Hospital Leaders Highlight Challenges in Today’s Environment

Just as many hospitals are turning the financial corner with improving margins and patient volumes post-COVID, looming cuts to reimbursement and inflationary pressures are threatening their bottom lines. These financial headwinds coupled with ongoing trends, such as the commercialization of advanced technology and the shift of procedures to outpatient settings, are impacting hospital purchasing decisions. To guard against financial challenges faced by hospital customers, orthopedic companies should adopt targeted strategies that position their businesses for success.

The Trends and Pressures

The One Big Beautiful Bill Act is expected to have a significant financial impact on many hospitals as cuts to Medicaid take hold and provisions in the law potentially impact Affordable Care Act subsidies, thereby reducing the number of uninsured and resulting in greater uncompensated care.

“We’re all trying to figure out how new laws are going to impact us and navigate that,” said Jane Torzewski, Director of the Medical Device Contracting Team at Mayo Clinic.

A recent survey by L.E.K. Consulting on the impact of various federal policy shifts on hospitals and health systems reported that healthcare leaders expressed concern over tariffs, changes to the 340B Drug Pricing Program, Medicaid and ACA eligibility, and site neutral payments, said Monish Rajpal, Partner and Managing Director at L.E.K.

“Those five changes are top of mind for hospitals and health systems. And they generally make the operating environment more constrained for hospitals, which obviously has a domino effect back to product manufacturers,” Mr. Rajpal said.

Added to that list of concerns for hospitals is the rising price of implant systems and enabling technology. Ms. Torzewski said that the ever-advancing technology makes it difficult for hospitals to decipher what they should buy and how much it will cost them long term. She added, “Fees that used to be absorbed by orthopedic companies are starting to be transferred to providers. Even items like shipping costs are skyrocketing.”

How Hospitals Are Responding

Hospitals are scrutinizing their spending more closely to address a decrease in reimbursement and an increase in overall costs.

Hospitals have fewer opportunities to consign instruments and implants and seek creative ways to fund the purchase of these products, Ms. Torzewski said. Further, advanced generations of implants could add thousands of dollars more per case, “I think we will see some providers opt out of using newer technologies,” she said.

During a BTIG webcast in October on ways that recent legislation could impact hospital capital expenditures and overall purchasing, two CFOs mentioned that their cost containment strategies include shifting procedures to outpatient care, better leveraging supplier agreements, consolidating suppliers and buying in bulk.

“If we’re moving a joint replacement from an inpatient side to an outpatient side, that’s not only driven by the insurance requirement, it’s also driven by the cost of care being lower,” said Fahd Benjalil, CFO and COO at Sharp Coronado Hospital, part of Sharp Healthcare in San Diego.

In its FY2024, Sharp began consolidating vendors based on purchasing volume to negotiate better rates. “We used to be an all-player model in terms of orthopedic implants,” Mr. Benjalil explained. “We shifted to a four-player model.”

Samuel Moore, CFO at Ascension Seton Medical Center in Austin, said the health system is pressing vendors to make price concessions to ensure administrative fees and rebates are maximized.

“One of the larger initiatives that we’ve worked on this year to help bend our cost curve is leveraging our supplier agreements with Vizient to ensure that the cost per case is the lowest that we can get,” Mr. Moore said.

He added that the Ascension health system is also looking more intently at bulk buys of supplies and technology.

“Bulk buys can be a really good way to get 20% to 30% discounts on supplies that you’re frankly going to use anyway, right?” Mr. Moore said. “As long as you have the space to store them and the cash outlay doesn’t cause a situation where you’re not able to pay for day-to-day operational items like payroll, then bulk buys can be a really good way to reduce our cost per case.”

Both Mr. Benjalil and Mr. Moore noted the need to prioritize and potentially defer capital equipment expenditures to put less strain on their budgets.

“All of our capital is definitely tied to our margins,” Mr. Benjalil said, “and with shrinking margins comes shrinking capital availability.”

Building Solid Relationships

For orthopedic companies, addressing the budgetary pressures that hospitals face presents an opportunity to deepen relationships and develop creative solutions that focus on lasting impact vs. temporary relief.

To begin, Ms. Torzewski suggested including hospital supply chain teams in discussions with physicians about procurement. “Orthopedic companies, in particular, have traditionally focused on building relationships with physicians, and they bypassed supply chain,” she said.

The supply chain team can offer creative ideas about acquiring and paying for supplies, Ms. Torzewski said. For example, the procurement process often involves product review by a value analysis team and supply expense committee. The supply chain team is part of this process and understands which features and functions of technology will be most important under these reviews. The team can also suggest contracting options, such as volume-based pricing and rebates based on purchase commitments earned.

“While supply chain departments can’t sell a product, we can communicate effectively with the teams that help bring inventory into our organizations,” Ms. Torzewski said.

Open, upfront dialogue must continue once agreements are in place and relationships are built, Ms. Torzewski said. That means companies should be proactive in communicating if they can’t meet inventory requirements or plan to raise their prices.

“My first reaction to bad news is, ‘Let’s put our heads together to figure out how we can minimize the impact on my organization. What can we do creatively?’” she said. “Having a fee show up on an invoice without any explanation just creates animosity. Transparency, solution-oriented accessibility—those are really key and will help build solid relationships and grow a company’s spend.”

Mr. Rajpal said that orthopedic companies should strive to develop partnerships with their hospital customers and provide strategic solutions. “You can’t continue to view the relationship as transactional,” he added.

For example, he said that price reductions are not necessarily the best solution in the shift of procedures to outpatient settings, as device companies are also feeling downward pressure on their margins. The key is working with hospitals to deliver more value for the price.

“Can you work together to decrease the amount of outstanding inventory, which is a massive cost to both sides? What can you do to help improve throughput? What tools can you put into their hands to help them determine which patients should be treated as outpatients vs. inpatients? What’s the best planned procedure workflow for any given patient?” he said. “There are a lot of opportunities for companies and hospitals to partner.”