daily operations and profit margins.

“Staffing constraints are gating the full potential of procedure volumes being realized in orthopedics,” Mr. Rajpal said. “The consensus we hear is that staffing will not get significantly worse, but there are real structural barriers that will stop it from improving rapidly. The reasonable expectation is for small and gradual improvements as we get further from the pandemic.”

Orthopedic executives have discussed staffing concerns since the start of the pandemic. Companies have noted that procedure volumes are recovering, but hospital staffing shortages remain the biggest barrier to working through the backlog.

Shifting Procedures to ASCs

The U.S. market has seen a notable shift in the mix of care settings utilized for orthopedic procedures in recent years. While the shift was “brewing” prior to COVID (given the emergence of BPCI, CJR and commercial payment bundles, and enablement of reimbursement for procedures conducted in ASC settings), COVID has catalyzed the process.

“ASCs make up a small but material and fast-growing portion of the large joint replacement market,” Mr. Rajpal said. “Physicians have bought into the clinical and value opportunity that ASCs represent. This  will become an important part of a shift toward broader and true value-based care in this setting.

“It’s also important to understand that while ASCs will capture more cases in the future, they’re also a very different customer setting than hospitals. The decision-making processes are different, given their ownership and governance. ASCs tend to be more price sensitive. The density of procedure volumes is lower at ASCs than at hospitals. Device companies need to be thoughtful about the sales models they’re using for ASCs.”

While the shift in procedures provides opportunities for ASCs, it also creates challenges for hospitals. Mr. Rajpal noted that the movement of cases to outpatient settings, especially in the joint replacement segment, is siphoning money away from hospitals that are struggling financially for different reasons.

“In many geographic regions in the country, hospitals are not able to fully leverage or capture volume with ASCs because of regulations like Certificate-of-need laws,” Mr. Rajpal said. “They’re losing control of these high-volume, high-value procedures at a time when their finances are already stricken.”

He added that the types of cases that are shifting to ASCs tend to involve younger patients. “These are highly reimbursed cases,” he said. “Not only are you losing a really important set of procedures that are high volume and high value, but you’re losing the most financially attractive subset of those procedures.”

Mr. Rajpal recommended that orthopedic companies develop clear protocols for engaging with ASCs and adjusting their product offerings accordingly.

“Having the right ASC strategy means you must think about your portfolio, value proposition, price point, pricing model and commercial model,” Mr. Rajpal said. “It’s also important for companies to make their products easy, simple, and fast to use and track. That improves efficiency and removes unnecessary staff burden, which is critical.”

Seeking Supportive Partners

Supply chain challenges and cost containment remain critical for hospital systems, just as they do for device companies. L.E.K.’s study found that hospitals have renewed their emphasis on the strategic importance of the supply chain function.

“Many hospitals are increasingly looking to bring in-house greater portions of supply chain operations to manage costs and increase their level of control of inventory availability and scheduling,” the study said.

Half of the survey’s respondents reported that their hospitals own or lease warehousing. While only 45% of those hospitals with warehousing currently engage in self-distribution, more reported plans to develop this capability for acute and non-acute sites within the next three years.

Hospitals are also emphasizing resiliency programs, particularly for planning ahead or changing inventory levels. The study noted that the most valuable components of partner resiliency programs are awareness of inventory status by location, consumption forecasts and real-time visibility of shipment locations.

Orthopedic companies have routinely struggled with forecasting on both sides of their supply chains. It’s important for companies to understand that hospitals are providing greater resources and demands on their supply chain organization.

A final takeaway from the study is an emerging emphasis on hospitals leveraging support from their supplier partners to cope with current conditions.

The study noted that progressive health systems have historically taken the lead in pursuing partners for various services and have done so increasingly with medtech firms, distributors and wholesalers. More traditional hospital systems are responding to the current environment by following suit.

“[Traditionalists] have increased their overall reported willingness to work with third-party service providers, from ~45% in 2019 to ~50% in 2022, reporting moderate to high likelihood on average, with significant increases in medical device companies, healthcare IT providers and data analytics companies,” the study said.

Moving Forward

Orthopedics is part of a complex, evolving healthcare ecosystem that will always present opportunities and challenges. Companies that stay tuned to the needs of their customers will prevail. However, this requires consideration of hospital systems’ different, segmented needs. Needs and engagement approaches will differ for large, progressive health systems, vs. traditional and community hospitals, vs. large (and increasingly Private Equity sponsored) practice groups, and of inpatient vs. ASC.

Mr. Rajpal noted that his call to action around refining product, pricing and commercialization strategies extends, in segmented manner across these customer cohorts.

“Considering the evolution of the space more broadly leads to a rethinking of your overall commercial strategy across your customer base,” he said. “You must think about how to approach segments of your customer bases differently, while maintaining overall coherence and alignment organizationally, moving forward.”