Bridging the Divide in Healthcare Vendor Finance: Providing Value in an Increasingly Complex Landscape
by Rita Garwood May/June 2016
Healthcare reform in the U.S. has led to a focus on cost and quality of care, which has sparked rapid consolidation within the industry and shifted the decision-making process to the C-suite. To grow and acquire vendor relationships in the healthcare industry, equipment finance companies must help their partners provide the advanced technology that doctors want through solutions that ensure the metrics and total cost of ownership the CxO is targeting.
Whether the candidates are for it or against it, healthcare reform has been a hot-button political issue for more than a century. In 1912, the first U.S. healthcare reform supporters backed Progressive party candidate Theodore Roosevelt, who lost to Woodrow Wilson.1 On November 19, 1945, President Harry S. Truman became the first sitting U.S. president to endorse a national healthcare program, although his plan was based upon policy developed by his predecessor, Franklin Delano Roosevelt.2
The issue has only escalated since then, and with good reason. The U.S. healthcare system is the most expensive in the world. According to the World Health Organization, healthcare costs more per person in the U.S. than in any other UN member nation except East Timor.3
According to an Organization for Economic Cooperation and Development (OECD) report, healthcare spending in the U.S. (excluding investment expenditure in the sector) was 16.4% of GDP in 2013 — almost double the OECD average of 8.9% and much higher than the next three big spenders: the Netherlands (11.1%), Switzerland (11.1%) and Sweden (11.0%).4
Despite this spending, international peer reviewed medical journal BMJ ranked the U.S. last in overall quality of care among 11 industrialized nations in a 2014 report.5
Controlling Cost & Improving Quality
These statistics fuel the ongoing push to reform the U.S. healthcare system, specifically when it comes to cost and quality of care.
“Today, all of the leading payers are responsible for two things: patients getting quality care, but at an affordable price,” says medical reimbursement consultant Kathryn Barry. “But you have to squeeze on the affordability, and that’s the position we’re in right now.”
This goal of keeping costs low has affected reimbursements from public and private payers, which, in turn, have led healthcare organizations to change the decision-making process for the acquisition or replacement of medical equipment. “Decisions that used to be clinically-driven and made by physicians are now being made in the C-suite,” says John Sparta, vice president of Healthcare Sales and Program Management at DLL. Sparta says that while there is still a clinical component in the decision-making process, healthcare organizations need to determine whether an equipment acquisition makes sense from an investment perspective.
“We’re seeing a lot more joint decision making, a lot more of the chief medical officer and the CFO making the decisions as they look across the spectrum of care and what the community needs,” says Rick Gundling, SVP of Healthcare Financial Practices at the Healthcare Financial Management Association. “When we talk about increasing value to the purchaser, patient or consumer, part of that is quality over cost. What’s the cost to the purchaser to buy it?”
“If you’re on the device manufacturer side, you can create a great product, but you must prove that it’s better than the current standard of care and show specifically how it’s better,” says Barry. “How did the patient improve? How will it save money to the overall healthcare system? If it is just adding cost, we can’t afford it anymore.”
“It’s a whole different relationship, a different conversation with different requirements,” says Sparta. “You still have to keep the doctors, nurses and clinicians happy, but the money is going to come from the C-suite, and they’re going to decide what equipment to buy and when.”
This shift in decision-making is only one of the complexities facing the healthcare industry today.
“Since the Affordable Care Act passed about five or six years ago, it’s accelerated a lot of the changes in healthcare: new payment models, new delivery systems, new ways to joint venture and affiliate with other organizations to make sure that there is a more clinical integration across the spectrum,” says Gundling.
Consolidation has been occurring at a rapid pace in the healthcare industry. According to data from PwC, 2015 was a record-breaking year for mergers and acquisitions within the healthcare sector, with 1,460 transactions worth approximately $563 billion reported.6 PwC anticipates that 2016 could set another record in terms of M&A transaction volume.7
“Stand-alone regional and rural hospitals are going away,” says Sparta. “They aren’t disappearing but are becoming part of a system or IDN (Integrated Delivery Network), and within those groups are going to be physician’s practices. You’re also going to see home healthcare companies and urgent care centers get acquired — all branded within a network to create better patient care, but also a better business model that can thrive under the new healthcare reform regulations.”
“In the last three to five years, we’ve seen that probably 75% of physicians are now employees of healthcare systems,” says Barry. “Physicians are selling their practices; they can’t fight any longer in private practice. They need the overhead leverage economic opportunity of being part of a bigger organization.”
