Understanding Matters…Hospital Medical Technologies: Who Makes the Big Spend Decisions and How Do They Get There?
Most new hospital medical technology purchases hit the capital procurement process. Capital purchasing decisions by hospitals can often be a complex maze of processes that impact the timeliness of consideration and final approval and allocation of funds for procurement. Typically, items above a certain monetary threshold meet the institutional requirement to be vetted through a capital purchasing process. This process begins anywhere starting at $10,000 and upwards depending on the overall Hospital size and budget. Despite the huge volume of capital purchasing in hospitals - and maybe because of the complexity of the process - I have found that many investor materials (CIMs, MPs) misstate or simply gloss over key considerations on whether a company has the capabilities, and the product has the value proposition sufficient to navigate this process. Capital items are generally tangible items with a useful life greater than 1 year and often are associated with ancillary costs for installation, service, and other costs for implementation.
Hospital capital purchasing is generally a bottom-up process to determine annual capital needs. The capital purchasing decisions are often vetted through a process analogous to Congressional budget approvals or the “Rope Line” at an exclusive event. Annually, departments are invited to submit a list for annual capital purchase consideration (waiting line). For new hospital Key Programs or service lines, capital items are often approved through an ancillary process that circumvents the standard review and allocation process and goes directly to the C-suite for sign off as part of the core investment in the startup business line (VIP ushers and bypasses the waiting line). However, the standard annual process typically involves the list of requested capital items vetted through a subcommittee of departmental leaders (administrators, physicians, nurse managers) to prioritize the list into buckets of ascending priority. Let’s call this the “Pretty Pony List.” Not every department is able to purchase their pretty pony as the institution typically establishes a fixed amount for annual capital purchases.
The list is itemized by priority and is then generally sent to a small (appropriations) committee often including the CFO, COO, CEO and Senior level managers to determine which of the projects will get funded during the current capital purchasing cycle and which items will be pushed off until the next cycle or outright denied for funding consideration. Often there is some trading of items amongst the priority list so that the overall budget is maintained. Bearing witness and participation to very many capital purchasing exercises for new technology adoption, I have reduced down key factors that I believe underlie most of these decisions, and therefore should directly translate to any commercial diligence exercise for capital medical technologies within hospitals and hospital IDNs. My recommended diligence list of 10 for adoption of new technology are…
- Can the seller prove anticipated Return on Investment (ROIC) and impact on hospital revenue or reduce expenses?
- Does the item align with hospital vision or strategy?
- Is the item essential for patient experience or clinical care?
- Does the item provide a competitive advantage or marketing edge over competitors?
- Does the item replace necessary or mandatory equipment?
- Is the item important for patient safety or environmental regulatory metrics?
- Is the item necessary for key programs or providers to maintain market share?
- Are the hidden costs included (installation, training, integration, licensing fees, support, consumables, security, maintenance and service agreement)?
- Can technology be resold at the end of functional lifespan?
- Do key physicians/staff champion the adoption and utilization?
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