Lessons Learned From The New Playing Field
By Mike LaPrade, Vice President and General Manager, Commercial Sales
and National Accounts, RTI Surgical
I was confident that our newly created division was on a successful path. In late 2011 and prior to going to market, we had commissioned a robust third-party voice of customer research project and interviewed over 120 key buying influencers, including surgeons, procurement managers, supply chain personnel, and even contract managers from some of the major GPOs (Group Purchasing Organizations). Based on the feedback, we completed our commercialization strategy and began scaling up resources throughout 2012 in anticipation of launching our new division the following year.
But in the year or so it took to scale up…things had changed. We were used to having surgeons call the shots. If a surgeon approved a new product for an upcoming case, that’s what was used. And most of the time, price was not a factor. But the passing of the Affordable Care Act (ACA) created numerous uncertainties in the hospital marketplace. Hospitals were facing significant financial pressures and this created a series of events that changed the way medical device companies interact with hospital customers like never before. In the last couple of years, we’ve seen significant hospital layoffs, hospital and industry consolidations, more physician employment by hospitals, reduced industry access to physicians, reductions in contracted suppliers, new decision makers involved in the purchasing process, and many other factors that now present us with a whole new set of challenges. And while surgeon relationships are still important, that is just one of several factors that contribute to our ability to succeed in the marketplace.
It was a new paradigm. And we knew we had learned some important lessons. Several identifiable trends compelled us to change our way of thinking to ensure a longterm, sustainable business model.
Healthcare consumerism: Patients are shopping doctors, hospitals and healthcare plans (as both premiums and deductibles go up). There is no longer a guarantee that doctors will continue treating the same patients for decades, nor that there will be brand loyalty to a hospital or an insurance provider. Patient experience is a major driver. People who read online reviews and join advocacy groups are aware that they can improve their healthcare experience elsewhere. Healthcare providers are keenly aware of this, too, and are responding to it by improving their overall delivery of service.
Economics: Hospital operating margins have historically been very low, in the range of 3-4% on average. And the ACA has introduced thousands of previously-uninsured patients into the healthcare system, albeit at extremely low Medicaid reimbursement rates. The financial benefit from this new patient flow, however, has been offset by the advent of public insurance exchanges, which reimburse at lower rates than traditional commercial carriers. Combine this with our aging population – more than 10,000 people per day are turning 65 – and most of those patients are changing from high margin commercial insurance to (often negative margin) Medicare coverage. We’re also going to see billions of dollars in Medicare reductions over the next 10 years. All of these factors put significant pressure on hospitals to find new ways of cutting costs. And, at the same time, we have to consider…
Volume to value: With cost containment comes a simultaneous focus on improved value, driven both by patient demand and regulatory guidelines. Hospitals can no longer afford to base their business models on treating an increased number of patients; they must rely on treating their patients better. They are looking for supplier value propositions that differ from product and price, and that means different things to different stakeholders across the institution. What can you do as a supplier to increase quality, improve patient experience, and contain costs? As hospitals employ more and more physicians, those physicians now have to be in concert with other stakeholders who are concerned about efficiency, profitability, readmission rates and other factors in addition to clinical outcomes and product safety. Hospitals want metrics on patient care experience, product utilization, product efficacy, reduction in care variation, and more.
Evidence: Historically, medical device companies performed bench-top and animal testing against competitive products to demonstrate the performance of their products. Today, you have to go further. Compelling results in the form of human clinical data are vital. This reassures hospitals that your product will contribute to better overall health in their patient population. If clinical data is not available, your chance of getting product approval significantly diminishes, regardless of your product quality and pricing.
Industry consolidation and horizontal integration: This is the era of hospital and industry consolidation. More mergers and acquisitions are happening among suppliers (Medtronic/Covidien, Zimmer/Biomet) every day. IDNs (Integrated Delivery Networks) are ubiquitous, comprising hospitals, physician offices, clinics, home health agencies and other healthcare entities. GPO mergers are also taking place (Novation/ MedAssets), whose contracting arms often negotiate for dozens of IDNs and hundreds of hospitals. And, to add to the complexity, some IDNs are forming their own GPOs, and even creating their own insurance plans. These consolidations are leading to centralized purchasing models, largely driven by C-level roles and system-wide VACs (Value Analysis Committees). This adds incremental layers of process as well as new stakeholder touchpoints to ensure you are aligned with their overall value proposition.
Lengthened purchasing process: VACs and product approval processes are more cumbersome than ever. As stated earlier, more stakeholders are influencing the purchasing decision than ever before. Multiple administrative functions are now involved, as hospital C-suites are looking to ensure that every avenue is examined when it comes to creating value, reducing costs, and ensuring profitable outcomes. Importantly, many of these hospitals are changing the way the committee approval process operates, which cause significant slow-downs and often halt the process. We’ve seen hospital committees take upwards of 18-24 months to approve a single new product for formulary.