Healthcare providers are not the only ones experiencing this spike in M&A activity. Insurance companies are following suit.
“The leading national payers are all trying to consolidate,” Barry says. “One is trying to buy the other, so we’re going through consolidation of private payers. With that consolidation, you then have leverage to negotiate, and right now they are aggressively negotiating discounted fees and rates from physicians and facilities. And that’s causing a domino effect for the healthcare provider world to also consolidate.”
Bridging the Divide
Given the increasing complexity of the healthcare landscape, how can equipment finance companies continue to provide value to their vendor partners who manufacture medical equipment?
“We pride ourselves on our ability to help our vendors get to the C-suite where we can help bridge the divide between the clinical nature of the equipment and the business solution really needed by the CFO of the hospital or healthcare organization,” says Sparta.
Traditionally, healthcare device salespeople have been knowledgeable from a clinical perspective. “That’s their background,” Sparta says. “They can tell you all about the equipment, and they can really hold their own with doctors, nurses and clinicians when it comes to the capabilities and benefits of the equipment.”
However, Sparta says that clinical expertise often does not translate very well to the CFO who might challenge, “I know it’s the latest and greatest, but show me why this is a good acquisition for our healthcare organization. What’s the total cost of ownership and the impact on quality measures and reimbursement?”
“One of the key things that we like to bring to the table is helping our vendors/manufacturer partners sell effectively to large IDN’s and healthcare organizations,” Sparta says. “We can ask the right questions, understand the requirements of the CxO, as well as the clinical need, and translate that into the right kind of proposal or solution for that organization.”
Providing this value to vendor customers requires not only a deep understanding of the myriad of complexities facing the healthcare sector today, but also a firm handle on the financial aspects of a deal.
“All the members within the healthcare business here at DLL have extensive experience in the healthcare industry,” Sparta says. “They have either been working for us or within the financing side of the healthcare business for long periods of time.”
“Our industry specialization throughout the whole value chain allows us to create the right solutions for our partners, take the appropriate amount of risk for us as an organization and be good at it,” Sparta says.
“You need to be able to get in front of a group of healthcare salespeople and speak their language,” Sparta says. “You need to be able to ride with them when they go see a customer and not be a fish out of water. You have to be able to help understand the conversation, understand the needs and complexities of the healthcare industry and bring value to the table.”
Satisfying All Sides
In any vendor relationship, an equipment finance company must consider the needs of two parties: the customer (the medical equipment manufacturer) and the buyer (the healthcare provider).
“We traditionally work with a manufacturer, vendor or distribution channel,” Sparta says. “We’ll have someone assigned to that relationship who is going to understand how that organization sells, what their channel is and what drives that channel.”
Sparta says DLL’s primary focus in a vendor relationship is helping the vendor partner achieve four primary goals: accelerating sales, creating larger sales, retaining margin and locking in future sales by creating solutions that promote customer retention.
A key component in establishing an ongoing relationship between the vendor and its customer is offering financing options that fit the healthcare provider’s needs. In some cases, a traditional capital or operating lease will work best, while in other scenarios a hospital might want to try managed equipment services or pay per use options.
“Imagine the acquisition of an ultrasound machine that is going to be used for the next four years,” Sparta says. “Would you want to pay for four years of scans upfront, or would you rather pay for them as the scans are performed? It’s a great opportunity for the leasing and finance industry to provide solutions that support a more usage-based model.”
Sparta says DLL’s core product in the healthcare industry is the fair market value (FMV) lease, which enables healthcare providers to stay current with technology. “With an FMV lease, healthcare providers can choose to upgrade their equipment when new technology comes out,” Sparta says. “They can maintain the latest equipment which should give them the best patient outcomes as well as help them avoid emergency expenditures when software gets outdated or the equipment just gets old and needs to be replaced.”
While equipment finance companies can provide dynamic financing options that keep the healthcare industry on the cutting edge of progress, we can’t say the same for politicians and policy makers in the U.S. In fact, they will probably be debating healthcare reform for another century.
Igel, Lee. “The history of health care as a campaign issue” (PDF). Physician Executive. 34 (3): 12–13. PMID 18605264. Retrieved April 8, 2016.
“World Health Statistics.” World Health Organization. 2009.
“How Does Spending in the United States Compare?” OECD Health Statistics 2015. Organization for Economic Co-operation and Development. July 7, 2015. Accessed April 8, 2016.
BMJ 2014; 348 :g4080
“U.S. Health Services Deal Insights.” PwC. February 2016.
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