Hospital Budgets Increase as Healthcare Reform Shapes Spending Priorities

L.E.K. Consulting Study Reveals Growing Hospital Reliance on Group Purchasing Organizations, Emphasis on Products That Help to Demonstrate Care Quality

Marketwired

BOSTON, MA--(Marketwire -02/27/12)- Hospital budgets are on the upswing but cost pressures and changing healthcare models are dictating how hospital leaders are determining their strategic priorities. Sixty-one percent of U.S. hospital executives expect budget increases in 2012, a trend that is expected to continue during the next five years, according to the L.E.K. Consulting Strategic Hospital Priorities Study. L.E.K.'s third annual study of nearly 200 senior hospital decision-makers tracks changes in hospital strategies and purchasing trends.

Information technology is a top area for investment, with 57% of hospitals planning to increase their IT spending in this area through 2016. During the same time period, one-third of executives are planning to increase spending for large medical devices after several years of delaying medical technology equipment purchases due to financial constraints. Other spending increases during the next five years include facilities (35%) and small medical devices (18%). Hospital leaders are also willing to pay a premium for disposable products that prevent infections and reduce medical errors -- and they expect a 23% spending rise in this category.

"In many cases, product innovation is a baseline consideration for MedTech purchases as hospitals are prioritizing spending on products that can either demonstrate support for improved patient care that will help maintain favorable reimbursement levels, or help trim care costs by decreasing length of stay, reducing errors and preventing readmissions," said Bob Lavoie, Vice President and Head of L.E.K. Consulting's global MedTech Practice. "Although hospital leaders are optimistic that their budgets will grow during the next five years, they expect to continue to scrutinize purchases and use multiple levers to manage procurement costs."

GPO Growth and Centralized Procurement Reflect Emphasis on Cost
Most respondents (89%) reported increased budgetary pressures during the past year. As a result, 80% of hospital administrators continued their aggressive supplier negotiations to better manage costs. Despite their best efforts, there is a concern that rising costs from manufacturers and suppliers, and added costs associated with new regulatory requirements, may raise overall supply costs.

To make the most of their budgets, 62% of hospital executives plan to increase their current GPO use in 2012, up from 52% last year. Hospital GPO use is expanding beyond low-cost, high-volume supplies and is increasingly used to purchase higher-priced medical equipment. And smaller hospitals anticipate using GPOs more than larger hospitals because larger hospitals can use their size to negotiate volume discounts with many of their suppliers.

Additionally, many hospital executives are centralizing purchasing to make the most of their buying power, which illustrates a departure from individual physicians taking the lead in procuring key medical products. The development of accountable care organizations is also likely to push more centralized purchasing. Currently, less than 20% of respondents are pursuing some form of an ACO-like model today. However, 61% said they are likely to move toward this model within the next three years.

"This dramatic shift in how medical devices are being purchased requires MedTech companies to reevaluate their commercial models and develop clearly defined sales approaches that go beyond the traditional physician call point to also include hospital executives, department heads and procurement groups," said Lavoie. L.E.K. Vice President Lucas Pain added, "The physician is important, but no longer sufficient; those companies that clearly demonstrate how they can help address hospital pain points and improve outcomes to the broader group of decision-making influencers will fare better."

Other study findings show that a majority of hospital executives (71%) are allocating budgets to address operational priorities such as controlling costs, increasing efficiency and improving the profitability of their patient mix. Respondents reported that they are looking for medical device companies to help them address new healthcare insurance reform care and reporting mandates by clearly articulating product cost-benefit value propositions, providing clinical data, sharing risk and offering full solutions.

Additional L.E.K. Strategic Hospital Priorities Study findings are available in the L.E.K. Executive Insights report.

About the Study
The third annual L.E.K. Strategic Hospital Priorities Study was fielded in November 2011. L.E.K. surveyed nearly 200 U.S. hospital decision makers including CEOs, CFOs, COOs, material managers and purchasing directors for the study.

About L.E.K. Consulting
L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and analytical rigor to help clients solve their most critical business problems. Founded nearly 30 years ago, L.E.K. employs more than 900 professionals in 20 offices across Europe, the Americas and Asia-Pacific. L.E.K. advises and supports global companies that are leaders in their industries -- including the largest private and public sector organizations, private equity firms and emerging entrepreneurial businesses. L.E.K. helps business leaders consistently make better decisions, deliver improved business performance and create greater shareholder returns. For more information, go to www.lek.com.

Contact:
For further information contact:
Alex Wallace
L.E.K. Consulting
(617) 951-9507
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