Reduced suppliers: Supplier reductions are being driven by both providers and suppliers. Providers need to cut costs and are making significant price reduction and product consolidation demands. And conversely, in order to even consider these demands, suppliers are pushing for increased purchase commitments and supplier consolidations to offset their loss in price/ margin. This phenomenon is occurring within all product categories, and physician preference items (PPIs) are not exempt. We’ve recently seen several large GPOs and IDNs looking to reduce their list of approved spine vendors to achieve further procurement and supply chain efficiencies. One GPO is reducing its list from over 100 spine companies to only 15, and another from 60 to ten. These steps are being taken to reduce variation, standardize care, enhance clinical outcomes, and streamline efficiencies.
Consulting: Many GPOs are adding value to their services beyond contracting and price savings. They have developed consulting divisions as well, looking at outcomes, quality and safety measures, population health, insurance, business intelligence, and more. This enhances their relationship and value offered to hospital clients, and those GPOs that are only offering contract/purchasing services will likely not survive the long haul.
Building a more effective sales organization for tomorrow
So what does all this mean? Well, RTI, like many other companies, had to supplement our prior research, take what we learned from this changing healthcare environment, and restructure our approach. Part of it is simple, starting with the basic Miller-Heiman view of the buy/sell hierarchy:
To ensure we were making an important contribution to our evolving hospital customers, we had to make some significant changes in our sales approach:
Hiring profile: Historically, we had been successful with reps who had surgeon relationships, were clinically astute, and could sell in the OR. Now, that’s only part of the equation. We also need people who speak the language of supply chain, purchasing/procurement, and the C-suite. What is each decision-maker interested in? With surgeons, our focus was primarily at Levels 1 and 2 – meeting specs and delivering high-quality products; but with procurement and supply chain, we also have to demonstrate Level 3 value; for department heads, we need to address Level 4 – business goals; and for the C-suite, we have to address Level 5 – institutional goals. Our W2 reps had surgeon relationships but had difficulty speaking the business and contracting language. So we added 1099s that carried other products from other companies in their sales bag. At first glance, one might think that was a mistake, since we would only garner a percentage of their selling time. However, what they had that our W2s did not was higher level business influencer relationships, experience selling to these call points, and immediate access to the other key decision makers. They moved our products through the sales cycle much quicker and had greater success with product conversions.
Re-educating and training: Given the success many of our 1099s were having, we immediately decided to revamp our training programs. Instead of focusing our efforts solely on the clinical decision makers, we created selling tools, models, and training programs to address the needs of the other key influencers as well. While reinventing our sales process took time, consistent coaching, and continued reinforcement, it eventually paid off and continues to do so today.
Strategic alliances: Given the increasing amount of consolidation that continues to occur on a regular basis, it can be overwhelming to see large companies get larger and have more contracting power than ever before. Therefore it’s important to also look at potential strategic relationships that can be made with companies who offer complementary products to your portfolio. We have seen beneficial alliances create new opportunities and contracting leverage at the IDN level. As long as both entities are benefitting and not out-leveraging one another, this is a model that can work.
Contracting: Finally, contracting is becoming more and more important in healthcare today, even in physician preference product categories. As mentioned earlier, GPOs, IDNs, and industry competitors are consolidating to gain scale. Scale creates both buying and selling power. As providers look to improve quality of care, improve the patient experience, and cut costs, only those companies that are willing to come to the negotiating table will be left standing. We’ve seen many market share leaders lose contract status, and consequently market share, because they weren’t willing to change with the times, realize that there is a financial crisis in healthcare today, and renegotiate their existing agreements.
The companies that will ultimately win in the long run are the ones that acknowledge the changing healthcare environment and are proactive in creating new partnership opportunities with GPOs, IDNs, and the key economic buying influencers that reside in each. Successful companies will change their value proposition to ensure they’re meeting the goals of not only the clinician, but also supply chain, procurement, and the C-suite alike.
Too many companies – the ones who will likely be cut by supplier rationalization – can see things only from an internal point of view. They know how good their product is, and they’re determined to convince clinicians that it’s better than what they’re using today. But it isn’t about products anymore, or even clinician relationships. It’s about understanding the organizational needs of the hospital provider and the motivations of their key stakeholders. What’s important to the CEO? The procurement and supply chain people? The OR director? Understand their needs in an evolving marketplace. If you’re improving patient outcomes, enhancing the patient experience and lowering costs, you’ve given them the gift they want. And that’s the gift that gives in return.
Mike LaPrade, Vice President and General Manager, Commercial Sales and National Accounts RTI Surgical. Mike has built, developed, and led successful sales, marketing, and business development teams in the medical device industry for over 20 years at companies such as Gambro/Baxter, Boston Scientific, and Tyco Healthcare/ Covidien. His experience includes a broad range of commercialization activities, such as developing and implementing corporate strategy, pioneering new corporate functions, building start-up business divisions, leading C-suite negotiations, and closing multi-million dollar deals.
RTI Surgical is a leading global surgical implant company providing surgeons with safe biologic, metal and synthetic implants. Committed to delivering a higher standard, RTI’s implants are used in sports medicine, general surgery, spine, orthopedic, trauma and cardiothoracic procedures, and are distributed in nearly 50 countries. RTI is headquartered in Alachua, Fla., and has four manufacturing facilities throughout the U.S. and Europe. RTI is accredited in the U.S. by the American Association of Tissue Banks and is a member of Advamed. firstname.lastname@example.org