Healthcare's focus on information technology adds weight to pressure on scanner sales

Vendors transform themselves in reaction to market dynamics

Fighting for survival in the Darwinian world of U.S. healthcarehas transformed the species Scanner Manufacturer. Medical imagingvendors have gotten tougher and smarter while learning to chasethe managed-care dollar. That's the good news. The bad news isthat another predator has emerged on top of the healthcare capitalequipment purchasing food chain: information technology.

Hospital executives realize that, if they haven't built theirinformation infrastructures yet, they had better do it soon orrisk their own extinction. In the zero-sum competition for healthcareinvestment funds, money spent on multimillion-dollar computernetworks will not be available for purchases of medical equipment,particularly big-ticket medical imaging systems.

If that isn't bad enough, the total healthcare investment poolin the U.S. will likely stagnate or shrink in the future as publicfunds for Medicare and Medicaid are cut back. It's a jungle outthere.

Several independent efforts at polling healthcare executivesover the last year indicate that the need to spend more on upgradinginformation technology is clearly on their minds. These includethe Linc Anthem Health Care Capital Survey (SCAN 5/22/96); a surveyof senior healthcare executives attending Andersen Consulting's1995 Health Management Conference; and the 1996 Leadership Surveysponsored by the Healthcare Information and Management SystemsSociety (HIMSS) and Hewlett-Packard.

Hospital information expenditures have almost nowhere to go butup, said Dr. Michael Eliastam, a Boston-based associate partnerwith Andersen Consulting. The industry has spent relatively littleand is woefully deficient in this area.

"It's clear that until now, the amount of money spent bydelivery systems on information technology has been incrediblysmall," Eliastam said.

What is happening now is that they want to put a lot more moneyinto information systems because everyone realizes that to managepatients, you have to have information. Up to now, managing patientshas been done totally blind.

Global expenditures on healthcare information technology arerising, although the costs are coming down per unit of computerprocessing capability, according to John Page, executive directorof the Chicago-based HIMSS.

Medical imaging vendors face two hospital budgeting dynamics:a diversion and a dwindling of capital funds, Page adds.

"Capital budgets in general are not going up as in the 1980s,"he said.

"The total pot is shrinking and funds are being divertedfrom cafeterias, parking lots, and medical imaging equipment toother things. Those other things are information systems."

Tight hospital finances will also drive the need for more sophisticatedmanagement systems in the future, said Martin Zimmerman, presidentand CEO of Chicago-based medical financing firm Linc Anthem. Assumingsteady costs, proposed cuts in Medicare expenditures may reducehospital profits by 50% to 75%, he said.

Hospitals need to invest in information technology because theymust have sufficient data to track where they are making and losingmoney and to measure the quality of care they are providing, saidGail Malcolm, manager of marketing communications and programsfor medical information systems supplier SMS of Malvern, PA.

That investment is crucial in the context of hospital downsizingand a shift of focus from acute care settings to ambulatory care,she said. In some cases, major teaching hospitals are reducingthe number of acute care beds by 30% to 40%. Fewer beds meansoperating costs must be reduced.

Investments in healthcare information processing are high forseveral reasons, said Linc's Zimmerman:

• Hospital financial reporting requirements are becoming increasinglycomplicated as institutions engage in more complex activities,such as joint ventures and practice acquisitions;

• With profit margins under pressure, hospitals can't afforda leakage of funds due to poor reporting;

• Information systems equipment tends to become obsolete fasterthan most medical equipment; and

• Even within diagnostic and therapeutic areas, data-handlingrequirements, such as image transmission and telemedicine, aretaking a larger chunk of hospital budget dollars.

Some of the increased expenditures on healthcare informationtechnology expected over the next several years will involve buildinginfrastructure items, such as fiber-optic lines for data transmissionwithin hospitals and hospital networks. This could result in abubble of rising expenditures that might then decline somewhat.

Ultimately, however, healthcare information costs will remainhigher than in the past, Zimmerman said. Continuing purchasesof computer software upgrades will take a large chunk out of hospitalbudgets for the foreseeable future.

