Changing Business Models in Healthcare

Historically, the medical products market has been characterized by vendors who have adopted one of two business models: volume drive or complex systems. Using a complex systems model, vendors such as Pyxis and Alaris would adjust their offerings to coincide with each customer’s specific needs. However, a wave of new “as a service” business models are driving change in the healthcare sector.

Complex Systems Model

What does a complex systems model look like? Sales are frequently time consuming and have many constituencies—each offering must be sized, implemented, and supported in ways particular to a customer. The customer goes through a rigorous selection process to decide which product they want, eventually paying for the product itself as well as installation, integration, training and other professional services needed to operationalize the product. The purchasing process typically involves capital purchases or lease, and is subject to the organization’s budgeting process and priorities. Also included in the exchange are annual maintenance agreements for software, hardware or both. Medical technology companies have optimized their entire businesses, including marketing, sales, and support around this complex systems business model.

'As A Service' Models for the Healthcare Sector

A new wave of business models that started with “software as a service” now includes any number of “ ___ as a service” offerings in the healthcare sector. These offerings are platforms, infrastructure, business processes, and any other prefix that can be rendered on demand, as needed, and are now shifting the medical products market in new directions.

The implication of this wave of change is profound, reshaping the demands of vendor and customer. While “as a service” business models don’t signal a change in complexity, they do signal a shift in responsibility for managing the complexity, from the customer, to the vendor. The key benefit to the medical products customer is that “as a service” business models focus on payment for what is consumed. Imagine the impact this model would have on electronic health record (EHR) vendors! They have enjoyed a business model that locks in much of their profits before use begins, and certainly before results are measured. As for vendors, the benefit of this new way of transacting business will flow to those who can adapt their processes to the new requirements. It may also favor new business that starts with this business model.

When it comes to technology waves, healthcare tends to lag behind, well entrenched in a conservative mindset. This “as a service” wave has been fueled by changes to healthcare economics, the availability of cloud computing, and the consumerism of personal communications devices, most noteworthy the iPhone, a device that has changed how all of us view and use technology.

Healthcare providers are also facing unprecedented change from inside the system as payers change incentives, and from the new consumer healthcare push from external sources.

Delivering Better Outcomes, Lower Costs

To compete in regional markets, health systems need to deliver a better patient outcome at a lower comparative cost than their competition. Realizing they must streamline operations to reduce costs, many health systems have initiated cost and quality improvements projects. Identifying patients with clinical or personal conditions that increase their risk of readmissions and generate penalties is often at the top of the list, but there are many other ways to drive efficiencies.

An analysis by Premier Inc., a group purchasing organization serving 2,500 hospitals nationwide, showed that “a typical 200- to 300-bed community hospital could save over $6 million a year by streamlining processes that take too long or use too many employees”. Ensuring that higher-paid employees don’t waste time performing tasks that are more suitable to lower-paid employees could save another $2.4 million a year, the analysis suggested, bringing the savings potential to more than 10 percent of total hospital labor costs.

As health systems make these changes, they will demand more from their medical technology providers, shifting the basis of competition to businesses that can successfully drive consumption and usage of their products.