Chris Charland is the senior director of capital equipment at Novation. He spoke recently with Healthcare Finance News editor Richard Pizzi about healthcare supply chain management trends to expect in 2011.
What kind of impact did the recession have on supply chain in 2010?
Last year construction and capital was down significantly. The hardest hit area was imaging equipment, which was down 20 and 30 percent. That’s primarily due to the buy cycle – it takes a year to select and purchase a high dollar item. So in effect we’re experiencing a one-year lag in purchasing. But we do see that trend flattening out as we enter the New Year. The large imaging equipment manufacturers estimate a 5 percent growth in 2011. The medical device side has remained relatively flat, although orthopedic devices are still a growing market.
Where there any segments of the industry that weren’t hit as hard by the recession?
The market for movable capital equipment was relatively flat. It didn’t take the bit financial hit that imaging equipment did. Where hospitals had an opportunity to hold off on purchases, they would. An example of that would be in patient monitoring. That type of equipment is not revenue generating and can last up to 15 years. We’ve heard from a lot of our CFOs that equipment like that might not be replaced. CFOs have grown more focused on critical equipment that generates revenue, like a CT scanner or an MRI. We classified this market last year as being in a “deep freeze,” but this year we’re seeing a thaw.
Will the thaw in capital investment be across the board, or in certain categories more than others?
Based on the experience of our members, I’d say there was a significant amount of new construction that was put on hold in 2010, either “no build” or limited construction. This year there are several very large construction projects that are underway, primarily on the West coast. The West coast facilities will see construction increases because of the seismic retrofit requirements. Most hospitals that need to do retrofits are doing complete rebuilds. Stanford, UCSF, and San Francisco General are undergoing major expansions or doing complete rebuilds.
We’re also seeing some billion dollar-plus rebuilding projects beginning in Texas. As far as what types of hospitals are being built, we’re seeing growth in children’s hospitals and cancer centers. Those are two key segments where the growth is not just in physical facilities, but also in capital equipment purchasing.
What about spending trends in other regions of the country?
Growth is more pocketed in other regions. There is more hospital consolidation still ongoing on the East coast.
Could you talk more about the outlook for medical devices?
I would expect pricing of medical devices to continue eroding. There are constant pressures on that segment. Pricing transparency has become very clear over the past five years. There are now clear benchmarks for prices available to physicians and hospitals, and there weren’t a few years ago.
What issues should supply chain executives consider in 2011 that they might not be anticipating?
As for new product categories, the bio-absorbable stent has been approved in Europe, and that will make its way to the U.S. market in a few years. It will come in as a premium-priced device. Molecular imaging is becoming very large, in conjunction with PET scanners, DT scanners and MRIs. There is a move away from contrast imaging agents to molecular imaging agents, and the latter are very expensive.
Proton therapy is another up-and-coming technology. These are pieces of capital equipment that can be priced into the hundreds of millions of dollars. But they hold a lot of promise. That’s a potentially big investment siting out there, if you’re a large health system.
It’s a good time to buy capital equipment. It’s very competitive, because there are new suppliers entering the market and growing stronger. Both pricing and service are competitively priced. As a result, we’re seeing very aggressive deals getting done.
Things have changed, however, because over the past three years you’ve seen a due diligence process for purchasing like never before. CFOs required extensive return-on-investment calculations from department managers and vice presidents before authorizing a purchase. CFOs want to see a comprehensive business plan. This has made mid-level managers at hospitals more business-savvy.
There are three key constituents in a capital purchase: hospital administration, the physician, and the supplier. Over the past 20 years, the physician could basically get what they wanted, and the suppliers knew that. But since the financial crisis, physician and hospital alignment has increased one hundred-fold. Physicians are now beginning to understand the financial ramifications of purchases, and they realize they will no longer be the sole selectors of million dollar pieces of equipment.