"My guess is that we are looking at a systemic change, wheremore of the dollars spent on equipment in hospitals are goingto be spent in the area of information technology and systemsthat control cost and transfer information more efficiently,"he said.

The industry reacts. As healthcare executives focus on meetingtheir growing information processing requirements, reduced fundingfor medical equipment purchases is transforming both the medicalimaging market and imaging vendors.

Hospitals are hanging on to their medical equipment longer. Inpart, this results from the increase in upgradable systems. Butneeded replacement purchases are also being put off.

"Analysts and surveys all point out that the replacementcycle has slowed since 1994 in most areas of diagnostic imaging,"said David Lowe, chairman and CEO of ADAC Laboratories of Milpitas,CA.

"That is certainly the case in our business in nuclear medicine."

Hospital customers are stretching out the useful life of equipmentmuch more than they did a decade ago, agreed Ira Miller, vicepresident of the multi-hospital systems business group of Cleveland-basedPicker International. Older imaging equipment -- sometimes operatedfor more than 15 years -- requires expensive servicing, whichcreates pent-up demand for replacements, he said.

The reality of limited purchasing dollars is giving a boost tothe used medical equipment market and is persuading many hospitalsto upgrade through software purchases when possible, rather thanreplacing medical hardware.

"There are ways to get equipment today that are lower cost,including (purchasing) refurbished (systems) and upgrades,"Miller said. "

There is less true platform change going on than in the past.A lot of things are happening to accommodate the market at thispoint."

Even though medical imaging equipment prices have been underpressure for several years, imaging systems will likely cost lessin the future because of reduced demand and the presence of somuch existing equipment in the market, Zimmerman said.

"There is simply less buying of imaging equipment by hospitalstoday on a per capita basis than there was years ago," hesaid. "

The market is still down domestically by 25% to 30% from the highpoint of the early '90s."

The glut of existing imaging equipment means that independentlessors must do a better job moving products around, either recyclingthem offshore or transferring from larger to smaller users. Therefurbished equipment market will become more active in healthcare,as it has in other industries, he said.

Medical imaging market tightness did not come as a surprise tovendors, Lowe noted. That is one reason why ADAC has increasedits investment in healthcare information products, including itsacquisition of Community Health Computing and its entrance intoa joint venture with Hewlett-Packard for the development of cardiologyinformation systems.

But there remains plenty of profit opportunity for vendors withthe right products, he said.

"In order to significantly alter the lengthening replacementcycles, companies need to come up with equipment that offers improveddiagnostic accuracy, and to show the clinical cost savings associatedwith reducing the downstream cost of treating patients,"Lowe said.

Vendors have reacted to slumping demand in both classic and innovativeways, Picker's Miller said. The main classic reaction has beenthe reduction in scanner prices. That drop seems to be levelingoff now, he said.

More fundamentally, however, vendors are trying to make themselvesmore important to their customers, he said.

"We are offering more services," Miller said.

"We (in the industry) have gone from discrete OEM serviceto multivendor service. We have added asset management. We haveadded consulting capabilities. The more useful we can become,the stronger the tie between the vendor and the provider."

On the financial side, companies like Linc Anthem have movedinto new areas of hospital financing, expanding from equipmentleasing, in order to maintain their business.

"We are making our numbers and they are up every year, butwe make them in a different way," Zimmerman said. "

We are not (leasing) as many CT scanners or MRIs. The manufacturersare providing more of the equipment financing."

Medical imaging equipment vendors are also changing the way inwhich they interact with many hospital customers, Miller said.

"As we try to become more important to the healthcare providerand as the healthcare provider becomes bigger and more complex,the vendors are responding with organizations to deal at veryhigh levels within the provider community," he said.

Imaging suppliers are moving away from the traditional salesmodel, in which they connect to hospital customers only throughthe radiology department and then work their way up the hospitalsystem to influence the final purchasing decision, he said.

Picker's multi-hospital systems business group, formed in January,interacts with senior hospital system management, providing strategicassistance when requested, Miller said. Similar efforts have beenunder way for some time at other vendors, including GE and Siemens.